

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

~~2000 16th Street~~

~~Denver, CO~~



2000 16th Street
Denver,	CO	80202

Telephone number ~~(303) 405-2100~~(720) 631-2100

Securities registered pursuant to Section 12(b) of the Act:



Title of each class:	Trading symbol(s):	Name of each exchange on which registered:
Common Stock, $0.001 par value	DVA	NYSE

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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



Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of November ~~2, 2018,~~1, 2019, the number of shares of the Registrant’s common stock outstanding was approximately ~~166.0~~129.7 million shares.

DAVITA INC.

INDEX



		Page No.
	PART I. FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements:
	Consolidated Statements of ~~Operations~~Income for the three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018	1
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018	2
	Consolidated Balance Sheets as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018	3
	Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2018~~2019 and September 30, ~~2017~~2018	4
	Consolidated Statements of Equity for the three and nine months ended September 30, ~~2018~~2019 and ~~for the year ended December 31, 2017~~September 30, 2018	65
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4340
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6358
Item 4.	Controls and Procedures	6458

	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item ~~1A.~~6.	~~Risk Factors~~Exhibits	65
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~Signature	97
~~Item 6.~~	~~Exhibits~~	98
	~~Signature~~	~~100~~67

Note: Items 3, 4 and 5 of Part II are omitted because they are not applicable.

DAVITA INC.

CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~INCOME

(unaudited)

(dollars in thousands, except per share data)


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Dialysis and related lab patient service revenues	$	2,670,701		$	2,561,543		$	7,980,178		$	7,478,938		$	2,781,169		$	2,670,701		$	8,150,386		$	7,980,178
Provision for uncollectible accounts	(11,977		)	(119,321		)	(35,838		)	(335,979		)	(3,977		)	(11,977		)	(19,689		)	(35,838		)
Net dialysis and related lab patient service revenues	2,658,724			2,442,222			7,944,340			7,142,959			2,777,192			2,658,724			8,130,697			7,944,340
Other revenues	188,606			322,849			639,387			952,762			126,886			188,606			359,198			639,387
Total revenues	2,847,330			2,765,071			8,583,727			8,095,721			2,904,078			2,847,330			8,489,895			8,583,727
Operating expenses and charges:
Patient care costs and other costs	2,063,770			1,951,609			6,168,444			5,698,318
Patient care costs													1,991,172			2,063,770			5,913,860			6,168,444
General and administrative	336,299			272,911			866,922			798,602			298,736			336,299			824,887			866,922
Depreciation and amortization	146,000			142,634			435,878			415,544			155,915			146,000			456,685			435,878
Equity investment loss (income)	3,824			5,308			(6,126		)	5,456
Provision for uncollectible accounts	800			(2,685		)	(7,300		)	(1,381		)	—			800			—			(7,300		)
Equity investment (income) loss													(3,936		)	3,824			(11,158		)	(6,126		)
Investment and other asset impairments	6,093			—			17,338			15,168			—			6,093			—			17,338
Goodwill impairment charges	—			—			3,106			34,696			83,855			—			124,892			3,106
Loss (gain) on changes in ownership interests, net	1,506			—			(32,451		)	(6,273		)
Gain on settlement, net	—			—			—			(526,827		)
Loss (gain) on changes in ownership interest, net													—			1,506			—			(32,451		)
Total operating expenses and charges	2,558,292			2,369,777			7,445,811			6,433,303			2,525,742			2,558,292			7,309,166			7,445,811
Operating income	289,038			395,294			1,137,916			1,662,418			378,336			289,038			1,180,729			1,137,916
Debt expense	(125,927		)	(109,306		)	(359,135		)	(321,637		)	(88,589		)	(125,927		)	(351,774		)	(359,135		)
Debt prepayment, refinancing and redemption charges													(21,242		)	—			(33,402		)	—
Other income, net	4,007			3,396			10,583			12,180			5,280			4,007			17,863			10,583
Income from continuing operations before income taxes	167,118			289,384			789,364			1,352,961			273,785			167,118			813,416			789,364
Income tax expense	52,047			90,546			206,652			474,126			65,254			52,047			197,938			206,652
Net income from continuing operations	115,071			198,838			582,712			878,835			208,531			115,071			615,478			582,712
Net loss from discontinued operations, net of tax	(211,739		)	(370,872		)	(147,829		)	(388,959		)
Net (loss) income	(96,668		)	(172,034		)	434,883			489,876
Net (loss) income from discontinued operations, net of tax													(6,843		)	(211,739		)	102,854			(147,829		)
Net income (loss)													201,688			(96,668		)	718,332			434,883
Less: Net income attributable to noncontrolling interests	(40,128		)	(42,442		)	(125,717		)	(129,654		)	(58,418		)	(40,128		)	(152,222		)	(125,717		)
Net (loss) income attributable to DaVita Inc.	$	(136,796	)	$	(214,476	)	$	309,166		$	360,222
Net income (loss) attributable to DaVita Inc.													$	143,270		$	(136,796	)	$	566,110		$	309,166
Earnings per share attributable to DaVita Inc.:
Basic net income from continuing operations per share	$	0.44		$	0.81		$	2.69		$	3.91		$	1.00		$	0.44		$	2.88		$	2.69
Basic net (loss) income per share	$	(0.82	)	$	(1.14	)	$	1.79		$	1.89
Basic net income (loss) per share													$	0.95		$	(0.82	)	$	3.51		$	1.79
Diluted net income from continuing operations per share	$	0.44		$	0.80		$	2.66		$	3.85		$	0.99		$	0.44		$	2.87		$	2.66
Diluted net (loss) income per share	$	(0.82	)	$	(1.12	)	$	1.77		$	1.86
Diluted net income (loss) per share													$	0.95		$	(0.82	)	$	3.50		$	1.77
Weighted average shares for earnings per share:
Basic	166,770,664			188,883,922			172,403,944			190,770,165			150,675,465			166,770,664			161,147,122			172,403,944
Diluted	167,262,358			191,408,117			174,348,421			193,546,245			151,295,950			167,262,358			161,636,011			174,348,421
Amounts attributable to DaVita Inc.:
Net income from continuing operations	$	73,371		$	152,870		$	463,989		$	745,067		$	150,113		$	73,371		$	464,590		$	463,989
Net loss from discontinued operations	(210,167		)	(367,346		)	(154,823		)	(384,845		)
Net (loss) income attributable to DaVita Inc.	$	(136,796	)	$	(214,476	)	$	309,166		$	360,222
Net (loss) income from discontinued operations													(6,843		)	(210,167		)	101,520			(154,823		)
Net income (loss) attributable to DaVita Inc.													$	143,270		$	(136,796	)	$	566,110		$	309,166

See notes to condensed consolidated financial statements.

DAVITA INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(dollars in thousands)

Three months ended
September 30, Nine months ended
September 30,
2018 2017 2018 2017
Net (loss) income $ (96,668 ) $ (172,034 ) $ 434,883
$ 489,876
Other comprehensive (loss) income, net of tax:

Unrealized gains (losses) on interest rate cap agreements:

Unrealized gains (losses) on interest rate cap agreements 37
(478 ) 819
(5,479 )
Reclassifications of net realized gains on interest rate cap agreements into net (loss) income 1,606
1,265
4,680
3,793
Unrealized gains on investments:

Unrealized gains on investments —
863
—
3,478
Reclassification of net investment realized gains into net (loss) income —
(9 ) —
(221 )
Unrealized (losses) gains on foreign currency translation:

Foreign currency translation adjustments (8,827 ) 29,143
(39,475 ) 91,546
Other comprehensive (loss) income (7,184 ) 30,784
(33,976 ) 93,117
Total comprehensive (loss) income (103,852 ) (141,250 ) 400,907
582,993
Less: Comprehensive income attributable to noncontrolling interests (40,128 ) (42,442 ) (125,717 ) (129,652 )
Comprehensive (loss) income attributable to DaVita Inc. $ (143,980 ) $ (183,692 ) $ 275,190
$ 453,341



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	201,688		$	(96,668	)	$	718,332		$	434,883
Other comprehensive income (loss), net of tax:
Unrealized (losses) gains on interest rate cap agreements:
Unrealized (losses) gains	(1,060		)	37			(1,672		)	819
Reclassifications of net realized losses into net income (loss)	1,569			1,606			4,782			4,680
Unrealized losses on foreign currency translation:
Foreign currency translation adjustments	(44,502		)	(8,827		)	(45,790		)	(39,475		)
Other comprehensive loss	(43,993		)	(7,184		)	(42,680		)	(33,976		)
Total comprehensive income (loss)	157,695			(103,852		)	675,652			400,907
Less: Comprehensive income attributable to noncontrolling interests	(58,418		)	(40,128		)	(152,222		)	(125,717		)
Comprehensive income (loss) attributable to DaVita Inc.	$	99,277		$	(143,980	)	$	523,430		$	275,190

See notes to condensed consolidated financial statements.

DAVITA INC.

CONSOLIDATED BALANCE SHEETS

(unaudited)

(dollars in thousands, except per share data)


	September 30, 2018			December 31, 2017		September 30, 2019			December 31, 2018
ASSETS
Cash and cash equivalents	$	448,215		$	508,234	$	1,253,256		$	323,038
Restricted cash and equivalents	91,940			10,686		103,885			92,382
Short-term investments	4,730			32,830		100,713			2,935
Accounts receivable, net	1,847,086			1,714,750		1,901,225			1,858,608
Inventories	91,102			181,799		98,641			107,381
Other receivables	383,783			372,919		474,145			469,796
Income tax receivable	26,002			49,440		16,236			68,614
Prepaid and other current assets	88,857			112,058		50,617			111,840
Current assets held for sale, net	5,947,786			5,761,642		—			5,389,565
Total current assets	8,929,501			8,744,358		3,998,718			8,424,159
Property and equipment, net of accumulated depreciation of $3,454,107 and $3,103,662	3,275,636			3,149,213
Intangible assets, net of accumulated amortization of $225,862 and $356,774	97,609			113,827
Property and equipment, net of accumulated depreciation of $3,792,683 and $3,524,098, respectively						3,419,238			3,393,669
Operating lease right-of-use assets						2,781,288			—
Intangible assets, net of accumulated amortization of $78,437 and $80,566, respectively						117,666			118,846
Equity method and other investments	240,820			245,534		219,386			224,611
Long-term investments	35,047			37,695		35,041			35,424
Other long-term assets	76,517			47,287		114,834			71,583
Goodwill	6,702,659			6,610,279		6,765,659			6,841,960
	$	19,357,789		$	18,948,193	$	17,451,830		$	19,110,252
LIABILITIES AND EQUITY
Accounts payable	$	458,927		$	509,116	$	332,136		$	463,270
Other liabilities	560,692			552,662		716,023			595,850
Accrued compensation and benefits	631,799			616,116		662,826			658,913
Current portion of operating lease liabilities						374,214			—
Current portion of long-term debt	1,784,065			178,213		121,441			1,929,369
Current liabilities held for sale	1,419,621			1,185,070		—			1,243,759
Total current liabilities	4,855,104			3,041,177		2,206,640			4,891,161
Long-term operating lease liabilities						2,682,125			—
Long-term debt	8,440,673			9,158,018		8,014,475			8,172,847
Other long-term liabilities	452,445			365,325		135,087			450,669
Deferred income taxes	515,893			486,247		604,921			562,536
Total liabilities	14,264,115			13,050,767		13,643,248			14,077,213
Commitments and contingencies:
Commitments and contingencies
Noncontrolling interests subject to put provisions	1,064,412			1,011,360		1,296,059			1,124,641
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; 182,828,547 and 182,462,278 shares issued and 165,984,480 and 182,462,278 shares outstanding, respectively)	183			182
Common stock ($0.001 par value, 450,000,000 shares authorized; 166,540,590 and 166,387,307 shares issued and 133,888,864 and 166,387,307 shares outstanding, respectively)						167			166
Additional paid-in capital	1,055,839			1,042,899		906,990			995,006
Retained earnings	3,951,247			3,633,713		3,349,180			2,743,194
Treasury stock (16,844,067 and zero shares, respectively)	(1,153,511		)	—
Accumulated other comprehensive (loss) income	(29,109		)	13,235
Treasury stock (32,651,726 and zero shares, respectively)						(1,860,157		)	—
Accumulated other comprehensive loss						(77,604		)	(34,924		)
Total DaVita Inc. shareholders' equity	3,824,649			4,690,029		2,318,576			3,703,442
Noncontrolling interests not subject to put provisions	204,613			196,037		193,947			204,956
Total equity	4,029,262			4,886,066		2,512,523			3,908,398
	$	19,357,789		$	18,948,193	$	17,451,830		$	19,110,252

See notes to condensed consolidated financial statements.

DAVITA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(dollars in thousands)

Nine months ended
September 30,
2018 2017
Cash flows from operating activities:

Net income $ 434,883
$ 489,876
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 435,878
593,527
Impairment charges 20,444
701,523
Stock-based compensation expense 59,605
28,478
Deferred income taxes 200,056
(132,781 )
Equity investment loss, net 8,611
19,071
Gain on sales of business interests, net (57,547 ) (23,402 )
Other non-cash charges, net 164,856
41,703
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
Accounts receivable (74,622 ) (146,024 )
Inventories 88,355
14,272
Other receivables and other current assets (757 ) (43,556 )
Other long-term assets 2,142
(13,831 )
Accounts payable (12,800 ) 18,595
Accrued compensation and benefits 40,225
(60,063 )
Other current liabilities 45,624
39,445
Income taxes 21,749
22,669
Other long-term liabilities 5,546
18,648
Net cash provided by operating activities 1,382,248
1,568,150
Cash flows from investing activities:
Additions of property and equipment (705,659 ) (639,829 )
Acquisitions (113,526 ) (726,538 )
Proceeds from asset and business sales 135,268
92,529
Purchase of investments available for sale (5,791 ) (9,882 )
Purchase of investments held-to-maturity (3,728 ) (223,482 )
Proceeds from sale of investments available for sale 8,783
5,822
Proceeds from investments held-to-maturity 32,628
398,765
Purchase of equity investments (12,874 ) (3,014 )
Distributions received on equity investments 3,580
80
Net cash used in investing activities (661,319 ) (1,105,549 )

~~DAVITA INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS - (continued)~~

~~(unaudited)~~

~~(dollars in thousands)~~


	Nine months ended September 30,						Nine months ended September 30,
	2018			2017			2019			2018
Cash flows from operating activities:
Net income							$	718,332		$	434,883
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization							456,685			435,878
Impairment charges							124,892			20,444
Debt prepayment, refinancing and redemption charges							33,402			—
Stock-based compensation expense							47,811			59,605
Deferred income taxes							72,590			200,056
Equity investment loss, net							5,131			8,611
Gain (loss) on sales of business interests, net							23,022			(57,547		)
Other non-cash charges, net							24,291			164,856
Changes in operating assets and liabilities, net of effect of acquisitions and divestitures:
Accounts receivable							(182,684		)	(74,622		)
Inventories							9,519			88,355
Other receivables and other current assets							51,319			(757		)
Other long-term assets							2,324			2,142
Accounts payable							(106,662		)	(12,800		)
Accrued compensation and benefits							(57,930		)	40,225
Other current liabilities							140,046			45,624
Income taxes							57,279			21,749
Other long-term liabilities							(27,542		)	5,546
Net cash provided by operating activities							1,391,825			1,382,248
Cash flows from investing activities:
Additions of property and equipment							(547,183		)	(705,659		)
Acquisitions							(77,348		)	(113,526		)
Proceeds from asset and business sales							3,863,619			135,268
Purchase of other debt and equity investments							(5,160		)	(5,791		)
Purchase of investments held-to-maturity							(98,322		)	(3,728		)
Proceeds from sale of other debt and equity investments							5,893			8,783
Proceeds from investments held-to-maturity							—			32,628
Purchase of equity investments							(8,770		)	(12,874		)
Distributions received on equity investments							1,296			3,580
Net cash provided by (used in) investing activities							3,134,025			(661,319		)
Cash flows from financing activities:
Borrowings	41,674,279			38,160,821			38,519,991			41,674,279
Payments on long-term debt and other financing costs	(40,828,443		)	(38,269,284		)	(40,570,003		)	(40,828,443		)
Purchase of treasury stock	(1,161,511		)	(321,411		)	(1,837,022		)	(1,161,511		)
Distributions to noncontrolling interests							(157,170		)	(139,673		)
Stock award exercises and other share issuances, net	8,803			15,781			7,333			8,803
Distributions to noncontrolling interests	(139,673		)	(165,463		)
Contributions from noncontrolling interests	43,179			51,156			44,095			43,179
Proceeds from sales of additional noncontrolling interests	15			—
Proceeds from sales of additional noncontrolling interest							—			15
Purchases of noncontrolling interests	(19,988		)	(1,432		)	(10,988		)	(19,988		)
Net cash used in financing activities	(423,339		)	(529,832		)	(4,003,764		)	(423,339		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(5,790		)	5,449			(4,178		)	(5,790		)
Net increase (decrease) in cash, cash equivalents and restricted cash	291,800			(61,782		)
Less: Net increase in cash, cash equivalents and restricted cash from discontinued operations	270,565			82,694
Net increase (decrease) in cash, cash equivalents and restricted cash from continuing operations	21,235			(144,476		)
Net increase in cash, cash equivalents and restricted cash							517,908			291,800
Less: Net (decrease) increase in cash, cash equivalents and restricted cash from discontinued operations							(423,813		)	270,565
Net increase in cash, cash equivalents and restricted cash from continuing operations							941,721			21,235
Cash, cash equivalents and restricted cash of continuing operations at beginning of the year	518,920			683,463			415,420			518,920
Cash, cash equivalents and restricted cash of continuing operations at end of the period	$	540,155		$	538,987		$	1,357,141		$	540,155

See notes to condensed consolidated financial statements.

DAVITA INC.

CONSOLIDATED STATEMENTS OF EQUITY

(unaudited)

(dollars and shares in thousands)



	Three months ended September 30, 2019
	Non- controlling interests subject to put provisions			DaVita Inc. Shareholders’ Equity																			Non- controlling interests not subject to put provisions
				DaVita Inc. Shareholders’ Equity
				Common stock			Additional paid-in capital			Retained earnings		Treasury stock					Accumulated other comprehensive loss
				Shares	Amount		Additional paid-in capital			Retained earnings		Shares		Amount			Accumulated other comprehensive loss			Total
Balance at June 30, 2019	$	1,185,733		166,533	$	167	$	989,021		$	3,205,910	(2,060	)	$	(112,189	)	$	(33,611	)	$	4,049,298		$	193,771
Comprehensive income:
Net income	38,778									143,270										143,270			19,640
Other comprehensive loss																	(43,993		)	(43,993		)
Stock unit shares issued				8																—
Stock-settled stock-based compensation expense							18,724													18,724
Changes in noncontrolling interest from:
Distributions	(37,868		)																				(23,588		)
Contributions	8,946																						3,868
Acquisitions and divestitures	(91		)																				10
Partial purchases	8						(202		)											(202		)	246
Fair value remeasurements	100,553						(100,553		)											(100,553		)
Purchase of treasury stock												(30,592	)	(1,747,968		)				(1,747,968		)
Balance at September 30, 2019	$	1,296,059		166,541	$	167	$	906,990		$	3,349,180	(32,652	)	$	(1,860,157	)	$	(77,604	)	$	2,318,576		$	193,947


	Non- controlling interests subject to put provisions			DaVita Inc. Shareholders’ Equity																											Non- controlling interests not subject to put provisions			Nine months ended September 30, 2019
									Additional paid-in capital														Accumulated other comprehensive (loss) income											Non- controlling interests subject to put provisions				DaVita Inc. Shareholders’ Equity																									Non- controlling interests not subject to put provisions
				Common stock								Retained earnings				Treasury stock																						DaVita Inc. Shareholders’ Equity
				Shares		Amount						Retained earnings			Shares			Amount				Accumulated other comprehensive (loss) income				Total			Common stock									Additional paid-in capital				Retained earnings			Treasury stock						Accumulated other comprehensive loss
Balance at December 31, 2016	$	973,258		194,554		$	195				$	1,027,182			$	3,710,313			—					$	—			$	(89,643	)								Additional paid-in capital				Retained earnings		$	201,694
																																Non- controlling interests subject to put provisions				Shares			Amount				Additional paid-in capital			Retained earnings			Shares		Accumulated other comprehensive loss			Amount			Accumulated other comprehensive loss			Total						Non- controlling interests not subject to put provisions
Balance at January 1, 2019																																				166,387			$	166					—	Retained earnings				$	—			$	3,703,442		Accumulated other comprehensive loss
Cumulative effect of change in accounting principle																																											Additional paid-in capital				39,876												39,876
Comprehensive income:
Net income	103,641												663,618															663,618						63,296			102,078													566,110												566,110				50,144
Other comprehensive income																							102,878				102,878				(2			)
Stock purchase shares issued				360					22,131																		22,131
Other comprehensive loss																																																								(42,680		)	(42,680		)
Stock unit shares issued				117					(101		)																(101		)									154			1			(3,246		)													(3,245		)
Stock-settled SAR shares issued				398					—																		—
Stock-settled stock-based compensation expense									34,981																		34,981																	47,723															47,723
Changes in noncontrolling interest from:
Distributions	(128,853		)																												(82,614		)	(98,103		)																											(59,067		)
Contributions	52,911																														21,641			24,714																													19,381
Acquisitions and divestitures	43,799								(823		)																(823		)		(5,770		)	1,782																													(1,981		)
Partial purchases	(397		)						(2,752		)																(2,752		)		(2,208		)	(2,240		)								10,732															10,732				(19,480		)
Fair value remeasurements	(32,999		)						32,999																		32,999							143,225										(143,225		)													(143,225		)
Purchase of treasury stock																	(12,967	)		(810,949		)					(810,949		)																						(32,652	)	(1,860,157		)				(1,860,157		)
Retirement of treasury stock				(12,967	)	(13		)	(70,718		)		(740,218		)		12,967			810,949							—
Balance at December 31, 2017	$	1,011,360		182,462		$	182		$	1,042,899			$	3,633,713			—			$	—		$	13,235			$	4,690,029			$		196,037
Cumulative effect of change in accounting principle													8,368										(8,368		)		—
Comprehensive income:
Net income	77,803												309,166														309,166				47,914
Other comprehensive loss																							(33,976		)		(33,976		)
Stock unit shares issued				154					(448		)																(448		)
Stock-settled SAR shares issued				212		1			(4,887		)																(4,886		)
Stock-settled stock-based compensation expense									59,539																		59,539
Changes in noncontrolling interest from:
Distributions	(85,372		)																												(54,301		)
Contributions	26,367																														16,812
Acquisitions and divestitures	11,262								79																		79				(212		)
Partial purchases	(869		)						(17,482		)																(17,482		)		(1,637		)
Fair value remeasurements	23,861								(23,861		)																(23,861		)
Purchase of treasury stock																	(16,844	)		(1,153,511		)					(1,153,511		)
Balance at September 30, 2018	$	1,064,412		182,828		$	183		$	1,055,839			$	3,951,247			(16,844	)		$	(1,153,511	)	$	(29,109	)		$	3,824,649			$	204,613
Balance at September 30, 2019																																		$	1,296,059			166,541			$	167		$	906,990		$	3,349,180			(32,652	)	$	(1,860,157	)	$	(77,604	)	$	2,318,576			$	193,947

See notes to condensed consolidated financial statements.

DAVITA INC.

CONSOLIDATED STATEMENTS OF EQUITY - continued

(unaudited)

(dollars and shares in thousands)



	Three months ended September 30, 2018
	Non- controlling interests subject to put provisions			DaVita Inc. Shareholders’ Equity																				Non- controlling interests not subject to put provisions
				DaVita Inc. Shareholders’ Equity
				Common stock			Additional paid-in capital			Retained earnings			Treasury stock					Accumulated other comprehensive loss
				Shares	Amount		Additional paid-in capital			Retained earnings			Shares		Amount			Accumulated other comprehensive loss			Total
Balance at June 30, 2018	$	1,047,158		182,815	$	183	$	1,022,783		$	4,088,043		(11,995	)	$	(809,900	)	$	(21,925	)	$	4,279,184		$	205,323
Comprehensive income:
Net income	25,525									(136,796		)									(136,796		)	14,603
Other comprehensive loss																		(7,184		)	(7,184		)
Stock unit shares issued				8
Stock-settled SAR shares issued				5			(1		)												(1		)
Stock-settled stock-based compensation expense							39,707														39,707
Changes in noncontrolling interest from:
Distributions	(27,375		)																					(18,292		)
Contributions	7,191																							4,419
Acquisitions and divestitures	10,597																							(9		)
Partial purchases	(49		)				(5,285		)												(5,285		)	(1,431		)
Fair value remeasurements	1,365						(1,365		)												(1,365		)
Purchase of treasury stock													(4,849	)	(343,611		)				(343,611		)
Balance at September 30, 2018	$	1,064,412		182,828	$	183	$	1,055,839		$	3,951,247		(16,844	)	$	(1,153,511	)	$	(29,109	)	$	3,824,649		$	204,613



	Nine months ended September 30, 2018
	Non- controlling interests subject to put provisions			DaVita Inc. Shareholders’ Equity																			Non- controlling interests not subject to put provisions
				DaVita Inc. Shareholders’ Equity
				Common stock			Additional paid-in capital			Retained earnings		Treasury stock					Accumulated other comprehensive income (loss)
				Shares	Amount		Additional paid-in capital			Retained earnings		Shares		Amount			Accumulated other comprehensive income (loss)			Total
Balance at January 1, 2018	$	1,011,360		182,462	$	182	$	1,042,899		$	3,633,713	—		$	—		$	13,235		$	4,690,029		$	196,037
Cumulative effect of change in accounting principle										8,368							(8,368		)	—
Comprehensive income:
Net income	77,803									309,166										309,166			47,914
Other comprehensive loss																	(33,976		)	(33,976		)
Stock unit shares issued				154			(448		)											(448		)
Stock-settled SAR shares issued				212	1		(4,887		)											(4,886		)
Stock-settled stock-based compensation expense							59,539													59,539
Changes in noncontrolling interest from:
Distributions	(85,372		)																				(54,301		)
Contributions	26,367																						16,812
Acquisitions and divestitures	11,262						79													79			(212		)
Partial purchases	(869		)				(17,482		)											(17,482		)	(1,637		)
Fair value remeasurements	23,861						(23,861		)											(23,861		)
Purchase of treasury stock												(16,844	)	(1,153,511		)				(1,153,511		)
Balance at September 30, 2018	$	1,064,412		182,828	$	183	$	1,055,839		$	3,951,247	(16,844	)	$	(1,153,511	)	$	(29,109	)	$	3,824,649		$	204,613

See notes to condensed consolidated financial statements

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(dollars and shares in thousands, except per share data)

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


1.	Condensed consolidated interim financial statements

The condensed consolidated interim financial statements included in this report are prepared by the Company without audit. In the opinion of management, all adjustments necessary for a fair presentation of the results of operations are reflected in these condensed consolidated interim financial statements. All significant intercompany accounts and transactions have been eliminated. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. The most significant estimates and assumptions underlying these financial statements and accompanying notes generally involve revenue recognition and accounts receivable, ~~contingencies,~~leases, impairments of goodwill and investments, accounting for income taxes, ~~long-term variable compensation accruals,~~ consolidation of variable interest entities and certain fair value estimates. The results of operations for the nine months ended September 30, ~~2018~~2019 are not necessarily indicative of the operating results for the full year. ~~The~~These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018 (10-K). Prior year balances and amounts have been reclassified to conform to the current year presentation. The Company has evaluated subsequent events through the date these condensed consolidated interim financial statements were issued and has included all necessary adjustments and disclosures.


2.	Revenue recognition

~~On January 1, 2018, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 606~~ ~~Revenue from Contracts with Customers~~ (Topic 606) using the cumulative effect method for those contracts that were not substantially completed as of January 1, 2018. Results for reporting periods beginning on and after January 1, 2018 are presented under Topic 606, while prior period amounts continue to be presented in accordance with the Company's historical accounting under ~~Revenue Recognition~~ ~~(Topic 605).~~

The adoption of this new standard primarily changed the Company’s presentation of revenues, provision for uncollectible accounts and allowance for doubtful accounts. Topic 606 requires revenue to be recognized based on the Company’s estimate of the transaction price the Company expects to collect as a result of satisfying its performance obligations. Accordingly, for performance obligations satisfied after the adoption of Topic 606, the Company no longer separately presents a provision for uncollectible accounts on the consolidated income statement and no longer presents the related allowance for doubtful accounts on the consolidated balance sheet. However, as a result of the Company’s election to apply Topic 606 only to contracts not substantially completed as of January 1, 2018, the Company continues to maintain an allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606. Net collections or write-offs of accounts receivable generated prior to January 1, 2018, beyond amounts previously reserved thereon, are presented in the provision for uncollectible accounts on the consolidated income statement in accordance with Topic 605.

The Company’s allowance for doubtful accounts related to performance obligations satisfied prior to the adoption of Topic 606 was $71,108 and $218,399 as of September 30, 2018 and December 31, 2017, respectively.

There are significant ~~risks~~uncertainties associated with estimating revenue, which generally take several years to resolve. These estimates are subject to ongoing insurance coverage changes, geographic coverage differences, differing interpretations of contract coverage and other payor issues, as well as patient issues including, ~~determining~~without limitation, determination of applicable primary and secondary coverage, changes in patient coverage and coordination of benefits. As these estimates are refined over time, both positive and negative adjustments to revenue are recognized in the current period. As a result of changes in these estimates, a reduction in revenue of $4,138 was recognized during the three months ended September 30, 2019 and additional revenue of $35,658 was recognized during the nine months ended September 30, 2019, associated with performance obligations satisfied prior to January 1, 2019. Additional revenue of $1,246 and $77,473 was recognized during the three and nine months ended September 30, 2018, respectively, associated with performance obligations satisfied ~~in years~~ prior to ~~the adoption of Topic 606 of $1,246 and $77,473, respectively,~~January 1, 2018, which ~~includes~~included a benefit of $36,000 for the nine months ended September 30, 2018 from electing to apply Topic 606, Revenue from Contracts with Customersonly to contracts not substantially completed as of January 1, 2018.

The following table summarizes the Company's segment revenues by primary payor source:



	For the three months ended
	September 30, 2019									September 30, 2018
	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	$	1,558,890		$			$	1,558,890		$	1,513,191		$			$	1,513,191
Medicaid and Managed Medicaid	176,292						176,292			159,165						159,165
Other government	116,984			90,947			207,931			113,043			80,915			193,958
Commercial	828,953			37,276			866,229			786,470			31,364			817,834
Other revenues:
Medicare and Medicare Advantage				65,759			65,759						130,746			130,746
Medicaid and Managed Medicaid				227			227						12,042			12,042
Commercial				33,503			33,503						20,205			20,205
Other⁽¹⁾	10,308			20,784			31,092			4,932			29,042			33,974
Eliminations of intersegment revenues	(32,362		)	(3,483		)	(35,845		)	(25,424		)	(8,361		)	(33,785		)
Total	$	2,659,065		$	245,013		$	2,904,078		$	2,551,377		$	295,953		$	2,847,330


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

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

~~The following table summarizes the Company's segment revenues by primary payor source:~~


	For the three months ended																		For the nine months ended
	September 30, 2018									September 30, 2017⁽¹⁾									September 30, 2019									September 30, 2018
	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			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	$	1,513,191		$			$	1,513,191		$	1,338,155		$			$	1,338,155		$	4,572,599		$			$	4,572,599		$	4,524,449		$			$	4,524,449
Medicaid and Managed Medicaid	159,165						159,165			155,113						155,113			490,723						490,723			466,948						466,948
Other government	113,043			80,915			193,958			89,243			72,681			161,924			333,675			264,191			597,866			330,500			250,048			580,548
Commercial	786,470			31,364			817,834			783,171			17,334			800,505			2,458,360			103,760			2,562,120			2,366,182			70,156			2,436,338
Other revenues:
Medicare and Medicare Advantage				130,746			130,746						232,251			232,251						191,472			191,472						427,532			427,532
Medicaid and Managed Medicaid				12,042			12,042						17,142			17,142						327			327						43,991			43,991
Commercial				20,205			20,205						27,222			27,222						98,428			98,428						77,633			77,633
Other⁽²⁾⁽¹⁾	4,932			29,042			33,974			4,792			47,438			52,230			20,715			59,204			79,919			14,965			103,014			117,979
Eliminations of intersegment revenues	(25,424		)	(8,361		)	(33,785		)	(13,475		)	(5,996		)	(19,471		)	(93,337		)	(10,222		)	(103,559		)	(63,943		)	(27,748		)	(91,691		)
Total	$	2,551,377		$	295,953		$	2,847,330		$	2,356,999		$	408,072		$	2,765,071		$	7,782,735		$	707,160		$	8,489,895		$	7,639,101		$	944,626		$	8,583,727


(1)	As noted above, prior period amounts have not been adjusted under the cumulative effect method. In this table, the Company's dialysis and related lab services revenues for the three months ended September 30, 2017 has been presented net of the provision for uncollectible accounts of~~$119,321 to conform to the current period presentation.~~


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

For the nine months ended
September 30, 2018
September 30, 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 $ 4,524,449
$ $ 4,524,449
$ 3,924,255
$ $ 3,924,255
Medicaid and Managed Medicaid 466,948
466,948
450,984
450,984
Other government 330,500
250,048
580,548
271,947
183,050
454,997
Commercial 2,366,182
70,156
2,436,338
2,304,745
46,537
2,351,282
Other revenues:
Medicare and Medicare Advantage 427,532
427,532
682,964
682,964
Medicaid and Managed Medicaid �� 43,991
43,991
54,757
54,757
Commercial 77,633
77,633
79,241
79,241
Other⁽²⁾
14,965
103,014
117,979
14,951
139,337
154,288
Eliminations of intersegment revenues (63,943 ) (27,748 ) (91,691 ) (38,559 ) (18,488 ) (57,047 )
Total $ 7,639,101
$ 944,626
$ 8,583,727
$ 6,928,323
$ 1,167,398
$ 8,095,721


~~(1)~~	As noted above, prior period amounts have not been adjusted under the cumulative effect method. In this table, the Company's dialysis and related lab services revenues for the nine months ended September 30, 2017 has been presented net of the provision for uncollectible accounts of $335,979 to conform to the current period presentation.

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~


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

Dialysis and related lab patient service ~~revenues~~

revenues. Dialysis and related lab services patient service revenues are recognized in the period services are provided. Revenues consist primarily of payments from Medicare, Medicaid and commercial health plans for dialysis and related lab services provided to patients. A usual and customary fee schedule is maintained for the Company’s dialysis treatments and related lab services; however, actual collectible revenue is normally recognized at a discount from the fee schedule.

Revenues associated with Medicare and Medicaid programs are estimated based on: (a) the payment rates that are established by statute or regulation for the portion of payment rates paid by the government payor (e.g., 80% for Medicare patients) and (b) for the portion not paid by the primary government payor, estimates of the amounts ultimately collectible from other government programs paying secondary coverage (e.g., Medicaid secondary coverage), the patient’s commercial health plan secondary coverage, or the patient. The Company’s reimbursements from Medicare are subject to certain variations under Medicare’s single bundled payment rate system, whereby reimbursements can be adjusted for certain patient characteristics and other factors. The Company’s revenue recognition is estimated based on its judgment regarding its ability to collect, which depends upon its ability to effectively capture, document and bill for Medicare’s base payment rate as well as these other variable factors.

