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 and as such are intended to be covered by the safe harbor for "forward-looking statements" provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements could include, among other things, DaVita's response to and the expected future impacts of the coronavirus (COVID-19), including statements about our balance sheet and liquidity, our expenses and expense offsets, revenues, billings and collections, availability or cost of supplies, treatment volumes, mix expectation, such as the percentage or number of patients under commercial insurance, the availability, acceptance, impact, administration and efficacy of COVID-19 vaccines, treatments and therapies, the continuing impact on the U.S. and global economies, labor market conditions, and overall impact on our patients and teammates, as well as other statements regarding our future operations, financial condition and prospects, expenses, strategic initiatives, government and commercial payment rates, expectations related to value-based care, integrated kidney care and Medicare Advantage (MA) plan enrollment, and our ongoing stock repurchase program. All statements in this report, other than statements of historical fact, are forward-looking statements. Without limiting the foregoing, statements including the words "expect," "intend," "will," “could,” "plan," "anticipate," "believe" and similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on DaVita's current expectations and are based solely on information available as of the date of this report. DaVita undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of changed circumstances, new information, future events or otherwise, except as may be required by law. Actual future events and results 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 include, among other things:

*•*the continuing impact of the COVID-19 pandemic, current macroeconomic and marketplace conditions, and global events, many of which are interrelated and which relate to, among other things, the impact of the COVID-19 pandemic on our patients, teammates, physician partners, suppliers, business, operations, reputation, financial condition and results of operations; the government’s response to the ongoing pandemic; the pandemic's impact on the U.S. and global economies, labor market conditions, interest rates, inflation and evolving monetary policies; the availability, acceptance, impact and efficacy of COVID-19 vaccines, treatments and therapies; further spread or resurgence of the virus, including as a result of the emergence of new strains of the virus; the continuing impact of the pandemic on our revenues and non-acquired growth due to lower treatment volumes; COVID-19's impact on the chronic kidney disease (CKD) population and our patient population including on the mortality of these patients; any potential negative impact on our commercial mix or the number of our patients covered by commercial insurance plans; continued increased COVID-19-related costs; our ability to successfully implement cost savings initiatives; supply chain challenges and disruptions; and elevated teammate turnover and training costs and higher salary and wage expense. including, among other things, increased contract wages, driven in part by persisting labor market conditions and a high demand for our clinical personnel, any of which may also have the effect of heightening many of the other risks and uncertainties discussed below, and in many cases, the impact of the pandemic and the aforementioned global economic conditions on our business may persist even after the pandemic subsides;

*•*the concentration of profits generated by higher-paying commercial payor plans for which there is continued downward pressure on average realized payment rates; a reduction in the number or percentage of our patients under such plans, including, without limitation, 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, as a result of our making incorrect assumptions about how our patients will respond to any change in financial assistance from charitable organizations; or as a result of payors' implementing restrictive plan designs, including, without limitation, actions taken in response to the U.S. Supreme Court’s decision in Marietta Memorial Hospital Employee Health Benefit Plan, et al. v. DaVita Inc. et al. (Marietta); how and whether regulators and legislators will respond to the Marietta decision including, without limitation, whether they will issue regulatory guidance or adopt new legislation; how courts will interpret other anti-discriminatory provisions that may apply to restrictive plan designs; whether there could be other potential negative impacts of the Marietta decision; and the timing of each of these items;

*•*the extent to which the ongoing implementation of healthcare reform, or changes in or new legislation, regulations or guidance, enforcement thereof or related litigation result in a reduction in coverage or reimbursement rates for our services, a reduction in the number of patients enrolled in or that select higher-paying commercial plans, including for example MA plans; or other material impacts to our business or operations; or our making incorrect assumptions about how our patients will respond to any such developments;

*•*risks arising from potential changes in laws, regulations or requirements applicable to us, such as potential and proposed federal and/or state legislation, regulation, ballot, executive action or other initiatives, including, without limitation, those related to healthcare and/or labor matters;

*•*our ability to attract, retain and motivate teammates and our ability to manage operating cost increases or productivity decreases whether due to union organizing activities, legislative or other changes, demand for labor, volatility and uncertainty in the labor market, the current challenging and highly competitive labor market conditions, or other reasons;

*•*U.S. and global economic and marketplace conditions, interest rates, inflation, unemployment, labor market conditions, and evolving monetary policies, and our ability to respond to these challenging conditions, including among other things our ability to successfully identify cost savings opportunities and to implement cost savings initiatives such as ongoing initiatives that increase our use of third-party service providers to perform certain activities, initiatives that relate to clinic optimization and capacity utilization improvement, and procurement opportunities, among other things;

*•*our ability to successfully implement our strategies with respect to integrated kidney care and value-based care initiatives and home based dialysis in the desired time frame and in a complex, dynamic and highly regulated environment, including, among other things, maintaining our existing business; meeting growth expectations; recovering our investments; entering into agreements with payors, third party vendors and others on terms that are competitive and, as appropriate, prove actuarially sound; structuring operations, agreements and arrangements to comply with evolving rules and regulations; finding, training and retaining appropriate staff; and further developing our integrated care and other capabilities to provide competitive programs at scale;

*•*a reduction in government payment rates under the Medicare End Stage Renal Disease program, state Medicaid or other government-based programs and the impact of the MA benchmark structure;

*•*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;

*•*legal and compliance risks, such as our continued compliance with complex, and at times, evolving government regulations and requirements;

*•*the impact of the political environment and related developments on the current healthcare marketplace and on our business, including with respect to the Affordable Care Act, the exchanges and many other core aspects of the current healthcare marketplace, as well as the composition of the U.S. Supreme Court and the current presidential administration and congressional majority;

