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Operator
Ladies and gentlemen, thank you for standing by.
And welcome to the Pediatrix Medical Group 2005 first quarter earnings conditions call. (OPERATOR INSTRUCTIONS).
Before I open up the call to the Pediatrix management team, I want to read a forward-looking advisory statement.
Matters discussed during this conference call include forward-looking statements.
All statements other than statements of historical fact that address activities, events, or developments that Pediatrix believes, anticipates, intends, expects, or projects, and similar expressions, are forward-looking statements.
Forward-looking statements are based on assumptions and assessments made by Pediatrix management based on factors they believe to be appropriate in light of their experience.
Forward-looking statements are subject to risks and uncertainties that could cause actual results, developments, and business decisions to differ materially from those contemplated by these statements.
Pediatrix describes uncertainties, risks, and assumptions in its most recent annual report on Form 10-K filed with the U.S.
Securities and Exchange Commission.
Please see the section entitled "Risk Factors" in that report.
Pediatrix undertakes no duty to update or revise any forward-looking statements made during this call, whether as a result of new information, future events, or otherwise.
At this point, I would like to remind you that following the remarks by Dr. Roger Medel, Pediatrix's Chief Executive Officer, and Mr. Karl Wagner, Pediatrix's Chief Financial Officer, management will host a brief question-and-answer session.
I would now like to turn the conference over to Dr. Medel.
Please go ahead, sir.
- CEO & Director
Good morning, and thank you for joining Pediatrix's 2005 first quarter earnings conference call.
We have a lot of ground to cover over the next few minutes in providing an overview of our operation, the strong core financial results that we continue to generate, as well as the discussion of our growth opportunities.
As you know, our first quarter earnings include the impact of a previously-announced $6 million pretax charge.
This charge is related to the ongoing national Medicaid and TriCare investigation.
The reserves cover a settlement offer that we made to representatives of the government last month.
As most of you know, this investigation began years ago.
From the beginning, we have cooperated with government authorities, and we continue to do so as the process moves along.
While we would characterize our settlement offer as the next step in the process, it's tough for us to make any kind of predictions about any settlement amount or the timing or eventual outcome of this matter.
Any discussion at that level would be purely speculative at this point.
I also want to provide an update on the outstanding Federal Trade Commission investigation into the 2001 Magella Healthcare acquisition. .
We continue to cooperate with this investigation as well, and there is an active dialogue, but we're not in a position to predict either the outcome or timing of this matter either.
As such, there will be very little that we can say about these investigations, including during the question-and-answer period.
Obviously, we're being as active as we can be in moving these matters toward conclusion.
In the meantime, we're going to do what we've been doing for years, something we do very well, and that's managing physician practices across the national platform.
When you exclude the impact of the charge, our 2005 first quarter earnings were very strong.
Earnings per share, excluding the charge, were at the high end of our guided range of $0.93 Days sales outstanding, a measure of our operating efficiency, were reduced to below 60 days, as we worked through patient account disruptions that occurred during the busy hurricane season in the 2004 third quarter.
The improvement in working capital accounts left a positive cash flow for our 2005 first quarter, a period when we normally expect negative cash flow as we make payments for expenses that are accrued during the prior year.
All in all, our team directed a very solid quarter in managing the core operations of Pediatrix, our national physician group practice.
Karl will provide greater detail into this quarter's finances in a few minutes.
I want to spend some time talking about our growth, and we're very pleased with the pace of acquisitions so far this year.
During the first quarter, we completed five neonatal physician group practice acquisitions.
Thus far in the second quarter, we've added a pediatric cardiology group and another neonatal physician group.
Our acquisition growth is occurring largely within our core subspecialty of neonatology, and there are plenty of opportunities for us to continue to grow within this specialty.
At the same time, we're encouraged that our pipeline includes possible transactions within our other physician subspecialties of maternal fetal, pediatric cardiology and pediatric intensive care.
We continue to do a good job attracting physicians to our practice, mostly because over the course of more than a decade, we've delivered on our promises to dedicate resources to constantly finding ways to take better care of our patients.
Physicians want to contribute to those covered by joining Pediatrix.
At a recent investor conference, I made a very affirmative statement regarding our core competencies in general.
