Forward-looking statements

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

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

Results of operations

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

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

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

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

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

Operating income                       $    245               $   236            $    222               $    702               $    646

The following table summarizes consolidated net operating revenues:

                                                                                            Nine months ended
                                                   Three months ended                         September 30,
                                    September 30,       June 30,       September 30,
                                        2009              2009             2008              2009         2008
                                                    (dollar amounts rounded to nearest million)
Dialysis and Related Lab
Services                           $         1,491     $    1,441     $         1,378     $    4,309     $ 4,026
Other - Ancillary Services and
Strategic Initiatives                           83             78                  69            232         173

Consolidated net operating
revenues                           $         1,574     $    1,519     $         1,447     $    4,541     $ 4,199

The following table summarizes consolidated operating income:

                                                                                                     Nine months ended
                                                   Three months ended                                  September 30,
                                  September 30,         June 30,          September 30,
                                      2009                2009                2008                2009               2008
                                                         (dollar amounts rounded to nearest million)
Dialysis and Related Lab
Services                         $           260        $     250        $           235        $     746          $     700
Other - Ancillary Services
and Strategic Initiatives                     (4 )             (3 )                   (4 )            (12 )              (25 )

Total segment margin                         256              247                    231              734                675
Reconciling items:
Stock-based compensation                     (11 )            (11 )                  (11 )            (34 )              (30 )
Equity investment income                       1               -                       1                1                  1

Consolidated net operating
income                           $           245        $     236        $           222        $     702          $     646

Consolidated net operating revenues

Consolidated net operating revenues for the third quarter of 2009 increased by approximately $55 million, or approximately 3.6%, as compared to the second quarter of 2009. The increase in consolidated net operating revenues was primarily due to an increase in Dialysis and Related Lab Services net revenues of approximately $50 million, principally due to an increase in the number of treatments as a result of an additional treatment day in the third quarter of 2009 and non-acquired treatment growth, as well as an increase in the average dialysis revenue per treatment. The increase in consolidated net revenues was also due to an increase of approximately $5 million in the Ancillary Services and Strategic Initiatives net revenues primarily from growth in our pharmacy business.

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

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

Consolidated operating income

Consolidated operating income for the third quarter of 2009 increased by approximately $9 million or approximately 3.8% as compared to the second quarter of 2009. The increase in consolidated operating income was primarily due to an increase in the Dialysis and Related Lab Services operating income, due to
(i) growth in revenue, primarily from additional treatments, (ii) an increase in the intensity of physician-prescribed pharmaceuticals and (iii) cost control initiatives and continued improved productivity, partially offset by (i) higher workers compensation costs, (ii) an increase in pharmaceutical costs and
(iii) higher center level settlement and impairment charges.

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

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

Operating segments

Dialysis and Related Lab Services

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

Segment margin            $           260      $       250      $           235      $           746      $           700

Dialysis treatments             4,339,195        4,228,179            4,091,099           12,649,812           12,044,639
Average dialysis
treatments per
treatment day                      54,927           54,207               51,786               54,175               51,385
Average dialysis
revenue per dialysis
treatment (including
the lab)                  $           343      $       340      $           336                  340      $           334

Net Operating Revenues

Dialysis and Related Lab Services' net operating revenues for the third quarter of 2009 increased by approximately $50 million, or approximately 3.5%, as compared with the second quarter of 2009. The increase in net operating revenues was primarily due to an increase in the number of treatment days in the third quarter of 2009 and non-acquired treatment growth at existing and new centers, as well as an increase of approximately $3 in our average dialysis revenue per treatment. The increase in the average dialysis revenue per treatment was primarily due to an increase in the intensities of physician-prescribed pharmaceuticals, an increase in our non-government payment rates and an increase in our reimbursement rates for, average sale price, or ASP, associated with EPO, partially offset by changes in the mix of our non-government payors.

Dialysis and Related Lab Services' net operating revenues increased by approximately $113 million, or 8.2%, in the third quarter of 2009, as compared to the third quarter of 2008. The increase in net operating revenues in the third quarter of 2009 was principally due to an increase in the number of treatments of approximately 6.1%, an increase in the average dialysis revenue per treatment of approximately 2.0%, with the balance of the increase due to additional lab revenue and management fees. The increase in the number of treatments was primarily attributable to non-acquired treatment growth at existing and new centers and growth through acquisitions. The increase in the average dialysis revenue per treatment was primarily due to a 1% increase in the Medicare composite rate, an increase in the intensities of physician-prescribed pharmaceuticals, an increase in our non-government payment rates and an increase in our reimbursement rates for ASP associated with EPO, partially offset by changes in the mix of our non-government payors.