*•*changes in pharmaceutical practice patterns, reimbursement and payment policies and processes, or pharmaceutical pricing, including with respect to hypoxia inducible factors, among other things;

*•*our ability to develop and maintain relationships with physicians and hospitals, changing affiliation models for physicians, and the emergence of new models of care or other initiatives introduced by the government or private sector that, among other things, may erode our patient base and impact reimbursement rates;

*•*our ability to complete acquisitions, mergers, dispositions, joint ventures or other strategic transactions that we might announce or be considering, on terms favorable to us or at all, or to successfully integrate any acquired businesses, or to successfully operate any acquired businesses, joint ventures or other strategic transactions, or to successfully expand our operations and services in markets outside the United States, or to businesses or products outside of dialysis services;

*•*continued increased competition from dialysis providers and others, and other potential marketplace changes, including without limitation increased investment in and availability of funding to new entrants in the dialysis and pre-dialysis marketplace;

*•*the variability of our cash flows, including without limitation any extended billing or collections cycles; the risk that we may not be able to generate or access sufficient cash in the future to service our indebtedness or to fund our other liquidity needs; and the risk that we may not be able to refinance our indebtedness as it becomes 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, as well as our use of a considerable amount of available funds to 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;

*•*our aspirations, goals and disclosures related to environmental, social and governance (ESG) matters, including, among other things, evolving regulatory requirements affecting ESG standards, measurements and reporting requirements; the availability of suppliers that can meet our sustainability standards; and our ability to recruit, develop and retain diverse talent in our labor markets; and

*•*the other risk factors, trends and uncertainties set forth in our Annual Report on Form 10-K for the year ended December 31, 2022 (2022 10-K), and the risks and uncertainties discussed in any subsequent reports that we file or furnish with the Securities and Exchange Commission (SEC) from time to time.

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

Company Overview

Our principal business is to provide dialysis and related lab services to patients in the United States, which we refer to as our U.S. dialysis business. We also operate our U.S. integrated kidney care (IKC) business, our U.S. other ancillary services, and our international operations, which we collectively refer to as our ancillary services, as well as our corporate administrative support. Our U.S. dialysis business 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) or end stage kidney disease (ESKD).

General Economic and Marketplace Conditions

Developments in general economic and market conditions could have a material adverse impact on our patients, teammates, physician partners, suppliers, business, operations, reputation, financial condition, results of operations, cash flows and/or liquidity. Many of these external factors and conditions are interrelated, including, among other things, the continuing impact of COVID-19 on the mortality rates of our patients and other ESRD or CKD patients, supply chain challenges, inflation, rising interest rates, labor market conditions and wage pressure. Certain of these impacts could be further intensified by concurrent global events such as the ongoing conflict between Russia and Ukraine, which has continued to drive sociopolitical and economic uncertainty in Europe and across the globe.

Operational and Financial Impacts

In the first quarter of 2023, we saw an increase in treatment volume compared to the prior quarter due primarily to a higher patient census. However, we continue to experience a negative impact on revenue and treatment volume on a full year over full year basis due to the cumulative negative impact of COVID-19 on the mortality rates of our patients, which has in turn had an adverse impact on our patient census over time. As the pandemic continues to subside, we expect that the impact of COVID-19 will likely continue to negatively impact our revenue and non-acquired growth for a period of time due to the compounding impact of mortalities, among other things. New admission rates, future revenues and non-acquired growth could also continue to be negatively impacted over time to the extent that the CKD population experiences elevated mortality levels due to the pandemic. There remains significant uncertainty as to the ultimate impact of COVID-19 on our treatment volumes, in part due to, among other things, the indeterminate severity and duration of the pandemic and the complexity of factors that may drive new admissions and missed treatment rates over time. Depending on the ultimate severity and duration of the pandemic, the magnitude of these cumulative impacts could have a material adverse impact on our results of operations, financial condition and cash flows.

Ongoing global economic conditions, such as general labor, supply chain and inflationary pressures, combined with the impact of COVID-19, have also increased, and will continue to increase, our expenses, including, among others, staffing and labor costs. While we continued to experience elevated levels of compensation and training expenses during the first quarter, we have experienced improvement in labor costs, primarily due to decreased utilization of contract labor in the first quarter. We expect certain of these increased costs to continue, and the cumulative impact of these costs could be material. In addition, potential staffing shortages or disruptions, if material, could ultimately lead to the unplanned closures of certain centers or adversely impact clinical operations, and may otherwise have a material adverse impact on our ability to provide dialysis services or the cost of providing those services, among other things. In the first quarter, we also saw a continued elevated level of effort and cost needed to procure certain of our equipment and clinical supplies, including dialysis supplies.

The staffing and labor cost inflation described above, in addition to higher equipment and clinical supply costs, have put pressure on our existing cost structure, and as noted above, we expect that certain of those increased costs will persist as global supply chains continue to experience volatility and disruptions and as inflationary pressures and challenging labor market conditions continue. During the first quarter, we continued to implement cost savings opportunities to help mitigate these cost and volume pressures. These include, among other things, anticipated cost savings related to certain general and administrative cost efficiencies, such as ongoing initiatives that increase our use of third party service providers to perform certain activities, including, among others, finance and accounting functions as well as related information technology functions; initiatives relating to clinic optimization and initiatives for capacity utilization improvement; and procurement opportunities. We have incurred, and expect to continue to incur, charges in connection with the continued implementation of certain of these initiatives, and there can be no assurance that we will be able to successfully execute these initiatives or that they will achieve expectations or succeed in helping offset the impact of these challenging conditions. Any failure on our part to adjust our business and operations in this manner, to adjust to other marketplace developments or dynamics or to appropriately implement these initiatives in accordance with applicable legal, regulatory or compliance requirements could adversely impact our ability to provide dialysis services or the cost of providing those services, among other things, and ultimately could have a material adverse effect on our business, reputation, results of operations, financial condition and cash flows.