With all of the distractions that have hit our organization over the past six years, we've maintained a very disciplined approach toward managing our business and simultaneously adapting our systems as new practices, even new subspecialties, have joined our group.
In almost 10 years as a public company, we have helped firms through a focused strategy of growing by adding value to the practice of medicine within our specialty.
During that time, our so-called peer group, which once numbered as high as 30 public companies and countless privately-held physician management companies, imploded for a variety of reasons, erratically altered their core strategy or withdrew from the scrutiny of the public equity market to restructure their operations.
And here we stand, a very profitable physician group with strong cash-generating characteristics that employs almost 800 physicians who are giving back to their patients, to their subspecialties, through our investment in research and education and improved care.
I offer that to you because for too long, we have been almost apologetic for being in a sector that, through no fault of ours, has had many problems; and yet, we are very proud of the results that we're accomplishing, both on our financial statements and for our patients across the country.
I make this point because pediatric and maternal field subspecialties cannot be the only groups of physicians who are looking for relief from a very challenging legal, regulatory and administrative environment.
They cannot be the only groups of physicians looking to integrate to find ways to improve patient care through collaborative research and education efforts.
The fact that there were significant flaws with models that were tried years ago does not mean that the opportunities within this area have disappeared.
On the contrary.
I encourage you to talk to physicians you may know, regardless of their specialty.
I would argue that most of them retain their passion for the clinical side of their practice for patient care.
But many have grown very dissatisfied with the increasing demands that keep those doctors from their patients, or with the forces that second guess their decisions.
Over the past few years, I have had the luxury of reviewing a lot of opportunities within healthcare.
Based on what I've seen, I'm more convinced than ever that our models strike the appropriate balance between clinical and administrative support.
I firmly believe that there are elements of our models that would work well with other specialties.
I know as well that many of the physicians within those specialties would benefit from a partner that could deliver meaningful value to their practices so that they can better focus their energies on patient care.
As we continue to explore all possibilities for growth and diversification, our eyes will remain acutely focused on physician practice management opportunity.
I've taken a little more time than normal, because I want to draw your attention to the very difficult environment that most physicians face, an environment that I believe creates opportunities for Pediatrix.
At this point, let me turn the call over to Karl Wagner for a review of our first quarter results and a discussion of our guidance.
Karl?
- CFO & Treasurer
Thanks, Roger.
Good morning, everyone.
I'll start my remarks by stating that this was a very strong quarter for the operations of Pediatrix, which resulted in earnings per share at the high end of our range.
As Roger said, we recorded a $6 million charge this quarter to increase our reserves related to the outstanding TriCare and Medicaid investigation.
This charge causes some difficulty in making direct year-over-year comparisons based on the GAAP financial statements that we issued this morning.
Hopefully my remarking will separate unusual items from our core operations and you will see that this was a very solid quarter for Pediatrix.
In doing so, the discussion of operating income, general and administrative expenses, net income, and earnings per share include some non-GAAP information.
I refer to you this morning's press release available on our website for a detailed reconciliation of GAAP and non-GAAP information that we will discuss this morning.
Our net patient service revenue for the three months ended March 31, 2005 was a record $164.2 million, up 11% from last year's first quarter.
Revenue growth was a result of contributions from acquisitions completed during 2004 and 2005 in same unit revenue growth.
Same unit revenue grew 4%, and included same unit NICU patient volume growth of 3.7%.
We're seeing patient volume growth that's within our historical range.
In addition, other services, including maternal fetal medicine and newborn screening contributed to same unit revenue growth.
Same unit revenue from factors related to pricing was negative, as expected, as a result of the shift from commercial to government payers that we experienced during the third quarter of 2004.
Our payer mix has remained relatively stable since August of 2004.
We should expect same unit revenue associated with reimbursement related factors will remain negative until we've [INAUDIBLE] this mix shift later this year.
We continue to see modest price increases in those contracts that we negotiate with managed care payers, which is consistent with what we have seen in the past.
The 2005 first quarter profit after practice expenses was $60.1 million, a 7% increase year over year from 56.3 million for the 2004 first quarter.
Margin after practice expenses was 36.6% for the 2005 first quarter, which declined by 149 basis points from 38% for the same period of last year.
The margin decline can be attributed principally to the payer mix shift that occurred in the 2004 second half.