Under Medicare’s bundled payment rate system, services covered by Medicare are subject to estimating risk, whereby reimbursements from Medicare can vary significantly depending upon certain patient characteristics and other variable factors. Even with the bundled payment rate system, Medicare payments for bad debt claims as established by cost reports require evidence of collection efforts. As a result, billing and collection of Medicare bad debt claims can be delayed significantly and final payment is subject to audit.

Medicaid payments, when Medicaid coverage is secondary, can also be difficult to estimate. For many states, Medicaid payment terms and methods differ from Medicare, and may prevent accurate estimation of individual payment amounts prior to billing.

Revenues associated with commercial health plans are estimated based on contractual terms for the patients under healthcare plans with which the Company has formal agreements, non-contracted health plan coverage terms if known, estimated secondary collections, historical collection experience, historical trends of refunds and payor payment adjustments (retractions), inefficiencies in the Company’s billing and collection processes that can result in denied claims for payments, and regulatory compliance matters.

Commercial revenue recognition also involves significant estimating risks. With many larger, commercial insurers the Company has several different contracts and payment arrangements, and these contracts often include only a subset of the Company’s centers. In certain circumstances, it may not be possible to determine which contract, if any, should be applied prior to billing. In addition, for services provided by non-contracted centers, final collection may require specific negotiation of a payment amount, typically at a significant discount from the Company’s usual and customary rates.

Other ~~revenues~~

revenues. Other revenues consist of the revenues associated with the ancillary services and strategic initiatives, management and administrative support services that are provided to outpatient dialysis centers that the Company does not own or in which the Company owns a noncontrolling interest, and administrative and management support services to certain other non-dialysis joint ventures in which the Company owns a noncontrolling interest. ~~Revenues associated with pharmacy services are estimated~~

The Company’s allowance for doubtful accounts related to performance obligations satisfied in years prior to January 1, 2018 was $15,090 and $52,924 as ~~prescriptions are filled~~of September 30, 2019 and shipped to patients. Revenues associated with dialysis management services, disease management services, clinical research programs, physician services, end stage renal disease (ESRD) seamless care organizations, and comprehensive care are estimated in the period services are provided. Revenues associated with direct primary care are estimated over the membership period.December 31, 2018, respectively.

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~


3.	Earnings per share

Basic earnings per share is calculated by dividing net income attributable to the Company, adjusted for any change in noncontrolling interest redemption rights in excess of fair value, by the weighted average number of common shares outstanding, net of the weighted average shares held in escrow that under certain circumstances may have been returned to the Company. Weighted average common shares outstanding include vested restricted stock unit awards for which recipients have satisfied either the explicit vesting terms or retirement eligibility requirements.

Diluted earnings per share includes the dilutive effect of outstanding stock-settled stock appreciation rights ~~(SSARs)~~ and unvested stock units (under the treasury stock method) as well as the weighted average shares held in escrow that were outstanding during the period.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

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


	Three months ended September 30,						Nine months ended September 30,						Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017			2019			2018			2019		2018
Numerators:
Net income from continuing operations attributable to DaVita Inc.	$	73,371		$	152,870		$	463,989		$	745,067		$	150,113		$	73,371		$	464,590	$	463,989
Change in noncontrolling interest redemption rights in excess of fair value	98			—			—			—			—			98			—		—
Net income from continuing operations for earnings per share calculation	73,469			152,870			463,989			745,067			150,113			73,469			464,590		463,989
Net loss from discontinued operations attributable to DaVita Inc.	(210,167		)	(367,346		)	(154,823		)	(384,845		)
Net (loss) income attributable to DaVita Inc. for earnings per share calculation	$	(136,698	)	$	(214,476	)	$	309,166		$	360,222
Net (loss) income from discontinued operations attributable to DaVita Inc.													(6,843		)	(210,167		)	101,520		(154,823		)
Net income (loss) attributable to DaVita Inc. for earnings per share calculation													$	143,270		$	(136,698	)	$	566,110	$	309,166

Basic:
Weighted average shares outstanding during the period	166,819			191,078			173,875			192,964			150,675			166,819			161,147		173,875
Weighted average contingently returnable shares held in escrow for the DaVita HealthCare Partners merger	(48		)	(2,194		)	(1,471		)	(2,194		)	—			(48		)	—		(1,471		)
Weighted average shares for basic earnings per share calculation	166,771			188,884			172,404			190,770			150,675			166,771			161,147		172,404

Basic net income (loss) attributable to DaVita Inc. from:
Continuing operations per share	$	0.44		$	0.81		$	2.69		$	3.91		$	1.00		$	0.44		$	2.88	$	2.69
Discontinued operations per share	(1.26		)	(1.95		)	(0.90		)	(2.02		)	(0.05		)	(1.26		)	0.63		(0.90		)
Basic net (loss) income per share attributable to DaVita Inc.	$	(0.82	)	$	(1.14	)	$	1.79		$	1.89
Basic net income (loss) per share attributable to DaVita Inc.													$	0.95		$	(0.82	)	$	3.51	$	1.79

Diluted:
Weighted average shares outstanding during the period	166,819			191,078			173,875			192,964			150,675			166,819			161,147		173,875
Assumed incremental shares from stock plans	443			330			473			582			621			443			489		473
Weighted average shares for diluted earnings per share calculation	167,262			191,408			174,348			193,546			151,296			167,262			161,636		174,348

Diluted net income (loss) attributable to DaVita Inc. from:
Continuing operations per share	$	0.44		$	0.80		$	2.66		$	3.85		$	0.99		$	0.44		$	2.87	$	2.66
Discontinued operations per share	(1.26		)	(1.92		)	(0.89		)	(1.99		)	(0.04		)	(1.26		)	0.63		(0.89		)
Diluted net (loss) income per share attributable to DaVita Inc.	$	(0.82	)	$	(1.12	)	$	1.77		$	1.86
Diluted net income (loss) per share attributable to DaVita Inc.													$	0.95		$	(0.82	)	$	3.50	$	1.77

Anti-dilutive stock-settled awards excluded from calculation⁽¹⁾	5,281			5,201			4,987			5,239			7,293			5,281			6,414		4,987


(1)	Shares associated with stock-settled stock appreciation rights and performance stock units were excluded from the diluted denominator calculation because they are anti-dilutive under the treasury stock method.


4.	Restricted cash and equivalents

The Company had restricted cash and cash equivalents of $103,885 and $92,382 at September 30, 2019 and December 31, 2018, respectively. There has been no material change in the nature of the Company's restricted cash and cash equivalents from that described in Note 4 to the Company's consolidated financial statements included in the 10-K.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)


4.	~~Restricted cash and equivalents~~

The Company had restricted cash and cash equivalents of $91,940 and $10,686 at September 30, 2018 and December 31, 2017, respectively. Approximately $78,951 of the balance at September 30, 2018 represents restricted cash equivalents held in trust to satisfy insurer and state regulatory requirements related to the Company's self-insurance for professional and general liability and workers' compensation risks administered by wholly-owned captive insurance entities. Prior to the first quarter of 2018, these requirements were satisfied by a letter of credit rather than restricted cash held in trust. The remaining restricted cash and equivalents held at September 30, 2018 and December 31, 2017 primarily represent cash pledged to third parties in connection with two of the Company's ancillary and strategic initiatives businesses.


5.	Short-term and long-term investments

~~Effective January 1, 2018, the Company adopted ASU No. 2016-01,~~ ~~Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.~~ The amendments in this ASU revise accounting related to (i) the classification and measurement of investments in equity securities and (ii) the presentation of certain fair value changes for financial liabilities at fair value. The Company also adopted ASU 2018-03 which provides related technical corrections and improvements. The principal effect of these ASUs on the Company's consolidated financial statements is that, prior to adoption of ASU 2016-01, changes in the fair values of investments in equity securities with readily determinable fair values or redemption values were recognized in other comprehensive income until realized, while under ASU 2016-01 all changes in the fair values of these equity securities are recognized in current earnings. The adoption of these ASUs did not have a material impact on these condensed consolidated financial statements.

Effective January 1, 2018, the Company recognized a cumulative effect of change in accounting principle upon adoption of ASUs 2016-01 and 2018-03, in conjunction with ASU 2018-02, the effect of which was to decrease accumulated other comprehensive income, and to increase retained earnings, by $5,662 in after-tax unrealized gains accumulated in other comprehensive income through December 31, 2017 from equity securities classified as available-for-sale investments prior to adoption of ASU 2016-01.

From January 1, 2018, equity securities that have readily determinable fair values or redemption values are recorded at estimated fair value with changes in their value recognized in current earnings. The Company classifies its debt securities as held-to-maturity and records them at amortized cost based on its intentions and strategy concerning those investments.

The Company classifies these debt and equity investments as "Short-term investments" or "Long-term investments" on its consolidated balance sheet, as applicable, based on the characteristics of the financial instrument or the Company's intentions or expectations for the investment.

The Company’s ~~investments in these~~ short-term and long-term debt and equity investments consist of the following:



	September 30, 2019						December 31, 2018
	Debt securities		Equity securities		Total		Debt securities		Equity securities		Total
Certificates of deposit and other time deposits	$	98,113	$	—	$	98,113	$	2,235	$	—	$	2,235
Investments in mutual funds and common stock	—		37,641		37,641		—		36,124		36,124
	$	98,113	$	37,641	$	135,754	$	2,235	$	36,124	$	38,359
Short-term investments	$	98,113	$	2,600	$	100,713	$	2,235	$	700	$	2,935
Long-term investments	—		35,041		35,041		—		35,424		35,424
	$	98,113	$	37,641	$	135,754	$	2,235	$	36,124	$	38,359

September 30, 2018 December 31, 2017
Debt
securities Equity
securities Total Debt
securities Equity
securities Total
Certificates of deposit and other time deposits $ 2,230
$ —
$ 2,230
$ 31,630
$ —
$ 31,630
Investments in mutual funds and common stock —
37,547
37,547
—
38,895
38,895
$ 2,230
$ 37,547
$ 39,777
$ 31,630
$ 38,895
$ 70,525
Short-term investments $ 2,230
$ 2,500
$ 4,730
$ 31,630
$ 1,200
$ 32,830
Long-term investments —
35,047
35,047
—
37,695
37,695
$ 2,230
$ 37,547
$ 39,777
$ 31,630
$ 38,895
$ 70,525

Debt securities: The Company's short-term debt investments are principally bank certificates of deposit with contractual maturities longer than three months but shorter than one year. These debt securities are accounted for as held to maturity and recorded at amortized cost, which approximates their fair values at September 30, ~~2018~~2019 and December 31, ~~2017.~~2018.

Equity securities: The Company's equity investments in mutual funds and common stock are held within a trust to fund existing obligations associated with several of the Company’s non-qualified deferred compensation plans. During the nine months ended September 30, ~~2018,~~2019, the Company recognized pre-tax net gains ~~of $1,597~~ in the income statement of $2,776 associated

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars~~ with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $586 and ~~shares~~a net increase in ~~thousands, except per share data)~~

unrealized gains of $2,190. During the nine months ended September 30, 2018, the Company recognized pre-tax realized gains in the income statement of $1,597 associated with changes in the fair value of these equity securities, comprised of pre-tax realized gains of $4,101 and a net decrease in unrealized gains of $2,504. During the nine months ended September 30, 2017, the Company recognized pre-tax realized gains on the sale or redemption of equity securities of $362, or $221 after-tax, which was previously recorded in other comprehensive income.


6.	Equity method and other investments

Equity investments in nonconsolidated businesses over which the Company maintains significant influence, but which do not have readily determinable fair values, are carried on the equity method.

As described in Note 5 to these condensed consolidated financial statements, effective January 1, 2018, the Company adopted ASU 2016-01 and related ASU 2018-03 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative for investments in equity securities without readily determinable fair values.

Specifically, under this measurement alternative, unless elected otherwise for a particular investment, the Company initially records equity investments that qualify for the measurement alternative at cost but remeasures them to fair value through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment.

The Company maintains equity method and minor adjusted cost method investments in the private securities of certain other healthcare and healthcare-related businesses. The Company classifies these investments as "Equity method and other investments" on its consolidated balance sheet.

The total carrying amount of equity investments carried under the adjusted cost method measurement alternative at September 30, 2018 was $12,386. Through September 30, 2018, there have been no meaningful impairments or other downward or upward valuation adjustments recognized on these investments.

~~Total~~Company's equity method and other investments ~~in nonconsolidated businesses~~ were ~~$240,820 and $245,534 at September 30, 2018 and December 31, 2017, respectively.~~ comprised of the following:



	September 30, 2019		December 31, 2018
APAC joint venture	$	118,528	$	129,173
Other equity method partnerships	90,410		83,052
Adjusted cost method investments	10,448		12,386
	$	219,386	$	224,611

During the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company recognized equity investment income of ~~$6,126~~$11,158 and ~~loss of $5,456,~~$6,126, respectively, from equity method investments in nonconsolidated businesses.

The Company's largest equity method investment is its ownership interest in DaVita Care Pte. Ltd. (the APAC JV), which was carried at $146,829 and $160,481 at September 30, 2018 and December 31, 2017, respectively. The Company recognized a non-cash other-than-temporary impairment on this investment of $280,066 in the fourth quarter of 2017.

~~As of September 30, 2018 and December 31, 2017, the Company holds a 60% voting interest and a 73.3% current economic interest in the~~joint venture, or APAC JV. Based on the governance structure and voting rights established for the APAC JV at its formation on August 1, 2016, certain key decisions affecting the joint venture’s operations are not subject to the unilateral discretion of the Company, but rather are shared with the other noncontrolling investors. These other noncontrolling investors currently collectively hold a 40% voting interest and a 26.7% economic interest in the APAC JV. DuringJV). In the third quarter of ~~2018,~~2019, the investors in the APAC JV jointly agreed to a ~~six-month~~ deferral of the ~~subscribed incremental~~ capital ~~contribution originally~~contributions that were scheduled for August 1, ~~2018 based upon an assessment of the capital needs of the joint venture.~~2019 to December 1, 2019. The Company continues to expect the economic interests of the noncontrolling investors in the APAC JV to adjust to match their voting interests by ~~August~~December 1, ~~2019.~~2019 or shortly thereafter.

The Company's other equity method investments include legal entities for which the Company maintains significant influence but in which it does not have a controlling financial interest. Almost all of these are U.S. partnerships in the form of limited liability companies. The Company's ownership interests in these partnerships vary, but typically range from 30% to

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

50%. During the nine months ended September 30, 2019, the Company recognized a $1,938 downward valuation adjustment on one of its adjusted cost method investments. During the nine months ended September 30, 2018, there were 0 meaningful impairments or other valuation adjustments recognized on these investments.


7.	Goodwill

Changes in goodwill by reportable segment were as follows:



	U.S. dialysis and related lab services			Other-ancillary services and strategic initiatives			Consolidated total
Balance at December 31, 2017	$	6,144,761		$	465,518		$	6,610,279
Acquisitions	130,574			147,774			278,348
Divestitures	(331		)	(15,166		)	(15,497		)
Impairment charges	—			(3,106		)	(3,106		)
Foreign currency and other adjustments	—			(28,064		)	(28,064		)
Balance at December 31, 2018	$	6,275,004		$	566,956		$	6,841,960
Acquisitions	18,089			59,149			77,238
Impairment charges	—			(124,892		)	(124,892		)
Foreign currency and other adjustments	—			(28,647		)	(28,647		)
Balance at September 30, 2019	$	6,293,093		$	472,566		$	6,765,659

Balance at September 30, 2019
Goodwill	$	6,293,093		$	622,307		$	6,915,400
Accumulated impairment charges	—			(149,741		)	(149,741		)
	$	6,293,093		$	472,566		$	6,765,659

U.S. dialysis and
related lab services

Other-ancillary
services and
strategic initiatives
Consolidated total
Balance at January 1, 2017 $ 5,691,587
$ 323,788
$ 6,015,375
Acquisitions 485,434
131,598
617,032
Divestitures (32,260 ) (126 ) (32,386 )
Impairment charges —
(36,196 ) (36,196 )
Foreign currency and other adjustments —
46,454
46,454
Balance at December 31, 2017 $ 6,144,761
$ 465,518
$ 6,610,279
Acquisitions 24,431
111,223
135,654
Divestitures (331 ) (15,166 ) (15,497 )
Impairment charges —
(3,106 ) (3,106 )
Foreign currency and other adjustments —
(24,671 ) (24,671 )
Balance at September 30, 2018 $ 6,168,861
$ 533,798
$ 6,702,659

Balance at September 30, 2018:
Goodwill $ 6,168,861
$ 561,399
$ 6,730,260
Accumulated impairment charges —
(27,601 ) (27,601 )
$ 6,168,861
$ 533,798
$ 6,702,659

The Company elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairmenteffective January 1, 2017.

~~Each of~~ The amendments in this ASU simplify the ~~Company’s operating segments described in Note 19 to these condensed consolidated financial statements represents an individual reporting unit~~test for goodwill impairment ~~testing purposes, except that each sovereign jurisdiction within~~by eliminating the ~~Company’s international operating segments is considered a separate reporting unit.~~

~~Within~~second step in the U.S. dialysis and related lab services operating segment, the Company considers each of its dialysis centers to constitute an individual business for which discrete financial information is available. However,assessment. All goodwill impairment tests performed since these dialysis centers have similar operating and economic characteristics, and the allocation of resources and significant investment decisions concerning these businesses are highly centralized and the benefits broadly distributed, the Company has aggregated these centers and deemed them to constitute a single reporting unit.

The Company has applied a similar aggregation to the vascular access service centers in its vascular access reporting unit, to the physician practices in its physician services reporting unit, to the dialysis centers within each international reporting unit, and to the non-dialysis healthcare businesses within each international region. For the Company’s other operating segments, discrete business components below the operating segment level constitute individual reporting units.adoption were performed under this new guidance.

During the three months ended March 31, 2019, the Company recognized a $41,037 goodwill impairment charge in its Germany kidney care business. This charge resulted primarily from a change in relevant discount rates, as well as a decline in current and ~~nine~~expected future patient census and an increase in first quarter and expected future costs, principally due to wage increases expected to result from recently announced legislation.

During the three months ended September 30, ~~2018,~~2019, the Company ~~performed scheduled annual and other reporting unit~~completed additional goodwill impairment ~~assessments.~~assessments of reporting units previously disclosed as at-risk of significant goodwill impairment, including its Germany kidney care business. As a result of these assessments, the Company recognized a further goodwill impairment charge of $78,439 in its Germany kidney care business and a $5,416 goodwill impairment charge in its German other health operations. The incremental charge recognized in the Germany kidney care business resulted from changes and developments in the Company's outlook for this business since its last assessment. These primarily concern developments in the business in response to evolving market conditions and changes in the Company's expected timing and ability to mitigate them, which was based on results of in-depth operating and strategic reviews completed by the Company’s new Germany management team during the third quarter.

The impairment charges recognized in the third quarter of 2019 at the Company’s Germany kidney care business and its German other health operations include increases of $16,756 and $1,013, respectively, to the goodwill impairment charges, and reductions to deferred tax expense, related to deferred tax assets that the impairments themselves generated. The result is an $83,855 goodwill impairment charge to operating income and a $17,769 credit to tax expense, for a net $66,086 impact on net income. As of September 30, 2019, the Company's Germany kidney care business and its German other health operations remain at risk of further goodwill impairment.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

During the nine months ended September 30, 2019, the Company recognized total goodwill impairment charges of $124,892 consisting of the charges described above.

Further changes in expected patient census, increases in operating costs, reductions in reimbursement rates, changes in actual or 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:



Reporting unit	Goodwill balance as of September 30, 2019		Carrying amount coverage⁽¹⁾	Sensitivities
Reporting unit	Goodwill balance as of September 30, 2019		Carrying amount coverage⁽¹⁾	Operating income⁽²⁾	Discount rate⁽³⁾
Germany Kidney Care	$	287,256	—%	(1.3)%	(11.0)%
Brazil Kidney Care	$	72,461	4.4%	(2.8)%	(7.0)%


(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.

The Company did not recognize any goodwill impairment charges during the three months ended September 30, 2018 and recognized a goodwill impairment charge of $3,106 at ~~the Company's~~its German ~~integrated healthcare business~~other health operations during the nine months ended September 30, 2018.

During the nine months ended September 30, 2017, the Company recognized goodwill impairment charges of $34,696, at the Company’s vascular access reporting unit. These charges resulted primarily from continuing changes in the Company's outlook for this business as the Company's partners and operators 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. There is no goodwill remaining at the Company's vascular access reporting unit.

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

Except as described above, in Note 11 to the Company's consolidated financial statements included in the 10-K and in Note 7 to the Company’s ~~annual report on Form 10-K for the year ended December 31, 2017 and quarterly reports on Form~~condensed consolidated financial statements included in subsequent 10-Q ~~for the quarters ended March 31, 2018 and June 30, 2018, none~~filings, NaN of the Company's various other reporting units were considered at risk of significant goodwill impairment as of September 30, ~~2018.~~2019. Since the dates of the Company's last annual goodwill impairment assessments there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected the Company's businesses. However, these changes did not cause management to believe it is more likely than not that the fair values of any of the Company's reporting units would be less than their respective carrying amounts as of September 30, ~~2018.~~2019.


8.	Income taxes

The Company's effective income tax rate from continuing operations was 31.1% for the third quarter of 2018 as compared to 26.2% for the second quarter of 2018 and 31.3% for the third quarter of 2017. The Company's effective income tax rate increased in the third quarter of 2018 as compared to the second quarter of 2018 due to non-deductible advocacy costs and additional non-deductible expenses related to the Tax Cuts and Jobs Act of 2017 (2017 Tax Act), partially offset by return to provision adjustments.

As of September 30, ~~2018,~~2019, the Company’s total liability for unrecognized tax benefits relating to tax positions that do not meet the more-likely-than-not threshold was ~~$40,376,~~$52,769, of which ~~$37,533~~$49,926 would impact the Company's effective tax rate if recognized. The total balance increased ~~$7,600~~$12,387 from the December 31, ~~2017~~2018 balance of ~~$32,776.~~$40,382.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in its income tax expense. At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had approximately ~~$8,296~~$11,292 and ~~$4,195,~~$9,019, respectively, accrued for interest and penalties related to unrecognized tax benefits, net of federal tax benefits.

The Company performed a provisional analysis of the 2017 Tax Act and recorded a reasonable estimate of its effect at December 31, 2017. The Company is in the process of completing its analysis with regards to the 2017 Tax Act and will record any adjustments to its estimate on or before December 22, 2018. As of September 30, 2018, the Company has not made any material adjustments to its December 31, 2017 estimates.


9.	~~Long-term debt~~

~~Long-term debt was comprised of the following:~~

September 30,
2018

December 31,
2017
Senior secured credit facilities:
Term Loan A $ 700,000
$ 775,000
Term Loan A-2 995,000
—
Term Loan B 3,351,250
3,377,500
Revolver 275,000
300,000
Senior notes 4,500,000
4,500,000
Acquisition obligations and other notes payable 167,779
150,512
Capital lease obligations 289,333
297,170
Total debt principal outstanding 10,278,362
9,400,182
Discount and deferred financing costs (53,624 ) (63,951 )
10,224,738
9,336,231
Less current portion (1,784,065 ) (178,213 )
$ 8,440,673
$ 9,158,018

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)


9.	Long-term debt

Long-term debt was comprised of the following:



								As of September 30, 2019
	September 30, 2019			December 31, 2018			Maturity date	Interest rate		Estimated fair value⁽⁴⁾
Senior Secured Credit Facilities⁽¹⁾:
New Term Loan A	$	1,750,000		$			8/12/2024	LIBOR + 1.50%		$	1,750,000
New Term Loan B	2,750,000						8/12/2026	LIBOR + 2.25%		$	2,770,625
Prior Term Loan A⁽²⁾				675,000			12/24/2019	⁽³⁾		$	—
Prior Term Loan A-2⁽²⁾				995,000			12/24/2019	⁽³⁾		$	—
Prior Term Loan B				3,342,500			6/24/2021	⁽³⁾		$	—
Prior revolving line of credit⁽²⁾				175,000			12/24/2019	⁽³⁾		$	—
Senior Notes:
5 1/8% Senior Notes	1,750,000			1,750,000			7/15/2024	5.125	%	$	1,776,250
5% Senior Notes	1,500,000			1,500,000			5/1/2025	5.00	%	$	1,492,200
5 3/4% Senior Notes	—			1,250,000			8/15/2022			$	—
Acquisition obligations and other notes payable⁽⁵⁾	181,757			183,979			2019-2027	5.50	%	$	181,757
Financing lease obligations⁽⁶⁾	280,138			282,737			2020-2037	5.36	%	$	280,138
Total debt principal outstanding	8,211,895			10,154,216
Discount and deferred financing costs⁽⁷⁾	(75,979		)	(52,000		)
	8,135,916			10,102,216
Less current portion	(121,441		)	(1,929,369		)
	$	8,014,475		$	8,172,847


(1)	As of September 30, 2019, the Company has an undrawn new revolving line of credit under its new senior secured credit facilities of $1,000,000. The new revolving line of credit interest rate in effect at September 30, 2019 was 1.50% plus London Interbank Offered Rate (LIBOR) and it matures on August 12, 2024.


(2)	On May 6, 2019, the Company entered into an agreement to extend the maturity dates of its then existing Term Loan A, Term Loan A-2 and revolving line of credit under its prior senior secured credit facilities by six months, to December 24, 2019.


(3)	At June 30, 2019, the interest rate on the Company's then existing term loan debt was LIBOR plus interest rate margins in effect of 2.00% for the prior Term Loan A and prior revolving line of credit, 1.00% for the prior Term Loan A-2 and 2.75% for the prior Term Loan B.


(4)	Fair value estimates are based upon bid and ask quotes for these instruments, typically a level 2 input. The balances of acquisition obligations and other notes payable, and financing lease obligations are presented in the condensed consolidated financial statements as of September 30, 2019 at their approximate fair values due to the short-term nature of their settlements.


(5)	The interest rate presented for acquisition obligations and other notes payable is their weighted average interest rate based on the current interest rate in effect and assuming no changes to the LIBOR based interest rates.


(6)	The interest rate presented for financing lease obligations is their weighted average discount rate.

(7)

As of September 30, 2019, the carrying amount of the Company’s current senior secured credit facilities includes a discount of $6,708 and deferred financing costs of $47,255, and the carrying amount of the Company’s senior notes includes deferred financing costs of $22,016. As of December 31, 2018, the carrying amount of the Company’s then existing senior secured credit facilities included a discount of $6,104 and deferred financing costs of $12,580, and the carrying amount of the Company’s senior notes included deferred financing costs of $33,316.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

Scheduled maturities of long-term debt at September 30, ~~2018~~2019 were as follows:



2019 (remainder of the year)	29,841
2020	129,082
2021	153,120
2022	168,824
2023	224,455
2024	3,171,804
Thereafter	4,334,769

2018 (remainder of the year) 49,701
2019 2,028,808
2020 74,985
2021 3,311,502
2022 1,289,539
2023 36,437
Thereafter 3,487,390
The Company closed the DaVita Medical Group (DMG) sale on June 19, 2019 and, as required by the terms of its prior senior secured credit agreement, used all of the net proceeds from the sale of DMG to prepay term debt outstanding under that credit agreement. During the nine months ended September 30, 2019, the Company made mandatory principal prepayments of $647,424 on the prior Term Loan A, $995,000 on the prior Term Loan A-2 and $2,823,447 on the prior Term Loan B.

On ~~March 29, 2018,~~August 12, 2019, the Company entered into ~~an Increase Joinder No. 1 (Increase Joinder Agreement) under its existing~~a new $5,500,000 senior secured credit ~~facilities. Pursuant to this Increase Joinder Agreement,~~agreement (the New Credit Agreement) consisting of a secured term loan A facility in the aggregate principal amount of $1,750,000 with a delayed draw feature, a secured term loan B facility in the aggregate principal amount of $2,750,000 and a secured revolving line of credit in the aggregate principal amount of $1,000,000 (the foregoing referred as the new Term Loan A, new Term Loan B and new revolving line of credit, respectively). In addition, the Company ~~entered~~can increase the existing revolving commitments and enter into one or more incremental term loan facilities in an ~~additional $995,000 Term Loan A-2.~~ amount not to exceed the sum of $1,500,000 (less the amount of other permitted indebtedness incurred or issued in reliance on such amount), plus an amount of indebtedness such that the senior secured leverage ratio is not in excess of 3.50:1.00 after giving effect to such borrowings.

The new Term Loan ~~A-2~~A and new revolving line of credit initially bear interest at LIBOR plus an interest rate margin of 1.50%, which is subject to adjustment depending upon the Company's leverage ratio under the New Credit Agreement and can range from 1.00% to 2.00%. The new Term Loan A requires amortizing quarterly principal payments beginning on December 31, 2019 in annual amounts of $10,938 in 2019, $54,688 in 2020, $87,500 in 2021, $98,437 in 2022, and $142,187 in 2023, with the balance of $1,356,250 due in 2024. The new Term Loan B bears interest at LIBOR plus an interest rate margin of ~~1.00%~~2.25%. The new Term Loan B requires amortizing quarterly principal payments beginning on December 31, 2019 in annual amounts of $6,875 in 2019, and $27,500 for each year from 2020 through 2025, with the balance of $2,578,125 due in 2026.

~~During~~The Company's term loans and revolving line of credit under its New Credit Agreement are guaranteed by certain of the Company’s direct and indirect wholly-owned domestic subsidiaries, which hold most of the Company’s domestic assets, and are secured by substantially all of the assets of DaVita Inc. and these guarantors. Contemporaneously with the Company entering into the New Credit Agreement and pursuant to the indentures governing the Company’s senior notes, certain subsidiaries of the Company were released from their guarantees of the Company's senior notes such that, after that release, the remaining subsidiary guarantors of the senior notes were the same subsidiaries guaranteeing the New Credit Agreement. The New Credit Agreement contains certain customary affirmative and negative covenants such as various restrictions or limitations on permitted amounts of investments, acquisitions, share repurchases, the payment of dividends, and redemptions and incurrence of other indebtedness. Many of these restrictions and limitations will not apply as long as the Company’s leverage ratio calculated in accordance with the New Credit Agreement is below 4.00:1.00. In addition, the New Credit Agreement places limitations on the amount of gross revenue from individual immaterial subsidiaries and also requires compliance with a maximum leverage ratio covenant of 5.00:1.00 through 2022 and 4.50:1.00 thereafter.

In the third quarter of 2019, the Company used a portion of the proceeds from the new Term Loan A and new Term Loan B to pay off the remaining principal balances outstanding and accrued interest and fees on its prior Term Loan B and prior revolving line of credit in the amount of $1,153,274; to redeem all of its outstanding 5.75% Senior Notes due in 2022 for an aggregate cash payment consisting of principal; redemption premium and accrued but unpaid interest to the redemption date of $1,267,565; and to repurchase 21,802 shares of common stock under the modified “Dutch auction” tender offer (the Tender Offer) for a total cost of $1,233,886, including fees and expenses, as described in Note 14 to these condensed consolidated financial statements. The remaining debt borrowings added cash to the balance sheet for potential acquisitions, share repurchases and other general corporate purposes.

In addition to the prepayments described above, during the first nine months of ~~2018,~~2019 the Company made ~~mandatory~~regularly

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

scheduled principal payments under its then existing senior secured credit facilities ~~totaling $75,000~~of $27,576 on its prior Term Loan A and ~~$26,250~~$17,500 on its prior Term Loan B. The Company did not have any regularly scheduled principal payments under its new senior secured credit facilities during the first nine months of 2019.

As a result of the transactions described above, the Company recognized debt prepayment, refinancing and redemption charges of $21,242 and $33,402 in the three and nine month periods ended September 30, 2019, respectively, as a result of the repayment of all principal balances outstanding on the Company's prior senior secured credit facilities and the redemption of its 5.75% Senior Notes. The $21,242 of such charges recognized in the third quarter of 2019 represented debt discount and deferred financing cost write-offs associated with the portion of the Company's prior senior secured debt that was paid in full in the third quarter of 2019, as well as redemption charges on its 5.75% Senior Notes redeemed in the third quarter of 2019. The $12,160 of such charges recognized in the second quarter of 2019 represented accelerated amortization of debt discount and deferred financing costs associated with the portion of the Company's prior senior secured debt that was mandatorily prepaid in or shortly after the second quarter of 2019 and prior extensions thereof.

As of September 30, ~~2018,~~2019, the Company maintains several ~~effective~~ interest rate cap agreements that have the economic effect of capping the Company's maximum exposure to LIBOR variable interest rate changes on specific portions of the Company's floating rate debt, ~~as described below.~~including all of the new Term Loan B and a portion of the new Term Loan A. The remaining $1,000,000 outstanding principal balance of the new Term Loan A is subject to LIBOR-based interest rate volatility. The cap agreements are designated as cash flow hedges and, as a result, changes in the fair values of these cap agreements are reported in other comprehensive income. The amortization of the original cap premium is recognized as a component of debt expense on a straight-line basis over the terms of the cap agreements. These cap agreements do not contain credit-risk contingent features.

~~As of September 30, 2018,~~In August 2019, the Company ~~maintains~~entered into several ~~effective~~forward interest rate cap agreements ~~that were entered into in October 2015~~ with a notional ~~amounts totaling $3,500,000. These cap agreements became effective June 29, 2018 and~~amount of $3,500,000 that have the economic effect of capping the Company's maximum exposure to LIBOR variable ~~component~~interest rate changes on specific portions of the ~~Company’s interest~~Company's floating rate ~~at a maximum of 3.50% on an equivalent amount of its debt.~~debt (2019 cap agreements). These 2019 cap agreements ~~expire on June 30, 2020. As of September 30, 2018, the total~~are designated as cash flow hedges and, as a result, changes in their fair value of these cap agreements was an asset of approximately $2,135. During the nine months ended September 30, 2018, the Company recognized debt expense of $2,163 from these cap agreements and recorded a gain of $1,103values are reported in other comprehensive ~~income due to an increase in the unrealized fair value of these cap agreements.~~

~~Previously, the Company maintained other interest rate~~income. These 2019 cap agreements that were entered into in November 2014 with notional amounts totaling $3,500,000. These cap agreements had the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50%do not contain credit-risk contingent features, and become effective on ~~an equivalent amount of the Company’s debt. However, these interest rate cap agreements expired on~~ June 30, 2018. During the nine months ended September 30, 2018, the Company recognized debt expense of $4,140 from these cap agreements and recorded an immaterial loss in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.2020.