We believe the ultimate impact of the COVID-19 pandemic and the aforementioned general economic and marketplace conditions on the Company over time will depend on future developments that are highly uncertain and difficult to predict. We expect that these conditions will continue to impact our business in 2023.

Financial Results

The discussion below includes analysis of our financial condition and results of operations for the three months ended March 31, 2023 compared to the three months ended December 31, 2022, and the year to date periods for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Consolidated results of operations

The following tables summarize our revenues, operating income and adjusted operating income by line of business. See the discussion of our results for each line of business following the tables. When multiple drivers are identified in the following discussion of results, they are listed in order of magnitude:

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
			(dollars in millions)
Revenues:
U.S. dialysis			$	2,612					$	2,658					$	(46)					(1.7)		%
Other — Ancillary services			284						285						(1)						(0.4)		%
Elimination of intersegment revenues			(23)						(27)						4						14.8		%
Total consolidated revenues			$	2,873					$	2,917					$	(44)					(1.5)		%
Operating income (loss):
U.S. dialysis			$	361					$	335					$	26					7.8		%
Other — Ancillary services			(25)						(40)						15						37.5		%
Corporate administrative support			(25)						(38)						13						34.2		%
Operating income			$	312					$	256					$	56					21.9		%
Adjusted operating income (loss)(1):
U.S. dialysis			$	400					$	387					$	13					3.4		%
Other — Ancillary services			(24)						(32)						8						25.0		%
Corporate administrative support			(24)						(38)						14						36.8		%
Adjusted operating income			$	352					$	317					$	35					11.0		%

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

(1)For a reconciliation of adjusted operating income by reportable segment, see "Reconciliations of Non-GAAP measures" section below.

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
			(dollars in millions)
Revenues:
U.S. dialysis			$	2,612					$	2,575					$	37					1.4		%
Other — Ancillary services			284						265						19						7.2		%
Elimination of intersegment revenues			(23)						(22)						(1)						(4.5)		%
Total consolidated revenues			$	2,873					$	2,818					$	55					2.0		%
Operating income (loss):
U.S. dialysis			$	361					$	406					$	(45)					(11.1)		%
Other — Ancillary services			(25)						(32)						7						21.9		%
Corporate administrative support			(25)						(36)						11						30.6		%
Operating income			$	312					$	338					$	(26)					(7.7)		%
Adjusted operating income (loss)(1):
U.S. dialysis			$	400					$	411					$	(11)					(2.7)		%
Other — Ancillary services			(24)						(32)						8						25.0		%
Corporate administrative support			(24)						(36)						12						33.3		%
Adjusted operating income			$	352					$	343					$	9					2.6		%

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

(1)For a reconciliation of adjusted operating income by reportable segment, see "Reconciliations of Non-GAAP measures" section below.

U.S. dialysis results of operations

Treatment volume:

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
Dialysis treatments			7,117,427						7,239,660						(122,233)						(1.7)		%
Average treatments per day			92,434						91,641						793						0.9		%
Treatment days			77.0						79.0						(2.0)						(2.5)		%
Normalized non-acquired treatment growth(1)			—		%				(2.1)		%

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

(1)Normalized non-acquired treatment growth reflects year over year growth in treatment volume, adjusted to exclude acquisitions and other similar transactions, and further adjusted to normalize for the number and mix of treatment days in a given quarter versus the prior year quarter.

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
Dialysis treatments			7,117,427						7,109,788						7,639						0.1		%
Average treatments per day			92,434						92,335						99						0.1		%
Treatment days			77.0						77.0						—						—		%

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

Our U.S. dialysis treatment volume is directly correlated with our operating revenues and expenses. The decrease in our U.S. dialysis treatments for the first quarter of 2023 from the fourth quarter of 2022 was primarily driven by two fewer treatment days, partially offset by increased average treatments per day due to increased admits due to growth in our patient population.

The increase in our U.S. dialysis treatments for the three months ended March 31, 2023 from the three months ended March 31, 2022 was primarily driven by increased average treatments per day due to decreased mortality in our patient population.

Revenues:

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
			(dollars in millions, except per treatment data)
Total revenues			$	2,612					$	2,658					$	(46)					(1.7)		%
Average patient service revenue per treatment			$	366.14					$	366.30					$	(0.16)					—		%

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

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
			(dollars in millions, except per treatment data)
Total revenues			$	2,612					$	2,575					$	37					1.4		%
Average patient service revenue per treatment			$	366.14					$	361.35					$	4.79					1.3		%

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

U.S. dialysis average patient service revenue per treatment for the first quarter of 2023 compared to the fourth quarter of 2022 decreased, driven by a seasonal decline from co-insurance and deductibles, partially offset by an increase in the Medicare base rate in 2023, favorable changes due to the continued shift to MA plans and a seasonal increase in hospital inpatient dialysis treatments.

U.S. dialysis average patient service revenue per treatment for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022 primarily driven by a net increase in the Medicare rate due to base rate increase in 2023 partially offset by the reinstatement of 2% sequestration. The increase was also impacted by the continued shift to MA plans and increases in hospital inpatient dialysis revenues.