That shift resulted in lower average reimbursement for our physician services, as more patients were covered under government-sponsored health plans than under commercial health plans.
Since a large portion of our practice expenses are fixed salaries and benefits and we staff our units based on patient volume, the reduction in revenue per patient led to a compression in margins throughout our income statement.
The charge to increase our reserves related to the national Medicaid and TriCare investigations was booked as a part of our general and administrative expenses.
As a result, operating income for the 2005 first quarter was 29.3 million or 17.9% of revenue.
When excluding the charge, operating income was 35.3 million, up 4% from the 2004 first quarter, and operating margin of 21.5% Operating margin declined 149 basis points, excluding the impact of the charge in 2005 first quarter when compared to the prior year, largely as a result of the payer mix shift.
Interest expense increased year-over-year, as we used our expanded credit facility to fund acquisitions and make our normal annual bonus and benefit-related payments in the first quarter and as a result of the fourth quarter borrowing for share repurchases and acquisitions.
Our effective tax rate remained at 37.25%, the same as it was for most of 2004.
Net income for the 2005 first quarter was $18 million, or 21.7 million when excluding the charge.
This compares to net income of 21.3 million for the first quarter of 2004.
We reported earnings per share of $0.77 for the first quarter, or $0.93 when including the charge, based on our weighed average 23.5 million shares outstanding.
This compares with EPS of $0.85 based on a weighed average 25.1 million shares outstanding the 2004 first quarter.
Earnings per share growth, when excluding the charge, was largely as a result of the share repurchases completed during the past year, as well as the growth of our business.
Our balance sheet remains very clean and strong.
Cash balances at March 31st were 4.1 million, and we expect to meet cash at these levels as long as we have amounts outstanding under our credit facility.
At March 31, the balance on that facility was 82 million; and with capital leases and other obligations, our total debt was only 83.2 million.
Accounts receivable was 105.4 million.
It is down for the second consecutive quarter, despite our revenue growth.
Our cash collections have been strong.
We have worked through the delays in receiving payments that occurred during the 2004 third quarter hurricane season.
DSOs returned to below 60, a level that we're very pleased with.
The significant reduction in the cash payable in accrued expenses is the result of normal timing of first quarter payments of incentive bonuses [INAUDIBLE] and 401K plan matching contributions that occurred during the -- that occurred during the prior year.
This reduction in accrued expenses typically leads to negative cash flow in our first quarter; however, the progress made to reduce our days sales outstanding positively impact cash flows from operations during the quarter.
We generated cash flow from operations of $656,000 for the first quarter, which compares to negative cash flow of 7.9 million for the comparable period in 2004.
Obviously, this was not a normal occurrence because of the catch-up from late 2004 in the accounts receivable collections.
So we expect that next year's first quarter cash flow from operations will likely be negative, consistent with cash history.
During the 2005 first quarter, we invested 36.9 million of cash in amounts available under our credit facility to complete five physicians group practice acquisitions.
Since then, we've invested another 18.2 million to complete two additional acquisitions -- a pediatric cardiology practice based in Miami, Florida, and Tulsa, Oklahoma, neonatal physician group practice.
Our maintenance capital expenditures remained low at only $1.5 million for the quarter.
During this quarter, we exercised an option to expand our credit facility by $75 million to 225 million.
As I said, we had an outstanding balance of 82 million under the facility at March 31, a period in which we saw significant outflows related to bonuses and benefit plans that drove the relatively high number of acquisitions.
This expanded credit facility, along with our cash flow from operations, provide us with the resources to continue to fund growth of our core operations.
The remainder of the year, we expect that our priorities for cash flow from operations will be to continue to invest in our acquisitions program and reduce amounts outstanding under the credit facility.
Overall, Pediatrix is reporting a very strong quarter, one that comes in at the high end of our guidance when excluding the impact of the charge.
We have a very solid foundation for our business, and we are seeing strong, solid growth.
I want to spend a few minutes discussing our previously-issued earnings guidance and some of the changes incurring with accounting for equity-based compensation.
First, our current guidance is for earnings per share of $1.10 to $1.12 for the 2005 second quarter, $1.25 to $1.28 the third quarter, and $1.24 to $1.27 for the fourth quarter.
This guidance assumes contributions from the acquisitions continuing to growth.