The following table summarizes the Company’s ~~derivative instruments~~interest rate cap agreements outstanding as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018, which are classified in "Other long-term assets" on its consolidated balance sheet:



						Nine months ended September 30, 2019				Fair value
	Notional amount		LIBOR maximum rate	Effective date	Expiration date	Debt expense		Recorded OCI loss		September 30, 2019		December 31, 2018
2015 cap agreements	$	3,500,000	3.50%	6/29/2018	6/30/2020	$	6,428	$	851	$	—	$	851
2019 cap agreements	$	3,500,000	2.00%	6/30/2020	6/30/2024			$	1,393	$	20,642

September 30, 2018 December 31, 2017
Derivatives designated as hedging instruments Balance sheet location Fair value Balance sheet location Fair value
Interest rate cap agreements Other long-term assets $ 2,135
Other long-term assets $ 1,032

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

The following table summarizes the effects of the Company’s interest rate cap agreements for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:



	Amount of unrecognized (losses) gains in OCI on interest rate cap agreements												Income statement location	Reclassification from accumulated other comprehensive income into net income
	Three months ended September 30,						Nine months ended September 30,							Three months ended September 30,						Nine months ended September 30,
Derivatives designated as cash flow hedges	2019			2018			2019			2018				2019			2018			2019			2018
Interest rate cap agreements	$	(1,420	)	$	50		$	(2,244	)	$	1,103		Debt expense	$	2,101		$	2,163		$	6,428		$	6,303
Related income tax	360			(13		)	572			(284		)	Related income tax	(532		)	(557		)	(1,646		)	(1,623		)
Total	$	(1,060	)	$	37		$	(1,672	)	$	819			$	1,569		$	1,606		$	4,782		$	4,680

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
September 30, Nine months ended
September 30, Three months ended
September 30, Nine months ended
September 30,
Derivatives designated as cash flow hedges 2018 2017 2018 2017 2018 2017 2018 2017
Interest rate cap
agreements $ 50
$ (782 ) $ 1,103
$ (8,967 ) Debt expense $ 2,163
$ 2,070
$ 6,303
$ 6,208
Tax (benefit) expense (13 ) 304
(284 ) 3,488
Tax expense (557 ) (805 ) (1,623 ) (2,415 )
Total $ 37
$ (478 ) $ 819
$ (5,479 ) $ 1,606
$ 1,265
$ 4,680
$ 3,793

~~As of September 30, 2018, the Company’s Term Loan B debt bears interest at LIBOR plus an interest rate margin of 2.75%. Term Loan B is subject~~See Note 15 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 $148,750 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 $551,250. Term Loan A-2 is subject to the variability of LIBOR plus an interest rate margin of 1.00%. Interest ratesthese condensed consolidated financial statements for further details on ~~the Company’s senior notes are fixed by their terms.~~amounts recorded and reclassified from accumulated other comprehensive (loss) income.

The Company’s weighted average effective interest rate on the senior secured credit facilities at the end of the third quarter of 2019 was ~~4.80%~~4.30%, based on the current margins in effect ~~of 2.00%~~ for the new Term Loan A ~~1.00% for Term Loan A-2,~~ and ~~2.75% for~~the new Term Loan B as of September 30, ~~2018.~~2019, as described above.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

The Company’s overall weighted average effective interest rate ~~during~~for the ~~quarter~~three and nine months ended September 30, ~~2018~~2019 was ~~4.93%~~5.09% and 5.14%, respectively, and as of September 30, ~~2018~~2019 was ~~5.03%. The Company's weighted average effective interest rate for the nine months ended September 30, 2018 was 4.92%~~4.66%.

As of September 30, ~~2018,~~2019, the Company’s interest rates are fixed on approximately ~~47.43%~~44.03% of its total debt.

As of September 30, ~~2018,~~2019, the Company ~~had $275,000 drawn on its $1,000,000~~has an undrawn revolving line of credit under its new senior secured credit facilities of $1,000,000, for which approximately ~~$14,355~~$13,055 was committed for outstanding letters of credit. The ~~remaining amount is unencumbered. The~~ Company also has approximately ~~$22,621~~$59,723 of ~~additional~~ outstanding letters of credit ~~related to its Kidney Care business and $211 of committed outstanding letters~~under a separate bilateral secured letter of credit ~~related to DaVita Medical Group (DMG), which is backed by a certificate of deposit.~~facility.


10.	Leases

The majority of the Company’s facilities are leased under non-cancellable operating leases ranging in terms from five years to fifteen years and which contain renewal options of five years to ten years at the fair rental value at the time of renewal. These renewal options are included in the Company’s determination of the right-of-use assets and related lease liabilities when renewal is considered reasonably certain at the commencement date. Certain of the Company’s leases are subject to periodic consumer price index increases or contain fixed escalation clauses. The Company also leases certain facilities and equipment under finance leases. The Company has elected the practical expedient to not separate lease components from non-lease components related to its real estate financing and operating leases.

Financing and operating right-of-use assets are recognized based on the net present value of lease payments over the lease term at the commencement date. Since most of the Company's leases do not provide an implicit rate of return, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of lease payments.

As of September 30, 2019 and December 31, 2018, assets recorded under finance leases were $254,967 and $367,164, respectively, and accumulated amortization associated with finance leases was $21,606 and $131,971, respectively, included in property and equipment, net, on the Company's consolidated balance sheet.

In certain markets, the Company acquires and develops dialysis centers. Upon completion, the Company sells the center to a third party and leases the space back with the intent of operating the center on a long term basis. Both the sale and leaseback terms are generally market terms. The lease terms are consistent with the Company's other operating leases with the majority of the leases under non-cancellable operating leases ranging in terms from five years to fifteen years and which contain renewal options of five years to ten years at the fair rental value at the time of renewal.

The Company adopted Topic 842, Leases beginning on January 1, 2019 through a modified retrospective approach for leases existing at the adoption date with a cumulative effect adjustment. Consequently, financial information was not updated for dates and periods before January 1, 2019.

The components of lease expense were as follows:



Lease cost	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost⁽¹⁾:
Fixed lease expense	$	133,342	$	392,398
Variable lease expense	30,786		89,264
Financing lease cost:
Amortization of leased assets	6,164		17,693
Interest on lease liabilities	3,803		11,293
Net lease cost	$	174,095	$	510,648


(1)	Includes short-term lease expense and sublease income, which are immaterial.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

Other information related to leases was as follows:



Lease term and discount rate	September 30, 2019
Weighted average remaining lease term (years):
Operating leases	9.1
Finance leases	10.5
Weighted average discount rate:
Operating leases	4.2	%
Finance leases	5.4	%



Other information	Nine months ended September 30, 2019
Gains on sale leasebacks, net	$	13,903
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	467,338
Operating cash flows from finance leases	$	16,226
Financing cash flows from finance leases	$	21,905
Net operating lease assets obtained in exchange for new or modified operating lease liabilities	$	299,697

Future minimum lease payments under non-cancellable leases as of September 30, 2019 were as follows:



	Operating leases			Finance leases
2019 (remainder of the year)	$	121,795		$	8,384
2020	497,654			38,411
2021	474,292			33,950
2022	437,481			34,369
2023	390,993			34,511
2024	340,662			34,540
Thereafter	1,433,145			183,786
Total future minimum lease payments	$	3,696,022		$	367,951
Less portion representing interest	(639,683		)	(87,813		)
Present value of lease liabilities	$	3,056,339		$	280,138

Future minimum lease payments under non-cancellable leases as of December 31, 2018 were as follows:



	Operating leases		Capital leases
2019	$	483,488	$	36,754
2020	462,154		41,044
2021	432,950		34,026
2022	395,462		33,690
2023	349,649		33,845
Thereafter	1,589,949		194,611
	$	3,713,652	373,970
Less portion representing interest			(91,233		)
Total capital lease obligations, including current portion			$	282,737

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)


11.	Contingencies

The majority of the Company’s revenues are from government programs and may be subject to adjustment as a result of: (i) examination by government agencies or contractors, for which the resolution of any matters raised may take extended periods of time to finalize; (ii) differing interpretations of government regulations by different Medicare contractors or regulatory authorities; (iii) differing opinions regarding a patient’s medical diagnosis or the medical necessity of services provided; and (iv) retroactive applications or interpretations of governmental requirements. In addition, the Company’s revenues from commercial payors may be subject to adjustment as a result of potential claims for refunds, as a result of government actions or as a result of other claims by commercial payors.

The Company operates in a highly regulated industry and is a party to various lawsuits, demands, claims, qui tam suits, governmental investigations and audits (including, without limitation, investigations or other actions resulting from its obligation to self-report suspected violations of law) and other legal proceedings. The Company records accruals for certain legal proceedings and regulatory matters to the extent that the Company determines an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. As of September 30, ~~2018,~~2019 and December 31, ~~2017,~~2018, the Company’s total recorded accruals ~~including DMG,~~ with respect to legal proceedings and regulatory matters, net of anticipated third party recoveries, were immaterial. While these accruals reflect the Company’s best estimate of the probable loss for those matters as of the dates of those accruals, the recorded

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

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, 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 also may be impacted by various factors, including, without limitation, 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 may result in a change of business practices. Further, there may be various levels of judicial review available to the Company 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 the Company is subject.

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

~~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 OIG for the U.S. Department of Health and Human Services (HHS) requesting 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 requested information regarding JSA’s communications about patient diagnoses as they related to certain MA plans generally, and more specifically as related to two Florida physicians with whom JSA previously contracted.

In addition to the subpoena described above, in June 2015, the Company received a civil subpoena from the OIG covering the period from January 1, 2008 through the present and seeking production of a wide range of documents relating to the Company’s and its subsidiaries’ (including DMG and its subsidiary JSA) provision of services to MA plans and related patient diagnosis coding and risk adjustment submissions and payments. The Company believes that the request was part of a broader industry investigation into MA patient diagnosis coding and risk adjustment practices and potential overpayments by the government. The information requested included information related 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 the Company’s November 1, 2012, acquisition of HealthCare Partners (now known as the Company's DMG business), and the Company notified Centers for Medicare and Medicaid Services (CMS) in April 2015 of the coding practice and potential overpayments. In that regard, the Company identified certain additional coding practices which may have been problematic, some of which were the subject of the previously disclosed and dismissed ~~Swoben Private Civil Suit~~.

The Company entered into a settlement agreement with the Department of Justice (DOJ) and OIG to resolve these matters on September 28, 2018. As previously disclosed, an escrow established in connection with the Company's acquisition of HealthCare Partners in 2012 held back a portion of the purchase price to the prior owners of HealthCare Partners as security for the indemnification rights of the Company. The settlement amount of $270,000 was paid with these escrowed funds.

2016 U.S. Attorney Texas Investigation: In early February 2016, the Company announced that its pharmacy ~~services~~services' wholly-owned subsidiary, DaVita Rx, LLC (DaVita Rx), received a Civil Investigative Demand (CID) from the U.S. Attorney’s Office, ~~for the~~ Northern District of Texas. The government is conducting a federal False Claims Act (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 an investigation into the Company’s relationships with pharmaceutical manufacturers. The CID covers the period from January 1, 2006 through the present. In the spring of 2015, the Company initiated an internal compliance review of DaVita Rx during which it 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. The Company notified the government in September 2015 that it was conducting this review of DaVita Rx and began providing regular updates of its review. Upon completion of its review, the Company filed a self-disclosure with the OIG in February 2016 and has been working to address and update the practices it identified in the self-disclosure, some of which overlap with information requested by the U.S. Attorney’s Office. The OIG informed the Company in February 2016 that its submission was not accepted. They indicated that the OIG is not expressing an opinion regarding the conduct disclosed or the Company’s legal positions. In connection with the Company’s ongoing efforts working with the government, the Company learned that a qui tam complaint had been filed covering some of the issues in the CID and practices that had been identified by the ~~Company’s self-disclosure.~~Company in a self-disclosure filed with the Office of Inspector General (OIG) for the U.S. Department of Health and Human Services (HHS) in February 2016. In December 2017, the Company finalized and executed a settlement agreement with the government and relators in the qui tam matter ~~and~~ that included total monetary consideration of $63,700, as previously ~~announced,~~disclosed, of which $41,500 was an incremental cash

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

payment and $22,200 was for amounts previously refunded, and all of which was previously accrued. The government’s investigation into certain of the Company's relationships with pharmaceutical manufacturers is ongoing, and in July 2018 the ~~government~~OIG served ~~an HHS-OIG~~the Company with a subpoena seeking additional documents and information relating to those relationships. The Company is continuing to cooperate with the government in this investigation.

2017 U.S. Attorney Massachusetts Investigation: In January 2017, the Company was served with an administrative subpoena for records by the U.S. Attorney’s Office, District of Massachusetts, relating to an investigation into possible federal health care offenses. The subpoena ~~covers~~covered the period from January 1, 2007 ~~through~~to the present, and ~~seeks~~sought 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. The Department of Justice notified the Court on July 23, 2019 of its decision to elect not to intervene in the matter of U.S. ex rel. David Gonzalez v. DaVita Healthcare Partners, et al. The complaint then was unsealed in the U.S. District Court, District of Massachusetts by order entered on August 1, 2019. The Department of Justice has confirmed that the complaint, which alleges violations of the FCA and various

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

state false claims acts, was the basis of its investigation initiated in January 2017. The Company ~~is continuing to cooperate~~has not been served with the ~~government in this investigation.~~complaint.

2017 U.S. Attorney Colorado Investigation: In November 2017, the U.S. Attorney’s Office, District of Colorado informed the Company of an investigation it was conducting into possible federal ~~health care~~healthcare offenses involving DaVita Kidney Care, as well as several of the Company’s wholly-owned ~~subsidiaries, including DMG,~~subsidiaries. The matter currently includes an investigation into DaVita Rx, DaVita Laboratory Services, Inc. (DaVita Labs), and RMS Lifeline Inc. (Lifeline). In each of August 2018 and May 2019, the Company received a CID ~~from the DOJ. The CID was issued~~ pursuant to the FCA ~~and covers~~from the ~~period from January 2005 through the present. In connection with the resolution of the~~ ~~2015~~ U.S. ~~OIG Medicare Advantage Civil Investigation~~ ~~referred to above, the Company resolved possible claims~~Attorney's Office relating to ~~DMG in~~ this investigation. The Company is continuing to cooperate with the government in this investigation.

~~2017 U.S. Attorney Florida Investigation~~: In November 2017, the U.S. Attorney’s Office, Southern District of Florida informed the Company of an investigation it was conducting into possible federal healthcare offenses involving the Company's wholly-owned subsidiary, Lifeline. The Company is continuing to cooperate with the government in this investigation.

2018 U.S. Attorney Florida Investigation: In March 2018, DaVita Labs received two CIDs from the U.S. Attorney’s Office, Middle District of Florida that were identical in nature but directed to the two different labs. According to the face of the CIDs, the U.S. Attorney’s Office is conducting an investigation as to whether the Company’s subsidiary submitted claims for blood, urine, and fecal testing, where there were insufficient test validation or stability studies to ensure accurate results, in violation of the FCA. In October 2018, DaVita Labs received a subpoena from the OIG in connection with this matter requesting certain patient records linked to clinical laboratory tests. On September 30, 2019, the U.S. Attorney’s Office notified the U.S. District Court, Middle District of Florida, of its decision not to elect to intervene at this time in the matter of U.S. ex rel. Lorne Holland, et al. v. DaVita Healthcare Partners, Inc., et al. The court then unsealed the complaint, which alleges violations of the FCA, by order dated the same day. The Company ~~is continuing to cooperate~~has not been served with the ~~government in this investigation.~~complaint.

* * *

Although the Company cannot predict whether or when proceedings might be initiated or when these matters may be resolved (other than as may be 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 and to develop over the course of time. In addition to the inquiries and proceedings specifically identified above, the Company frequently is 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 the Company 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, substantial financial penalties or awards against the Company, substantial payments made by the Company, harm to the Company’s reputation, required changes to the Company’s business practices, exclusion from future participation in the Medicare, Medicaid and other federal health care programs and, if criminal proceedings were initiated against the Company, members of its board of directors or management, possible criminal penalties, any of which could have a material adverse effect on the Company.

Shareholder and Derivative 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 the Company and certain executives. The complaint covers the time period of August 2015 to October 2016 and alleges, generally, that the Company and its executives violatedfederal securities laws concerning the Company’s 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

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

operational status and future growth prospects." In November 2017, the court appointed the lead plaintiff and an amended complaint was filed on January 12, 2018. On March 27, 2018, the Company and various individual defendants filed a motion to dismiss. ~~Briefing on~~On March 28, 2019, the ~~motion is complete. The plaintiffs filed an opposition to~~U.S. District Court for the District of Colorado denied the motion to ~~dismiss on June 6, 2018.~~dismiss. The Company ~~filed a reply in support of~~answered the ~~motion~~complaint on ~~July 19, 2018.~~May 28, 2019. The Company disputes these allegations and intends to defend this action accordingly.

In re DaVita Inc. Stockholder Derivative Litigation: On August 15, 2017, the U.S. District Court for the District of Delaware consolidated ~~three~~3 previously disclosed shareholder derivative lawsuits: the Blackburn Shareholder action filed on February 10, 2017, the Gabilondo Shareholder action filed on May 30, 2017, and the City of Warren Police and Fire Retirement System Shareholder action filed on June 9, 2017. The complaint covers the time period from 2015 to present and alleges, generally, breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, corporate waste, and misrepresentations and/or failures to disclose certain information in violation of the federal securities laws in connection with an alleged practice to direct patients with government-subsidized health insurance into private health insurance plans to

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

maximize the Company’s profits. An amended complaint was filed in September 2017, and on December 18, 2017, the Company filed a motion to dismiss and a motion to stay proceedings in the alternative. ~~The plaintiffs filed an opposition to~~On April 25, 2019, the court denied the Company's motion to ~~dismiss~~dismiss. The Company answered the complaint on March 9, 2018. On June 25, 2018, the U.S. District Court for the District of Delaware granted the Company’s motion to stay proceedings and stayed the case until January 7, 2019, the date of the next status conference.May 28, 2019. The Company disputes these allegations and intends to defend this action accordingly.

Other Proceedings

~~White, Kathleen, et al. v. DaVita Healthcare Partners, Inc., Civil Action No. 15-cv-2106, U.S. District Court for the District of Colorado~~: Three actions (Menchaca v. DaVita Healthcare Partners, Inc., Saldana v. DaVita Healthcare Partners, Inc. and Hardin v. DaVita Healthcare Partners, Inc.) were consolidated in December 2016 into one action in U.S. District Court for the District of Colorado. In all three actions, the plaintiffs brought claims for wrongful death based on allegations related to Granuflo®, a product used as a component of the dialysis process. The Menchaca and Saldana actions arose out of the treatment of patients in California, while the Hardin action arose out of the treatment of a patient in Illinois. On June 27, 2018, the jury returned a verdict in favor of the plaintiffs, collectively awarding $8,500 in compensatory damages and $375,000 in punitive damages. Judgment on this verdict was not entered. On November 1, 2018, the parties filed a joint motion notifying the court that they have arrived at a settlement of the three actions. The resolution of all three of the consolidated actions, collectively, is for $25,500, and requires the filing of a stipulation of dismissal with prejudice in each case. The court has now ordered the parties to file these stipulations of dismissal by November 30, 2018. The Company believes it is probable that it will be able to recover the settlement amount from insurers, indemnitors, and the like; however, the Company can make no assurances that it will recover the full amount.

In addition to the foregoing, from time to time the Company is subject to other lawsuits, demands, claims, governmental investigations and audits and legal proceedings that arise due to the nature of its business, including, without limitation, contractual disputes, such as with payors, suppliers and others, employee-related matters and professional and general liability claims. From time to time, the Company also initiates litigation or other legal proceedings as a plaintiff arising out of contracts or other matters.

~~Resolved Matters~~

~~2011 Suit against the U.S. Department of Veterans Affairs~~: As previously disclosed, the Company 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 the Company provided from 2005 through 2011 to veterans pursuant to VA regulations. In the first quarter of 2017, the Company received a payment of $538,000 related to the settlement with the VA. The Company's consolidated entities recognized a net gain of $527,000 on this settlement. The Company's nonconsolidated and managed entities recognized a gain of $9,000, of which the Company's equity investment share was $3,000. The net effect was a net increase of $530,000 to the Company's operating income.

* * *

Other than as may be described above, the Company cannot predict the ultimate outcomes of the various legal proceedings and regulatory matters to which the Company is or may be subject from time to time, including those described in this Note 1011 to these condensed consolidated financial statements, 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 the Company’s revenues, earnings and cash

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

flows. Further, any legal proceedings or regulatory matters involving the Company, 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 the Company’s business, results of operations, financial ~~results~~condition, cash flows or reputation.


~~11.~~12.	~~Noncontrolling interests subject to put provisions and other~~Other commitments

The Company has potential obligations to purchase the equity interests held by third parties in several of its majority-owned joint ventures and other nonconsolidated entities. These obligations are in the form of put provisions 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, the Company would be required to purchase the third-party owners’ equity interests at either the appraised fair market value or a predetermined multiple of earnings or cash flows attributable to the equity interests put to the Company, which is intended to approximate fair value. The methodology the Company uses 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 noncontrolling interests subject to put provisions are 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 the Company’s 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 interests obligations may be settled 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’ 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.

The Company has certain other potential commitments to provide operating capital to a number of dialysis centers that are wholly-owned by third parties or businesses in which the Company maintains a noncontrolling equity interest as well as to physician-owned vascular access clinics or medical practices that the Company operates under management and administrative services agreements of approximately ~~$5,264.~~

Certain consolidated joint ventures are originally contractually scheduled to dissolve after terms ranging from 10 to 50 years. While noncontrolling interests in these limited life entities qualify as mandatorily redeemable financial instruments, they are subject to a classification and measurement scope exception from the accounting guidance generally applicable to other mandatorily redeemable financial instruments. Future distributions upon dissolution of these entities would be valued below the related noncontrolling interest carrying balances in the consolidated balance sheet.$6,935.


~~12.~~13.	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) ~~and~~as well as long-term performance-based cash awards. Long-term incentive compensation expense, which ~~was~~is primarily general and administrative in nature, ~~was~~is attributed to the Company’s U.S. dialysis and related lab services business, corporate administrative support, and ancillary services and strategic initiatives.

The Company’s stock-based compensation expense for stock-settled awards ~~are~~is measured at ~~their~~the estimated fair ~~values~~value of awards 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~~and recognized ~~as compensation expense~~ on a cumulative straight-line basis over the vesting terms of the awards unless the stock awards are based on non-market based performance metrics, in which case expense is adjusted for the expected ultimate shares to be issued as of the end of each reporting period. Stock-based compensation expense for cash-settled awards is based on their estimated fair values as of the end of each reporting period. The expense for all stock-based awards is recognized net of expected forfeitures.

During the nine months ended September 30, ~~2018,~~2019, the Company granted ~~1,897 stock-settled stock appreciation rights with an aggregate grant-date fair value of $30,817 and a weighted-average expected life of approximately 4.2 years and 1,097~~1,921 restricted and performance stock units with an aggregate grant-date fair value of ~~$72,718~~$96,472 and a weighted-average expected life of approximately ~~3.3~~3.4 years and 2,390 stock-settled stock appreciation rights with an aggregate grant-date fair value of $33,545 and a weighted-average expected life of approximately 4.0 years.

For the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company recognized ~~$74,077~~$82,469 and ~~$46,972,~~$74,077, respectively, in total LTIP expense, of which ~~$60,461~~$43,666 and ~~$25,281,~~$60,461, respectively, represented stock-based compensation expense for stock appreciation rights, restricted stock units, performance stock units and discounted employee stock plan purchases, which are primarily included in general and administrative expense. The estimated tax benefits recorded for stock-based compensation for the nine months ended September 30, 2019 and 2018 was $6,798 and $10,887, respectively.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

primarily included in general and administrative expense. The estimated tax benefits recorded for stock-based compensation for the nine months ended September 30, 2018 and 2017 was $10,887 and $8,497, respectively.

During the three months ended September 30, 2018, the Company adopted a retirement policy (Rule of 65 policy). The Rule of 65 policy generally provides that Section 16 executive officers that are a minimum age of 55 with five years of continuous service with the Company receive certain benefits with respect to their outstanding equity awards upon a qualifying retirement if the sum of their age plus years of service is greater than or equal to 65. These benefits generally include accelerated vesting of restricted stock unit awards, continued vesting of stock-settled stock appreciation rights and performance stock unit awards and an exercise window from the original vest date through the original expiration date regardless of continued employment, with pro rata vesting for a Rule of 65 retirement within one year of the award grant date. The adoption of the Rule of 65 policy resulted in a $14,680 modification charge and a net acceleration of expense of $8,790 during the three and nine months ended September 30, 2018 that is included in the expense amounts reported above.

As of September 30, ~~2018,~~2019, the Company had ~~$122,887 of~~$166,502 in total estimated but unrecognized compensation expense for outstanding LTIP awards, including ~~$103,923~~$151,805 related to stock-based compensation arrangements under the Company’s equity compensation and employee stock purchase plans. The Company expects to recognize the performance-based cash component of these LTIP ~~costs~~expenses over a weighted average remaining period of ~~0.9 year~~0.6 years and the stock-based component of these LTIP ~~costs~~expenses over a weighted average remaining period of ~~1.5~~1.6 years.

For the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company recognized ~~$7,919~~$2,791 and ~~$6,046,~~$7,919, respectively, in actual tax benefits upon the settlement of stock awards.

On November 4, 2019, the independent members of the Company’s Board of Directors (Board) unanimously approved an award of 2,500 premium-priced stock-settled stock appreciation rights (Premium-Priced Award) to the Company’s Chief Executive Officer (CEO), which is subject to stockholder approval of a related amendment to the Company's 2011 Incentive Award Plan.

The base price of the Premium-Priced Award is $67.80 per share, which is a 20% premium to the Tender Offer clearing price. The award vests 50% on each of the third and fourth anniversaries of the date of Board approval and expires after five years. The award includes a holding period requiring that the CEO hold any shares acquired upon exercise until the five-year anniversary of the Board approval, that is, for the full term of the award, subject to lapse of the holding period upon a change in control of the Company or due to Mr. Rodriguez’s death or termination due to disability.


~~13.~~14.	Share repurchases

~~During~~The following table summarizes the Company's repurchases of its common stock during the three and nine months ended September 30, ~~2018,~~2019.



	Three months ended September 30, 2019					Nine months ended September 30, 2019
	Shares repurchased	Amount paid		Average amount		Shares repurchased	Amount paid		Average amount
Tender Offer⁽¹⁾	21,802	$	1,233,886	$	56.60	21,802	$	1,233,886	$	56.60
Open market repurchases	8,790	514,082		58.49		10,850	626,271		57.72
	30,592	$	1,747,968	$	57.14	32,652	$	1,860,157	$	56.97


(1)	The amount paid for shares repurchased associated with the Company's Tender Offer during the three and nine months ended September 30, 2019 includes the clearing price of $56.50 per share plus related fees and expenses of $2,074.

In addition, the Company also repurchased ~~a total of 16,844~~4,283 shares of its common stock for ~~$1,153,511~~$245,544 at an average ~~price~~cost of ~~$68.48~~$57.32 per ~~share. The~~share, subsequent to September 30, 2019 through November 4, 2019.

Effective July 17, 2019, the Board terminated all remaining prior share repurchase authorizations available to the Company ~~has not~~at that time and approved a new share repurchase authorization of $2,000,000. As of the close of business on November 4, 2019, the Company had repurchased ~~any~~a total of 30,661 of shares of its common stock ~~subsequent~~for $1,753,627 under this repurchase authorization.

Effective as of the close of business on November 4, 2019, the Board terminated all remaining prior share repurchase authorizations available to ~~September 30, 2018.~~

Onthe Company under the aforementioned July ~~11, 2018, the Company's Board of Directors~~17, 2019 authorization and approved ~~an additional~~a new share repurchase authorization ~~in the amount~~ of $1,389,999. This share repurchase authorization was in addition to the $110,001 remaining at that time under the Company’s Board of Directors’ prior share repurchase authorization approved in October 2017.$2,000,000. Accordingly, as of November ~~5, 2018,~~6, 2019, the Company ~~has~~had a total of ~~$1,355,605 remaining~~$2,000,000 available under the current ~~Board~~ repurchase ~~authorizations~~authorization for additional share repurchases. Although ~~these~~this share repurchase ~~authorizations do~~authorization does not have an expiration ~~dates,~~date, the Company remains subject to share repurchase limitations, including under the terms of its current senior secured credit facilities and the indentures governing its senior notes.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)


~~14.~~15.	Accumulated other comprehensive (loss) income

For the three months ended September 30, 2018 For the nine months ended September 30, 2018
Interest
rate cap
agreements Investment
securities Foreign
currency
translation
adjustments Accumulated
other
comprehensive
(loss) income Interest
rate cap
agreements Investment
securities Foreign
currency
translation
adjustments Accumulated
other
comprehensive
(loss) income
Beginning balance $ (11,258 ) $ (10,667 ) $ (21,925 ) $ (12,408 ) $ 5,662
$ 19,981
$ 13,235
Cumulative effect
of change in
accounting
principle⁽¹⁾
—
—
—
(2,706 ) (5,662 ) —
(8,368 )
Unrealized gains (losses) 50
(8,827 ) (8,777 ) 1,103
—
(39,475 ) (38,372 )
Related income tax expense (13 ) —
(13 ) (284 ) —
—
(284 )
37
(8,827 ) (8,790 ) 819
—
(39,475 ) (38,656 )
Reclassification
from accumulated
other comprehensive
income into net
income 2,163
—
2,163
6,303
—
—
6,303
Related income tax expense (557 ) —
(557 ) (1,623 ) —
—
(1,623 )
1,606
—
1,606
4,680
—
—
4,680
Ending balance $ (9,615 ) $ (19,494 ) $ (29,109 ) $ (9,615 ) $ —
$ (19,494 ) $ (29,109 )



	For the three months ended September 30, 2019									For the nine months ended September 30, 2019
	Interest rate cap agreements			Foreign currency translation adjustments			Accumulated other comprehensive loss			Interest rate cap agreements			Foreign currency translation adjustments			Accumulated other comprehensive loss
Beginning balance	$	(6,360	)	$	(27,251	)	$	(33,611	)	$	(8,961	)	$	(25,963	)	$	(34,924	)
Unrealized losses	(1,420		)	(44,502		)	(45,922		)	(2,244		)	(45,790		)	(48,034		)
Related income tax	360			—			360			572			—			572
	(1,060		)	(44,502		)	(45,562		)	(1,672		)	(45,790		)	(47,462		)
Reclassification into net income	2,101			—			2,101			6,428			—			6,428
Related income tax	(532		)	—			(532		)	(1,646		)	—			(1,646		)
	1,569			—			1,569			4,782			—			4,782
Ending balance	$	(5,851	)	$	(71,753	)	$	(77,604	)	$	(5,851	)	$	(71,753	)	$	(77,604	)

~~_________________~~



	For the three months ended September 30, 2018									For the nine months ended September 30, 2018
	Interest rate cap agreements			Foreign currency translation adjustments			Accumulated other comprehensive loss			Interest rate cap agreements			Investment securities			Foreign currency translation adjustments			Accumulated other comprehensive (loss) income
Beginning balance	$	(11,258	)	$	(10,667	)	$	(21,925	)	$	(12,408	)	$	5,662		$	19,981		$	13,235
Cumulative effect of change in accounting principle⁽¹⁾	—			—			—			(2,706		)	(5,662		)	—			(8,368		)
Unrealized gains (losses)	50			(8,827		)	(8,777		)	1,103			—			(39,475		)	(38,372		)
Related income tax	(13		)	—			(13		)	(284		)	—			—			(284		)
	37			(8,827		)	(8,790		)	819			—			(39,475		)	(38,656		)
Reclassification into net income	2,163			—			2,163			6,303			—			—			6,303
Related income tax	(557		)	—			(557		)	(1,623		)	—			—			(1,623		)
	1,606			—			1,606			4,680			—			—			4,680
Ending balance	$	(9,615	)	$	(19,494	)	$	(29,109	)	$	(9,615	)	$	—		$	(19,494	)	$	(29,109	)


(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.~~Cuts and Jobs Act of 2017.

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

For the three months ended September 30, 2017 For the nine months ended September 30, 2017
Interest
rate cap
agreements Investment
securities Foreign
currency
translation
adjustments Accumulated
other
comprehensive
(loss) income Interest
rate cap
and swap
agreements Investment
securities Foreign
currency
translation
adjustments Accumulated
other
comprehensive
(loss) income
Beginning balance $ (14,502 ) $ 4,580
$ (17,386 ) $ (27,308 ) $ (12,029 ) $ 2,175
$ (79,789 ) $ (89,643 )
Unrealized (losses) gains (782 ) 1,253
29,143
29,614
(8,967 ) 4,682
91,546
87,261
Related income tax benefit (expense) 304
(390 ) —
(86 ) 3,488
(1,202 ) —
2,286
(478 ) 863
29,143
29,528
(5,479 ) 3,480
91,546
89,547
Reclassification
from accumulated
other comprehensive
income into net
income 2,070
(15 ) —
2,055
6,208
(362 ) —
5,846
Related income tax (expense) benefit (805 ) 6
—
(799 ) (2,415 ) 141
—
(2,274 )
1,265
(9 ) —
1,256
3,793
(221 ) —
3,572
Ending balance $ (13,715 ) $ 5,434
$ 11,757
$ 3,476
$ (13,715 ) $ 5,434
$ 11,757
$ 3,476

Net cap realized losses ~~on interest rate cap agreements that are~~ reclassified into income are recorded as debt expense in the corresponding consolidated statements of ~~operations.~~income. See Note 9 to these condensed consolidated financial statements for further details.

~~Net realized~~Prior to January 1, 2018, unrealized gains and losses on available-for-sale equity securities were recorded to accumulated other comprehensive income and reclassified to other income when realized. Subsequent to January 1, 2018, unrealized gains and losses on investment securities ~~reclassified into income for the nine months ended September 30, 2017 were recognized in~~are recorded directly to other income ~~in the corresponding consolidated statements of operations. See Note 5~~rather than to ~~these condensed consolidated financial statements for further details.~~accumulated other comprehensive income.


~~15.~~16.	Acquisitions and divestitures

Routine acquisitions

During the nine months ended September 30, ~~2018,~~2019, the Company acquired dialysis businesses consisting of ~~five~~7 dialysis centers located in the U.S. and 189 dialysis centers located outside the U.S. for a total of ~~$110,671~~$75,323 in net cash, ~~$15,461~~$529 in deferred purchase price obligations, and ~~$4,733~~$19,818 in ~~liabilities~~earn-out obligations and assumed ~~and earn-out obligations.~~liabilities. The assets and liabilities for these acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s condensed consolidated financial statements, as are their operating results, from the designated effective dates of the acquisitions.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

The initial purchase price allocations for these transactions have been recorded at estimated fair values based on the best information available to management and will be finalized when certain information arranged to be obtained has been received. In particular, certain income tax amounts are pending final evaluation and quantification of pre-acquisition tax contingencies and filing of final tax returns. In addition, valuation of certain working capital items, fixed assets and intangibles are pending final audits and related valuation reports.

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

The following table summarizes the assets acquired and liabilities assumed in these transactions at their estimated acquisition date fair values:



Current assets	$	5,238
Property and equipment	3,607
Intangible and other long-term assets	15,848
Goodwill	77,238
Current liabilities	(3,360		)
Long-term liabilities	(1,139		)
Noncontrolling interests	(1,762		)
	$	95,670

Current assets $ 10,183
Property and equipment 5,654
Intangible and other long-term assets 3,672
Goodwill 135,654
Current liabilities (12,139 )
Long-term liabilities (212 )
Noncontrolling interests (11,947 )

$ 130,865

Amortizable intangible assets acquired during the first nine months of ~~2018~~2019 primarily represent non-compete agreements which had weighted-average estimated useful lives of approximately ~~five~~six years. The total estimated amount of goodwill deductible for tax purposes associated with these acquisitions was approximately ~~$115,378.~~

~~Sale of Paladina Health~~

~~Effective June 1, 2018, the Company sold 100% of the equity of DaVita DPC Holding Co., LLC (Paladina Health), its direct primary care business, resulting in an estimated gain of $33,699.~~$75,529.