Operating expenses:

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
			(dollars in millions, except per treatment data)
Patient care costs			$	1,832					$	1,865					$	(33)					(1.8)		%
General and administrative			259						283						(24)						(8.5)		%
Depreciation and amortization			167						184						(17)						(9.2)		%
Equity investment income			(6)						(8)						2						25.0		%
Total operating expenses and charges			$	2,251					$	2,324					$	(73)					(3.1)		%
Patient care costs per treatment			$	257.34					$	257.60					$	(0.26)					(0.1)		%

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

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
			(dollars in millions, except per treatment data)
Patient care costs			$	1,832					$	1,796					$	36					2.0		%
General and administrative			259						217						42						19.4		%
Depreciation and amortization			167						162						5						3.1		%
Equity investment income			(6)						(6)						—						—		%
Total operating expenses and charges			$	2,251					$	2,169					$	82					3.8		%
Patient care costs per treatment			$	257.34					$	252.61					$	4.73					1.9		%

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

Charges impacting operating income

Closure costs. During the third quarter of 2022, we began a strategic review of our outpatient clinic capacity requirements and utilization, which have been impacted both by declines in our patient census in some markets due to the COVID-19 pandemic, as well as by our initiatives toward, and advances in, increasing the proportion of our home dialysis patients. This review has resulted in higher than normal charges for center capacity closures.

During the first quarter of 2023, we incurred charges for U.S. dialysis center closures of approximately $22.2 million, which increased our patient care costs by $12.6 million, our general and administrative expenses by $4.8 million and our depreciation and amortization expense by $4.8 million. By comparison, during the fourth quarter of 2022, U.S. dialysis center closures were approximately $35.3 million, which increased our patient care costs by $6.0 million, our general and administrative expenses by $5.3 million and our depreciation and amortization expense by $24.0 million. During the first quarter of 2022, U.S. dialysis center closures were approximately $4.5 million, which increased our patient care costs by $2.9 million, our general and administrative expenses by $1.4 million and our depreciation and amortization expense by $0.2 million. These capacity closures costs included net losses on assets retired, lease costs, asset impairments and accelerated depreciation and amortization.

We will continue to optimize our U.S. dialysis center footprint through center mergers and/or closures and expect our center closure rates to remain at elevated levels over the next several quarters.

Severance costs. During the fourth quarter of 2022, we committed to a plan to increase efficiencies and cost savings in certain general and administrative support functions. As a result of this plan, we recognized expenses related to termination and other benefit commitments in our U.S. dialysis business of $16.9 million and $17.0 million during first quarter of 2023 and the fourth quarter of 2022, respectively.

Patient care costs. U.S. dialysis patient care costs per treatment for the first quarter of 2023 decreased from the fourth quarter of 2022 primarily due to decreases in pharmaceutical costs, health benefit expenses, contract wages and insurance expense. These decreases were partially offset by increases in compensation expenses and fixed other direct operating expenses in our dialysis centers due to fewer number of treatments in the first quarter of 2023. In addition, our patient costs per treatment were negatively impacted by increases in center closure costs, as described above, and costs related to management meetings.

U.S. dialysis patient care costs per treatment for the three months ended March 31, 2023 increased from the three months ended March 31, 2022 primarily due to increased compensation expenses including increased wage rates and headcount. Other drivers of the increase include increases in other direct operating expenses associated with our dialysis centers as well as center closure costs, as described above, and travel costs, including management meetings. These increases were partially offset by decreased pharmaceutical costs, contract wages and health benefit expenses.

General and administrative expenses. U.S. dialysis general and administrative expenses in the first quarter of 2023 decreased from the fourth quarter of 2022 primarily due to decreased professional fees, a refund received related to 2022 advocacy costs, seasonal decreases in other costs, including IT costs and other purchased services as well as health benefit expenses. These decreases were partially offset by increased long-term incentive compensation expense.

U.S. dialysis general and administrative expenses for the three months ended March 31, 2023 increased from the three months ended March 31, 2022 primarily due to increases in compensation expenses including increased wage rates and severance costs, as described above. Other drivers of this change include increased costs related to travel and management meetings, center closure costs, as described above, and higher IT-related costs. These increases were partially offset by a refund received related to 2022 advocacy costs.

Depreciation and amortization. U.S. dialysis depreciation and amortization expenses for the quarter ended March 31, 2023 decreased compared to the quarter ended December 31, 2022 primarily due to less accelerated depreciation related to center closures, as described above.

U.S. dialysis depreciation and amortization expenses for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 increased primarily due to accelerated depreciation related to expected center closures, as described above, as well as a full quarter of depreciation from the rollout of our new clinical system in May 2022, partially offset by operating fewer centers.

Equity investment income. U.S. dialysis equity investment income decreased for the first quarter of 2023 compared to the fourth quarter of 2022 due to a decline in profitability at certain nonconsolidated dialysis partnerships.

U.S. dialysis equity investment income remained relatively flat for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Operating income and adjusted operating income:

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
			(dollars in millions)
Operating income			$	361					$	335					$	26					7.8		%
Adjusted operating income(1)			$	400					$	387					$	13					3.4		%

(1)For a reconciliation of adjusted operating income by reportable segment, see "Reconciliations of Non-GAAP measures" section below.

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
			(dollars in millions)
Operating income			$	361					$	406					$	(45)					(11.1)		%
Adjusted operating income(1)			$	400					$	411					$	(11)					(2.7)		%

(1)For a reconciliation of adjusted operating income by reportable segment, see "Reconciliations of Non-GAAP measures" section below.

U.S. dialysis operating income for the first quarter of 2023 compared to the fourth quarter of 2023 and for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, was impacted by center closure and severance costs, as described above.

U.S. dialysis operating income and adjusted operating income for the first quarter of 2023 increased from the fourth quarter of 2022 primarily due to decreased pharmaceutical costs, health benefit expenses, contract wages, professional fees, a refund received related to 2022 advocacy costs and seasonal decreases in other general administrative costs, as described above. Operating income and adjusted operating income were negatively impacted by decreased dialysis treatments, as described above. Other impacts include increased compensation expenses, costs related to management meetings and long-term incentive compensation expense.