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

Operating Expenses and Charges

Patient care costs. Dialysis and Related Lab Services' patient care costs on a per treatment basis increased by approximately $3 in the third quarter of 2009, as compared to the second quarter of 2009. The increase in the

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

Dialysis and Related Lab Services' patient care costs on a per treatment basis increased by approximately $5 in the third quarter of 2009 as compared to the third quarter of 2008. The increase in the per treatment costs was primarily attributable to an increase in the intensities of physician-prescribed pharmaceuticals, higher benefit costs and an increase in pharmaceutical costs, partially offset by improved productivity.

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

General and administrative expenses. Dialysis and Related Lab Services' general and administrative expenses for the third quarter of 2009 decreased in absolute dollars by approximately $0.5 million from the second quarter of 2009. The decrease in the third quarter of 2009 as compared to the second quarter of 2009 was primarily due to the timing of certain expenditures such as professional fees and certain cost control initiatives. In absolute dollars, general and administrative expenses increased by approximately $4.0 million and $19.8 million in the third quarter of 2009 and for the nine months ended September 30, 2009, respectively, as compared to the same periods in 2008. The increases were primarily due to higher labor and benefit costs, and in addition, the nine months ended September 30, 2009 included an increase in our professional fees for legal and compliance initiatives.

Depreciation and amortization. The decrease in depreciation and amortization for Dialysis and Related Lab Services in the third quarter of 2009 as compared to the second quarter of 2009 was primarily due to the acceleration of depreciation on certain assets in the second quarter of 2009. The increase in depreciation and amortization for the Dialysis and Related Lab Services in the third quarter of 2009 and for the nine months ended September 30, 2009, as compared to the same periods in 2008, was primarily due to growth in new centers and expansions of certain existing centers.

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

Operating income

Dialysis and Related Lab Services operating income for the third quarter of 2009 increased by approximately $10 million, as compared to the second quarter of 2009. The increase in operating income was primarily attributable to an increase in revenue as a result of an additional treatment day in the third quarter of 2009 and from non-acquired treatment growth, as well as an increase in the average dialysis revenue per treatment of approximately $3 primarily from an increase in the intensities of physician-prescribed pharmaceuticals, an increase in our non-government payment rates and an increase in our reimbursement rates for ASP associated with EPO, partially offset by changes in the mix of our non-government payors. Operating income also increased as a result of cost control initiatives and continued improved productivity, partially offset by higher workers compensation costs, increases in our pharmaceuticals costs and higher center level settlement and impairment charges.

Dialysis and Related Lab Services operating income for the third quarter of 2009 increased by approximately $25 million, as compared to the third quarter of 2008. The increase in operating income was primarily attributable to growth in revenue from additional treatments as a result of non-acquired treatment growth, as well as increases in our average dialysis revenue per treatment of approximately $7 primarily from a

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

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

Other - Ancillary Services and Strategic Initiatives



                                                  Three months ended                                          Nine months ended
                              September 30,             June 30,           September 30,           September 30,             September 30,
                                   2009                   2009                 2008                    2009                      2008
                                                              (dollar amounts rounded to nearest million)
Revenues                     $             83          $       78         $            69         $           232           $           173

Segment loss                 $             (4 )        $       (3 )       $            (4 )       $           (12 )         $           (25 )

Net operating revenues

The Ancillary Services and Strategic Initiatives net operating revenues for the third quarter of 2009 increased by approximately $5 million as compared to the second quarter of 2009. The increase was primarily due to revenue growth in our pharmacy business.

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

The increase in net operating revenues for the nine months ended September 30, 2009 of approximately $59 million, as compared to the same period in 2008, was primarily due to growth in our pharmacy and growth in HomeChoice Partners, VillageHealth special needs plans and clinical research businesses.

Operating expenses

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

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

Ancillary Services and Strategic Initiatives operating expenses for the nine months ended September 30, 2009 increased by approximately $46 million as compared to the same period in 2008, primarily due to volume growth in our pharmacy business, higher labor and benefits costs and an increase in pharmaceutical costs, partially offset by lower professional fees that were incurred in 2008 in connection with the VillageHealth special needs plans.

Operating loss

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

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

Corporate level charges

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

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

Debt expense. Debt expense of $45.5 million in the third quarter of 2009 decreased by approximately $1.6 million from the second quarter of 2009. The . . .