Contingent earn-out obligations

The Company has several contingent earn-out obligations associated with acquisitions that could result in the Company paying the former owners of acquired companies a total of up to ~~$14,042~~$35,338 if certain EBITDA, operating income performance targets or quality margins are met primarily over the next one year to five years.

Contingent earn-out obligations are remeasured at fair value at each reporting date until the contingencies are resolved with changes in the liabilities due to the remeasurement recorded in earnings. See Note 18 to these condensed consolidated financial statements for further details. As of September 30, ~~2018,~~2019, the ~~Company has~~ estimated ~~the~~ fair values of ~~its~~these contingent earn-out obligations ~~to be $7,233,~~is $19,833, of which ~~a total of $431~~$4,401 is included in other current liabilities and the remaining ~~$6,802~~$15,432 is included in other long-term liabilities in the Company’s consolidated balance sheet.

The following is a reconciliation of changes in ~~liabilities for~~ contingent earn-out ~~obligations:~~obligations for the nine months ended September 30, 2019:


	For the nine months ended September 30, 2018
Beginning balance	$	6,388
Beginning balance December 31, 2018				$	2,608
Contingent earn-out obligations associated with acquisitions	1,246			19,731
Remeasurement of fair value for contingent earn-out obligations	(401		)	(2,179		)
Ending balance	$	7,233
Payments on contingent earn-out obligations				(327		)
Ending balance September 30, 2019				$	19,833

~~In December 2017,~~On June 19, 2019, the Company ~~entered into an agreement to sell~~completed the sale of its DMG division to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc., ~~subject~~for an aggregate purchase price of $4,340,000, prior to ~~receipt~~certain closing and post-closing adjustments specified in the related equity purchase agreement dated as of ~~required regulatory approvals~~December 5, 2017, as amended as of September 20, 2018 and ~~other customary~~as of December 11, 2018 (as amended, the equity purchase agreement).

The Company has recorded a preliminary estimated pre-tax net loss of approximately $23,022 on the sale of its DMG division for the nine months ended September 30, 2019. This preliminary net loss is based on initial estimates of the Company's expected aggregate proceeds from the sale, net of transaction costs and obligations, as well as the estimated values of DMG net assets sold as of the closing ~~conditions. As a result, the~~date. These estimated net proceeds include $4,465,476 in cash received from Optum at closing, or $3,824,509 net of cash and restricted cash included in DMG ~~business has been classified as held for sale and its results of operations are reported as discontinued operations for all periods presented in these condensed consolidated financial statements.~~net assets sold.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

~~During~~The ultimate net proceeds from the ~~third quarter~~DMG sale, as well as the value of ~~2018, the Company recorded a $216,147 charge on~~ its ~~DMG business which included a $98,201 valuation adjustment and $117,946 in related tax expense on this~~previously held for sale ~~business based~~net assets sold, remain subject to estimate revisions and post-closing adjustments pursuant to the equity purchase agreement, which could be material. Under the equity purchase agreement, the Company also has certain indemnification obligations that could require payments to the buyer relating to the Company's previous ownership and operation of the DMG business. Potential payments under these provisions, if any, remain subject to significant uncertainties and could have a material adverse effect on ~~an updated assessment~~the net proceeds ultimately retained by the Company or the total amount of ~~fair value, which includes inputs such as~~its loss on the ~~transaction itself, risks and timing, and performance~~sale of ~~the~~this business.

The following table presents the financial results of discontinued operations related to DMG:



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
Revenues	$	—		$	1,252,909		$	2,713,059		$	3,733,270
Expenses	1,996			1,260,814			2,541,783			3,679,747
Valuation adjustment	—			98,201			—			98,201
(Loss) income from discontinued operations before taxes	(1,996		)	(106,106		)	171,276			(44,678		)
Loss on sale of discontinued operations before taxes	—			—			(23,022		)	—
Income tax expense	4,847			105,633			45,400			103,151
Net (loss) income from discontinued operations, net of tax	$	(6,843	)	$	(211,739	)	$	102,854		$	(147,829	)

Three months ended
September 30, Nine months ended
September 30,
2018 2017 2018 2017
Revenues $ 1,252,909
$ 1,178,443
$ 3,733,270
$ 3,461,493
Expenses 1,260,814
1,164,562
3,679,747
3,396,914
Goodwill impairment charges —
601,040
—
651,659
Valuation adjustment 98,201
—
98,201
—
(Loss) income from discontinued operations before taxes (106,106 ) (587,159 ) (44,678 ) (587,080 )
Income tax expense (benefit) 105,633
(216,287 ) 103,151
(198,121 )
Net loss from discontinued operations, net of tax (211,739 ) (370,872 ) (147,829 ) (388,959 )

~~The following table presents the financial position of discontinued operations related to DMG:~~

September 30, 2018 December 31, 2017
Assets

Cash and cash equivalents $ 444,468
$ 179,668
Other current assets 848,905
826,608
Property and equipment, net 438,332
379,945
Intangible assets, net 1,316,571
1,316,550
Other long-term assets 114,236
178,894
Goodwill 2,883,475
2,879,977
Valuation allowance on disposal group (98,201 ) —
Total current assets held for sale, net $ 5,947,786
$ 5,761,642
Liabilities

Other liabilities $ 652,502
$ 505,734
Medical payables 457,748
457,040
Current portion of long-term debt 2,839
2,845
Long-term debt 33,595
35,003
Other long-term liabilities 272,937
184,448
Total current liabilities held for sale $ 1,419,621
$ 1,185,070

The following table presents cash flows of discontinued operations related to DMG:



	Nine months ended September 30,
	2019			2018
Net cash provided by operating activities from discontinued operations	$	97,005		$	208,570
Net cash used in investing activities from discontinued operations	$	(43,442	)	$	(32,860	)

September 30,
2018 September 30,
2017
Net cash provided by operating activities from discontinued
operations
$ 208,570
$ 298,974
Net cash used in investing activities from discontinued operations $ (32,860 ) $ (187,606 )

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

During the ~~first nine months of 2018,~~period from January 1, 2019 to June 18, 2019 immediately prior to sale, the Company's DMG business acquired ~~three~~2 medical businesses for a total of ~~$2,854~~$2,025 in cash and deferred purchase price of $275. Certain income tax amounts are pending final evaluation and quantification of any pre-acquisition tax contingencies. In addition, valuation of medical claims liabilities and certain other working capital items relating to acquisitions are pending final quantification. The assets and liabilities for all acquisitions were recorded at their estimated fair values at the dates of the acquisitions and are included in the Company’s current held for sale assets and liabilities.

~~Sale of Tandigm Health investment~~

~~Effective June 1, 2018, DMG sold its 19% ownership interest in the Tandigm Health joint venture and a related supporting business resulting in a gain, net of tax, of $18,636.~~

~~Goodwill impairment charges~~

As previously disclosed, prior to being reclassified as held for sale, the Company recorded goodwill impairment charges for the DMG business of $601,040 and $651,659 for the three and nine months ended September 30, 2017. These charges resulted from continuing developments in the Company’s DMG business, including the determination that commercial membership was expected to be lower than previously expected due to increased reimbursement pressure, Medicaid reimbursement rates were expected to trend lower within the state of California, and the gap between Medicare rate increases and medical cost increases were likely to persist. The charges recorded during the nine months ended September 30, 2017 resulted additionally from medical cost and utilization trends.$212.

The Company relies on the operating activities of certain legal entities that it does not directly own or control, but over which it has indirect influence and of which it is considered the primary beneficiary. These entities are subject to the consolidation guidance applicable to variable interest entities (VIEs).

~~Under U.S. generally accepted accounting principles (GAAP), VIEs typically include entities for which (i)~~There have been no material changes in the entity’s equity is not sufficient to finance its activities without additional subordinated financial support; (ii) the equity holders as a group lack the power to direct the activities that most significantly influence the entity’s economic performance, the obligation to absorb the entity’s expected losses, or the right to receive the entity’s expected returns; or (iii) the voting rights of some investors are not proportional to their obligations to absorb the entity’s losses.

~~The Company has determined that substantially all~~nature of the ~~legal entities it is associated~~Company's arrangements with ~~that qualify as~~ VIEs ~~must be~~or its judgments concerning them from those described in Note 23 to the Company's consolidated financial statements included in ~~its consolidated financial statements. A number of these VIEs are within~~ the Company's DMG business, which is classified as held for sale and as a discontinued operation in these condensed consolidated financial statements. The Company manages these entities and provides operating and capital funding as necessary for these entities to accomplish their operational and strategic objectives. A number of these entities are subject to nominee share ownership or share transfer restriction agreements that effectively transfer the majority of the economic risks and rewards of their ownership to the Company. In other cases, the Company’s management agreements with these entities include both financial terms and protective and participating rights to the entities’ operating, strategic and non-clinical governance decisions which transfer substantial powers over and economic responsibility for the entities to the Company. In some cases, such entities are subject to broad exclusivity or noncompetition restrictions that benefit the Company. Further, in some cases, the Company has contractual arrangements with its related party nominee owners that effectively indemnify these parties from the economic losses from, or entitle the Company to the economic benefits of, these entities.10-K.

The analyses upon which these consolidation determinations rest are complex, involve uncertainties, and require significant judgment on various matters, some of which could be subject to different interpretations. At September 30, ~~2018,~~2019, these condensed consolidated financial statements include total assets of VIEs of ~~$916,672~~$389,284 and total liabilities and noncontrolling interests of VIEs to third parties of ~~$508,743, including assets of $658,054 and liabilities and noncontrolling interests of $355,172 related to the Company's DMG business classified as held for sale.~~

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

The Company also sponsors certain non-qualified deferred compensation plans whose trusts qualify as VIEs and the Company consolidates these plans as their primary beneficiary. The assets of these plans are recorded in short-term or long-term investments with matching offsetting liabilities recorded in accrued compensation and benefits and other long-term liabilities. See Note 5 to these condensed consolidated financial statements for disclosures on the assets of these consolidated non-qualified deferred compensation plans.$273,660.

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

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

The following table summarizes the Company’s assets, liabilities and temporary equity that are measured at fair value on a recurring basis as of September 30, ~~2018:~~2019:



	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
Assets
Investments in equity securities	$	37,641	$	37,641	$	—	$	—
Interest rate cap agreements	$	20,642	$	—	$	20,642	$	—
Liabilities
Contingent earn-out obligations	$	19,833	$	—	$	—	$	19,833
Temporary equity
Noncontrolling interests subject to put provisions	$	1,296,059	$	—	$	—	$	1,296,059

Investments in ~~mutual funds~~equity securities represent investments in various open-ended registered investment companies (mutual funds) and common stock ~~represent equity securities that~~and are recorded at estimated fair value based ~~upon quoted~~on reported market prices or redemption prices, ~~reported by each mutual fund.~~as applicable. See Note 5 to these condensed consolidated financial statements for further discussion.

Interest rate cap agreements are recorded at fair value estimated from valuation models utilizing the income approach and commonly accepted valuation techniques that use inputs from closing prices for similar assets and liabilities in active markets as well as other relevant observable market inputs at quoted intervals such as current interest rates, forward yield curves, implied volatility and credit default swap pricing. The Company does not believe the ultimate amount that could be realized upon settlement of these interest rate cap agreements would be materially different from the fair value estimates currently reported. See Note 9 to these condensed consolidated financial statements for further discussion.

The estimated fair value measurements of contingent earn-out obligations are primarily based on unobservable inputs, including projected EBITDA. The estimated fair value of these contingent earn-out obligations is remeasured as of each reporting date and could fluctuate based upon any significant changes in key assumptions, such as changes in the Company credit risk-adjusted rate that is used to discount the obligations to present value. See Note 1516 to these condensed consolidated financial statements for further discussion.

See Note 1118 to ~~these condensed~~the Company's consolidated financial statements included in the 10-K for a discussion of the Company’s methodology for estimating the fair value of noncontrolling interests subject to put obligations.

The ~~carrying amount of the Company’s~~Company's fair value estimates for its senior secured credit facilities ~~totaled $5,302,569, including a discount of $6,724~~ and ~~deferred financing costs of $11,957 as of September 30, 2018, and their fair value was approximately $5,353,109~~senior notes are based upon ~~quoted market prices~~bid and ask quotes for ~~similar~~these instruments, typically a level 2 input.

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

~~The carrying amount~~ See Note 9 to these condensed consolidated financial statements for further discussion of the Company’s senior notes was $4,465,057, including deferred financing costs of $34,943 as of September 30, 2018 and their fair value was approximately $4,404,175, based upon quoted market prices for similar instruments, a level 2 input.Company's debt.

Other financial instruments consist primarily of cash and cash equivalents, accounts receivable, accounts payable, other accrued liabilities, lease liabilities and ~~other~~ debt. The balances of ~~the Company's~~non-debt financial instruments ~~other than the senior secured credit facilities and the senior notes~~ are presented in ~~the~~these condensed consolidated financial statements at September 30, ~~2018~~2019 at their approximate fair values due to the short-term nature of their settlements.

The ~~Company has consisted of two major divisions, DaVita Kidney Care (Kidney Care) and DMG. The Kidney Care division is~~Company’s operations are comprised of ~~the Company’s~~its U.S. dialysis and related lab services business, various ancillary services and strategic initiatives, including its international operations, and ~~the Company’s~~its corporate administrative support. The Company’s U.S. dialysis and related lab services business is its largest line of business and is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as ESRD. The Company’s ancillary services and strategic initiatives consist primarily of pharmacy services, disease management services, vascular access services, clinical research programs, physician services, ESRD seamless care organizations and comprehensive care, as well as the Company’s international operations.

The Company’s DMG division is a patient- and physician-focused integrated healthcare delivery and management company with over two decades of providing coordinated outcomes-based medical care in a cost-effective manner. In December 2017,On June 19, 2019, the Company ~~entered into an equity purchase agreement to sell~~completed the sale of its DMG division to Optum, a subsidiary of UnitedHealth Group Inc.~~, subject to receipt of required regulatory approvals and other customary closing conditions.~~ As a result of this ~~pending~~ transaction, ~~the DMG business has been classified as held for sale and its~~DMG's results of operations ~~are~~have been reported as discontinued operations for all periods ~~presented in these condensed consolidated financial statements. See Note 16 to these condensed consolidated financial statements for further discussion.~~

The Company’s operating segments have been defined based on the separate financial information that is regularly produced and reviewed by the Company’s chief operating decision maker in making decisions about allocating resources to and assessing the financial performance of the Company’s various operating lines of business. The chief operating decision maker for the Company is its Chief Executive Officer.presented.

The Company’s separate operating segments include its U.S. dialysis and related lab services business, each of its ancillary services and strategic initiatives, its ~~consolidated international~~ kidney care operations in each ~~country,~~foreign sovereign jurisdiction, its other health operations in each foreign sovereign jurisdiction, and its equity method investment in the ~~Asia Pacific joint venture, and its other health operations in Europe and Latin America.~~APAC JV. The U.S. dialysis and related lab services business qualifies as a separately reportable segment, and all other ancillary services and strategic initiatives operating segments, including the international operating segments, have been combined and disclosed in the other segments category.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

The Company’s operating segment financial information included in this report is prepared on the internal management reporting basis that the chief operating decision maker uses to allocate resources and assess the financial performance of the Company's operating segments. For internal management reporting, segment operations include direct segment operating expenses but generally exclude corporate administrative support costs, which consist primarily of indirect labor, benefits and long-term incentive-based compensation expenses of certain departments which provide support to all of the Company’s various operating lines of business, except to the extent that such costs are charged to and borne by certain ancillary services and strategic initiatives via internal management fees. These corporate administrative support costs are reduced by internal management fees received from the Company’s ancillary lines of business.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

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

Other revenues⁽¹⁾

Other revenues⁽¹⁾:

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

A summary of assets by reportable segment was as follows:



	September 30, 2019		December 31, 2018
Segment assets
U.S. dialysis and related lab services (including equity investments of $100,815 and $95,290, respectively)	$	15,997,552	$	12,333,641
Other—Ancillary services and strategic initiatives (including equity investments of $118,571 and $129,321, respectively)	1,454,278		1,387,046
DMG—Held for sale (including equity investments of $0 and $4,833, respectively)	—		5,389,565
Consolidated assets	$	17,451,830	$	19,110,252

Depreciation and amortization expense by reportable segment was as follows:


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017		2019		2018		2019		2018
U.S. dialysis and related lab services	$	138,669	$	132,112	$	411,697	$	387,142	$	147,607	$	138,669	$	433,008	$	411,697
Other—Ancillary services and strategic initiatives	7,331		10,522		24,181		28,402		8,308		7,331		23,677		24,181
	$	146,000	$	142,634	$	435,878	$	415,544	$	155,915	$	146,000	$	456,685	$	435,878

~~Assets by reportable segment were as follows:~~

September 30,
2018

December 31,
2017
Segment assets

U.S. dialysis and related lab services (including equity
investments of $94,144 and $84,866, respectively) $ 12,101,111
$ 11,776,042
Other—Ancillary services and strategic initiatives (including
equity investments of $146,676 and $160,668, respectively) 1,308,892
1,410,509
DMG—Held for sale (including equity investments of $5,060 and
$10,321, respectively) 5,947,786
5,761,642
Consolidated assets $ 19,357,789
$ 18,948,193

Expenditures for property and equipment by reportable segment were as follows:


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017		2019		2018		2019		2018
U.S. dialysis and related lab services	$	214,728	$	207,472	$	603,186	$	538,620	$	157,721	$	214,728	$	477,533	$	603,186
Other—Ancillary services and strategic initiatives	5,019		9,135		37,191		28,256		15,544		5,019		31,184		37,191
DMG—Held for sale	11,935		24,282		65,282		72,953		—		11,935		38,466		65,282
	$	231,682	$	240,889	$	705,659	$	639,829	$	173,265	$	231,682	$	547,183	$	705,659

The effects of changes in DaVita Inc.’s ownership interests in consolidated subsidiaries on the Company’s consolidated equity were as follows:



	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019		2018
Net income (loss) attributable to DaVita Inc.	$	143,270		$	(136,796	)	$	566,110	$	309,166
Changes in paid-in capital for:
Sales of noncontrolling interests	—			—			—		79
Purchases of noncontrolling interests	(202		)	(5,285		)	10,732		(17,482		)
Net transfers to noncontrolling interests	(202		)	(5,285		)	10,732		(17,403		)
Net income (loss) attributable to DaVita Inc., net of transfers to noncontrolling interests	$	143,068		$	(142,081	)	$	576,842	$	291,763

Three months ended
September 30,

Nine months ended
September 30,
2018 2017 2018 2017
Net (loss) income attributable to DaVita Inc. $ (136,796 ) $ (214,476 ) $ 309,166
$ 360,222
Changes in paid-in capital for:
Sales of noncontrolling interests —
—
79
—
Purchases of noncontrolling interests (5,285 ) —
(17,482 ) 195
Net transfers to noncontrolling interests (5,285 ) —
(17,403 ) 195
Net (loss) income attributable to DaVita Inc., net of transfers to noncontrolling interests $ (142,081 ) $ (214,476 ) $ 291,763
$ 360,417

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

~~revenue recognition guidance in GAAP. The Company adopted these ASUs beginning January 1, 2018. See Note 2 for further details.~~

~~In January 2016, the FASB issued ASU No. 2016-01,~~ ~~Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities~~. In February 2018, the FASB issued ASU 2018-03, which provides various related technical corrections and improvements. The Company adopted these ASUs beginning January 1, 2018. See Note 5 for further details.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in ~~this ASU~~Topic 842 revise the accounting related to lessee accounting. Under the new guidance, lessees ~~will be~~are required to recognize a lease liability and a right-of-use asset for substantially all leases with lease terms in excess of twelve months. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ~~In July 2018, the FASB issued ASU No. 2018-10, Codification Amendments to~~The Company adopted Topic 842 ~~and ASU No. 2018-11, which include targeted improvements to the guidance issued in ASU 2016-02. The amendments in these ASUs are effective for the Company~~ beginning on January 1, 2019 ~~and are to be applied~~ through a modified retrospective ~~transition~~ approach for leases existing at ~~or entered into after, either at~~ the ~~beginning of the earliest comparative period presented~~

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in ~~the financial statements or at the~~ thousands, except per share data)

~~In October 2016, the FASB issued ASU No. 2016-16,~~ ~~Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. The amendments in this ASU allow entities~~supportable information to ~~recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.~~inform those credit loss estimates. The current ~~guidance does not allow~~incurred loss model delays recognition of credit losses until ~~the asset~~it is probable that a loss has been ~~sold to an outside party.~~incurred, while this ASU’s new current expected credit loss model requires estimation of credit losses expected over the life of the financial asset or group of similar financial assets. The amendments in this ASU are effective for the Company ~~beginning~~ on January 1, ~~2018~~2020 and are to be applied on a ~~modified retrospective basis.~~modified-retrospective approach. The ~~adoption~~Company is still evaluating certain aspects of this ASU ~~did not~~as well as the impacts it may have ~~a material impact~~ on ~~the Company’s~~its consolidated financial statements when adopted on January 1, ~~2018.~~2020.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The amendments in ~~the new~~this ASU ~~are~~were effective for the Company on January 1, 2019 and are to be applied prospectively. The adoption of this ASU isdid not ~~expected to~~ have a material impact on the Company’s consolidated financial statements when adopted on January 1, 2019.

~~In February 2018, the FASB issued ASU No. 2018-02,~~ ~~Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~, which allows for the reclassification of certain income tax effects related to the 2017 Tax Act between “Accumulated other comprehensive income” and “Retained earnings.” This ASU relates to the requirement that adjustments to deferred tax liabilities and assets related to a change in tax laws or rates be included in “Income from continuing operations”, even in situations where the related items were

~~DAVITA INC.~~

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

~~(unaudited)~~

~~(dollars and shares in thousands, except per share data)~~

originally recognized in “Other comprehensive income” (rather than in “Income from continuing operations”). The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company elected to early adopt this ASU on January 1, 2018 and applied the change in the period of adoption. The adoption of this ASU resulted in the reclassification of an immaterial amount of deferred tax effects from accumulated other comprehensive income to retained earnings via a cumulative change in accounting principle effective January 1, 2018. See Note 14 for more details.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework -Changes to the Disclosure Requirements for Fair Value Measurement. The applicable amendments in this ASU remove requirements for disclosures concerning transfers between fair value measurement ~~Levels~~levels 1, 2 and 3 and disclosures concerning valuation processes for ~~Level~~level 3 fair value measurements. The applicable amendments in this ASU also add a requirement to separately disclose the changes in unrealized gains and losses included in other comprehensive income for the reporting period for ~~Level~~level 3 items measured at fair value on a recurring basis, and require disclosure of the range and weighted average of significant unobservable inputs used to develop ~~Level~~level 3 fair value measurements. The amendments in this ASU are effective for the Company beginning on January 1, 2020 and its new requirements are to be applied on a prospective basis. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

The following information is presented in accordance with Rule 3-10 of Regulation S-X. The operating and investing activities of the separate legal entities included in the Company’s condensed consolidated financial statements are fully interdependent and integrated. Revenues and operating expenses of the separate legal entities include intercompany charges for management and other administrative services. The Company’s senior notes are guaranteed by a substantial majority of its domestic subsidiaries as measured by revenue, income and assets. The subsidiary guarantors have guaranteed the senior notes on a joint and several basis. However, a subsidiary guarantor will be released from its obligations under its guarantee of the senior notes and the indentures governing the senior notes if, in general, there is a sale or other disposition of all or substantially all of the assets of such subsidiary guarantor, including by merger or consolidation, or a sale or other disposition of all of the equity interests in such subsidiary guarantor held by the Company and its restricted subsidiaries, as defined in the indentures; such subsidiary guarantor is designated by the Company as an unrestricted subsidiary, as defined in the indentures, or otherwise ceases to be a restricted subsidiary of the Company, in each case in accordance with the indentures; or such subsidiary guarantor no longer guarantees any other indebtedness, as defined in the indentures, of the Company or any of its restricted subsidiaries, except for guarantees that are contemporaneously released. The senior notes are not guaranteed by certain of the Company’s domestic subsidiaries, any of the Company’s foreign subsidiaries, or any entities that do not constitute subsidiaries within the meaning of the indentures, such as corporations in which the Company holds capital stock with less than a majority of the voting power, joint ventures and partnerships in which the Company holds less than a majority of the equity or voting interests, non-owned entities and third parties. Contemporaneously with the Company entering into the New Credit Agreement and pursuant to the indentures governing the Company’s senior notes, certain subsidiaries of the Company were released from their guarantees of the Company's senior notes such that, after that release, the remaining subsidiary guarantors of the senior notes were the same subsidiaries guaranteeing the New Credit Agreement. The following condensed consolidating financial statements have been prepared for all periods presented based on the current subsidiary guarantors and non-guarantors stipulated in the Company's New Credit Agreement.

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)



For the three months ended September 30, 2019	DaVita Inc.			Guarantor subsidiaries			Non- Guarantor subsidiaries			Consolidating adjustments			Consolidated total
Patient services revenues	$	—		$	1,761,235		$	1,087,531		$	(67,597	)	$	2,781,169
Provision for uncollectible accounts	—			(2,728		)	(1,249		)	—			(3,977		)
Net patient service revenues	—			1,758,507			1,086,282			(67,597		)	2,777,192
Other revenues	204,183			140,956			83,860			(302,113		)	126,886
Total net revenues	204,183			1,899,463			1,170,142			(369,710		)	2,904,078
Operating expenses	11,046			1,823,752			1,060,654			(369,710		)	2,525,742
Operating income	193,137			75,711			109,488			—			378,336
Debt expense	(110,712		)	(43,535		)	(14,206		)	58,622			(109,831		)
Other income, net	51,150			2,994			9,758			(58,622		)	5,280
Income tax expense	33,364			28,320			3,570			—			65,254
Equity earnings in subsidiaries	43,059			123,186			—			(166,245		)	—
Net income from continuing operations	143,270			130,036			101,470			(166,245		)	208,531
Net loss from discontinued operations, net of tax	—			—			(6,843		)	—			(6,843		)
Net income	143,270			130,036			94,627			(166,245		)	201,688
Less: Net income attributable to noncontrolling interests	—			—			—			(58,418		)	(58,418		)
Net income attributable to DaVita Inc.	$	143,270		$	130,036		$	94,627		$	(224,663	)	$	143,270

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

Guarantor
subsidiaries Non-
Guarantor
subsidiaries Consolidating
adjustments Consolidated
total
For the three months ended September 30, 2018 DaVita Inc.
Net (loss) income $ (136,796 ) $ (121,771 ) $ 87,100
$ 74,799
$ (96,668 )
Other comprehensive income (loss) 1,643
—
(8,827 ) —
(7,184 )
Total comprehensive (loss) income (135,153 ) (121,771 ) 78,273
74,799
(103,852 )
Less: Comprehensive income attributable to noncontrolling interest —
—
—
(40,128 ) (40,128 )
Comprehensive (loss) income attributable to DaVita Inc. $ (135,153 ) $ (121,771 ) $ 78,273
$ 34,671
$ (143,980 )



For the three months ended September 30, 2019	DaVita Inc.		Guarantor subsidiaries		Non- Guarantor subsidiaries			Consolidating adjustments			Consolidated total
Net income	$	143,270	$	130,036	$	94,627		$	(166,245	)	$	201,688
Other comprehensive income (loss)	509		—		(44,502		)	—			(43,993		)
Total comprehensive income	143,779		130,036		50,125			(166,245		)	157,695
Less: Comprehensive income attributable to noncontrolling interest	—		—		—			(58,418		)	(58,418		)
Comprehensive income attributable to DaVita Inc.	$	143,779	$	130,036	$	50,125		$	(224,663	)	$	99,277



For the three months ended September 30, 2018	DaVita Inc.			Guarantor subsidiaries		Non- Guarantor subsidiaries			Consolidating adjustments			Consolidated total
Net (loss) income	$	(136,796	)	$	135,218	$	(156,413	)	$	61,323		$	(96,668	)
Other comprehensive income (loss)	1,643			—		(8,827		)	—			(7,184		)
Total comprehensive (loss) income	(135,153		)	135,218		(165,240		)	61,323			(103,852		)
Less: Comprehensive income attributable to noncontrolling interest	—			—		—			(40,128		)	(40,128		)
Comprehensive (loss) income attributable to DaVita Inc.	$	(135,153	)	$	135,218	$	(165,240	)	$	21,195		$	(143,980	)

Guarantor
subsidiaries Non-
Guarantor
subsidiaries Consolidating
adjustments Consolidated
total
For the three months ended September 30, 2017 DaVita Inc.
Net (loss) income $ (214,476 ) $ (249,861 ) $ 131,490
$ 160,813
$ (172,034 )
Other comprehensive income 1,641
—
29,143
—
30,784
Total comprehensive (loss) income (212,835 ) (249,861 ) 160,633
160,813
(141,250 )
Less: Comprehensive income attributable to noncontrolling interest —
—
—
(42,442 ) (42,442 )
Comprehensive (loss) income attributable to DaVita Inc. $ (212,835 ) $ (249,861 ) $ 160,633
$ 118,371
$ (183,692 )



For the nine months ended September 30, 2018	DaVita Inc.		Guarantor subsidiaries		Non- Guarantor subsidiaries			Consolidating adjustments			Consolidated total
Net income	$	309,166	$	547,382	$	162,058		$	(583,723	)	$	434,883
Other comprehensive income (loss)	5,499		—		(39,475		)	—			(33,976		)
Total comprehensive income	314,665		547,382		122,583			(583,723		)	400,907
Less: Comprehensive income attributable to noncontrolling interest	—		—		—			(125,717		)	(125,717		)
Comprehensive income attributable to DaVita Inc.	$	314,665	$	547,382	$	122,583		$	(709,440	)	$	275,190

Guarantor
subsidiaries Non-
Guarantor
subsidiaries Consolidating
adjustments Consolidated
total
For the nine months ended September 30, 2018 DaVita Inc.
Net income $ 309,166
$ 255,681
$ 431,540
$ (561,504 ) $ 434,883
Other comprehensive income (loss) 5,499
—
(39,475 ) —
(33,976 )
Total comprehensive income 314,665
255,681
392,065
(561,504 ) 400,907
Less: Comprehensive income attributable to noncontrolling interest —
—
—
(125,717 ) (125,717 )
Comprehensive income attributable to DaVita Inc. $ 314,665
$ 255,681
$ 392,065
$ (687,221 ) $ 275,190

Guarantor
subsidiaries Non-
Guarantor
subsidiaries Consolidating
adjustments Consolidated
total
For the nine months ended September 30, 2017 DaVita Inc.
Net income $ 360,222
$ 240,548
$ 466,867
$ (577,761 ) $ 489,876
Other comprehensive income 1,571
—
91,546
—
93,117
Total comprehensive income 361,793
240,548
558,413
(577,761 ) 582,993
Less: Comprehensive income attributable to noncontrolling interest —
—
—
(129,652 ) (129,652 )
Comprehensive income attributable to DaVita Inc. $ 361,793
$ 240,548
$ 558,413
$ (707,413 ) $ 453,341

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)



For the nine months ended September 30, 2018	DaVita Inc.			Guarantor subsidiaries			Non- Guarantor subsidiaries			Consolidating adjustments			Consolidated total
Cash flows provided by operating activities:
Net income	$	309,166		$	547,382		$	162,058		$	(583,723	)	$	434,883
Changes in operating assets and liabilities and non-cash items included in net income	(235,558		)	(104,179		)	703,379			583,723			947,365
Net cash provided by operating activities	73,608			443,203			865,437			—			1,382,248
Cash flows used in investing activities:
Additions of property and equipment	(124,585		)	(296,028		)	(285,046		)	—			(705,659		)
Acquisitions	—			(5,646		)	(107,880		)	—			(113,526		)
Proceeds from asset and business sales	—			55,035			80,233			—			135,268
Proceeds (purchases) from investment sales and other items, net	32,345			(2,295		)	(7,452		)	—			22,598
Net cash used in investing activities	(92,240		)	(248,934		)	(320,145		)	—			(661,319		)
Cash flows provided by (used in) financing activities:
Long-term debt and related financing costs, net	866,537			(8,601		)	(12,100		)	—			845,836
Intercompany borrowings (payments)	454,410			(174,148		)	(280,262		)	—			—
Other items	(1,154,921		)	(18,713		)	(95,541		)	—			(1,269,175		)
Net cash provided by (used in) financing activities	166,026			(201,462		)	(387,903		)	—			(423,339		)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	—			—			(5,790		)	—			(5,790		)
Net increase (decrease) in cash, cash equivalents and restricted cash	147,394			(7,193		)	151,599			—			291,800
Less: Net increase in cash, cash equivalents and restricted cash from discontinued operations	—			—			270,565			—			270,565
Net increase (decrease) in cash, cash equivalents and restricted cash from continuing operations	147,394			(7,193		)	(118,966		)	—			21,235
Cash, cash equivalents and restricted cash of continuing operations at beginning of the year	150,307			19,963			348,650			—			518,920
Cash, cash equivalents and restricted cash of continuing operations at end of the period	$	297,701		$	12,770		$	229,684		$	—		$	540,155

Guarantor
subsidiaries Non-
Guarantor
subsidiaries Consolidating
adjustments Consolidated
total
For the nine months ended September 30, 2017 DaVita Inc.
Cash flows from operating activities:
Net income $ 360,222
$ 240,548
$ 466,867
$ (577,761 ) $ 489,876
Changes in operating assets and liabilities and non-cash
items included in net income (282,651 ) 585,836
197,328
577,761
1,078,274
Net cash provided by operating activities 77,571
826,384
664,195
—
1,568,150
Cash flows from investing activities:

Additions of property and equipment (94,385 ) (305,261 ) (240,183 ) —
(639,829 )
Acquisitions —
(627,324 ) (99,214 ) —
(726,538 )
Proceeds from asset and business sales —
90,533
1,996
—
92,529
Proceeds (purchases) from investment sales and other items, net 123,894
(4,788 ) 49,183
—
168,289
Net cash provided by (used in) investing activities 29,509
(846,840 ) (288,218 ) —
(1,105,549 )
Cash flows from financing activities:

Long-term debt and related financing costs, net (92,721 ) (10,394 ) (5,348 ) —
(108,463 )
Intercompany borrowing (payments) 188,977
(7,968 ) (181,009 ) —
—
Other items (305,630 ) (1,432 ) (114,307 ) —
(421,369 )
Net cash used in financing activities (209,374 ) (19,794 ) (300,664 ) —
(529,832 )
Effect of exchange rate changes on cash, cash
equivalents and restricted cash —
—
5,449
—
5,449
Net decrease in cash, cash equivalents and restricted cash (102,294 ) (40,250 ) 80,762
—
(61,782 )
Less: Net increase (decrease) in cash, cash equivalents and restricted cash from discontinued operations —
(41,934 ) 124,628
—
82,694
Net increase (decrease) in cash, cash equivalents and restricted cash from continuing operations (102,294 ) 1,684
(43,866 ) —
(144,476 )
Cash, cash equivalents and restricted cash of continuing
operations at beginning of the year 549,921
8,687
124,855
—
683,463
Cash, cash equivalents and restricted cash of continuing
operations at end of the period $ 447,627
$ 10,371
$ 80,989
$ —
$ 538,987

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

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

Prior to the DMG sale, the Company provided services to certain physician groups within its DMG business which, while consolidated in its financial statements for financial reporting purposes, were not subsidiaries of nor owned by the Company, did not constitute “Subsidiaries” as defined in the indentures governing our outstanding senior notes, and did not guarantee those senior notes. In addition, the Company operated under management agreements with these physician groups pursuant to which it received management fees from these physician groups.