U.S. dialysis operating income and adjusted operating income for the three months ended March 31, 2023 decreased from the three months ended March 31, 2022 primarily due to increases in compensation expenses and travel costs including management meetings as well as other direct operating expenses associated with our dialysis centers and IT-related costs. Operating income and adjusted operating income were positively impacted by increases in dialysis treatments and our average patient service revenue per treatment, as described above, as well as decreases in pharmaceutical costs, contract wages, and a refund received related to 2022 advocacy costs.

Other—Ancillary services

Our other operations include ancillary services that are primarily aligned with our core business of providing dialysis services to our network of patients. As of March 31, 2023, these consisted principally of our U.S. IKC business, certain U.S. other ancillary businesses (including our clinical research programs, transplant software business, and venture investment group), and our international operations.

These ancillary services generated revenues of approximately $284 million in the first quarter of 2023, representing approximately 10% of our consolidated revenues.

As of March 31, 2023, DaVita IKC provided integrated care and disease management services to approximately 67,000 patients in risk-based integrated care arrangements and to an additional 15,000 patients in other integrated care arrangements. We also expect to add additional service offerings to our business and pursue additional strategic initiatives in the future as circumstances warrant, which could include, among other things, healthcare services not related to dialysis.

For a discussion of the risks related to IKC and our ancillary services, see the discussion in the risk factors in Part I, Item 1A Risk Factors of our 2022 10-K under the headings, "The U.S. integrated kidney care, U.S. other ancillary services and international operations that we operate or invest in now or in the future..." and "If we are not able to successfully implement our strategy with respect to our integrated kidney care and value-based care initiatives..."

As of March 31, 2023, our international dialysis operations provided dialysis and administrative services through a total of 351 outpatient dialysis centers located in 11 countries outside of the United States.

Ancillary services results of operations

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
			(dollars in millions)
Revenues:
U.S. IKC			$	98					$	102					$	(4)					(3.9)		%
U.S. other ancillary			7						7						—						—		%
International			179						177						2						1.1		%
Total ancillary services revenues			$	284					$	285					$	(1)					(0.4)		%
Operating (loss) income:
U.S. IKC			$	(37)					$	(34)					$	(3)					(8.8)		%
U.S. other ancillary			(3)						(1)						(2)						(200.0)		%
International(1)			15						(4)						19						475.0		%
Total ancillary services operating loss			$	(25)					$	(40)					$	15					37.5		%
Adjusted operating (loss) income(2):
U.S. IKC			$	(37)					$	(34)					$	(3)					(8.8)		%
U.S. other ancillary			(3)						(1)						(2)						(200.0)		%
International(1)			15						3						12						400.0		%
Total ancillary services adjusted operating loss			$	(24)					$	(32)					$	8					25.0		%

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

(1)The reported operating income (loss) and adjusted operating income for the three months ended March 31, 2023 and December 31, 2022 includes foreign currency losses embedded in equity method income recognized from our APAC JV of approximately $(0.7) million and $(5.0) million, respectively.

(2)For a reconciliation of adjusted operating (loss) income by reportable segment, see “Reconciliations of Non-GAAP measures” section below.

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
			(dollars in millions)
Revenues:
U.S. IKC			$	98					$	87					$	11					12.6		%
U.S. other ancillary			7						5						2						40.0		%
International			179						173						6						3.5		%
Total ancillary services revenues			$	284					$	265					$	19					7.2		%
Operating (loss) income:
U.S. IKC			$	(37)					$	(37)					$	—					—		%
U.S. other ancillary			(3)						(3)						—						—		%
International(1)			15						8						7						87.5		%
Total ancillary services operating loss			$	(25)					$	(32)					$	7					21.9		%
Adjusted operating (loss) income(2):
U.S. IKC			$	(37)					$	(37)					$	—					—		%
U.S. other ancillary			(3)						(3)						—						—		%
International(1)			15						8						7						87.5		%
Total ancillary services adjusted operating loss			$	(24)					$	(32)					$	8					25.0		%

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

(1)The reported operating income and adjusted operating income for the three months ended March 31, 2023 and March 31, 2022 includes foreign currency (losses) gains embedded in equity method income recognized from our Asia Pacific joint venture (APAC JV) of approximately $(0.7) million and $0.3 million, respectively.

(2)For a reconciliation of adjusted operating (loss) income by reportable segment, see “Reconciliations of Non-GAAP measures” section below.

Revenues

IKC revenues for the first quarter of 2023 decreased compared to the fourth quarter of 2022 due to a net decrease in shared savings, partially offset by an increase in revenues from our special needs plans. Other U.S. ancillary revenues for the first quarter of 2023 remained flat compared to the fourth quarter of 2022. International revenues for the first quarter of 2023 increased compared to the fourth quarter of 2022 due to a rate increase in one country and acquisition-related growth.

IKC revenues for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022 due to an increase in shared savings. Other U.S. ancillary services revenues for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022 due to increased revenues in our clinical research programs. Our international revenues for the three months ended March 31, 2023 increased from the three months ended March 31, 2022 due to acquisition-related growth as well as rate increases.

Charges impacting operating income - severance and other costs

During the fourth quarter of 2022, similar to U.S. dialysis, we committed to a plan to increase efficiencies and cost savings in certain general and administrative support functions and other overhead costs. As a result of this plan, we recognized expenses related to termination and other benefit commitments in our IKC business of $0.4 million and $0.5 million during the first quarter of 2023 and the fourth quarter of 2022, respectively. We recognized these expenses and other charges in our international operations of $7.5 million during the fourth quarter of 2022.