From and after June 19, 2019, these physician groups were no longer included in the Company's financial statements as they were deconsolidated upon the sale of DMG to Optum.

Restricted Subsidiaries⁽¹⁾

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

Restricted Subsidiaries⁽¹⁾

DAVITA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(continued)

(unaudited)

(dollars and shares in thousands, except per share data)

Restricted Subsidiaries⁽¹⁾

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

Forward-looking statements

This Quarterly Report on Form 10-Q, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that are forward-looking statements within the meaning of the federal securities laws. All statements ~~that do not concern~~in this report, other than statements of historical ~~facts~~fact, are forward-looking ~~statements and include, among other things, statements about our expectations, beliefs, intentions and/or strategies for the future.~~statements. Without limiting the foregoing, statements including the words "expect," "intend," "will," "plan," "anticipate," "believe,~~" "we are confident that,~~" "forecast," "guidance," "outlook," "goals," and similar expressions are intended to identify forward-looking statements. These forward-looking statements ~~may~~ include but are not limited to statements regarding our future operations, financial condition and prospects, such as expectations for ~~treatment growth rates, revenue per treatment, expense growth, levels of the provision for uncollectible accounts receivable, operating income, cash flow,~~ operating cash flow, ~~earnings per share, estimated tax rates,~~ estimated charges and accruals, ~~capital expenditures,~~ the development of new dialysis centers and dialysis center acquisitions or other new service offerings, government and commercial payment rates, ~~revenue estimating risk, the impact of our level of indebtedness on our financial performance,~~and our stock repurchase ~~program,~~program. Our actual results and ~~the pending DMG sale transaction. These~~other events could differ materially from any forward-looking statements due to numerous factors that involve substantial known and unknown risks and uncertainties. These risks and uncertainties ~~that could cause our actual results to differ materially from those described in the forward-looking statements, including risks resulting from~~ include, among other things:

the concentration of profits generated by higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates, and a reduction in the number of patients under such plans, including as a result of restrictions or prohibitions on the use and/or availability of charitable premium assistance, which may result in the loss of revenues or patients, or our making incorrect assumptions about how our patients will respond to any change in financial assistance from charitable organizations;

the extent to which the ongoing implementation of healthcare ~~exchanges~~reform, or changes in or new legislation, regulations or guidance, or enforcement thereof ~~including among other things those regarding~~or related litigation, and the ~~exchanges, results~~extent to which such developments result in a reduction in coverage or reimbursement rates for our services, ~~from and/or~~a reduction in the number of patients enrolled in higher-paying commercial ~~plans;~~ plans, or other material impacts to our business;

a reduction in government payment rates under the Medicare End Stage Renal Disease program or other government-based ~~programs;~~programs and the impact of the Medicare Advantage benchmark structure;

risks arising from potential and proposed federal and/or state legislation, regulation, or ballot, executive action or other initiatives, including ~~healthcare-related and labor-related legislation, regulation~~ such initiatives related to healthcare and/or ~~ballot or other initiatives;~~ labor matters;

the impact of the ~~changing~~ political environment and related developments on the current ~~health care~~healthcare marketplace and on our business, including with respect to the future of the Affordable Care Act, the exchanges and many other core aspects of the current health care marketplace; ~~uncertainties related to the impact of federal tax reform legislation;~~

changes in pharmaceutical practice patterns, reimbursement and payment policies and processes, or pharmaceutical pricing, including with respect to calcimimetics;

legal and compliance risks, such as our continued compliance with complex government regulations and the provisions of our current Corporate Integrity Agreement (CIA) and current or potential investigations by various government entities and related government or private party proceedings, and restrictions on our business and operations required by our CIA and other current or potential settlement terms and the financial impact thereof and our ability to recover any losses related to such legal matters from third parties; regulations;

continued increased competition from dialysis providers and others, and other potential marketplace changes; our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, including our ability to achieve anticipated savings from our recent restructurings;

our ability to maintain contracts with physician medical directors, changing affiliation models for physicians, and the emergence of new models of care introduced by the government or private sector that may erode our patient base and reimbursement rates, such as accountable care organizations, ~~(ACOs),~~ independent practice associations ~~(IPAs)~~ and integrated delivery systems;

our ability to complete acquisitions, mergers or dispositions that we might announce or be considering, on terms favorable to us or at all, or to integrate and successfully operate any business we may acquire or have acquired, or to successfully expand our operations and services in markets outside the United States, or to businesses outside of dialysis;

uncertainties related to potential payments and/or adjustments under certain provisions of the equity purchase agreement for the sale of our DaVita Medical Group (DMG) business, such as post-closing adjustments and indemnification obligations;

noncompliance by us or our business associates with any privacy or security laws or any security breach by us or a third party involving the misappropriation, loss or other unauthorized use or disclosure of confidential information;

the variability of our cash flows; the risk that we may not be able to generate sufficient cash in the future to service our indebtedness or to fund our other liquidity ~~needs,~~needs; and the risk that we may not be able to refinance our indebtedness as it becomes ~~due;~~ due, on terms favorable to us or at all;

factors that may impact our ability to repurchase stock under our stock repurchase program and the timing of any such stock repurchases, ~~including market conditions, the price~~as well as our use of ~~our common stock, our cash flow position, borrowing capacity and leverage ratios, and legal, regulatory and contractual requirements; the risk that we might invest material amounts~~a considerable amount of ~~capital and incur significant costs in connection with the growth and development of our international operations, yet we might not be able~~available funds to ~~operate them profitably anytime soon, if at all;~~ repurchase stock;

risks arising from the use of accounting estimates, judgments and interpretations in our financial statements;

impairment of our goodwill, investments or other assets; the risks and uncertainties associated with the timing, conditions and receipt of regulatory approvals and satisfaction of other closing conditions of the DMG sale transaction and continued disruption in connection with the DMG sale transaction making it more difficult to maintain business and operational relationships; risks and uncertainties related to our ability to complete the DMG sale transaction on the terms set forth in the equity purchase

agreement or at all; uncertainties related to our liquidity following the close of the DMG sale transaction and our planned subsequent entry into new external financing arrangements, which may be less than we anticipate; uncertainties related to our use of the proceeds from the DMG sale transaction and other available funds, including external financing and cash flow from operations, which may be or have been used in ways that ~~may not~~we cannot assure will improve our results of operations or enhance the value of our common stock; ~~risks related to certain contractual restrictions on the conduct of DMG's business while the DMG sale transaction is pending~~ and certain post-closing contractual obligations; the risk that laws regulating the corporate practice of medicine could restrict the manner in which DMG conducts its business; the risk that the cost of providing services under DMG’s agreements may exceed our compensation; the risk that any reductions in reimbursement rates, including Medicare Advantage rates, and future regulations may negatively impact DMG’s business, revenue and profitability; the risk that DMG may not be able to successfully establish a presence in new geographic regions or successfully address competitive threats that could reduce its profitability; the risk that a disruption in DMG’s healthcare provider networks could have an adverse effect on DMG’s business operations and profitability; the risk that reductions in the quality ratings of health plans DMG serves or healthcare services that DMG provides could have an adverse effect on DMG’s business; the risk that health plans that acquire health maintenance organizations may not be willing to contract

uncertainties associated with ~~DMG or may be willing to contract only on less favorable terms; and~~ the other risk factors set forth in our Quarterly Report on Form 10Q for the quarter ended June 30, 2019, as updated by Part II, Item 1A. of this Quarterly Report on Form ~~10-Q. We base our~~10-Q, and the other risks and uncertainties discussed in any subsequent reports that we file or furnish with the SEC from time to time.

The forward-looking statements should be considered in light of these risks and uncertainties. All forward-looking statements in this report are based solely on information ~~currently~~ available to us ~~and we~~on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of ~~changes in underlying factors,~~changed circumstances, new information, future events or otherwise.

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

Consolidated results of operations

~~The Company has consisted of two major divisions, DaVita Kidney Care (Kidney Care) and DaVita Medical Group (DMG). Kidney Care is comprised of our~~We operate principally as a U.S. dialysis and related lab services ~~our~~business and also operate other various ancillary services and strategic initiatives, including our international operations, and our corporate administrative support. ~~Our U.S. dialysis and related lab services business is our largest line~~

On June 19, 2019, we completed the sale of business and is a leading provider of kidney dialysis services in the U.S. for patients suffering from chronic kidney failure, also known as end stage renal disease (ESRD). DMG is a patient- and physician-focused integrated healthcare delivery and management company with over two decades of providing coordinated, outcomes-based medical care in a cost-effective manner.

~~In December 2017, we entered into an equity purchase agreement to sell~~ our DMG division to Collaborative Care Holdings, LLC (Optum), a subsidiary of UnitedHealth Group Inc.~~, subject to receipt of required regulatory approvals and other customary closing conditions.~~ As a result of this ~~pending~~ transaction, ~~the DMG business has been classified as held for sale and its~~DMG's results of operations ~~are~~have been reported as discontinued operations for all periods presented and DMG is not included below in this Management's Discussion and Analysis.

Our overall financial performance for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 benefited from the following items:

•an increase in operating income due to an increase in our margin on calcimimetics, and

•a decrease in advocacy costs to counter certain union policy initiatives.

The following table is a summary of our consolidated operating results for the third quarter of ~~2018~~2019 compared with the prior sequential quarter and the same quarter of ~~2017:~~2018, as well as the nine months ended September 30, 2019 compared to the same period in 2018:


	Three months ended															Nine months ended										Three months ended															Nine months ended
	September 30, 2018					June 30, 2018					September 30, 2017					September 30, 2018					September 30, 2017					September 30, 2019					June 30, 2019					September 30, 2018					September 30, 2019					September 30, 2018
																										(dollars in millions)
Revenues:⁽¹⁾
Dialysis and related lab patient service revenues	$	2,671				$	2,718				$	2,562				$	7,980				$	7,479				$	2,781				$	2,734				$	2,671				$	8,150				$	7,980
Provision for uncollectible accounts	(12		)			(49		)			(119		)			(36		)			(336		)			(4		)			(10		)			(12		)			(20		)			(36		)
Net dialysis and related lab patient service revenues	2,659					2,669					2,442					7,944					7,143					2,777					2,724					2,659					8,131					7,944
Other revenues	189					218					323					639					953					127					119					189					359					639
Total consolidated revenues	2,847			100	%	2,887			100	%	2,765			100	%	8,584			100	%	8,096			100	%	2,904			100	%	2,843			100	%	2,847			100	%	8,490			100	%	8,584			100	%
Operating expenses and charges:
Patient care costs	2,064			72	%	2,069			72	%	1,952			71	%	6,168			72	%	5,698			70	%	1,991			69	%	1,958			69	%	2,064			72	%	5,914			70	%	6,168			72	%
General and administrative	336			12	%	264			9	%	273			10	%	867			10	%	799			10	%	299			10	%	275			10	%	336			12	%	825			10	%	867			10	%
Depreciation and amortization	146			5	%	147			5	%	143			5	%	436			5	%	416			5	%	156			5	%	152			5	%	146			5	%	457			5	%	436			5	%
Equity investment loss (income)	4			—	%	(10		)	—	%	5			—	%	(6		)	—	%	5			—	%
Equity investment (income) loss																										(4		)	—	%	(5		)	—		4			—	%	(11		)	—	%	(6		)	—	%
Provision for uncollectible accounts	1			—	%	(2		)	—	%	(3		)	—	%	(7		)	—	%	(1		)	—	%	—			—	%	—			—		1			—	%	—			—	%	(7		)	—	%
Investment and other asset impairments	6			—	%	11			—	%	—			—	%	17			—	%	15			—	%
Impairment of other assets																										—			—	%	—			—	%	6			—	%	—			—	%	17			—	%
Goodwill impairment charges	—			—	%	3			—	%	—			—	%	3			—	%	35			—	%	84			3	%	—			—	%	—			—	%	125			1	%	3			—	%
Loss (gain) on changes in ownership interests, net	2			—	%	(34		)	(1	)%	—			—	%	(32		)	—	%	(6		)	—	%	—			—	%	—			—	%	2			—	%	—			—	%	(32		)	—	%
Gain on settlement, net	—			—	%	—			—	%	—			—	%	—			—	%	(527		)	(7	)%
Total operating expenses and charges	2,558			90	%	2,449			85	%	2,370			86	%	7,446			87	%	6,433			79	%	2,526			87	%	2,381			84	%	2,558			90	%	7,309			86	%	7,446			87	%
Operating income	$	289		10	%	$	438		15	%	$	395		14	%	$	1,138		13	%	$	1,662		21	%	$	378		13	%	$	462		16	%	$	289		10	%	$	1,181		14	%	$	1,138		13	%

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

~~(1)~~

~~On January 1, 2018, we adopted~~ ~~Revenue from Contracts with Customers~~ (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 prior periods continue to be reported in accordance with our historical accounting under ~~Revenue Recognition~~ ~~(Topic 605).~~

The following table summarizes our consolidated revenues among our reportable segments:


	Three months ended									Nine months ended						Three months ended									Nine months ended
	September 30, 2018			June 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017			September 30, 2019			June 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
	(dollars in millions)															(dollars in millions)
Revenues:⁽¹⁾
U.S. dialysis and related lab services patient service revenues	$	2,585		$	2,633		$	2,484		$	7,725		$	7,286		$	2,685		$	2,642		$	2,585		$	7,875		$	7,725
Provision for uncollectible accounts	(13		)	(49		)	(118		)	(37		)	(334		)	(4		)	(10		)	(13		)	(20		)	(37		)
U.S. dialysis and related lab services net patient service revenues	2,572			2,583			2,366			7,688			6,952			2,681			2,632			2,572			7,855			7,688
Other revenues	5			5			5			15			15			10			6			5			21			15
Total U.S. dialysis and related lab services revenues	2,577			2,588			2,370			7,703			6,967
Total net U.S. dialysis and related lab services revenues																2,691			2,637			2,577			7,876			7,703
Other—Ancillary services and strategic initiatives other revenues	192			222			324			652			956			120			117			192			349			652
Other—Ancillary services and strategic initiatives patient service revenues, net	112			106			90			320			230			128			122			112			368			320
Total other—ancillary services and strategic initiatives revenues	304			328			414			972			1,186
Total net other—ancillary services and strategic initiatives revenues																248			239			304			717			972
Elimination of intersegment revenues	(34		)	(29		)	(19		)	(92		)	(57		)	(36		)	(34		)	(34		)	(104		)	(92		)
Consolidated revenues	$	2,847		$	2,887		$	2,765		$	8,584		$	8,096		$	2,904		$	2,843		$	2,847		$	8,490		$	8,584

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 prior periods 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:

Adjusted consolidated operating income⁽¹⁾

related lab services revenues, which increased by approximately $736 million, primarily 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 ~~$214~~$255 million in our ancillary services and strategic initiatives revenues, ~~which was driven by a decline in volume in our pharmaceutical business~~primarily due to our pharmacy distribution ceasing operations, a decrease in revenues at Vively Health (formally known as DaVita Health Solutions) and the ~~changes in reimbursement for calcimimetics. Ancillary services and strategic initiatives net revenues were favorably impacted~~sale of our direct primary care business, partially offset by ~~increases~~an increase in revenues from DaVita IKC and our international ~~expansion, increases in VillageHealth~~operations, as described below. Consolidated revenues benefited from ~~special needs plans, and~~ an increase in ~~shared savings recognized at DaVita Health Solutions, 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 related lab services ~~business for~~revenues of approximately $173 million, primarily due to volume growth from additional treatments, partially offset by a decrease in our ~~Medicare patients~~average dialysis and ~~are now reimbursed under Medicare Part B. During an initial pass-through period, Medicare payment for calcimimetics will be based on a pass-through rate~~related lab services net revenue per treatment of ~~the average sales price plus~~ approximately 4%. CMS has stated intentions to enter calcimimetics into the ESRD bundle two years after transitioning to Part B. Previously, calcimimetics were reimbursed for Medicare patients through Part D once dispensed from traditional pharmacies, including DaVita Rx.$2, as described below.

Consolidated operating ~~results~~income for the third quarter of 2019, which includes goodwill impairment charges of $84 million at our Germany reporting units, decreased by approximately $84 million as compared to the second quarter of 2019. Excluding this item from the third quarter of 2019, adjusted consolidated operating income for the third quarter of 2019 was relatively flat as compared to the second quarter of 2019 and included an increase in U.S. dialysis and related lab services' operating income of $2 million and a decrease in adjusted operating losses in our ancillary and strategic initiatives of $1 million, offset by an increase in expenses in our corporate administrative support of $3 million, each as further described below.

Consolidated operating income for the third quarter of 2019, which includes goodwill impairment charges of $84 million at our Germany reporting units, increased by approximately $89 million as compared to the third quarter of 2018, which included restructuring charges of $11 million, ~~and~~ other asset impairment charges of $6 million, related to our pharmacy business, an equity investment loss related to APAC JV goodwill impairment of $6 million, and a loss on changes in ownership interests of $2 million, decreased by approximately $149 million as compared to the second quarter of 2018, which included a net gain on changes in ownership interests of $34 million, other asset impairment charges of $11 million, and a goodwill impairment charge of $3 million. Excluding these items, adjusted consolidated operating income for the third quarter of 2018 decreased by $105 million due to a decrease in U.S. dialysis and related lab services operating income of $59 million, an increase in expenses in our corporate administrative support of $27 million and an increase in adjusted operating losses in our ancillary and strategic initiatives of $18 million, as discussed below.

Consolidated operating results for the third quarter of 2018, which included restructuring charges of $11 million and other asset impairment charges of $6 million related to our pharmacy business, an equity investment loss related to APAC JV goodwill impairment of $6 million, and a loss on changes in ownership interests of $2 million, decreased by $106 million as compared to the third quarter in 2017, which included an equity investment loss of $6 million for goodwill impairments at our APAC JV and ~~restructuring charges related to our international business~~a net loss on changes in ownership interests of $3$2 million. Excluding these items from their respective periods, adjusted consolidated operating income for the third quarter of ~~2018 decreased~~2019 increased by ~~$90~~approximately $148 million primarily due to an increase in our margin on calcimimetics and a decrease in advocacy costs, which were the primary drivers of our increase in operating income in U.S. dialysis and related lab services of ~~$53 million, an increase in expenses in our corporate administrative support of $30 million, and an increase~~approximately $111 million. Adjusted operating income also benefited from a decrease in adjusted operating losses in our ancillary and strategic initiatives of $7$21 million and a decrease in expenses in our corporate administrative support of $16 million, each as further described below.

Consolidated operating ~~results~~income for the nine months ended September 30, 2019, which includes goodwill impairment charges of $125 million at our Germany reporting units, increased by approximately $43 million as compared to the nine months ended September 30, 2018, which included a net gain on changes in ownership interests of $32 million, other asset impairment charges of $17 million, ~~and~~ restructuring charges of $11 million, related to our pharmacy business, an equity investment loss related to APAC JV goodwill impairment of $6 million and a goodwill impairment charge of $3 million, decreased by $524 million as compared to the same period in 2017, which included goodwill impairment charges of $35 million related to our vascular access reporting unit, an equity investment loss of $6 million for goodwill impairments at our APAC JV ~~an asset~~and a goodwill impairment of $15 million related to the restructuring of our pharmacy business, a net gain on a settlement with the U.S. Department of Veterans Affairs (VA) of $530 million, restructuring charges related to our international businesscharge of $3 ~~million, and an adjustment to the gain on the APAC JV ownership change of $6~~ million. Excluding these items from their respective periods, adjusted consolidated operating income for the nine months ended September 30, ~~2018 decreased~~2019 increased by ~~$42~~approximately $163 million primarily due to an increase in our margin on calcimimetics and a decrease in ~~adjusted~~advocacy costs, which were the primary drivers of our increase in operating income in U.S. dialysis and related lab services of ~~$35 million and an increase in expenses in our corporate administrative support of $38 million, partially offset by~~approximately $144 million. Adjusted operating income also benefited from a decrease in adjusted operating losses in our ancillary and strategic initiatives of ~~$31~~$13 million and a decrease in expenses in our corporate administrative support of $5 million, each as further described below.

Currently, the oral and intravenous forms of calcimimetics are separately reimbursed and therefore are not part of the ESRD PPS bundled payment. CMS has had delays in adjusting reimbursement as oral generic products have entered the market lowering the cost of products we acquire. We expect our average revenue per treatment related to these pharmaceuticals to decline in future periods as CMS adjusts the reimbursement amount to more closely match the cost of these pharmaceuticals in accordance with their rules. We therefore do not expect to continue to realize the same level of operating income from calcimimetics beyond 2019.

Results of operations

Dialysis and related lab services’ revenues for the third quarter of ~~2018 decreased~~2019 increased by approximately ~~$11~~$54 million, or ~~0.4%~~2.0%, as compared to the second quarter of ~~2018. The decrease~~2019. This increase in dialysis and related lab services’ revenues was driven by an increase in treatments, principally due to one additional treatment day in the third quarter of 2019 as compared to the second quarter of 2019, and volume growth from acquired and non-acquired treatment growth. This increase in treatments was partially offset by a decrease in our average dialysis and related lab services' net revenue per treatment of ~~approximately $4, partially offset by volume growth from additional treatments due to acquired and non-acquired growth.~~less than $1. The decrease in our average net revenue per treatment was primarily ~~due~~attributable to a decrease in ~~revenue related to the administration of calcimimetics and a decrease in Medicare bad debt revenue. The second quarter of 2018 benefited from the recognition of $12 million in Medicare bad debt~~our acute services' revenue due to a

~~policy election made under the new revenue standard (described~~ decline in footnote 1 in the table above) to continue to apply the old guidance to contracts that were substantially completed as of December 31, 2017. We did not recognize any benefit from this election in the third quarter of 2018. These decreases in revenues werevolume, partially offset by ~~increases~~an increase in ~~reimbursement rates.~~average net revenue per treatment due to seasonal administration of influenza vaccinations and an increase in volume related to calcimimetics.

Dialysis and related lab services’ revenues for the third quarter of ~~2018~~2019 increased by approximately ~~$207~~$114 million, or ~~8.7%~~4.4%, as compared to the third quarter of ~~2017. The~~2018. This increase in net revenues was principally ~~due to~~driven by an increase in ~~our average dialysis net revenue per treatment of approximately $19 and volume growth from~~treatments due to one additional treatments. The increase in revenue per treatment was primarily related to the administration of calcimimetics, as discussed above. 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~~in the third quarter of ~~2018~~2019 as compared to the third quarter of ~~2017.~~2018 and volume growth from acquired and non-acquired treatment growth, as well as an increase in our average dialysis and related lab services' net revenue per treatment of less than $1. The increase in net revenue per treatment was primarily driven by an increase in Medicare rates and an increase in acute services' revenue, partially offset by a decrease in calcimimetics revenue due to a decline in rate.

Dialysis and related lab services’ revenues for the nine months ended September 30, ~~2018~~2019 increased by approximately ~~$736~~$173 million, or ~~10.6%~~2.2%, as compared to the ~~same period in 2017. The~~nine months ended September 30, 2018. This increase in net revenues was principally due to an increase in treatments driven by volume growth from acquired and non-acquired treatment growth. These increases were partially offset by a decrease in our average dialysis and related lab services' net revenue per treatment of approximately ~~$21 and volume growth from additional treatments. This increase~~$2. The decrease in net revenue per treatment was ~~primarily related~~driven by a decrease in calcimimetics revenue due to a decline in rate and a $36 million benefit recognized in the ~~administration of calcimimetics, as discussed above, as well as an increase~~nine months ended September 30, 2018 in Medicare bad debt revenue ~~of $36 million~~ due to a policy election made under the new revenue standard ~~described above. The increase~~to only apply the new guidance to contracts that were not substantially completed as of January 1, 2018. These decreases in ~~the number of treatments was primarily attributable to acquired and non-acquired~~net revenue per treatment ~~growth,~~were partially offset by ~~approximately one half less treatment day during the nine months ended September 30, 2018 as compared~~an increase in acute services' revenue due to ~~the same period~~an increase in ~~2017.~~

In November 2018, CMS issued a final rule to update the ESRD Prospective Payment System (PPS), which will increase dialysis facilities’ bundled payment rate by 1.6% in 2019 relative to the 2018 bundled payment rate. CMS projects in the final rule that the 2019 ESRD PPS will (i) increase the total payments to all ESRD facilities by 1.6%; (ii) increase total payments to hospital-based ESRD facilities by 1.7%; and (iii) increase total payments for freestanding facilities by 1.6% in 2019 compared to 2018. According to CMS, under the final rule, the agency expects to pay approximately $10.5 billion for costs associated with furnishing chronic maintenance dialysis services.volume.

Patient care costs. Dialysis and related lab services’ patient care costs of approximately ~~$247~~$236per treatment for the third quarter of ~~2018 were flat~~2019 decreased by approximately $1 per treatment as compared to the second quarter of ~~2018. Labor and benefits costs increased in the third quarter of 2018 compared to the second quarter of 2018, offset by decreases in pharmaceutical costs due~~2019. This decrease was primarily related to a decrease in calcimimetics unit costs due to the continued market transition to the oral generic form of the pharmaceutical and ~~other drug intensities, professional fees, insurance~~a decrease in travel expenses. These decreases were partially offset by increases in benefit costs and ~~travel expenses.~~in other direct operating expenses associated with our dialysis centers.

General and administrative expenses. Dialysis and related lab services’ general and administrative expenses ~~were approximately $233 million in~~for the third quarter of ~~2018 and $196~~2019 increased by approximately $19 million inas compared to the second quarter of ~~2018. General and administrative expenses increased~~2019. This increase was primarily ~~due to increases in advocacy costs and consulting fees, partially offset by a decrease in asset impairments~~ related to ~~expected center closures. The~~an increase in ~~advocacy spending was primarily due to our efforts to oppose legislative~~long-term incentive compensation expense driven by compensation plans based on operating income performance and ~~ballot initiatives~~an increase in ~~California and Ohio. We continue to expect advocacy spending, including in the fourth quarter of 2018.~~professional fees.

Dialysis and related lab services’ general and administrative expenses for the third quarter of ~~2018~~2019 increased by approximately ~~$36~~$2 million as compared to the third quarter of ~~2017.~~2018. This increase was primarily due to ~~increases~~an increase in ~~advocacy costs,~~long-term incentive compensation expense, as described above, an increase in labor and benefit costs ~~related to the 401(k) matching program that began~~and an increase in ~~2018, and travel expenses, partially~~professional fees, primarily offset by ~~decreases~~a decrease in ~~labor costs and professional fees.~~advocacy costs.

Dialysis and related lab services’ general and administrative expenses ~~of approximately $626 million~~ for the nine months ended September 30, ~~2018~~2019 increased by approximately ~~$52~~$22 million as compared to the ~~same period in 2017.~~nine months ended September 30, 2018. This increase was

primarily due to increases in ~~advocacy~~labor and benefit costs, long-term incentive compensation expense, as described above, ~~benefit costs related to the 401(k) matching program that began in 2018,~~ and ~~occupancy costs,~~professional fees. These increases were partially offset by ~~decreases~~a decrease in ~~consulting fees~~advocacy costs and ~~labor costs.~~a reduction in asset impairments related to expected center closures.

Depreciation and amortization. Depreciation and amortization for dialysis and related lab services ~~was approximately $139 million~~ for the third quarter of ~~2018, $138~~2019 increased approximately $3 million ~~for the second quarter of 2018, and $132 million for the third quarter of 2017. The increase in depreciation and amortization in the third quarter of 2018~~ as compared to the second quarter of ~~2018 and the third quarter of 2017~~2019. This increase was primarily due to an increase in depreciation expense related to increases in information technology and growth in newly developed ~~centers and acquired~~ centers.

Depreciation and amortization for dialysis and related lab services for the third quarter of 2019 increased approximately $9 million as compared to the third quarter of 2018. This increase was ~~approximately $412 million~~primarily due to an increase in depreciation expense related to increases in information technology and growth in newly developed centers and acquired centers, partially offset by a decrease due to a change in estimated useful lives for our dialysis machines.

Depreciation and amortization for dialysis and related lab services for the nine months ended September 30, ~~2018~~2019 increased approximately $21 million as compared to ~~$387 million for~~ the same period in ~~2017.~~2018. The increase was primarily due to the same factors as described above.

Equity investment income. Equity investment income for dialysis and related lab services ~~was approximately $4 million~~ for the third quarter of ~~2018, $6 million for the second quarter of 2018 and $8 million for the third quarter of 2017. Equity investment income for the third quarter of 2018~~2019 decreased by approximately $2 ~~million and $4~~ million as compared to the second quarter of ~~2018 and the third quarter of 2017, respectively,~~2019 primarily due to a ~~decline~~decrease in ~~our~~ results at ~~certain~~our nonconsolidated joint ventures.

Equity investment income for dialysis and related lab services for the third quarter of 2019 increased approximately $1 million as compared to the third quarter of 2018. This increase was ~~approximately $15 million~~primarily due to improved results at our nonconsolidated joint ventures.

Equity investment income for dialysis and related lab services for the nine months ended September 30, ~~2018~~2019 increased approximately $2 million as compared to ~~$20 million for~~ the same period in ~~2017. The decrease was~~2018 primarily due to ~~income recognized~~improved results at our nonconsolidated joint ~~ventures in the nine months ended September 30, 2017 related to the gain on the settlement with the VA, as discussed below.~~

~~Gain on settlement, net.~~ During the nine months ended September 30, 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.~~

Dialysis and related lab services’ operating income for the third quarter of ~~2018 decreased~~2019 increased by approximately ~~$59~~$2 million as compared to the second quarter of ~~2018.~~2019. Operating income ~~decreased~~increased primarily due to an increase in ~~advocacy costs, labor~~treatments, as described above, an increase in our margin on calcimimetics due to the continued market transition to the generic form of the pharmaceutical and ~~benefits costs, and consulting costs, as well as~~a decrease in travel expenses. Operating income was negatively impacted by a decrease in our average dialysis and related lab services' net revenue per ~~treatment. This decrease was partially offset by an increase~~treatment of less than $1, as described above, as well as increases in ~~the number of treatments in the third quarter of 2018~~other direct operating expenses associated with our dialysis centers, long-term incentive compensation expense, professional fees and ~~decreases in pharmaceutical costs, insurance costs, and travel expenses, as discussed above.~~benefit costs.

Dialysis and related lab services’ operating income for the third quarter of ~~2018 decreased~~2019 increased by approximately ~~$53~~$111 million as compared to the third quarter of ~~2017.~~2018. This ~~decrease~~increase in operating income was principally due to one less treatment day during the third quarter of 2018 as compared to the third quarter of 2017, increases in advocacy costs and labor and benefits costs, including the 401(k) matching program, as well as an increase in ~~travel expenses~~treatments, an increase in our average dialysis and related lab services' net revenue per treatment of less than $1 and an increase in our margin on calcimimetics, as described above. In addition, operating income benefited from decreases in other pharmaceutical unit costs and advocacy costs. Operating income was negatively impacted by increases in other direct operating expenses associated with our dialysis centers, as discussed above. Operating income benefited from an increase in our average dialysis net revenue per treatment, primarily related to the administration of calcimimetics, volume growth from additional treatments,long-term incentive compensation expense, benefit costs and ~~a decrease in~~ professional fees.

Dialysis and related lab services’ operating income for the nine months ended September 30, ~~2018 decreased~~2019 increased by approximately $565 million as compared to the same period in 2017, which included a net gain on settlement of $530 million. Excluding this item from the nine months ended September 30, 2017, dialysis and lab services' adjusted operating income for the nine months ended September 30, 2018 decreased by approximately $35$144 million as compared to the nine months ended September 30, ~~2017.~~2018. This ~~decrease~~increase in ~~adjusted~~ operating income was principally due to an increase in treatments and an increase in our margin on calcimimetics, as described above, as well as decreases in advocacy costs ~~as well as increases in labor~~ and ~~benefits costs, including the 401(k) matching program, occupancy~~other pharmaceutical unit costs and utilization. Operating income was negatively impacted by a decrease in our average dialysis and related lab services' net revenue per treatment of approximately $2, as described above, in addition to increases in other direct operating expenses associated with our dialysis centers, as discussed above. Adjusted operating income was also negatively impacted by a decrease of one half treatment day in the nine months ended September 30, 2018. Adjusted operating income benefited from an increase in our average dialysis net revenue per treatment related to the administration of calcimimetics, volume growth from additional treatments, reduced pharmaceuticallabor and benefits costs, long-term compensation expense and ~~intensity, and decreases in consulting~~professional fees.

Our other operations include ancillary services and strategic initiatives which are primarily aligned with our ~~U.S.~~core business of providing dialysis ~~and related lab~~ services ~~business, along with~~to our ~~international dialysis operations.~~network of patients. As of September 30, ~~2018,~~2019, these

consisted primarily of ~~pharmacy services,~~ disease management services, vascular access services, clinical research programs, physician services, ESRD seamless care organizations and comprehensive care as well as our international operations. ~~Our ancillary services and strategic initiatives~~These businesses generated approximately ~~$304~~$248 million in revenues for the third quarter of ~~2018,~~2019, representing approximately ~~10.4%~~8.4% 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.

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~~including our international ~~operations,~~operations. If any of these businesses are unsuccessful, it would have a negative impact on our business, results of operations and financial condition, and we may ~~determine~~decide to exit ~~the~~such 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 incurred, and may in the future incur, impairment and restructuring charges in addition to those described below related to our ancillary services and strategic initiatives.~~

Recent changes in the oral pharmacy space, including reimbursement rate pressures, have negatively affected the economics of our pharmacy services business. As a result, we are transitioning the customer service and fulfillment functions of this business to third parties and are winding down our distribution operation, which will result in a decline in revenues and costs. In the third quarter of 2018, we recognized restructuring charges of $11 million and incurred $6 million related to impairment of assets, in addition to the $11 million we incurred related to impairment of assets in the second quarter of 2018 related to this plan. We expect to continue to incur losses for these operations as we continue the transition and wind-down in the fourth quarter of 2018. We do not expect the net financial impact of this plan to be material.

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. The second quarter 2018 sale (described below) of Paladina Health, our direct primary care business, was a result of the implementation of this strategy.

As of September 30, ~~2018, we~~2019, our international dialysis operations provided dialysis and administrative services tothrough a total of ~~251~~249 outpatient dialysis centers located in 10nine 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:

Total ancillary services and strategic initiatives
operating (loss) income

Total ancillary services and strategic initiatives
operating loss

Adjusted operating loss⁽²⁾

Adjusted operating (loss) income ⁽²⁾

Total adjusted ancillary services and strategic
initiatives operating loss⁽²⁾

Adjusted operating income (loss)⁽¹⁾

Total adjusted ancillary services and strategic
initiatives operating loss⁽¹⁾

Revenues from our ancillary services and strategic initiatives for the third quarter of ~~2018 decreased~~2019 increased by approximately ~~$24~~$9 million, or ~~7.3%~~3.8%, as compared to the second quarter of ~~2018.~~2019. This ~~decrease~~increase was primarily due to ~~a decline~~an increase in ~~volume~~revenues related to our international operations driven by approximately one additional treatment day in the third quarter of 2019 as compared to the second quarter of 2019. Revenue also increased due to ~~the restructuring of our pharmacy business~~increases in revenues at DaVita IKC and DaVita Clinical Research, partially offset by a decrease in revenues ~~related to the sale of~~at our direct primary care business in the second quarter of 2018, as discussed below. These decreases were partially offset by an increase in revenues from our international operations due to non-acquired growth and an increase in VillageHealth revenues from special needs plans.ESCO joint ventures.

Revenues from our ancillary services and strategic initiatives for the third quarter of ~~2018~~2019 decreased by approximately ~~$110~~$56 million, or ~~26.6%~~18.4%, as compared to the third quarter of ~~2017.~~2018. This decrease was primarily due to ~~a decline~~our pharmacy distribution ceasing operations, partially offset by increases in volume in our pharmaceutical business due to changes in calcimimetics reimbursement for Medicare patients under Medicare Part B which is now billed in our U.S. dialysis and related lab services business,revenues at DaVita IKC, as well as our international operations due to one additional treatment day in the ~~restructuring~~third quarter of ~~our pharmacy business,~~2019 as ~~discussed below, a decrease in our shared savings revenue from our ESRD Seamless Care Organization (ESCO) joint ventures and a decrease related~~compared to the ~~sale of our direct primary care business in the second~~third quarter of 2018 ~~as discussed below. These decreases were partially offset by an increase in revenues from our international expansion~~and due to acquired and non-acquired ~~growth and an increase in VillageHealth revenues from special needs plans.~~treatment growth.

Revenues from our ancillary services and strategic initiatives for the nine months ended September 30, ~~2018~~2019 decreased by approximately ~~$214~~$255 million, or ~~18.0%~~26.2%, as compared to the ~~same period in 2017.~~nine months ended September 30, 2018. This decrease was primarily due to ~~a decline in volume in~~ our ~~pharmaceutical business due to changes in calcimimetics reimbursement, as discussed above,~~pharmacy distribution ceasing operations as well as ~~the restructuring of~~decreases in revenues at Vively Health, and our ~~pharmacy~~direct primary care business ~~as discussed below, a decrease in our shared savings revenue from our ESCO joint ventures and a decrease related~~due to the sale of ~~our direct primary care~~this business in the second quarter of 2018. These decreases were partially offset by ~~an increase~~increases in revenues ~~from~~at DaVita IKC, and our international ~~expansion~~operations due to acquired and non-acquired ~~growth, an increase in VillageHealth revenues from special needs plans, and an increase in shared savings recognized at DaVita Health Solutions.~~treatment growth.

Ancillary services and strategic ~~initiatives~~initiatives' operating and general expenses for the third quarter of ~~2018~~2019 increased by ~~$12~~$8 million from the second quarter of ~~2018. Operating expenses increased~~2019. This increase was primarily due to an increase in expenses associated with our international operations and an increase in medical costs at DaVita IKC.

Ancillary services and strategic initiatives' operating and general expenses for the third quarter of 2019 decreased by $95 million as compared to the third quarter of 2018. This decrease was primarily due to our pharmacy distribution ceasing operations, decreases in restructuring charges related to our pharmacy business of $11 million, and an equity investment loss of $6 million for goodwill impairments at our APAC JV ~~increases~~recognized in medical costs at VillageHealth related to the cost of calcimimetics and an increase in members in our special needs plans as well as a decrease in foreign exchange gains and increases in expenses at our international operations. These increases were partially offset by a decrease in pharmaceutical costs at our pharmacy business due to decreased volume and decreases in labor and benefit costs.

~~Ancillary services and strategic initiatives operating expenses for~~ the third quarter of 2018 decreased by $94 million as compared to the third quarter of 2017. This decrease was primarily related to a decrease in pharmaceutical costs at our pharmacy business due to decreased volume, as discussed above, and decreases in labor and benefit costs.2018. These decreases ~~in operating expenses~~ were partially offset by an increase in ~~restructuring charges of $9 million, increases in~~ medical costs at ~~VillageHealth related to the cost of calcimimetics~~DaVita IKC and ~~an increase in members in our special needs plans as well as~~ an increase in expenses associated with our international operations.

Ancillary services and strategic ~~initiatives~~initiatives' operating and general expenses for the nine months ended September 30, ~~2018~~2019 decreased by ~~$236~~$286 million as compared to the ~~same period in 2017. The~~nine months ended September 30, 2018. This decrease was primarily due to our pharmacy distribution ceasing operations, a decrease in ~~pharmaceutical costs~~expenses related to the sale of our direct primary care business in the second quarter of 2018, a decrease in expenses at DaVita Clinical Research, as well as decreases in restructuring charges related to our pharmacy business ~~due to decreased volume, as discussed above,~~of $11 million, and ~~decreases~~an equity investment loss of $6 million for goodwill impairments at our APAC JV recognized in ~~labor and benefit costs.~~the nine months ended September 30, 2018. These decreases ~~in operating expenses~~ were partially offset by an increase in ~~restructuring charges of $9 million, as well as an increase in~~ medical costs at ~~VillageHealth related to the cost of calcimimetics~~DaVita IKC and ~~an increase in members in our special needs plans as well as~~ an increase in expenses associated with our international operations.

During the first quarter of 2019, we recognized a $41 million goodwill impairment charge in our Germany kidney care business. This charge resulted primarily from a change in relevant discount rates, as well as a decline in current and expected future patient census and an increase in first quarter and expected future costs, principally due to wage increases expected to result from recently announced legislation.

During the third quarter of 2019, we recognized an incremental goodwill impairment charge of $79 million in our Germany kidney care business and a $5 million goodwill impairment charge in our German other health operations. The incremental charge recognized in the Germany kidney care business resulted from changes and developments in our outlook for this business since our last assessment. These primarily concern developments in the business in response to evolving market conditions and changes in our expected timing and ability to mitigate them.

During the nine months ended September 30, 2019, we recognized goodwill impairment charges of $125 million consisting of the charges described above.

We did not recognize any goodwill impairment charges during the third quarter of 2018 weand recognized a goodwill impairment charge of $3 million at our German ~~integrated healthcare business.~~

~~During~~other health operations during the nine months ended September 30, ~~2017, we recognized a~~2018.

See further discussion of these impairment charges and our reporting units that remain at risk of goodwill impairment ~~charge of $35 million at our vascular access reporting unit. This charge resulted primarily from continuing changes~~ in ~~our outlook as our partners~~Note 7 to the condensed consolidated financial statements.

Ancillary services and operators 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. There is no goodwill remaining at our vascular access reporting unit.

~~Restructuring and other asset impairment charges.~~ ~~During~~strategic initiatives' operating loss for the third quarter of ~~2018, we announced a plan to restructure our pharmacy business, as discussed above. As a result of this planned restructuring, we recognized restructuring~~2019, which includes goodwill impairment charges of ~~$11~~$84 million ~~which are included in operating and other general expenses as well as an asset impairment charge~~at our Germany reporting units, increased by approximately $83 million from the second quarter of ~~$6 million in~~2019. Excluding this item from the third quarter of ~~2018.~~

~~During the nine months ended September 30, 2018 and September 30, 2017, we recognized asset impairment charges of $17~~2019, adjusted operating losses decreased by $1 million, ~~and $15 million, respectively,~~primarily due to an increase in ~~addition to the restructuring charges of $11 million which are included~~DaVita Clinical Research operating results, partially offset by a decrease in operating ~~and other general expenses for the nine months ended September 30, 2018 related to the planned restructuring of our pharmacy business.~~

During the three and nine months ended September 30, 2017, we recognized restructuring charges related to our international business of $2 million and recognized equity investment losses of $1 million related to restructuring chargesresults at our APAC JV. These restructuring charges were related to a reorganization of our international general and administrative infrastructure at the global, regional and country level in order to improve efficiency.

~~Gain on changes in ownership interests, net.~~ We sold 100% of the stock of Paladina Health, our direct primary care business effective June 1, 2018 and recognized a gain of $35 million during the second quarter of 2018 on this transaction. During the three months ended September 30, 2018, we recognized a loss of $2 million related to the finalization of the purchase price under the terms of the purchase agreement for Paladina Health. In addition, we recognized a loss of $1 million related to the unwinding of a business internationally in the second quarter of 2018. In aggregate, we recognized a net gain of $32 million on changes in ownership interests for the nine months ended September 30, 2018.

During the nine months ended September 30, 2017, we recorded a $6 million non-cash gain as a result of our agreement with Khazanah Nasional Berhad and Mitsui and Co., Ltd. concerning the APAC JV related to a change in estimate of pending post-closing adjustments for the formation of thisESCO joint ~~venture.~~

~~Segment operating losses~~ventures.

Ancillary services and strategic initiatives operating loss for the third quarter of 2019, which includes goodwill impairment charges of $84 million at our Germany reporting units, increased by approximately $38 million from the third quarter of 2018, which included restructuring charges of $11 million, ~~and~~ other asset impairment charges of $6 million related to our pharmacy business, an equity investment loss of $6 million for goodwill impairments at our APAC JV and a loss on changes in ownership interests of $2 million, increased by approximately $63 million from the second quarter of 2018, which included a net gain on changes in ownership interests of $34 million, other asset impairment charges of $11 million, and a goodwill impairment charge of $3 million. Excluding these items from their respective periods, adjusted operating losses ~~increased~~decreased by ~~$18~~$21 million, primarily due to a decrease in ~~volume at~~adjusted operating losses related to our pharmacy business, an increase in international adjusted operating results and ~~a decrease~~an increase in ~~foreign exchange gains in our international operations.~~DaVita IKC operating results.

Ancillary services and strategic initiatives operating loss for the ~~third quarter of 2018,~~nine months ended September 30, 2019, which ~~included restructuring charges of $11 million and other asset~~includes goodwill impairment charges of $6$125 million ~~related to our pharmacy business, an equity investment loss of $6 million for goodwill impairments~~ at our ~~APAC JV and a loss on changes in ownership interests of $2 million,~~Germany reporting units, increased by approximately ~~$23~~$106 million from the third quarter of 2017, which included an equity investment loss of $6 million for goodwill impairments at our APAC JV and restructuring charges related to our international business of $3 million. Excluding these items from their respective periods, adjusted operating losses increased by $7 million, primarily due to a decrease in volume at our pharmacy business and an increase in costs at VillageHealth, partially offset by an improvement in our international operations.

~~Ancillary services and strategic initiatives operating loss for~~ the nine months ended September 30, 2018, which included a net gain on changes in ownership interests of $32 million, other asset impairment charges of $17 million, ~~and~~ restructuring charges of $11 million, ~~related to our pharmacy business,~~ an equity investment loss of $6 million for goodwill impairments at our APAC JV and a goodwill impairment charge of $3 million, decreased by approximately $79 million from the same period in 2017, which included goodwill impairment charges of $35 million related to our vascular access reporting unit, an equity investment loss of $6 million for goodwill impairments at our APAC JV, an asset impairment of $15 million related to the restructuring of our pharmacy business, restructuring charges related to our international business of $3 million, and an adjustment to the gain on the APAC JV ownership change of $6 million. Excluding these items from their respective periods,

adjusted operating losses decreased by ~~$31~~$13 million, primarily due to ~~shared savings recognized at~~a decrease in adjusted operating losses related to our pharmacy business and increases in DaVita ~~Health Solutions in the first quarter of 2018~~IKC and ~~improvement in our international business,~~DaVita Clinical Research's operating results. These increases to adjusted operating income were partially offset by ~~an increase~~decreases in ~~costs~~operating results at ~~VillageHealth.~~Vively Health and at our ESCO joint ventures.

Debt expense. Debt expense was $89 million in the third quarter of 2019, $132 million in the second quarter of 2019 and $126 million in the third quarter of ~~2018, $120 million in the second quarter of 2018 and $109 million~~2018. Debt expense in the third quarter of ~~2017. Debt expense increased by $6 million~~2019 decreased as compared to the second quarter of ~~2018~~2019 and ~~by $17 million~~ as compared to the third quarter of ~~2017,~~2018 primarily due to ~~an increase~~a decrease in our average outstanding debt balance and ~~an increase~~a decrease in our average interest rate.

Debt expense was ~~$359~~$352 million for the nine months ended September 30, ~~2018~~2019 as compared to ~~$322~~$359 million for the same period in ~~2017. Debt expense increased~~2018, decreasing by ~~$37~~$7 million primarily due to a decrease in our average outstanding debt balance as well as a decrease in our average interest rate.

Debt prepayment, refinancing and redemption charges. Debt prepayment, refinancing and redemption charges were $21 million and $33 million in the ~~same factors~~three and nine months ended September 30, 2019, respectively, as ~~discussed above.~~a result of the repayment of all principal balances outstanding on our prior senior secured credit facilities and the redemption of our 5.75% Senior Notes. The $21 million of such charges recognized in the third quarter of 2019 represented debt discount and deferred financing cost write-offs associated with the portion of our prior senior secured debt that was paid in full in the third quarter of 2019, as well as redemption charges on our 5.75% Senior Notes redeemed in the third quarter of 2019. The $12 million of such charges recognized in the second quarter of 2019 represented accelerated amortization of debt discount and deferred financing costs associated with the portion of our prior senior secured debt that was mandatorily prepaid in or shortly after the second quarter of 2019 and prior extensions thereof.

Corporate administrative support. Corporate administrative support consists primarily oflabor, 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~~business, partially offset by internal management fees charged to our other lines of business for that support.

Corporate administrative support costs were approximately $25 million in the third quarter of 2019, $22 million in the second quarter of 2019 and $41 million in the third quarter of ~~2018, $14 million in the second quarter of 2018 and $11 million~~2018. Corporate administrative support costs increased in the third quarter of ~~2017.~~2019 as compared to the second quarter of 2019 primarily due to an increase in long-term incentive compensation expense driven by operating income performance. Corporate administrative support costs in the third quarter of ~~2018~~2019 decreased as compared to the ~~second quarter~~same period of 2018 ~~increased~~primarily due to ~~an increase~~a decrease in long-term incentive compensation expense ~~due to~~resulting from the adoption of a retirement policy for certain officers ~~as discussed below~~ in ~~"Long-term incentive compensation", as well as~~the third quarter of 2018 that increased expense in that period and a reduction in internal management fees charged to our ancillary lines of business. Corporate administrative support costs in the third quarter of 2018 increased as compared to the same period of 2017 primarily due to the same factors as discussed above, partially offset by decreases in labor and benefit costs and legal fees. pharmacy business which ceased operations.

Corporate administrative support costs were approximately ~~$71~~$66 million in the nine months ended September 30, ~~2018,~~2019 as compared to ~~$33~~$71 million for the same period in ~~2017.~~2018. The ~~increase~~decrease in corporate administrative support costs was primarily due to a decrease in long-term incentive compensation expense resulting from the ~~same factors as discussed above~~adoption of a retirement policy for certain officers in the third quarter of 2018 that increased expense in that period and a reduction in internal management fees charged to our pharmacy business which ceased operations.

Other income. Other income was $5 million for the third quarter of ~~2018 as compared to~~2019, $6 million for the ~~third~~second quarter of ~~2017.~~

~~Other income.~~ ~~Other income was~~2019 and $4 million for the third quarter of ~~2018, $2 million for the second quarter of 2018 and $3 million for the third quarter of 2017.~~2018. The ~~increase~~decrease in other income in the third quarter of ~~2018~~2019 as compared to the second quarter of ~~2018~~2019 was primarily due to ~~a decrease~~an increase in foreign currency losses, partially offset by an increase in interest income and a decrease in ~~interest income.~~losses on the sale of investments in the third quarter of 2019. The increase in other income for the third quarter of ~~2018~~2019 as compared to the third quarter of ~~2017~~2018 was primarily due to an increase in interest income, ~~and an increase in gains on sale of investments,~~ partially offset by an increase in foreign currency losses.

Other income was approximately ~~$11~~$18 million in the nine months ended September 30, ~~2018,~~2019 as compared to ~~$12~~$11 million for the same period in ~~2017. Other income decreased~~2018. This increase was primarily due to an increase in ~~foreign currency losses and a decrease in~~ interest income.

Income taxes. The Company's effective income tax rate ~~from~~for continuing operations was 23.8% for the third quarter of 2019 as compared to 23.5% for the second quarter of 2019 and 31.1% for the third quarter of ~~2018 as compared to 26.2% for the second quarter of 2018 and 31.3% for the third quarter of 2017.~~2018. The Company's effective income tax rate increased in the third quarter of ~~2018~~2019 as compared to the second quarter of ~~2018~~2019 primarily due to ~~non-deductible~~goodwill impairment charges recognized during the third quarter of 2019, and decreased in the third quarter of 2019 as compared to the third quarter of 2018 primarily due to the amount of nondeductible advocacy costs ~~and additional non-deductible expenses related~~recognized in the third quarter of 2018 that did not recur in the third quarter of 2019.

The Company's effective income tax rate for continuing operations was 24.3% for the nine months ended September 30, 2019 as compared to 26.2% for the nine months ended September 30, 2018. This decrease was primarily due to the ~~2017 Tax Act, partially offset by return~~amount of nondeductible advocacy costs recognized in the nine months ended September 30, 2018 as compared to ~~provision adjustments.~~the nine months ended September 30, 2019.

Noncontrolling interests. Net income attributable to noncontrolling interests was $58 million for the third quarter of 2019 as compared to $54 million for the second quarter of 2019 and $40 million for the third quarter of ~~2018 compared to $39 million for the second quarter of 2018 and $42 million for the third quarter of 2017.~~2018. The increase ~~in net~~

~~income attributable to noncontrolling interests in the third quarter of 2018 as compared to the second quarter of 2018 was primarily due to treatment growth at certain joint ventures. The decrease~~ in net income attributable to noncontrolling interests in the third quarter of ~~2018~~2019 as compared to the second quarter of 2019 was primarily due to one additional treatment day in the third quarter of 2019 as compared to the second quarter of 2019 as well as improved operating margin due to calcimimetics which improved earnings in our joint ventures. The increase in net income attributable to noncontrolling interests in the third quarter of 2019 as compared to the third quarter of ~~2017~~2018 was primarily due to ~~a decrease~~improved earnings at certain joint ventures.

Net income attributable to noncontrolling interests was $152 million in ~~profitability~~the nine months ended September 30, 2019 as compared to $126 million for the same period in ~~our ESCO~~2018. This increase was primarily due to improved earnings at certain joint ventures.

Accounts receivable. Our consolidated ~~total~~ accounts receivable balances at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were ~~$1,847 million~~$1.901 billion and ~~$1,715 million,~~$1.859 billion, respectively, which represented approximately ~~60.5~~61 days and ~~57.4~~62 days sales outstanding (DSO), respectively, net of allowance for uncollectible accounts. The ~~increase~~decrease in ~~consolidated day sales outstanding (DSO) of three days~~DSO was primarily due to ~~a delay in~~improved collections inrelated to certain ~~international operations.~~payors. Our DSO calculation is based on the current quarter’s average revenues per day. There were no significant changes during the third quarter of ~~2018~~2019 from the second quarter of ~~2018~~2019 in the amount of unreserved accounts receivable over one year old or the amounts pending approval from third-party payors.

Liquidity and capital resources

The following table shows the summary of our major sources and uses of cash, cash equivalents and restricted cash:



	Three months ended						Nine months ended
	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
	(dollars in millions)
Net cash provided by operating activities:
Net income	$	202		$	(97	)	$	718		$	435
Non-cash items	305			466			788			832
Working capital	141			88			(89		)	108
Other	(7		)	—			(25		)	8
	$	641		$	458		$	1,392		$	1,382

Net cash (used in) provided by investing activities:
Capital expenditures:
Routine maintenance/IT/other	$	(84	)	$	(101	)	$	(245	)	$	(316	)
Development and relocations	(90		)	(131		)	(302		)	(390		)
Acquisition expenditures	(11		)	(24		)	(77		)	(114		)
Proceeds from sale of self-developed properties	12			7			38			33
DMG sale net proceeds received at closing, net of DMG cash divested	—			—			3,825			—
Other	(96		)	12			(105		)	126
	$	(269	)	$	(237	)	$	3,134		$	(661	)

Net cash used in financing activities:
Debt (payments) issuances, net	$	(886	)	$	274		$	(2,050	)	$	846
Distributions to noncontrolling interest	(61		)	(46		)	(157		)	(140		)
Contributions from noncontrolling interest	13			12			44			43
Other	5			(1		)	(4		)	(10		)
Share repurchases	(1,764		)	(356		)	(1,837		)	(1,162		)
	$	(2,693	)	$	(117	)	$	(4,004	)	$	(423	)

Total number of shares repurchased	30,591,750			4,849,051			32,651,726			16,844,067

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

Consolidated cash ~~flow~~flows from ~~operations~~operating activities during the third quarter of ~~2018 was $458~~2019 were $641 million, of which ~~$362~~$648 million was from continuing operations, compared towith consolidated operating cash flows ~~during~~for the third quarter of ~~2017~~2018 of ~~$553~~$458 million, of which ~~$355~~$362 million was from continuing operations. The increase in cash flow from continuing operations was primarily driven by an increase in operating income due to one additional treatment day in the third quarter of ~~2018~~2019 as compared to the third quarter of ~~2017 is~~2018 and decreases in pharmaceutical and advocacy costs, partially offset by an increase in tax payments.

On August 12, 2019, we entered into a new senior secured credit agreement as described in Note 9 to the condensed consolidated financial statements. We used the funds from the new senior secured credit facilities to pay off the remaining balances outstanding under our prior senior credit facilities, to redeem our 5.75% Senior Notes due in 2022 and to fund our tender offer (Tender Offer) and additional share repurchases as described in Note 14 to the condensed consolidated financial statements. The remaining debt borrowings added cash to the balance sheet for potential future acquisitions, share repurchases and other general corporate purposes.

Other significant changes in ~~working capital. Non-operating~~sources and uses of cash ~~outflows~~included net payments of $886 million towards debt in the third quarter of 2019. Net debt payments primarily consisted of the principal prepayments totaling $4,042 million on our term debt under our prior senior secured credit facility and the redemption of all of our outstanding 5.75% Senior Notes due in 2022 for an aggregate cash payment consisting of principal and redemption premium of $1,262 million, partially offset by the funding of

our term debt of $4,500 million under our new senior secured credit facility. In addition, we incurred deferred financing costs related to our new term debt and a cap premium fee for our forward interest rate cap agreements. By comparison, the third quarter of 2018 included ~~capital asset expenditures~~net advances of ~~$232~~$274 million, ~~including $131~~which included a $43 million draw on our prior Term Loan A-2 and net advances of $275 million on our prior revolving line of credit, net of scheduled principal payments on our term debt under our prior senior secured credit facility. See further discussion in Note 9 to the condensed consolidated financial statements related to debt activities. Cash flows used for new center developments and relocations and $101 million for maintenance and information technology. In addition, during the quarter ended September 30, 2018, we spent $24 million for acquisitions, paid distributions to noncontrolling interests of $46 million, and repurchased a total of 4,849,051 shares of our common stock for $344 million. Non-operating cash outflows forshare repurchases increased in the third quarter of 2017 included capital asset expenditures of $241 million, including $143 million for new center developments and relocations and $98 million for maintenance and information technology. In addition, during2019 as compared to the third quarter of ~~2017, we spent $107 million for acquisitions, including~~2018 primarily due to the Renal Ventures acquisition, as well as paid distributions to noncontrolling interests of $49 million and repurchased a total of 1,982,250 shares of our common stock for $117 million, of which $27 million remained unsettled at September 30, 2017.Tender Offer.

Consolidated cash ~~flow~~flows from ~~operations~~operating activities during the nine months ended September 30, 2019 were $1,392 million, of which $1,295 million was from continuing operations, compared with consolidated operating cash flows for the same period in 2018 ~~was~~of $1,382 million, of which $1,174 million was from continuing ~~operations, compared to consolidated cash flows during the same period in 2017 of $1,568 million, of which $1,269 million was from continuing~~ operations. The ~~decrease~~increase in cash flow from continuing operations was primarily driven by an increase in operating income due to decreases in pharmaceutical costs and advocacy costs, partially offset by funding of our 2018 401(k) match contribution in early 2019 and an increase in tax payments.

Other significant changes in sources and uses of cash during the nine months ended September 30, 2019 included the receipt of $4,465 million in preliminary net cash proceeds from Optum at close of the DMG sale in the second quarter of 2019, or $3,825 million net of cash and restricted cash included in DMG net assets sold, and net payments of $2,050 million towards debt in the nine months ended September 30, 2019. Net debt payments primarily consisted of the prepayments of term debt under our prior senior secured credit facility totaling $5,142 million funded primarily by the net proceeds from the DMG sale. In addition, we redeemed our outstanding 5.75% Senior Notes due in 2022 for an aggregate cash payment consisting of principal and redemption premium of $1,262 million, and made scheduled principal payments on our prior term loans. These were partially offset by the funding of our term debt of $4,500 million under our new senior secured credit facility. In addition, we incurred deferred financing costs related to our new term debt and a cap premium fee for our forward interest rate cap agreements. By comparison, the same period in 2018 ~~was primarily due~~included net advances of $846 million which included draws on our prior Term Loan A-2 of $995 million and deferred financing costs related to our prior Term Loan A-2, partially offset by scheduled principal payments on our prior term loans and a net reduction on our prior revolving line of credit. See further discussion in Note 9 to the ~~payment received~~condensed consolidated financial statements related to debt activities. Cash flows used for share repurchases increased in ~~the first quarter of 2017 from the settlement with the VA as well as the timing of tax payments and other working capital items. Non-operating cash outflows for~~ the nine months ended September 30, 2018 included capital asset expenditures of $706 million, including $390 million for new center developments and relocations and $316 million for maintenance and information technology. In addition, we spent $114 million for acquisitions and also paid distributions2019 as compared to ~~noncontrolling interests of $140 million, and we repurchased a total of 16,844,067 shares of our common stock for $1.154 billion during~~ the nine months ended September 30, 2018. Non-operating cash outflows for the nine months ended September 30, 2017 included capital asset expenditures of $640 million, including $398 million for new center developments and relocations and $242 million for maintenance and information technology. In addition, we spent $727 million for acquisitions, including the Renal Ventures acquisition, as well as paid $165 million in distributions to noncontrolling interests, and we repurchased a total of 5,556,823 shares of our common stock for $349 million during the nine months ended September 30, 2017, of which $27 million remained unsettled at September 30, 2017.

~~During the third quarter~~same period of 2018 our U.S. dialysis and related lab services business opened 47 dialysis centers, acquired three dialysis centers, closed and merged four dialysis centers and closed one dialysis center. In addition, our APAC JV also closed two dialysis centers.

During the nine months ended September 30, 2018, our U.S. dialysis and related lab services business opened 118 dialysis centers, acquired five dialysis centers, closed and merged six dialysis centers, closed two dialysis centers and added one dialysis center we operate under a management and administrative service agreement and closed one dialysis center we operated under a management and administrative service agreement. In addition, our international dialysis operations acquired 18 dialysis centers, developed one dialysis center, and closed two dialysis centers. Our APAC JV also acquired two dialysis centers and closed five dialysis centers.

~~During the third quarter of 2017, our U.S. dialysis and related lab services business opened 34dialysis centers, acquired one dialysis center, closed and merged seven dialysis centers, and closed three dialysis centers. In addition, our international dialysis operations acquired eightdialysis centers and opened one dialysis center. Our APAC JV also opened five dialysis centers and closed one dialysis center.~~

During the nine months ended September 30, 2017, our U.S. dialysis and related lab services business opened 85 dialysis centers, acquired 57 dialysis centers, including dialysis centers associated with the acquisition of Renal Ventures, closed and merged nine dialysis centers, closed six dialysis centers, and divested six dialysis centers. In addition, our international dialysis operations acquired 62 dialysis centers, opened eight dialysis centers, and closed one dialysis center. Our APAC JV acquired one dialysis centers, opened eight dialysis centers, and closed two dialysis centers.

During the third quarter of 2018, our DMG business acquired one primary care physician practice. During the third quarter of 2017, DMG acquired one private medical practice and two primary care physician practices, including the acquisition of Magan.

During the nine months ended September 30, 2018, our DMG business acquired two private medical practices and one primary care physician practice. During the nine months ended September 30, 2017, our DMG business acquired four private medical practices and four primary care physician practices, including the acquisition of Magan.

~~Also during the first nine months of 2018, we made mandatory principal payments under our senior secured credit facilities totaling $75.0 million on Term Loan A and $26.3 million on Term Loan B.~~

~~Cap agreements~~

As of September 30, 2018, the Company maintains several effective interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3.5 billion. These cap agreements became effective June 29, 2018 and have the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on an equivalent amount of its debt. These cap agreements expire on June 30, 2020. As of September 30, 2018, the total fair value of these cap agreements was an asset of approximately $2.1 million. During the nine months ended September 30, 2018, the Company recognized debt expense of $2.2 million from these cap agreements and recorded a gain of $1.1 million~~in other comprehensive income~~primarily due to ~~an increase in~~ the ~~unrealized fair value of these cap agreements.~~

Previously, the Company maintained other interest rate cap agreements that were entered into in November 2014 with notional amounts totaling $3.5 billion. These cap agreements had the economic effect of capping the LIBOR variable component of the Company’s interest rate at a maximum of 3.50% on an equivalent amount of the Company’s debt. However, these interest rate cap agreements expired on June 30, 2018. During the nine months ended September 30, 2018, the Company recognized debt expense of $4.1 million from these cap agreements and recorded an immaterial loss in other comprehensive income due to a decrease in the unrealized fair value of these 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%.Tender Offer.

As of September 30, ~~2018, our Term Loan B debt bears interest at LIBOR plus~~2019, we have 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 $148.8 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 $551.2 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 third quarter was 4.80%, 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 September 30, 2018.

Our overall weighted average effective interest rate during the quarter ended September 30, 2018 was 4.93% and as of September 30, 2018 was 5.03%. The Company's weighted average effective interest rate for the nine months ended September 30, 2018 was 4.92%.

~~As of September 30, 2018, our interest rates are fixed on approximately 47.43% of our total debt.~~

~~As of September 30, 2018, we had $275 million drawn on our $1.0 billion~~undrawn new revolving line of credit under our senior secured credit facilities of $1.0 billion, for which approximately ~~$14.4~~$13 million was committed for outstanding letters of credit. We also have approximately ~~$22.6~~$60 million of ~~additional~~ outstanding letters of credit ~~related to our Kidney Care business and $0.2 million of committed outstanding letters~~under a separate bilateral secured letter of credit ~~related~~facility.

See Note 9 to the condensed consolidated financial statements for components of our ~~DMG business, which is backed by a certificate of deposit.~~long-term debt and their interest rates.

We believe that our cash flow from operations and other sources of liquidity, including from amounts available under our ~~existing~~new credit facilities and ~~debt refinancing, as well as proceeds from~~our access to the ~~anticipated sale of our DMG business if consummated,~~capital markets, will be sufficient to fund our scheduled debt service under the terms of our debt agreements and other obligations for the foreseeable future, including the next 12 months. Our primary recurrent sources of liquidity are cash from operations and cash from borrowings.

The table below shows the growth in our dialysis operations by number of owned and operated dialysis centers:



	U.S. Dialysis Centers								International Dialysis Centers
	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018		2019		2018		2019		2018
Centers at beginning of period	2,723		2,580		2,664		2,510		248		253		241		237
Acquired	2		3		7		5		2		—		9		18
Developed	24		47		84		118		1		—		1		1
Managed and administrative, net⁽¹⁾	—		—		(1	)	—		—		—		—		—
Sold and closed⁽²⁾	(3	)	(1	)	(6	)	(2	)	(1	)	—		(1	)	(2	)
Closed⁽³⁾	(10	)	(4	)	(12	)	(6	)	—		—		—		—
APAC JV operated, net									(1	)	(2	)	(1	)	(3	)
Number of centers at end of period	2,736		2,625		2,736		2,625		249		251		249		251


(1)	Represents dialysis centers that we manage or provide administrative services for but in which we own a noncontrolling equity interest or which are wholly-owned by third parties.


(2)	Represents dialysis centers that were sold and/or closed for which patients were not retained.


(3)	Represents dialysis centers that were closed for which the majority of patients were retained and transferred to one of our other existing outpatient dialysis centers.

Goodwill

~~We elected to early adopt ASU No. 2017-04,~~ ~~Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,~~ ~~effective January 1, 2017.~~

During the ~~three~~first quarter of 2019, we recognized a $41 million goodwill impairment charge in our German kidney care business. This charge resulted primarily from a change in relevant discount rates, as well as a decline in current and expected future patient census and an increase in first quarter and expected future costs, principally due to wage increases expected to result from recently announced legislation.

During the nine months ended September 30, ~~2018,~~2019, we ~~performed scheduled annual and other reporting unit~~recognized goodwill impairment ~~assessments. These assessments resulted in no~~charges of $125 million consisting of the charges described above.

We did not recognize any goodwill impairment charges during the ~~three months ended September 30,~~third quarter of 2018 and recognized a goodwill impairment charge of $3 million at our German ~~integrated healthcare business~~other health operations during the nine months ended September 30, 2018.

See further discussion of these impairment charges and our reporting units that remain at risk of goodwill impairment in Note 7 to the condensed consolidated financial statements.

Long-term incentive program (LTIP) compensation

During the nine months ended September 30, 2017, we recognized goodwill impairment charges of $35 million at our vascular access reporting unit. These charges resulted primarily from continuing changes in our outlook as our partners and operators 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. There is no goodwill remaining at our vascular access reporting unit.

Except as described in our annual report on Form 10-K for the year ended December 31, 2017 and quarterly reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, none of our various other reporting units were considered at risk of significant goodwill impairment as of September 30, 2018. Since the dates of our last annual goodwill impairment assessments there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected our businesses. However, these changes did not cause management to believe it is more likely than not that the fair values of any of our reporting units would be less than their respective carrying amounts as of September 30, 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) and 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, corporate administrative support, and 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 nine months ended September 30, 2018,~~2019, we granted ~~1,897,129 stock-settled stock appreciation rights with an aggregate grant-date fair value of $31 million and a weighted-average expected life of approximately 4.2 years. We also granted 1,097,018~~1,920,536restricted and performance stock units with an aggregate grant-date fair value of ~~$73~~$96 million and a weighted-average expected life of approximately ~~3.3~~3.4 years and 2,389,500 stock-settled stock appreciation rights with an aggregate grant-date fair value of $34 million and a weighted-average expected life of approximately 4.0 years.

Long-term incentive compensation expense of ~~$43~~$41 million in the third quarter of ~~2018~~2019 increased by approximately ~~$27~~$13 million as compared to the second quarter of 2019 primarily due to an increase in the ultimate expected payout of cash-based awards during the third quarter of 2019, which resulted from an increase in expected adjusted operating income for the full year 2019, as well as a full quarter of expense on new stock-based awards in the third quarter of 2019 with only a partial quarter of expense during the second quarter of 2019.