Operating loss and adjusted operating loss

IKC operating loss and adjusted operating loss for the first quarter of 2023 compared to the fourth quarter of 2022 increased due to a net decrease in shared savings, partially offset by an increase in revenues from our special needs plans. Other U.S. ancillary services operating loss and adjusted operating loss for the first quarter of 2023 increased compared to the fourth quarter of 2022, driven by an increase in expenses related to our clinical research programs. International operating results and

adjusted operating income for the first quarter of 2023 increased from the fourth quarter of 2022 primarily due to an acquisition-related expense recognized in fourth quarter 2022, as well as increases in equity income resulting from fluctuations in foreign currency at our APAC JV and increases in revenue, as described above.

IKC operating loss and adjusted operating loss for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 remained flat, primarily due to increased shared savings, offset by continued investments in our integrated care support functions. Other U.S. ancillary services operating loss and adjusted operating loss for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 remained flat. International operating income and adjusted operating income for the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022 primarily driven by acquisition-related growth and revenue increases, as well as rate increases.

Corporate administrative support

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
			(dollars in millions)
Corporate administrative support			$	(25)					$	(38)					$	13					34.2		%

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
			(dollars in millions)
Corporate administrative support			$	(25)					$	(36)					$	11					30.6		%

Corporate administrative support expenses for the quarter ended March 31, 2023 compared to the quarter ended December 31, 2022 decreased primarily due to decreases in legal fees, partially offset by an increase in long-term incentive compensation. Corporate administrative support expenses for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 decreased primarily due to decreased legal fees.

Corporate-level charges

			Three months ended												Q1 2023 vs. Q4 2022
			March 31, 2023						December 31, 2022						Amount						Percent
			(dollars in millions)
Debt expense			$	101					$	101					$	—					—		%
Other income (loss), net			$	4					$	(8)					$	12					150.0		%
Effective income tax rate on income from continuing operations			20.5		%				23.3		%										(2.8)		%
Effective income tax rate on income from continuing operations attributable to DaVita Inc.(1)			27.5		%				38.5		%										(11.0)		%
Net income attributable to noncontrolling interests			$	55					$	59					$	(4)					(6.8)		%

(1)For a reconciliation of our effective income tax rate attributable to DaVita Inc., see "Reconciliations of Non-GAAP measures" section below.

			Three months ended												YTD Q1 2023 vs. YTD Q1 2022
			March 31, 2023						March 31, 2022						Amount						Percent
			(dollars in millions)
Debt expense			$	101					$	74					$	27					36.5		%
Other income (loss), net			$	4					$	(2)					$	6					300.0		%
Effective income tax rate			20.5		%				21.7		%										(1.2)		%
Effective income tax rate attributable to DaVita Inc.(1)			27.5		%				26.0		%										1.5		%
Net income attributable to noncontrolling interests			$	55					$	44					$	11					25.0		%

(1)For a reconciliation of our effective income tax rate attributable to DaVita Inc., see "Reconciliations of Non-GAAP measures" section below.

Debt expense

Debt expense for the first quarter of 2023 compared to the fourth quarter of 2022 was relatively flat primarily due to an increase in our weighted average effective interest rate, offset by a decrease in our weighted average outstanding credit facility balance. Debt expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 increased due to an increase in our weighted average effective interest rate.

Our overall weighted average effective interest rate for the three months ended March 31, 2023 was 4.55% compared to 4.49% for the three months ended December 31, 2022. See Note 6 to the condensed consolidated financial statements for further information on the components of our debt.

Other income (loss), net

Other income for the first quarter of 2023 compared to other loss for the fourth quarter of 2022, was primarily driven by a decrease in losses on investments. Other income for the three months ended March 31, 2023 compared to other loss for the three months ended March 31, 2022 was driven by an increase in interest income, partially offset by increased losses on investments.

Effective income tax rate

The effective income tax rate and the effective income tax rate attributable to DaVita Inc. decreased for the first quarter of 2023 compared to the fourth quarter of 2022 primarily due to expenses recognized in the fourth quarter related to finalized tax returns, international tax accruals and higher non-deductible advocacy spend.

The effective income tax rate for the three months ended March 31, 2023 decreased compared to the three months ended March 31, 2022 primarily due to an increase in the portion of our earnings attributable to non-controlling interests and a decrease in forecasted non-deductible advocacy spend in 2023, partially offset by a reduction in recognized tax benefits from stock-based compensation and tax credits. The effective income tax rate attributable to DaVita Inc. for the three months ended March 31, 2023 increased from the three months ended March 31, 2022 primarily due to a reduction in recognized tax benefits from stock-based compensation and tax credits, partially offset by a decrease in forecasted non-deductible advocacy spend in 2023.

Net income attributable to noncontrolling interests

The decrease in net income attributable to noncontrolling interests for the first quarter of 2023 from the fourth quarter of 2022 was due to reduced earnings at certain U.S. dialysis partnerships. The increase in net income attributable to noncontrolling interests for the three months ended March 31, 2023 from the three months ended March 31, 2022 was due to increased profitability at certain U.S. dialysis partnerships.

Accounts receivable

Our consolidated accounts receivable balances at March 31, 2023 and December 31, 2022 were $2.058 billion and $2.132 billion, respectively, representing approximately 65 and 68 days of revenue outstanding (DSO), respectively. Consolidated DSO decreased primarily due to release of billing holds and improved collections from certain payers. Our DSO calculation is based on the current quarter’s average revenues per day. There were no significant changes from the fourth quarter of 2022 to the first quarter of 2023 in the carrying amount of accounts receivable outstanding over one year old.