Long-term incentive compensation expense of $41 million in the third quarter of 2019 decreased by approximately $1 million as compared to the third quarter of 2018 primarily due to the adoption of a retirement policy (Rule of 65 policy) ~~and a full~~during the third quarter of ~~expense from a~~ 2018 broad-based grant in the second quarter. The Rule of 65 policy generally provides that Section 16 executive officers that are a minimum age of 55 with five years of continuous service with the Company receive certain benefits with respect to their outstanding equity awards upon a qualifying retirement if the sum of their age plus years of service is greater than or equal to 65. These benefits include accelerated vesting of restricted stock unit awards, continued vesting of stock-settled stock appreciation rights and performance stock unit awards and an exercise window from the original vest date through the original expiration date regardless of continued employment, with pro rata vesting for a Rule of 65 retirement within one year of the award grant date. The adoption of the Rule of 65 policywhich resulted in a $14.7 million modification charge and a net acceleration of expense of $8.8 million during the ~~three and nine months ended September 30,~~third quarter of 2018, ~~that is included~~partially offset by an increase in the ~~expense amounts reported above. Future equity~~ultimate expected payout on cash-based awards during the third quarter of 2019, due to ~~Rule of 65 eligible executives will be expensed over~~an increase in expected adjusted operating income for the ~~period during which risk of forfeiture exists.~~full year 2019.

Long-term incentive compensation expense ~~in the third quarter~~ of ~~2018 increased by approximately $23~~$82 million as compared to the third quarter of 2017 primarily due to the adoption of the Rule of 65 policy, as discussed above, partially offset by a cumulative revaluation of liability-based awards that increased expense in the third quarter of 2017 for changes in estimated ultimate payouts.

~~Long-term incentive compensation expense~~ for the nine months ended September 30, ~~2018~~2019 increased by approximately ~~$27~~$8 million as compared to the nine months ended September 30, ~~2017.~~2018. This increase in long-term incentive compensation expense was primarily due to an increase in the ultimate expected payout on cash-based awards during the nine months ended September 30, 2019, which resulted from an increase in expected adjusted operating income for the full year 2019, partially offset by the adoption of the Rule of 65 policy ~~as discussed above.~~during the nine months ended September 30, 2018 which resulted in a $14.7 million modification charge and a net acceleration of expense of $8.8 million during the nine months ended September 30, 2018.

As of September 30, ~~2018,~~2019, there was ~~$123~~$167 million in total estimated but unrecognized compensation expense for LTIP awards outstanding, including ~~$104~~$152 million 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~~expenses over a weighted average remaining period of ~~0.9 year~~0.6 years and the stock-based component of these LTIP ~~costs~~expenses over a weighted average remaining period of ~~1.5~~1.6 years.

Stock repurchases

~~During~~The following table summarizes our repurchases of our common stock during the three and nine months ended September 30, ~~2018, we repurchased a total of 16,844,067~~2019.



	Three months ended September 30, 2019					Nine months ended September 30, 2019
	Shares repurchased	Amount paid (in millions)		Average amount		Shares repurchased	Amount paid (in millions)		Average amount
Tender Offer⁽¹⁾	21,801,975	$	1,234	$	56.60	21,801,975	$	1,234	$	56.60
Open market repurchases	8,789,775	514		58.49		10,849,751	626		57.72
	30,591,750	$	1,748	$	57.14	32,651.726	$	1,860	$	56.97


(1)	The amount paid for shares repurchased associated with the Company's Tender Offer during the three and nine months ended September 30, 2019 includes the clearing price of $56.50 per share plus related fees and expenses of $2 million.

See further discussion in Note 14 to the condensed consolidated financial statements, which includes discussion of our ~~common stock for $1,154 million at an average price of $68.48 per share. We have not repurchased any shares of our common stock subsequent to September 30, 2018.~~

~~On July 11, 2018, our Board of Directors approved an additional~~$2.0 billion share repurchase authorization ~~in the amount of approximately $1,390 million. This share repurchase authorization was in addition to the approximately $110 million remaining at~~ that ~~time under our Board of Directors' prior share repurchase authorization approved in October 2017. Accordingly,~~became effective as of the close of business on November 5, 2018, we have a total of approximately $1,356 million remaining 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.4, 2019.

Off-balance sheet arrangements and aggregate contractual obligations

In addition to the debt and lease obligations reflected on our balance sheet, we have commitments associated with ~~operating leases and~~ letters of credit ~~as well as~~and potential obligations associated with our equity investments in nonconsolidated businesses and to dialysis ~~centers~~ventures that are wholly-owned by third parties. ~~Substantially all of our U.S. dialysis facilities are leased.~~ We have potential obligations to purchase the equity interests held by third parties in several of our majority-owned joint ventures and other nonconsolidated entities. These obligations are in the form of put provisions 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’ equity interests at either the appraised fair market value or a predetermined multiple of earnings or cash flows attributable to the 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 noncontrolling interests subject to put provisions are 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 interests obligations may be settled will vary significantly depending upon market conditions including, without limitation, 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’ 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~~ventures 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.

The following is a summary of these contractual obligations and commitments as of September 30, ~~2018~~2019 (in millions):

Remainder of
2018 1-3
years 4-5
years After
5 years Total
Scheduled payments under contractual obligations:
Long-term debt $ 43
$ 5,350
$ 1,279
$ 3,317
$ 9,989
Interest payments on the senior notes 38
710
401
202
1,351
Interest payments on Term Loan B⁽¹⁾
43
417
—
—
460
Interest payments on Term Loan A⁽²⁾
8
14
—
—
22
Interest payments on Term Loan A-2⁽²⁾
8
16
—
—
24
Kidney Care capital lease obligations 7
66
46
170
289
Kidney Care operating leases 122
1,360
719
1,487
3,688
DMG capital lease obligations 35
—
—
—
35
DMG operating leases 23
237
113
263
636
$ 327
$ 8,170
$ 2,558
$ 5,439
$ 16,494
Potential cash requirements under other commitments:
Letters of credit $ 37
$ —
$ —
$ —
$ 37
Noncontrolling interests subject to put provisions 640
196
115
113
1,064
Non-owned and minority owned put provisions 30
307
—
—
337
Operating capital advances —
2
1
2
5
Purchase commitments 91
875
251
—
1,217
$ 798
$ 1,380
$ 367
$ 115
$ 2,660



	Remainder of 2019		1-3 years		4-5 years		After 5 years		Total
Potential cash requirements under other commitments:
Letters of credit	$	73	$	—	$	—	$	—	$	73
Noncontrolling interests subject to put provisions	875		196		106		119		1,296
Non-owned and minority owned put provisions	3		43		—		—		46
Operating capital advances	—		3		1		3		7
Purchase commitments	80		1,026		—		—		1,106
	$	1,031	$	1,268	$	107	$	122	$	2,528


~~(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 September 30, 2018 plus an interest rate margin of 2.00% for Term Loan A and plus an interest rate margin of 1.00% for Term Loan A-2.~~

~~In addition~~See Note 9 and Note 10 to the ~~commitments listed above, we have committed to purchase a certain amount~~condensed consolidated financial statements for components of our ~~hemodialysis products~~long-term debt and ~~supplies at fixed prices through 2018~~leases 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 purchase agreements. related interest rates.

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

We also have an agreement with Baxter Healthcare Corporation (Baxter) that commits us to purchase a certain amount of hemodialysis and peritoneal dialysis supplies at fixed prices through 2022.

Our total expenditures for the nine months ended September 30, ~~2018~~2019 on such products for ~~Baxter was 2.3% and for Fresenius~~FMC was approximately 2.5% and for Baxter was 1.6% 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, without limitation, the operating requirements of our centers, the number of centers we acquire and growth of our existing centers.

In ~~January~~addition to the commitments listed above, in 2017 we entered into a ~~six year sourcing~~Sourcing and ~~supply agreement~~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 with Amgen. The actual amount of EPO that we will purchase 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 existing income tax liabilities for unrecognized tax benefits of approximately ~~$48.7~~$64 million, including interest, penalties and other long-term tax liabilities, are excluded from the table above 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~~the Company’s senior notes.

~~We provide~~Prior to the DMG sale, we provided services to certain physician groups ~~including those~~ within our DMG business which, while consolidated in our financial statements for financial reporting purposes, ~~are~~were not subsidiaries of nor owned by us, dodid not constitute “Subsidiaries” as defined in the indentures governing our outstanding senior notes, and dodid not guarantee those senior notes. In addition, we ~~have entered into~~operated under management agreements with these physician groups pursuant to which we ~~receive~~received management fees from ~~the~~these physician groups.

~~As of~~From and after September 30, ~~2018, if~~2019, these physician groups were no longer included in our financial statements as they were deconsolidated with the sale of DMG to Optum. As a result, our consolidated assets, other liabilities, and indebtedness were no longer affected by consolidation of these physician groups. If these physician groups had not been consolidated in our financial statements our consolidated assets would have been approximately $18.791 billion and our consolidated other liabilities would have been approximately $3.635 billion. Our consolidated indebtedness would have remained approximately $10.278 billion since almost all of these physician groups are classified as held for sale with DMG. For the nine months ended September 30, 2018, if these physician groups were not consolidated in our financial statements,during 2019, our consolidated net income would have been reduced by approximately ~~$13.8 million. Our~~$11 million for the nine months ended September 30, 2019. However, our consolidated total net revenues and consolidated operating income would have remained approximately ~~$8.584~~$8.490 billion and ~~$1.138~~$1.181 billion, respectively, since ~~almost all of~~ these DMG-related physician groups ~~are~~were all included in discontinued ~~operations.~~operations during the nine months ended September 30, 2019.

In addition, ~~our~~the DMG business ~~owns~~owned a 67% equity interest in California Medical Group Insurance (CMGI), which isprior to the sale of DMG was an Unrestricted Subsidiary ~~as defined in~~under the indentures governing our outstanding senior notes, and ~~does~~did not guarantee those senior notes. DMG's equity interest in CMGI iswas accounted for under the equity method of accounting, meaning that, although CMGI iswas not consolidated in our financial statements for financial reporting purposes, our

consolidated income statement ~~reflects~~reflected our ~~pro rata~~pro-rata share of CMGI’s net income within net loss from discontinued ~~operations.~~operations for periods prior to the DMG sale.

For the nine months ended September 30, ~~2018, excluding~~2019, if DMG's equity investment income attributable to CMGI were excluded, our consolidated net income would be lower by approximately ~~$298~~$249 thousand. See Note 2324 to the condensed consolidated financial statements for further details.

New Accounting Standards

See discussion of new accounting standards in Note 2122 to the condensed consolidated financial ~~statements included in Part I, Item 1 of this report.~~statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest rate sensitivity

During the third quarter of 2019, we entered into a new senior secured credit agreement as described in Note 9 to the condensed consolidated financial statements. 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 September 30, ~~2018.~~2019. The variable rates presented reflect the weighted average LIBOR rates in effect for all debt tranches plus interest rate margins in effect as of September 30, ~~2018.~~2019. The new Term Loan A ~~currently~~margin in effect at September 30, 2019 is 1.50%, and along with the new revolving line of credit, is subject to adjustment depending upon changes in our leverage ratio. The new Term Loan B bears interest at LIBOR plus an interest rate margin of ~~2.00%~~2.25%. 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 interest rate																													Average interest rate
	Expected maturity date																		Fair Value			Expected maturity date																										Fair Value
	2018		2019		2020		2021		2022		2023		Thereafter		Total				Fair Value			2019			2020			2021			2022			2023			2024			Thereafter			Total					Fair Value
	(dollars in millions)																							(dollars in millions)
Long term debt:
Fixed rate	$	15	$	31	$	30	$	28	$	1,279	$	28	$	3,480	$	4,891	5.28	%		$	4,796		$	11		$	32		$	26		$	29		$	42		$	1,777		$	1,721		$	3,638	5.11	%		$	3,657
Variable rate	$	35	$	1,998	$	45	$	3,284	$	10	$	8	$	7	$	5,387	4.80	%		$	5,418		$	19		$	97		$	127		$	140		$	182		$	1,395		$	2,614		$	4,574	4.31	%		$	4,594

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



	Notional Amount		Contract maturity date													Fair Value
	Notional Amount		2019		2020		2021		2022		2023		Thereafter		Receive variable	Fair Value
	(dollars in millions)
2015 cap agreements	$	3,500	$	—	$	3,500	$	—	$	—	$	—	—		LIBOR above 3.5%	$	—
2019 cap agreements	$	3,500	$	—	$	—	$	—	$	—	$	—	$	3,500	LIBOR above 2.0%	$	20.6

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%.

~~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~~There has been no material change 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~~nature 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~~Company's foreign currency exchange risks described in ~~the credit and capital markets.~~

AsItem 7A of September 30, 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 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 September 30, 2018. The LIBOR-based interest component is limited to a maximum LIBOR rate of 3.50% on the outstanding principal debt on Term Loan B and $148.8 million on Term Loan A as a result of the interest rate cap agreements, as described below.

As of September 30, 2018, we maintain several effective interest rate cap agreements that were entered into in October 2015 with notional amounts totaling $3.5 billion. These cap agreements became effective June 29, 2018 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. These cap agreements expire on June 30, 2020. As of September 30, 2018, the total fair value of these cap agreements was an asset of approximately $2.1 million. During the nine months ended September 30, 2018, we recognized debt expense of $2.2 million from these cap agreements and recorded a gain of $1.1 million~~in other comprehensive income due to an increase in the unrealized fair value of these cap agreements.~~

Previously, we maintained other interest rate cap agreements that were entered into in November 2014 with notional amounts totaling $3.5 billion. These cap agreements had 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. However, these interest rate cap agreements expired on June 30, 2018. During the nine months ended September 30, 2018, we recognized debt expense of $4.1 million from these cap agreements and recorded an immaterial loss in other comprehensive income due to a decrease in the unrealized fair value of these cap agreements.

Our weighted average effective interest rate on the senior secured credit facilities at the end of the third quarter was 4.80%, 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 September 30, 2018.

As of September 30, 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% and Term Loan A-2 bears interest at LIBOR plus an interest rate margin of 1.00%.

Our overall weighted average effective interest rate during the quarter ended September 30, 2018 was 4.93% and as of September 30, 2018 was 5.03%. Our weighted average effective interest rate for the nine months ended September 30, 2018 was 4.92%.

As of September 30, 2018, we had $275 million drawn on our $1.0 billion revolving line of credit under our senior secured credit facilities, of which approximately $14.4 million was committed for outstanding letters of credit. The remaining amount is unencumbered. We also have approximately $22.6 million of additional outstanding letters of credit related to our Kidney Care business and $0.2 million of committed outstanding letters of credit 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 ten other countries as well, including those of our APAC JV. 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~~statements included in 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 rates10-K 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.year ended December 31, 2018.

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 (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,~~2019, we adopted FASB Accounting Standards Codification Topic ~~606,~~ ~~Revenue from Contracts with Customers~~842, Leases. ~~Although the~~As a result of adopting this new standard, ~~is expected to have an immaterial impact on our ongoing net income,~~ we ~~did implement~~implemented new business processes and related control activities in order to maintain appropriate controls over financial reporting. There was no other change in 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

The information required by this Part II, Item 1 is incorporated herein by reference to the information set forth under the caption “Contingencies” in Note 1011 to the condensed consolidated financial statements included in this report.

Item 1A. Risk Factors

~~An updated description of~~

In addition to the following risk factors and the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider 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~~discussed in Part I,II, Item 1A1A. Risk Factors of our ~~Annual~~Quarterly Report on Form ~~10-K~~10-Q for the ~~year~~quarter ended ~~December 31, 2017 and any subsequent filings with the Securities and Exchange Commission ("SEC").~~June 30, 2019 (our Q2 Form 10-Q), which could materially affect our business, financial condition, results of operations or future results. The risks and uncertainties discussed below and in our Q2 Form 10-Q are not the only ones facing our business. Other than the risk factors set forth below, there have been no material charges in the risk factors described in our Q2 Form 10-Q. Please also read the cautionary notice regarding forward-looking statements in Part I, Item 2 ~~of Part I~~ of this Quarterly Report on Form 10-Q under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations."

~~Risk factors related to our overall business:~~

If we fail to adhere to all of the complex government laws, regulations and ~~regulations~~requirements 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 cash flows, and could materially harm our reputation and stock price.

~~Our operations are subject to~~We operate in a complex regulatory environment with an extensive and evolving set of federal, state and local government laws, regulations and requirements. These laws, regulations ~~such as Medicare~~ and ~~Medicaid payment rules~~requirements are promulgated and ~~regulations, federal~~overseen by a number of different legislative, administrative, regulatory, 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 disclosurequasi-regulatory bodies, each 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 blood products and other biological materials. The Medicare and Medicaid reimbursement rules impose complex and extensive requirements upon healthcare providers as well. Moreover, the various laws and regulations that apply to our operations are often subject towhich may have varying interpretations, judgments or related guidance. As such, we utilize considerable resources on an ongoing basis to monitor, assess and ~~additional laws~~respond to applicable legislative, regulatory and ~~regulations potentially affecting providers continue to be promulgated that may impact us. A violation or departure from any of these legal~~administrative requirements, ~~may result in government audits, lower reimbursements, significant fines and penalties, the potential loss of certification, recoupment efforts or voluntary repayments, among other things.~~

~~We endeavor to comply with all legal requirements; however,~~but there is no guarantee that we will be ~~able~~successful in our efforts to adhere to all of ~~the complex government~~these requirements. Laws, regulations and requirements that apply to or impact our ~~business. We further endeavor to structure all of our relationships with physicians~~business include, but are not limited to:

Medicare and ~~providers to comply with state and federal anti-kickback and physician self-referral laws. We utilize considerable resources to monitor laws~~Medicaid reimbursement statutes, rules and regulations (including, but not limited to, manual provisions, local coverage determinations, national coverage determinations, payment schedules and ~~implement necessary changes. However,~~ agency guidance);

federal and state anti-kickback laws, including, without limitation, any applicable exceptions or regulatory safe harbors thereunder;

the ~~laws~~Physician Self-Referral Law (the Stark Law) and ~~regulations in these areas are complex, changing and often subject to varying interpretations. For example, if an enforcement agency were to challenge~~ analogous state self-referral prohibition laws;


•	the 21^st Century Cures Act;

Federal Acquisition Regulations;

the level of compensation that we pay our medical directors or the number of medical directors whom we engage, or otherwise challenge these arrangements, 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.

~~In addition, failure to report and return overpayments within 60 days of when the overpayment is identified and quantified can lead to a violation of the FCA~~False Claims Act (FCA) and associated ~~penalties, as described in further detail below, and exclusion and penalties under~~ regulations;

the ~~federal~~ Civil Monetary Penalty statute (CMP) and associated regulations;

the Foreign Corrupt Practices Act (FCPA);

Medicare provider requirements, including ~~civil monetary penalties~~requirements associated with providing and updating certain information about the Medicare entity and its direct and indirect affiliates;

antitrust and competition laws and regulations; 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 blood products and other biological materials.

In addition, on October 9, 2019, the U.S. Department of ~~up to $20,000 (adjusted~~Health and Human Services, Office of Inspector General (OIG) and the Centers for ~~inflation) for each item or service for which~~Medicare & Medicaid Services (CMS) released 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 investments in resources to decreasepair of proposed rules that, if adopted, would change 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. 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 other federally funded health care programs. Moreover, amendments to

~~the federal~~Federal Anti-Kickback Statute ~~in the 2010 Affordable Care Act (ACA) make claims tainted by anti-kickback violations potentially subject~~(AKS), CMP and Stark Law regulations to ~~liability under the FCA, including~~ ~~qui tam~~ ~~or whistleblower suits.~~promote certain value-based and coordinated care arrangements. 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 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 a range from $11,181 to $22,363 for penalties assessed after 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.

Certain civil investigative demands received by us or our subsidiaries specifically reference that they are in connection with FCA investigations alleging, among other things, that we or our subsidiaries presented or caused to be presented false claims for payment to the government. See Note 10 to the condensed consolidated financial statements included in this report for further details.

Weproposed rules are subject to a 75-day comment period following publication in the Federal Register and remain subject to change until the publication of any final rules, the date and content of which are currently unknown.

We are also subject to a five-year Corporate Integrity Agreement (CIA) ~~which,~~. The term of the CIA expired on October 22, 2019, and the Company is in the process of working with the independent monitor and OIG to close out the review of the final annual reports by the independent monitor and the Company. The CIA imposed a number of additional requirements upon us and, for our domestic dialysis business, ~~requires~~required us to report probable violations of criminal, civil or administrative laws applicable to any federal ~~health care~~healthcare program for which penalties, sanctions or exclusions may be authorized under applicable healthcare laws and regulations. ~~See "If~~We expect to continue to incur costs related to CIA compliance, and until OIG closes out the CIA following review of the aforementioned final annual reports, OIG retains the right to impose penalties, sanctions and other consequences on us under the CIA, including, without limitation, potential exclusion from federal healthcare programs. Any future penalties, sanctions or other consequences under the CIA or otherwise could be more severe in circumstances in which OIG or a similar regulatory authority determines that we have repeatedly failed to comply with applicable laws, regulations or requirements. For additional information regarding our CIA, see the risk factor under the heading "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, financial condition and ~~financial condition."~~cash flows and could materially harm our reputation" in Part II, Item 1A in our Q2 Form 10-Q.

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

~~Suspension~~Loss of required certifications or suspension or exclusion from or termination of our participation in government payment programs;

Refunds of amounts received in violation of law or applicable payment program requirements dating back to the applicable statute of limitation ~~periods and/or penalties or fines;~~

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

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, Civil Monetary Penalties Law, Stark Law and FCA, or other failures to meet regulatory requirements;~~which could be material;

Enforcement actions, investigations, or audits by governmental agencies and/or state law 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, among others, 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~~expenses 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;~~fines, among other things;

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

Harm to our reputation which could negatively impact our business relationships, affect our ability to attract and retain patients, physicians and teammates, 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 matters, any of which could result in, among other things, substantial financial penaltiesor awards against us, substantial payments made by us, required changes to our business practices, exclusion from future participation in Medicare, Medicaid and other healthcare programs and possible criminal penalties, any of which could have a material adverse effect on our business, results of operations and financial condition and materially harm our reputation.

We are the subject of a number of investigations and audits by governmental agencies. In addition, we are, and may in the future be, subject to other investigations and audits by state or federal governmental agencies and/or private civil ~~qui tam~~ complaints filed by relators and other lawsuits, demands, claims and legal 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 legal or 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 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. Other than as described inSee Note 1011 to the condensed consolidated financial statements included in this report ~~we cannot predict~~for further details regarding the ~~ultimate outcomes of the various~~pending legal proceedings and regulatory matters to which we are or may be subject from time to time, ~~including those described~~any of which may include allegations of violations of applicable laws, regulations and requirements.

Changes in ~~the aforementioned sections of this report,~~federal and state healthcare legislation or ~~the timing of their resolution or the ultimate losses or impact of developments in those matters, which~~regulations could have a material adverse effect on our business, results of operations, financial condition and ~~financial condition. See Note 10 to the condensed consolidated financial statements included in this report for further details regarding these and other matters.~~cash flows.

~~Changes in~~The extensive federal and state laws, regulations and requirements that govern our business may continue to change over time, and there is no assurance that we will be able to accurately predict the nature, timing or extent of such changes or the impact of such changes on the markets in which we conduct business or on the other participants that operate in those markets.

For example, the regulatory framework of the Patient Protection and Affordable Care Act and the Health Care Reconciliation Act of 2010, as amended (ACA), and other healthcare reforms continues to evolve as a result of executive, legislative, regulatory and administrative developments and judicial proceedings. As such, there remains considerable uncertainty surrounding the continued implementation of the ACA and what similar healthcare reform measures or other changes might be enacted at the federal and/or state level. While legislative attempts to completely repeal the ACA have been

unsuccessful to date, there have been multiple attempts to repeal or amend the ACA through legislative action and legal challenges. For example, in December 2017, the Tax Cuts and Jobs Act of 2017 was signed into law which, among other things, repealed the penalty under ACA's individual mandate, which had required individuals to pay a fee if they failed to obtain a qualifying health ~~regulations~~insurance plan. In December 2018, a federal district court in Texas ruled the individual mandate was unconstitutional and inseverable from the ACA. As a result, the court ruled the remaining provisions of the ACA were also invalid, though the court declined to issue a preliminary injunction with respect to the ACA. The district court's ruling has been appealed to the U.S. Court of Appeals for the Fifth Circuit, and the ruling has been stayed pending the outcome of the appeal. On July 9, 2019, the U.S. Court of Appeals for the Fifth Circuit heard oral arguments on the appeal. It remains unclear whether the court's ruling ultimately will be upheld by appellate courts.

While there may be significant changes to the healthcare environment in the future, including, without limitation, as a result of potential changes to the political environment in connection with the upcoming election year or otherwise, the specific changes and their timing are not yet apparent. Nevertheless, previously enacted reforms and future changes, including among others, any changes in legislation, regulation or market conditions in connection with the upcoming election years, could have a material adverse effect on our business, results of operations, financial condition and ~~results of operations.~~

~~We cannot predict how employers, private payors or persons buying insurance might react~~cash flows. For example, our revenue levels are sensitive to the percentage of our patients with higher-paying commercial health insurance, and as such, legislative, regulatory or other changes ~~brought on by federal~~that decrease the accessibility and ~~state healthcare reform legislation,~~availability, including the ~~ACA and any subsequent legislation, or what form many~~duration, of ~~these regulations will take before implementation.~~

commercial insurance may have a material adverse impact on our business. The ~~ACA introduced healthcare~~ACA's health insurance exchanges, which provide a marketplace for eligible individuals and small employers to purchase ~~healthcare~~health insurance, initially increased the accessibility and availability of commercial insurance. ~~The business and regulatory environment continues to evolve~~However, certain legislative developments, such as the ~~exchanges mature,~~repeal of the individual mandate described above, have adversely impacted the risk pool in certain exchange markets, and ~~statutes~~the nature and ~~regulations are challenged, changed and enforced. If~~extent of commercial payor participation in the exchanges ~~continues~~has fluctuated as a result. Other proposed legislative developments or administrative decisions, such as moving to ~~decrease, it~~a universal health insurance or "single payor" system whereby health insurance is provided to all Americans by the government under government programs, or lowering or eliminating the cost-sharing reduction subsidies under the ACA, could ~~have a material adverse effect on~~impact the percentage of our ~~business, results~~patients with higher-paying commercial health insurance, impact the scope of ~~operations~~coverage under commercial health plans and ~~financial condition.~~increase our expenses, among other things. Although we cannot predict the short- or long-term effects of legislative or regulatory changes or the potential outcome or impact of the upcoming elections, we believe that future market changes could result in 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 changes in statutes, or regulations or ~~enforcement of statutes or regulations regarding the exchanges,~~related guidance or changes in other market conditions result in a reduction in the percentage of our patients with commercial insurance, limit the scope or nature of coverage through the exchanges or other health insurance programs or otherwise reduce reimbursement rates for our services from commercial and/or government payors, it could have a material adverse effect on our business, results of operations, financial condition and cash flows. For additional information on the impact of legislative or regulatory changes on the percentage of our patients with commercial insurance, see the risk factor under the heading "If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial ~~condition.~~condition and cash flows" in Part II, Item 1A in our Q2 Form 10-Q.

The 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 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 help accelerate the time it takes us to identify, quantify and process overpayments and we deployed significant resources intended to reduce our timeline and improve our claims processing methods to help 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, financial condition, cash flows and ~~financial condition.~~reputation. Failure to file a claim within the one year window could result in ~~payment~~payments denials, adversely affecting our business, results of operations, financial condition and ~~financial condition.~~cash flows.

~~New~~In addition to the ACA, changing legislation has led and may continue to lead to the emergence of new models of care ~~emerge and evolve~~ and other initiatives in both the government orand private ~~sector may arise, which~~sector. Any failure on our part to adequately implement strategic initiatives to adjust to these marketplace developments could ~~adversely~~have a material adverse impact on our business. For example, a July 10, 2019 executive order related to kidney care directed CMS to create payment models to evaluate the ~~Centers~~effects of creating payment incentives for ~~Medicare~~the greater use of home dialysis and ~~Medicaid Services (CMS)~~kidney transplants for those already on dialysis. CMS subsequently announced the ESRD Treatment Choices (ETC) mandatory payment model, which will be administered through the CMS Innovation Center (CMMI) and is proposed to launch in 50% of dialysis clinics across the country beginning in 2020. Under the proposed rule, which was subject to a comment period that ended in September 2019, CMS would select ESRD facilities and clinicians to participate in the model according to their location in randomly selected geographic areas and would require participation to minimize the potential for selection effect. We are in the early stages of assessing the potential impact of the ETC mandatory payment model, but we believe that if launched as proposed, the ETC model would negatively impact Medicare coverage and/or payment for ESRD claims. With home dialysis as a focus of the ETC model and the industry generally, any failure to adequately implement our growth strategy or offer or build on our abilities to offer home dialysis

~~(Innovation Center)~~options, to the extent such failure results in a significant reduction in the number of our patients, could have a material adverse impact on our business, results of operation, financial condition and cash flows.

In connection with the executive order, CMS also announced the implementation of four voluntary payment models designed to help healthcare providers reduce the cost and improve the quality of care for patients with late-stage chronic kidney disease and ESRD. CMS has stated these payment models are aimed to prevent or delay the need for dialysis and encourage kidney transplantation. These payment models also are currently scheduled to be launched in 2020. In October 2019, CMS released initial guidance around the voluntary payment models, and we expect additional guidance in the coming months. We are in the early stages of evaluating the voluntary payment models.

In addition, CMMI 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, without limitation, the Comprehensive ESRD Care Model (CEC Model) (which includes the development of end stage renal disease (ESRD) Seamless Care Organizations), the Duals Demonstration, and other models. We are currently participating in the CEC Model with ~~the Innovation Center,~~CMMI, 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~~CMMI 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.

In addition to the aforementioned new models of care, federal bipartisan legislation related to full capitation demonstration for ESRD was proposed in late 2017. Legislation, which has yet to secure introduction to the ~~form of the Dialysis Patient Access to Integrated-care, Empowerment, Nephrologists, Treatment and Services Demonstration Act (PATIENTS Act) has been proposed. This Act builds~~116th Congress, would build on prior coordinated care models, such as the CEC Model, and would establish a demonstration program for the provision of integrated care to Medicare ESRD patients. ~~However,~~We have made and continue to make investments in building our integrated care capabilities, but there can be no assurances that ~~the PATIENTS Act~~initiatives such as this or similar legislation will be introduced or passed ~~and if it~~into law. If such legislation is passed, there can be no assurances that we will be able to successfully execute on the required strategic initiatives that would allow us to provide a competitive and successful integrated care program on the broader scale contemplated by this legislation, and in the desired timeframe. Additionally, the ultimate terms and conditions of any such potential legislation remain unclear-for example, our costs of care could exceed our associated reimbursement rates under such legislation.

~~There is~~ The new and evolving landscape for integrated kidney care also ~~a considerable amount~~has led to opportunities with relative ease of ~~uncertainty~~entry for certain smaller and/or non-traditional providers, and we may be competing for patients in an asymmetrical environment with respect to data and/or regulatory requirements given our status as an ESRD service provider. For additional detail on our evolving competitive environment, see the risk factor under the heading "If we are unable to ~~the prospective implementation of the ACA and what similar measures or other changes might be enacted at the federal~~compete successfully, including, without limitation, implementing our growth strategy and/or ~~state level. There have been multiple attempts through legislative action~~retaining patients and ~~legal challenges~~physicians willing to ~~repeal or amend the ACA.~~serve as medical directors, it could materially adversely affect our business, results of operations, financial condition and cash flows" in Part II, Item 1A in our Q2 Form 10-Q. In ~~addition, the 2016 Presidential and Congressional elections and subsequent developments in 2017 and 2018 have caused the future state of the exchanges~~general, if we are unable to efficiently adjust to these and other ~~ACA reforms to be unclear. However, attempts to completely repeal the ACA have been unsuccessful to date. While there~~new models of care, it may, be significant changes to the healthcare environment in the future, including as a result of potential changes to the political environment, the specific changes and their timing are not yet apparent. Previously enacted reforms and future changesamong other things, erode our patient base or reimbursement rates, which could have a material adverse ~~effect~~impact on our business, results of operation, financial condition and ~~results of operations, including, for~~cash flows.

There have also been several state initiatives to limit payments to dialysis providers or impose other burdensome operational requirements. 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/or increasing our expenses.

~~Proposition 8, a California statewide ballot initiative, was proposed by~~on October 24, 2019, the Service Employees International Union - United Healthcare Workers West (SEIU) proposed a California statewide ballot initiative for the November 2020 election that seeks to impose certain regulatory requirements on dialysis clinics, including requirements related to physician staffing levels, clinical reporting, clinical treatment options and ~~sought~~the ability to ~~limit the amount of revenue~~make decisions on closing or reducing services for dialysis ~~providers can retain from caring for commercial patients by requiring rebates~~clinics. We expect to ~~insurers and taking into account only a portion of the costs incurred by dialysis providers. We incurred substantial~~incur costs in ~~our efforts to oppose Proposition 8. Proposition 8 was not approved in~~connection with this new proposal, should it become eligible for the November ~~2018 election. Ballot~~2020 election, and other potential ballot initiatives-and these costs may be substantial. Similar initiatives ~~similar to Proposition 8~~ were also proposed in Ohio and ~~Arizona;~~Arizona in the 2018 election cycle; however, neither ~~initiative~~of these initiatives met the applicable requirements for inclusion on the state ballot for the November 2018 ~~election. Although Proposition 8 did not pass,~~elections. We may face similar ballot initiatives or other legislation ~~might be proposed~~ in the ~~future.~~future in these or other states.

There ~~has~~have also been ~~potential~~ rule making ~~and/or~~and legislative efforts at both the federal and state level concerning charitable premium assistance. In December 2016, CMS published an interim final rule that questioned the use of charitable premium assistance for ESRD patients and would have established new conditions for coverage standards for dialysis facilities. In January 2017, a federal district court in Texas issued a preliminary injunction on CMS' interim final rule and in June 2017, at the request of CMS, the court stayed the proceedings while CMS pursues new rulemaking options. In ~~November 2017, when~~June 2019, CMS ~~published~~sent to the ~~2018 final~~White House Office of Management and Budget a proposed rule entitled "Conditions for Coverage for End-Stage Renal Disease Facilities-Third Party Payments," which is expected to be released in 2019. In addition, on October 13, 2019 a California bill (AB 290) was signed into law that ~~updates payment policies and rates under~~limits the ~~ESRD Prospective Payment System (PPS), and the 2019 proposed Notice~~amount of ~~Benefit and Payment Parameters, it did not pursue further discussion or rulemaking related~~reimbursement paid to ~~charitable premium assistance or propose changes~~certain providers for services provided 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~~patients with commercial insurance who receive charitable premium assistance. AB 290 is expected to become effective in July 2020. The American Kidney Fund (AKF), an organization that provides charitable premium assistance,

announced that it will be withdrawing from California at the end of 2019 as a result of the newly signed law. AKF has already ceased taking applications for new patient assistance in California. In the event AB 290 becomes effective and the AKF withdraws from California, we expect an adverse impact on the ability of patients to afford Medicare premiums and Medicare supplemental (Medigap) and commercial coverage, which we expect will in turn result in an adverse impact on our business, results of operations, financial condition and cash flows. In addition, ~~during the third quarter of 2018, a bill~~bills similar to AB 290 were recently introduced in Illinois (SB ~~1156) was~~650) and Oregon (SB 900), but have not been successfully passed ~~by the California legislature~~to date. If these or similar bills are introduced and implemented in other jurisdictions, and organizations that ~~would have imposed restrictions and obligations related to the use by patients on commercial plans of~~provide charitable premium assistance in ~~the state of California and would have limited the amounts paid to a provider for services provided to~~ those patients, if that provider has a financial relationship with the organization providing charitable premium assistance. SB 1156 was subsequently vetoed by the Governor of California. However, there can be no assurances that similar legislative or other initiatives will not be proposedjurisdictions are similarly impacted, it could in the ~~future.~~aggregate have a material adverse impact on our business, results of operations, financial condition and cash flows. For additional information on the impact of decreases to the percentage of our patients with commercial insurance, see the risk factor under the heading "If the number of patients with higher-paying commercial insurance declines, it could have a material adverse effect on our business, results of operations, financial condition and cash flows" in Part II, Item 1A in our Q2 Form 10-Q.