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 March 31,												YTD Q1 2023 vs. YTD Q1 2022
			2023						2022						Amount						Percent
			(dollars in millions and shares in thousands)
Net cash provided by operating activities:
Net income			$	171					$	206					$	(35)					(17.0)		%
Non-cash items in net income			209						203						6						3.0		%
Other working capital changes			89						(79)						168						(212.7)		%
Other			(6)						(8)						2						(25.0)		%
			$	463					$	322					$	141					43.8		%
Net cash used in investing activities:
Capital expenditures:
Routine maintenance/information technology/other			$	(109)					$	(84)					$	(25)					29.8		%
Development and relocations			(39)						(39)						—						—		%
Acquisition expenditures			—						(5)						5						(100.0)		%
Proceeds from sale of self-developed properties			—						8						(8)						(100.0)		%
Other			31						1						30						3,000.0		%
			$	(117)					$	(118)					$	1					(0.8)		%
Net cash used in financing activities:
Debt payments, net			$	(269)					$	(45)					$	(224)					497.8		%
Distributions to noncontrolling interests			(55)						(65)						10						(15.4)		%
Contributions from noncontrolling interests			5						5						—						—		%
Share repurchases			—						(236)						236						(100.0)		%
Other			43						—						43
			$	(276)					$	(342)					$	66					(19.3)		%
Total number of shares repurchased			—						2,104						(2,104)						(100.0)		%
Free cash flow(1)			265						147						118						80.3		%

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

(1)For a reconciliation of our free cash flow, see "Reconciliations of Non-GAAP measures" section below.

Consolidated cash flows

Consolidated cash flows from operating activities during the three months ended March 31, 2023 increased compared to the three months ended March 31, 2022 primarily due to a decrease in total DSO, which decreased approximately three days for the three months ended March 31, 2023 compared to an increase of four days for the three months ended March 31, 2022 as well as by changes in other working capital items partially offset by an increase in interest payments.

Free cash flow during the three months ended March 31, 2023 increased from the three months ended March 31, 2022 primarily due to a increase in net cash provided by operating activities partially offset by an increase in capital expenditures.

Significant uses of cash during the period included net debt payments which consisted of the repayment of $165 million on our revolving line of credit and regularly scheduled and other principal payments under our senior secured credit facilities totaling approximately $54 million on Term Loan A and $36 million on Term Loan B-1, as well as additional required payments under other debt arrangements.

By comparison, the same period in 2022 included draws on our revolving line of credit and subsequent repayment in full as of quarter end. Other net debt payments during the three months ended March 31, 2022 primarily consisted of regularly scheduled mandatory principal payments under our senior secured credit facilities totaling approximately $22 million on Term

Loan A and $7 million on Term Loan B-1, as well as additional required payments under other debt agreements. For the three months ended March 31, 2022 we also used cash to repurchase 2,103,905 shares of our common stock.

Dialysis center footprint

The table below shows the footprint of our dialysis operations by number of dialysis centers owned or operated:

			U.S.																								International
			Three months ended March 31,																		Three months ended March 31,
			2023						2022																		2023						2022
Number of centers operated at beginning of period			2,724						2,815																		350						339
Acquired centers			—						—																		—						3
Developed centers			3						9																		3						1
Net change in non-owned managed or administered centers(1)			—						—																		—						3
Sold and closed centers(2)			—						(5)																		(2)						—
Closed centers(3)			(20)						(10)																		—						—
Number of centers operated at end of period			2,707						2,809																		351						346

(1)Represents dialysis centers which we manage or provide administrative services to but in which we own a noncontrolling equity interest or which are wholly-owned by third parties, including our APAC JV centers.

(2)Represents dialysis centers that were sold and/or closed for which the majority of 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.

Available liquidity

As of March 31, 2023, we had an undrawn $1.0 billion revolving line of credit under our senior secured credit facilities. Credit available under this revolving line of credit is reduced by the amount of any letters of credit outstanding thereunder, of which there were none as of March 31, 2023. We separately had approximately $151 million in letters of credit outstanding under a separate bilateral secured letter of credit facility.

See Note 6 to the condensed consolidated financial statements for components of our long-term debt and their interest rates, as well as Note 14 concerning amendments to our senior secured credit facilities entered into subsequent to March 31, 2023. We may from time to time seek to obtain funds or refinance existing debt through additional debt financings or other capital alternatives.

The COVID-19 pandemic and certain economic and marketplace conditions, including inflationary and labor pressures, have driven increased pressure on our cash flows. As of the date of this report, we have not experienced a material deterioration in our liquidity position as a result of COVID-19 or those global economic and market conditions. The ultimate impact of the pandemic and those economic and market conditions will depend on future developments that are highly uncertain and difficult to predict.

We believe that our cash flow from operations and other sources of liquidity, including from amounts available under our senior secured credit facilities and our access to the 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, which are subject to general, economic, financial, competitive, regulatory and other factors that are beyond our control, as described in Item 1A Risk Factors of our 2022 10-K*.*

Reconciliations of Non-GAAP measures

The following tables provide reconciliations of adjusted operating income (loss) to operating income (loss) as presented on a U.S. generally accepted accounting principles (GAAP) basis for our U.S. dialysis reportable segment as well as for our U.S. IKC business, our U.S. other ancillary services, our international business, and for our total ancillary services which combines them and is disclosed as our other segments category, in addition to our corporate administrative support. These non-GAAP or “adjusted” measures are presented because management believes these measures are useful adjuncts to, but not alternatives for, our GAAP results. Note that the non-GAAP measures presented for prior periods below have been conformed to the method or calculation of non-GAAP measures presented for the current period.

Specifically, management uses adjusted operating income (loss) to compare and evaluate our performance period over period and relative to competitors, to analyze the underlying trends in our business, to establish operational budgets and forecasts and for incentive compensation purposes. We believe this non-GAAP measure is also useful to investors and analysts in evaluating our performance over time and relative to competitors, as well as in analyzing the underlying trends in our business. We also believe this presentation enhances a user's understanding of our normal operating income by excluding certain items which we do not believe are indicative of our ordinary results of operations.

In addition, our effective income tax rate on income attributable to DaVita Inc. excludes noncontrolling owners' income, which primarily relates to non-tax paying entities. We believe this adjusted effective income tax rate is useful to management, investors and analysts in evaluating our performance and establishing expectations for income taxes incurred on our ordinary results attributable to DaVita Inc.

Finally, our free cash flow represents net cash provided by operating activities less distributions to noncontrolling interests and all capital expenditures (including development capital expenditures, routine maintenance and information technology), plus contributions from noncontrolling interests and proceeds from the sale of self-developed properties. Management uses this measure to assess our ability to fund acquisitions and meet our debt service obligations and we believe this measure is equally useful to investors and analysts as an adjunct to cash flows from operating activities and other measures under GAAP.

It is important to bear in mind that these non-GAAP “adjusted” measures are not measures of financial performance under GAAP and should not be considered in isolation from, nor as substitutes for, their most comparable GAAP measures.

			Three months ended March 31, 2023
			U.S. dialysis						Ancillary services																								Corporate administration						Consolidated
						U.S. IKC						U.S. Other						International						Total
			(dollars in millions)
Operating income (loss)			$	361					$	(37)					$	(3)					$	15					$	(25)					$	(25)					$	312
Center closure charges			22																																				22
Severance and other costs			17						—																		—						1						18
Adjusted operating income (loss)			$	400					$	(37)					$	(3)					$	15					$	(24)					$	(24)					$	352

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

			Three months ended December 31, 2022
			U.S. dialysis						Ancillary services																								Corporate administration						Consolidated
						U.S. IKC						U.S. Other						International						Total
			(dollars in millions)
Operating income (loss)			$	335					$	(34)					$	(1)					$	(4)					$	(40)					$	(38)					$	256
Center closure charges			35																		3						3												38
Severance and other costs			17						—												5						5						1						23
Adjusted operating income (loss)			$	387					$	(34)					$	(1)					$	3					$	(32)					$	(38)					$	317

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

			Three months ended March 31, 2022
			U.S. dialysis						Ancillary services																								Corporate administration						Consolidated
						U.S. IKC						U.S. Other						International						Total
			(dollars in millions)
Operating income (loss)			$	406					$	(37)					$	(3)					$	8					$	(32)					$	(36)					$	338
Center closure charges			4																																				4
Adjusted operating income (loss)			$	411					$	(37)					$	(3)					$	8					$	(32)					$	(36)					$	343

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

			Three months ended
			March 31, 2023						December 31, 2022						March 31, 2022
			(dollars in millions)
Income from continuing operations before income taxes			$	215					$	147					$	263
Less: Noncontrolling owners' income primarily attributable to non-tax paying entities			(55)						(59)						(44)
Income before income taxes attributable to DaVita Inc.			$	159					$	89					$	219
Income tax expense			$	44					$	34					$	57
Less: Income tax attributable to noncontrolling interests			—						—						—
Income tax expense attributable to DaVita Inc.			$	44					$	34					$	57
Effective income tax rate on income from continuing operations attributable to DaVita Inc.			27.5		%				38.5		%				26.0		%

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

			Three months ended
			March 31, 2023						March 31, 2022
			(dollars in millions)
Net cash provided by operating activities			$	463					$	322
Adjustments to reconcile net cash provided by operating activities to free cash flow:
Distributions to noncontrolling interests			(55)						(65)
Contributions from noncontrolling interests			5						5
Expenditures for routine maintenance and information technology			(109)						(84)
Expenditures for development and relocations			(39)						(39)
Proceeds from sale of self-developed properties			—						8
Free cash flow			$	265					$	147

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

Off-balance sheet arrangements and aggregate contractual obligations

In addition to the debt obligations and operating lease liabilities reflected on our balance sheet, we have commitments associated with letters of credit, as well as certain working capital funding obligations associated with our equity investments in nonconsolidated dialysis ventures that we manage and some that we manage which are wholly-owned by third parties. For additional information see Note 7 to the condensed consolidated financial statements.

We also have potential obligations to purchase the noncontrolling interests held by third parties in many of our majority-owned dialysis partnerships 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. For additional information on these obligations and how we measure and report them, see Note 11 to the condensed consolidated financial statements included in this report and Notes 17 and 24 to the consolidated financial statements included in our 2022 10-K.

For information on the maturities and other terms of our long term debt, see Note 6 to the condensed consolidated financial statements.

As of March 31, 2023, we have outstanding letters of credit in the aggregate amount of approximately $151 million under a bilateral secured letter of credit facility separate from our senior secured credit facilities.

As of March 31, 2023, we have outstanding purchase agreements with various suppliers to purchase set amounts of dialysis equipment, parts, pharmaceuticals, and supplies. If we fail to meet the minimum purchase commitments under these contracts during any year, we are required to pay the difference to the supplier, as described further in Note 17 to the Company's consolidated financial statements included in the 2022 10-K.

Finally, on May 25, 2022, we entered into an agreement with Medtronic, Inc. and one of its subsidiaries (collectively, Medtronic) to form a new, independent kidney care-focused medical device company (Mozarc Medical). The transaction closed effective April 1, 2023. For additional information see Note 14.

New Accounting Standards

See discussion of new accounting standards in Note 13 to the condensed consolidated financial statements.