Any law, rule or guidance proposed or issued by CMS or other federal or state regulatory or legislative authorities or others, including, without limitation, any initiatives similar to ~~Proposition 8 or SB 1156,~~the proposed legislation and ballot initiatives described above, or other future ballot or other initiatives restricting or prohibiting the ability of patients with access to alternative coverage from selecting a marketplace plan on or off exchange, limiting the ~~payments~~amount of revenue that a dialysis provider can retain for ~~treatments provided to~~caring for patients with commercial ~~patients,~~insurance, imposing burdensome operational requirements, affecting payments made to providers for services provided to patients who receive charitable premium assistance and/or otherwise restricting or prohibiting the use of charitable premium assistance, could cause us to incur substantial costs to oppose any such proposed measures, impact our dialysis center development plans, and if passed and/or implemented, could adversely impact dialysis centers across the U.S. making certain centers economically unviable, lead to the closure of certain centers, restrict the

ability of dialysis patients to obtain and maintain optimal insurance coverage, and in some cases, have a material adverse effect on our business, results of operations, ~~and financial condition.~~

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, 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. These risks may be intensified to the extent that the laws change or to the extent that we increase our use of third-party service providers that utilize sensitive personal information, including PHI, on our behalf.

Data protection laws are evolving globally, and may add additional compliance costs and legal risks to our international operations. In Europe, the General Data Protection Regulation (GDPR) became 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. Enforcement actions involving GDPR compliance have started to be initiated by different European supervisory entities.

Data protection laws are also evolving nationally, and may add additional compliance costs and legal risks to our US operations. The California legislature recently passed the California Consumer Protection Act (CCPA), which is scheduled to become effective January 1, 2020. The CCPA is a privacy bill that requires certain companies doing business in California to disclose information regarding the collection and use of a consumer's personal data and to delete a consumer's data upon request. The Act also permits the imposition of civil penalties and expands existing state security laws by providing a private right of action for consumers in certain circumstances where consumer data is subject to a breach. The Company is still evaluating whether and how this rule will impact our US 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, 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 security technologies designed 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 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. 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, diligence, and/or our internal controls 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 and 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, physicians, vendors and other business partners 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 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.cash flows.

We may engage in acquisitions, mergers, joint ventures or dispositions, which may materially 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 or are not adequately addressed, we~~under certain circumstances, could ~~suffer severe consequences that would~~ have a material adverse effect on our business, results of operations, ~~and~~ financial condition and cash flows and could materially harm our reputation.

Our business strategy includes growth through acquisitions of dialysis centers and other businesses, as well as through entry into joint ventures. We may engage in acquisitions, mergers, joint ventures or dispositions or expand into new business lines or 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 agree to terms with merger 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 lines or 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 and cash flows or materially harm our reputation. 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 any continued increases in capital expenditures could have a material adverse effect on our ~~financial condition,~~business, results of operations, financial condition 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, without limitation, 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, which could harm our reputation. 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~~would have a material adverse effect on our business, results of operations, financial condition and cash flows and could materially harm our reputation.

We have in the past decided, and may in the future decide, to dispose of certain assets or businesses, such as the disposition of our DMG business, which we completed in June 2019. The sale of DMG results in a less diversified portfolio of businesses, and we will have a greater dependency on the performance of our kidney care business for our financial results, which could make us more susceptible to market fluctuations and other adverse events than if we had retained the DMG business.

In addition, under the terms of the equity purchase agreement in connection with the DMG sale agreement, as amended (the "DMG sale agreement") (and subject to the limitations therein), we agreed to certain indemnification obligations. As a result, we may become obligated to make payments to the buyer relating to our previous ownership and operation of the DMG business. Claims giving rise to these potential payments include, without limitation, claims related to breaches of our representations and warranties and covenants, including claims for breaches of our representations and warranties regarding compliance with law, litigation, absence of undisclosed liabilities, employee benefit matters, labor matters, or taxes, among others, and other claims for which we provided the buyer with a special indemnity. Any such post-closing liabilities and required payments under the DMG sale agreement, or otherwise, or in connection with any other past or future disposition of material assets or businesses could individually or in the aggregate have a material adverse effect on our business, results of operations, financial condition and cash flows and could materially harm our reputation. Further, the purchase price in the DMG sale agreement is subject to customary post-closing adjustments, including, without limitation, as a result of certain net working capital adjustments. We are currently engaged with Optum concerning what, if any, net working capital adjustment or other potential adjustments to the purchase price are appropriate, via the process set forth in the DMG sale agreement. Any negative adjustments to the purchase price, including, without limitation, as a result of this ongoing engagement with Optum, could result in a material adverse change in the amount of consideration that we are able to retain.

In connection with the closing of the DMG sale, we entered into a transition services agreement with Optum, whereby we and Optum will provide various transition services to one another for specified periods of time beginning on the closing date and extending for up to two years thereafter. In the course of performing our obligations under the transition services agreement, we will allocate certain of our resources, including without limitation, assets, facilities, equipment and the time and attention of our management and other teammates, for the benefit of the DMG business and not ours, which may negatively impact our business, results of operations and financial condition.

Additionally, joint ventures, including, without limitation, our Asia Pacific joint venture, 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 require us to make capital contributions or necessitate other payments, result in litigation or regulatory action against us, result in reputational harm to us or adversely affect the value of our investment or ~~partnership.~~partnership, among other things. There can be no assurances that these joint ventures and/or minority investments, including, without limitation, our Asia Pacific joint venture, ultimately will be successful.

If we are unable to compete successfully, including implementing our growth strategy and/or retaining our physicians and patients, it could materially adversely affect our business, results of operations and financial condition.

Acquisitions, patient retention and medical director and physician retention are important 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 expansion into various international markets, we will continue to face competition from large and medium-sized providers, among others, for these acquisition targets as well. As we and our competitors continue to grow and open new dialysis centers, each center in the United States 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 in existing and expanding markets is not limited to large competitors with substantial financial resources. Individual nephrologists have opened their own dialysis units or facilities. There also has been increasing indications of interest from non-traditional dialysis providers and others to enter the dialysis space and/or develop innovative technologies or business activities that could be disruptive to the industry. Although these potential new competitors and others may face operational and/or financial challenges, if their efforts to offer dialysis services and/or develop innovative technology or business activities in the dialysis or pre-dialysis space are successful and we are unable to effectively compete, it could have a material adverse impact on our business, results of operations and financial condition. In addition, 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 or prevent us from accessing existing or new technology on a cost-effective basis. See further discussion regarding risks associated with our suppliers under the 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 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; if we are not able to 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 business activities, new technology or reduced prevalence of ESRD or other reductions in demand for dialysis treatments that we offer; or if physicians choose not to refer to our clinics, it could materially 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 may be the sole or primary source of products critical to the services we provide, or to which we have committed obligations to make 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, it could have a material adverse impact on our business, results of operations and financial condition. In addition, the technology related to the products critical to the services we provide is subject to new developments 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 and other negative consequences 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 may not realize anticipated benefits from 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 profitably pursue all of our businesses at once, and we may be unable to successfully and profitably operate all businesses in the combined company. The administration of DMG requires implementation of appropriate operations, management, forecasting, and financial reporting systems and controls, all of which pose challenges. 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 continue to be less profitable than we currently anticipate or we do not have the experience, the appropriate expertise or the resources to profitably pursue all businesses in the combined company, our results of operations and financial condition may be materially and adversely affected.

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, 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 non-medical management services and receive a management fee for providing these 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 associated 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 if they are found to be 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 Increase Joinder Agreement, and we may continue to incur additional indebtedness in the future. If we are unable to generate sufficient cash to service our substantial indebtedness and for other intended purposes, it could, for example:

~~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 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, or to refinance existing debt on favorable terms when otherwise available.~~

In addition, we may continue to incur additional indebtedness in the 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 include covenants that could limit our indebtedness, we currently have the ability to incur substantial additional debt. The 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.

Our ability to make payments on our indebtedness, 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.

If the pending sale of DMG closes, our cash flows will be reduced accordingly. We cannot provide assurances that our business will generate sufficient cash 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, including those described above. In that regard, approximately $1.645 billion of indebtedness under secured credit facilities will become due and payable in June 2019 at its stated maturity. Although we plan to seek replacement secured credit facilities to refinance that indebtedness as it becomes due there can be no assurance that we will be able to do so on terms we consider acceptable or at all. 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 would 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. In addition, if we are unable to refinance or repay our indebtedness as it becomes due and payable from time to time (including the approximate $1.645 billion of secured indebtedness that becomes due in June 2019), we may seek waivers or extensions from the applicable lenders but there can be no assurance that those would be granted, in which case we would have to seek other sources of financing to repay that indebtedness, which might include sales of assets or equity securities or some of the other strategies discussed above. We cannot make any assurances that any such refinancing, restructurings, sales of assets, or issuances of equity can be accomplished, that any such waivers or extensions from lenders can be obtained or, if accomplished or obtained, will be on favorable terms or would raise sufficient funds to meet these obligations or our other liquidity needs. Any failure to pay our indebtedness when due could trigger cross default or cross acceleration provisions in our other debt instruments, thereby

permitting the holders of that other indebtedness to demand immediate repayment, and, in the case of secured indebtedness, would generally permit the holders of that indebtedness to possess and sell the collateral to satisfy our obligations.

The borrowings under our senior secured credit facilities are guaranteed by a substantial portion of our direct and indirect wholly owned domestic subsidiaries, including certain of DMG's subsidiaries, and are secured by a substantial portion of our and our subsidiaries' assets, including those of certain of DMG's subsidiaries. If the pending 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.

~~For additional details regarding specific risks we face regarding the pending sale of DMG, see the discussion in the risk factors under the heading “Risk factors related to the sale of DMG.”~~

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 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 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 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 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 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. For additional information regarding the risks related to our indebtedness, see the discussion in the risk factor above under the heading "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." 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.

~~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.

~~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 development or 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, or interpretation or enforcement thereof;~~

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

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

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

~~data and privacy restrictions.~~

~~Issues relating to the failure to comply with applicable non-U.S. laws, requirements or restrictions 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, including to fulfill financial reporting requirements, 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.

Any expansion of our international operations through acquisitions or through organic growth could increase these risks. Additionally, while we may invest material amounts of capital and incur significant costs in connection with the growth and

~~development of our international operations, including to start up or acquire new operations, we may not be able to operate them profitably on the anticipated timeline, or at all.~~

~~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 has adversely affected and may continue to adversely affect our business, results of operations and financial condition.~~

The announcement and pending sale of DMG has been and may continue to be disruptive to our business and has adversely affected and may continue to 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 have impaired and may continue to impair our ability to attract, retain and motivate key personnel and have caused and could continue to 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 have diverted and could continue to 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, if there is a significant delay in completing the sale, or if there is a modification in the terms of 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 (the “HSR Act”), and the approval of a notice of material modification by the California Department of Managed Health Care. On March 12, 2018, the Company received a request for additional information and documentary materials (commonly referred to as a “second request”) from the United State Federal Trade Commission (“FTC”) under the HSR Act in connection with the FTC’s review of the proposed sale of DMG. If any condition to the closing of the sale of DMG is neither satisfied nor, where permissible, waived, we may be unable to complete the disposition or complete the disposition on the terms set forth in the equity purchase agreement. In addition, satisfying the closing conditions to the sale of DMG may take longer than expected. In connection with the required regulatory approvals of the sale of DMG, regulators may impose material conditions, terms, obligations, costs or restrictions, including making their approval subject to the disposition of certain assets, 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 the sale of DMG or result in a failure to close the DMG sale on the terms set forth in the equity purchase agreement, or at all. In addition, either we or Optum may terminate the equity purchase agreement if, among other things, the sale has not been consummated prior to December 31, 2018 (subject to a six-month extension that can be exercised unilaterally by either party). 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, or at all. In the third quarter of 2018, we recognized a valuation adjustment with respect to the DMG business based on an updated assessment of fair value, which includes inputs such as the transaction itself, risks and timing, and performance of the business, and we may recognize additional valuation adjustments related to DMG in the future.

If the sale of DMG is not completed for any reason, investor confidence could decline. A failed transaction may result in negative publicity, protracted litigation, 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, and we will have incurred significant transaction costs, including legal fees, financial advisor fees and other related costs, without any commensurate benefit. Furthermore, we have incurred additional debt in anticipation of receiving the sale proceeds but there can be no assurances that we will receive the anticipated sale proceeds to repay such debt. Accordingly, if the proposed sale of DMG is not completed on the terms set forth in the equity purchase agreement or at all, 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 closing of 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 stock~~repurchases and for general corporate purposes, which may include growth investments. A number of factors may impact our ability to~~repurchase 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 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 have adversely affected and may continue to 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 have negatively affected and could continue to 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.

~~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 31% of our U.S. dialysis and related lab services net revenues for the nine months ended September 30, 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. Commercial payment rates could be materially lower in the future.

We continuously are 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.

A number of commercial payors have incorporated policies into their provider manuals limiting or refusing to accept charitable premium assistance from non-profit organizations, such as the American Kidney Fund, which may impact the number of patients who are able to afford commercial 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. In addition, payors may seek to decrease payment rates for out-of-network providers. Decreases in the number of patients with commercial 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 with commercial payors on rates, new business activities of commercial payors, 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 "Changes in federal and state healthcare regulations 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. Any changes impacting our highest paying commercial payors will have a disproportionate impact on us. In addition, many patients with commercial and government insurance rely on financial assistance from charitable organizations, such as the American Kidney Fund. Certain payors 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. CMS or another regulatory agency or legislative authority may issue a new rule or guidance that challenges charitable premium assistance. If any of these challenges to kidney patients' use of premium assistance are successful or restrictions are imposed on the use of financial assistance from such charitable organizations such that 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 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 44% of our U.S. dialysis and related lab services net revenues for the nine months ended September 30, 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 that are related to the treatment of dialysis, including pharmaceuticals that were historically separately reimbursed to the dialysis providers, such as erythropoietin (EPO), vitamin D analogs and iron supplements, irrespective of the level of pharmaceuticals administered or additional services 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 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.~~

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. MACs have proposed drafts of LCDs to this effect. Such coverage determinations could have an adverse impact on our revenue. There is also risk commercial insurers could seek to 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 and business needs, 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 BBA, an annual 2% reduction to Medicare payments took effect on April 1, 2013, and has been extended through 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 failure to adequately develop and maintain our clinical systems or failure of our clinical systems to operate effectively could have a material adverse effect on our business, results of operations and financial condition. For example, 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, if our clinical systems fail to accurately capture the data we report to CMS or we otherwise have data integrity issues with respect to the reported information, 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 from participation in the federal healthcare programs, and penalties under the federal Civil Monetary Penalty statute and could adversely impact our reputation.

For additional details regarding the risks we face for failing to adhere to our Medicare and Medicaid regulatory compliance obligations, see the risk factor above under the heading "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, reputation and 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 nine months ended September 30, 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 nine months ended September 30, 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 infrastructure, 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 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 have a material adverse effect on our business, results of operations and financial condition.

Changes in clinical practices, payment rates or regulations impacting 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 certain pharmaceuticals into the PPS at industry average doses and prices. Any variation above the industry average may be subject to partial reimbursement through the PPS outlier reimbursement policy.

Commercial payors have increasingly examined their administration policies for pharmaceuticals and, in some cases, have modified those policies. Changes in labeling of 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 administration policies could have a material adverse effect on our business, results of operations and financial condition. Further increased utilization of certain pharmaceuticals for patients for whom the cost of which is included in a bundled reimbursement rate, or further decreases in reimbursement for 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 of January 1, 2018, calcimimetics became part of the 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 the drug. If payors do not pay as anticipated, if we are not adequately reimbursed for the cost of the drug, or the processes we have implemented to provide the drug do not perform as anticipated, then we could be subject to both financial and 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 related to pharmaceuticals, 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 in breach of the CIA, and 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, reputation and stock price, including those consequences described under the risk factor "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, reputation and 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 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 September 30, 2018, we owned a controlling interest in numerous dialysis-related joint ventures, which represented approximately 25% of our net U.S. dialysis and related lab services net revenues for the nine months ended September 30, 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. Our joint venture arrangements do not satisfy all of the elements of any safe harbor under the federal Anti-Kickback Statute, however, and therefore are susceptible to government scrutiny. For example, in October 2014, we entered into a settlement agreement 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 on the settlement agreement, see "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".

There are significant risks associated with estimating the amount of dialysis revenues and related refund liabilities that we recognize, and if 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,~~resultsof operations and financial condition.~~

There are significant 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 200,800U.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 and financial condition.

Our ancillary services and strategic initiatives, including our pharmacy services and our international operations, that we operate or 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 are subject to many of the same risks, regulations and laws, as described in the risk factors related to our dialysis 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 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. For example, recent changes in the oral pharmacy space, including reimbursement rate pressures, have negatively impacted the economics of our pharmacy services business. As a result, we are transitioning the customer service and fulfillment functions of this business to third parties and are winding down our distribution operation, which will result in a decrease in revenues and costs. We expect to continue to incur losses for these operations as we continue the transition and wind-down in the fourth quarter of 2018. In the nine months ended September 30, 2018, we recognized restructuring charges of $11 million and incurred asset impairment charges of $17 million related to the restructuring of our pharmacy business. We expect to incur additional restructuring charges in the remainder of 2018 related to this plan.

If any of our ancillary services or strategic initiatives, including 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 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 our ancillary services or strategic initiatives. In that regard, we have taken, and may in the future take, impairment and restructuring charges in addition to those described above related to 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.

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, referral sources for many of our centers 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, under certain circumstances, 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. 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. 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. 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 patients to 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 our labor costs continue to rise, including due to shortages, changes in certification requirements and higher than normal turnover rates in skilled clinical personnel, or currently pending or future rules, regulations or initiatives impose additional requirements or limitations on our operations or profitability, or, if we are unable to attract and retain key leadership talent, we may experience disruptions in our business operations and increases in operating expenses, among other things, which could have a material adverse effect on our business, results of operations and financial condition.

We face increasing labor costs generally, and in particular, we 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. Furthermore, changes in certification requirements can impact our ability to maintain sufficient staff levels, including to the extent our teammates are not able to meet new requirements, among other things. In addition, if we experience a higher than normal turnover rate for our skilled clinical personnel, our operations and treatment growth may be negatively impacted, which could adversely affect our business, results of operations and financial condition. We also face competition in attracting and retaining talent for key leadership positions. If we are unable to attract and retain qualified individuals, we may experience disruptions in our business operations, including our ability to achieve strategic goals, which could have a material adverse affect on our business, results of operations and financial condition.

In addition, proposed ballot initiatives or referendums, legislation, regulations 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 those mandated by proposed ballot initiatives or referendums, legislation, regulations or policy changes could materially reduce our revenues and increase our operating expense and impact our ability to staff our clinics to any 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 or consolidate existing dialysis centers, postpone or not build new 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. For additional information on these risks, see "Changes in federal and state health regulations could have a material adverse effect on our business, financial condition and results of operations."

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

Our business is labor intensive, and our financial and operating results 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. 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 and ongoing union organizing activities at our facilities could continue or increase for other reasons. We could experience an upward trend in wages and benefits and labor and employment claims, including the filing of class action suits, or adverse outcomes of such claims, or face work stoppages. In addition, we are and may continue to be subject to targeted corporate campaigns by union organizers in response to which we have been and may continue to be required to expend substantial resources, both time and financial. Any of these events or circumstances could have a material adverse effect on our employee relations, treatment growth, productivity, business, results of operations and financial 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 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.~~

Approximately 84% of DMG's revenue for the nine months ended September 30, 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 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. 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 DMG and its associated physician groups 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.

If DMG's agreements or arrangements with any physician equity holder(s) of associated physicians, physician groups or 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 agreements 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 termination 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 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 impacting DMG that is greater compared to the industry average rate may have a 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.~~

Before DMG was reclassified as held for sale, we took impairment charges against the goodwill of several of our DMG reporting units based on continuing developments in our DMG business, including recent annual updates to Medicare Advantage benchmark reimbursement rates, changes in our expectations concerning future government reimbursement rates and our expected ability to mitigate them, medical cost and utilization trends, commercial pricing pressures, commercial membership rates, underperformance of certain at-risk reporting units and other market factors. Depending on the impact of continuing developments on the value of our DMG business, for example if DMG's fair value less the costs incurred in the sale of DMG falls below its carrying amount, we may need to recognize additional impairment charges on this business, and the amount of such charges, if any, could be significant. Our estimates of the fair value of this business rely on certain estimates and assumptions, including the terms and pricing agreed for the sale of this business, as well as applicable market multiples, discount and long-term growth rates, market data and future reimbursement rates, as applicable. Our estimates of the fair value of the DMG business could differ from the actual value that a market participant would pay for this business. In the third quarter of 2018, we recognized a valuation adjustment with respect to DMG based on an updated assessment of fair value, which includes inputs such as the transaction itself, risks and timing, and performance of the business, and we may recognize additional valuation adjustments related to DMG in the future. For additional information regarding the risks we face related to the pending sale of DMG, see the discussion in the risk factors under the heading "Risk factors related to the sale of DMG."

~~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.~~

The 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 were fully phased-in in 2017 and range between 95% and 115% of the Medicare 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 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.

Recent legislative and executive efforts to enact further healthcare reform legislation have caused the future state of the exchanges, other ACA reforms, and many core aspects of the current U.S. health care system to be unclear. 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 2018, CMS announced an average increase of 0.45%; and for 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 regions. In 2017, 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 2018, only one company will offer Medicare Advantage 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 nine months ended September 30, 2018, 70% 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 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 which 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 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 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. 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' (including 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 Note 10 to the condensed consolidated financial statements included in this report for further 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 January 29, 2018, the DOJ issued a final rule announcing adjustments to FCA penalties, under which the per claim penalty range increases to a range from $11,181 to $22,363 for penalties assessed after 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 Note 10 to the condensed consolidated financial statements included in this report, in March 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 change 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 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 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 continue 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 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. CMS has also implemented the Next Generation ACO model, which allows the ACO to assume higher levels of financial risk and reward than under the MSSP program. DMG has formed an MSSP ACO through a subsidiary in New Mexico and a Next Generation ACO (previously an MSSP ACO) through a subsidiary in California, and is evaluating whether to participate in more ACOs in the future. The continued development and expansion of ACOs, and potential changes to the participation requirements in ACOs, will have an uncertain impact on DMG's revenue and profitability. DaVita Kidney Care is also participating as a dialysis provider in Arizona, Florida, New Jersey, and Pennsylvania for the Innovation Center's CEC Model. Further, on August 17, 2018, CMS issued a proposed rule for the MSSP, which among other things, would require ACOs to eventually accept a two-sided risk model (as opposed to a one-sided model), wherein ACOs need to share in the financial risk of their patients' healthcare spending (~~i.e., shared losses) in addition to shared savings. If implemented as proposed, the rule could negatively impact the revenue and profitability of DMG's MSSP ACO.~~

The ACO programs are relatively new and therefore operational and regulatory guidance is limited. It is possible that the operations of DMG's subsidiary ACOs 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 ACOs at financial risk with a potential obligation to CMS. Traditionally, other than fee-for-service billing by the medical clinics and healthcare facilities offered 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 ACOs 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 ACOs, 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)) 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's 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 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 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 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 September 30, 2018, these cash bonuses under the program would total approximately $470 million if a change of control transaction occurred at that price and our Board of Directors did not modify this program. These and any other 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

~~(c)~~ Share repurchases

The following table summarizes ~~the Company’s~~our repurchases of ~~its~~our common stock during the third quarter of ~~2018:~~2019:

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
July 1-31, 2018 3,871,905
$ 70.48
3,871,905
$ 1,426.3
August 1-31, 2018 977,146
72.36
977,146
1,355.6
September 1-30, 2018 —
—
—
1,355.6

4,849,051
$ 70.86
4,849,051



Period	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)
July 1-31, 2019	4,214,205	$	56.47	4,214,205	$	2,000
August 1-31, 2019	21,801,975	56.57		21,801,975	$	768
September 1-30, 2019	4,575,570	60.47		4,575,570	$	492
	30,591,750	$	57.14	30,591,750

On July 11, 2018, our Board of Directors approved an additional share repurchase authorization in the amount of approximately ~~$1,390 million.~~$1.39 billion. This share repurchase authorization was in addition to the approximately $110 million remaining at that time under our Board of Directors’ prior share repurchase authorization approved in October 2017.

Effective July 17, 2019, our Board of Directors terminated all remaining prior share repurchase authorizations available to us at that time and approved a new share repurchase authorization of $2.0 billion. As of the close of business on November 4, 2019, we had repurchased a total of 30,660,921 of shares of our common stock for $1.75 billion under this repurchase authorization.

Effective as of the close of business on November 4, 2019, the Board terminated all remaining prior share repurchase authorizations available to us under the aforementioned July 17, 2019 authorization and approved a new share repurchase authorization of $2.0 billion. 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 September 30, 2018,~~As of November 6, 2019, we ~~repurchased~~had a total of ~~4,849,051 shares of our common stock~~$2.0 billion available under the current repurchase authorization for ~~approximately $344 million at an average price of $70.86 per share. As of November 5, 2018, we had approximately $1,356 million remaining in Board authorizations available for~~additional share ~~repurchases under our stock repurchase program.~~repurchases. Although ~~these~~this share repurchase ~~authorizations~~authorization does not have noan expiration ~~dates,~~date, we ~~are~~remain subject to share repurchase limitations, including under the terms of the current 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		~~Amendment No. 1 dated as of September 20, 2018, to that certain Equity Purchase~~Credit Agreement, dated ~~as of December 5, 2017,~~August 12, 2019, by and among DaVita Inc., ~~a Delaware corporation, Collaborative Care Holdings,~~certain subsidiary guarantors party thereto, the lenders party thereto, Credit Agricole Corporate and Investment Bank, JPMorgan Chase Bank, N.A. and MUFG Bank Ltd., as co-syndication agents, Bank of America, N.A., Barclays Bank PLC, Credit Suisse Loan Funding LLC, ~~a Delaware limited liability company~~Goldman Sachs Bank USA, Morgan Stanley Senior Funding, Inc. and ~~a wholly owned subsidiary of Optum, Inc.,~~Suntrust Bank, as co-documentation agents, and ~~solely with respect to Section 9.3~~Wells Fargo Bank, National Association, as administrative agent, collateral agent and ~~Section 9.18 thereto, UnitedHealth Group Incorporated, a Delaware corporation.~~swingline lender. (1)

~~10.2~~		Amendment Number Two to Employment Agreement, effective as of August 20, 2018, by and between DaVita Inc. and Kent J. Thiry. (2) *

~~10.3~~		DaVita Inc. Rule of 65 Policy, adopted on August 19, 2018. (2) *

~~12.1~~31.1		~~Ratio of earnings to fixed charges.~~ ü

~~31.1~~		Certification of the Chief Executive Officer, dated November ~~7, 2018,~~6, 2019, 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 ~~7, 2018,~~6, 2019, 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 ~~7, 2018,~~6, 2019, 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 ~~7, 2018,~~6, 2019, 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.~~ Document - the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. ü

101.SCH		Inline XBRL Taxonomy Extension Schema Document. ü

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

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

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

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

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). ü



*	~~Management contract or executive compensation plan or arrangement.~~
ü	Filed or furnished herewith.
(1)	Filed on ~~September 24, 2018~~August 14, 2019 as ~~an exhibit~~Exhibit 10.1 to the ~~Company’s Current Report on Form 8-K.~~
~~(2)~~	~~Filed on August 23, 2018 as an exhibit to the Company’s~~Company's Current Report on Form 8-K.

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: November ~~7, 2018~~6, 2019



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

~~100~~67



☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



	September 30, 2018						December 31, 2017
	Debt securities		Equity securities		Total		Debt securities		Equity securities		Total
Certificates of deposit and other time deposits	$	2,230	$	—	$	2,230	$	31,630	$	—	$	31,630
Investments in mutual funds and common stock	—		37,547		37,547		—		38,895		38,895
	$	2,230	$	37,547	$	39,777	$	31,630	$	38,895	$	70,525
Short-term investments	$	2,230	$	2,500	$	4,730	$	31,630	$	1,200	$	32,830
Long-term investments	—		35,047		35,047		—		37,695		37,695
	$	2,230	$	37,547	$	39,777	$	31,630	$	38,895	$	70,525



	U.S. dialysis and related lab services			Other-ancillary services and strategic initiatives			Consolidated total
Balance at January 1, 2017	$	5,691,587		$	323,788		$	6,015,375
Acquisitions	485,434			131,598			617,032
Divestitures	(32,260		)	(126		)	(32,386		)
Impairment charges	—			(36,196		)	(36,196		)
Foreign currency and other adjustments	—			46,454			46,454
Balance at December 31, 2017	$	6,144,761		$	465,518		$	6,610,279
Acquisitions	24,431			111,223			135,654
Divestitures	(331		)	(15,166		)	(15,497		)
Impairment charges	—			(3,106		)	(3,106		)
Foreign currency and other adjustments	—			(24,671		)	(24,671		)
Balance at September 30, 2018	$	6,168,861		$	533,798		$	6,702,659

Balance at September 30, 2018:
Goodwill	$	6,168,861		$	561,399		$	6,730,260
Accumulated impairment charges	—			(27,601		)	(27,601		)
	$	6,168,861		$	533,798		$	6,702,659



	September 30, 2018			December 31, 2017
Senior secured credit facilities:
Term Loan A	$	700,000		$	775,000
Term Loan A-2	995,000			—
Term Loan B	3,351,250			3,377,500
Revolver	275,000			300,000
Senior notes	4,500,000			4,500,000
Acquisition obligations and other notes payable	167,779			150,512
Capital lease obligations	289,333			297,170
Total debt principal outstanding	10,278,362			9,400,182
Discount and deferred financing costs	(53,624		)	(63,951		)
	10,224,738			9,336,231
Less current portion	(1,784,065		)	(178,213		)
	$	8,440,673		$	9,158,018



2018 (remainder of the year)	49,701
2019	2,028,808
2020	74,985
2021	3,311,502
2022	1,289,539
2023	36,437
Thereafter	3,487,390



	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 September 30,						Nine months ended September 30,							Three months ended September 30,						Nine months ended September 30,
Derivatives designated as cash flow hedges	2018			2017			2018			2017				2018			2017			2018			2017
Interest rate cap agreements	$	50		$	(782	)	$	1,103		$	(8,967	)	Debt expense	$	2,163		$	2,070		$	6,303		$	6,208
Tax (benefit) expense	(13		)	304			(284		)	3,488			Tax expense	(557		)	(805		)	(1,623		)	(2,415		)
Total	$	37		$	(478	)	$	819		$	(5,479	)		$	1,606		$	1,265		$	4,680		$	3,793



Current assets	$	10,183
Property and equipment	5,654
Intangible and other long-term assets	3,672
Goodwill	135,654
Current liabilities	(12,139		)
Long-term liabilities	(212		)
Noncontrolling interests	(11,947		)
	$	130,865


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


~~20.~~21.	Changes in DaVita Inc.’s ownership interests in consolidated subsidiaries


	Consolidated Total				Physician Groups				Unrestricted Subsidiaries		Company and Restricted Subsidiaries⁽¹⁾
For the nine months ended September 30, 2018
For the nine months ended September 30, 2019														Consolidated Total			Physician Groups			Unrestricted Subsidiaries		Company and Restricted Subsidiaries⁽¹⁾
Patient service operating revenues	Consolidated Total			$	Physician Groups			7,980,178	Unrestricted Subsidiaries		Company and Restricted Subsidiaries⁽¹⁾			$	—		$	—		$	7,980,178	$	8,150,386		$	—	$	—	$	8,150,386
Provision for uncollectible accounts	(35,838		)		—				—		(35,838		)	(19,689		)	—			—		(19,689		)
Net patient service operating revenues	7,944,340				—				—		7,944,340			8,130,697			—			—		8,130,697
Other revenues	639,387				—				—		639,387			359,198			—			—		359,198
Total net operating revenues	8,583,727				—				—		8,583,727			8,489,895			—			—		8,489,895
Operating expenses	7,445,811				—				—		7,445,811			7,309,166			—			—		7,309,166
Operating income	1,137,916				—				—		1,137,916			1,180,729			—			—		1,180,729
Debt expense, including refinancing charges	(359,135		)		—				—		(359,135		)
Debt expense														(385,176		)	—			—		(385,176		)
Other income	10,583				—				—		10,583			17,863			—			—		17,863
Income tax expense	206,652				—				—		206,652			197,938			—			—		197,938
Net income from continuing operations	582,712				—				—		582,712			615,478			—			—		615,478
Net (loss) income from discontinued operations, net of tax	(147,829		)		20,773				298		(168,900		)
Net income from discontinued operations, net of tax														102,854			12,706			249		89,899
Net income	434,883				20,773				298		413,812			718,332			12,706			249		705,377
Less: Net income attributable to noncontrolling interests	(125,717		)		(6,961		)		—		(118,756		)	(152,222		)	(1,255		)	—		(150,967		)
Net income attributable to DaVita Inc.	$	309,166			$	13,812			$	298	$	295,056		$	566,110		$	11,451		$	249	$	554,410


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



	Remainder of 2018		1-3 years		4-5 years		After 5 years		Total
Scheduled payments under contractual obligations:
Long-term debt	$	43	$	5,350	$	1,279	$	3,317	$	9,989
Interest payments on the senior notes	38		710		401		202		1,351
Interest payments on Term Loan B⁽¹⁾	43		417		—		—		460
Interest payments on Term Loan A⁽²⁾	8		14		—		—		22
Interest payments on Term Loan A-2⁽²⁾	8		16		—		—		24
Kidney Care capital lease obligations	7		66		46		170		289
Kidney Care operating leases	122		1,360		719		1,487		3,688
DMG capital lease obligations	35		—		—		—		35
DMG operating leases	23		237		113		263		636
	$	327	$	8,170	$	2,558	$	5,439	$	16,494
Potential cash requirements under other commitments:
Letters of credit	$	37	$	—	$	—	$	—	$	37
Noncontrolling interests subject to put provisions	640		196		115		113		1,064
Non-owned and minority owned put provisions	30		307		—		—		337
Operating capital advances	—		2		1		2		5
Purchase commitments	91		875		251		—		1,217
	$	798	$	1,380	$	367	$	115	$	2,660



	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
July 1-31, 2018	3,871,905	$	70.48	3,871,905	$	1,426.3
August 1-31, 2018	977,146	72.36		977,146	1,355.6
September 1-30, 2018	—	—		—	1,355.6
	4,849,051	$	70.86	4,849,051