We're pleased with the pace of acquisitions for the first few months of 2005, with same unit NICU patient volumes within our historical range.
As you know, our guidance does not reflect the impact of any potential increases in our liability for the national Medicaid and TriCare investigation.
Additionally, our guidance does not include any impact from accounting rule changes required in the expensing of stock options.
Earlier this year, the accounting standards have required that companies begin expensing stock option compensations by the middle of the year.
A few weeks ago, the timing for implementation of this standard was delayed until the beginning of 2006.
In anticipation of adopting these new standards, our board has been reviewing the structure of our equity compensation program, including the possible use of restricted stock under the incentive compensation plan that our shareholders approved last year.
Our annual grant of equity awards, which usually occur toward the beginning of the year, was deferred by the board this year, pending the implementation of the new accounting rules.
Our board will be considering the change in timing of this accounting standard, and they may determine that the issuance of restricted stock is an appropriate component of our equity compensation program for the year.
We expect that our board of directors will make a determination on the structure of our 2005 equity compensation in the near future, and that determination may have an impact on future results.
We'll provide you more information once the board makes its determination.
I want to thank you for listening to this overview.
Let me turn the call back to Roger before we take questions.
- CEO & Director
Thanks, Karl.
At this point, let's just open up the call for questions from our analysts and shareholders.
Operator
(OPERATOR INSTRUCTIONS) And our first question comes from the line of Anton Hee of Jefferies & Company.
Please go ahead.
- Analyst
Hi, thanks, good morning.
You've obviously made substantial progress in your -- collecting your receivables.
Are you where you want to be at this point, or can we expect continued improvements in the DSOs?.
- CFO & Treasurer
We're very happy where we are at this point.
And you know, we don't anticipate to see significant increases -- decreases in our DSO.
You know, we try to maintain it below 60, but we're always striving to bring it down as low as we can [INAUDIBLE] -- through our [INAUDIBLE] process.
- Analyst
Okay, I guess -- you haven't yet quantitied the expected impact of the SFAS 123 R at all.
- CFO & Treasurer
That's correct, we have not done that at this point.
It will be up to the board to determine how they want equity compensation, how they want to issue equity compensation; and based upon that determination, we'll be able to more clarity on that.
- Analyst
Okay, the -- looked like the payer mix remained pretty -- remained pretty confident in the first quarter.
You're now a month into the second quarter.
More of the same?
- CFO & Treasurer
We haven't seen anything that would have us believe there's a change coming in the payer mix at this point.
- Analyst
Okay.
And then you signed an agreement in late March with IVAX to distribute the screen -- the metabolic screening business in Latin America.
Can you talk more about that?
You know, is this more of an exploratory alliance or is it -- you know, is there substantial financial impact down the road, or is there, you know, any substantial capital investment required on your part?
- CEO & Director
This is Roger, Anton.
Good morning.
Actually, we're pretty excited about that, but it's still in the early stages.
IVAX, you know, does have a 600-person salesforce throughout Latin America.
And you know, our plan is to have that sales force promote our products, you know, within -- you know, within that geographical area.
You know, we're still in the very early stages of that.
You know, we've signed the agreement and then we have to have -- which we did last week -- you know, meetings with their sales directors and their sales forces, and you know, start to put together marketing materials and, you know, a lot of other -- you know, of these issues that we need to work through before we can actually get out there and start pushing it through -- you know, to their clients.
But we're very excited about it.
There are about 11 million births that are happening throughout, you know, this area alone; and so obviously, you would have a -- you know, three times almost the market here in the United States.
And so given their sales force and, you know, their large present and their history within that part of the continent, you know, we're pretty excited about it.
There are -- you know, we're not going have to make any investments, any capital investments -- all of that is on their side.
They're basically taking our product, marking it up and sending, you know, the product to -- or sending the tests to our lab in Pennsylvania for the actual running of the test.
So for us, you know, it really represents basically no investment.
- Analyst
And no SG&A investment either?
- CFO & Treasurer
That's correct.
- Analyst
Okay.
And real quick, what -- Karl, what tax rates are we using going forward?
- CFO & Treasurer
At this point, we should be continuing with our tax rate of 37.25.
- Analyst
Okay, thanks, guys.
Operator
Thank you.
We'll go to the line of Bill Bonello of Wachovia Securities.
Please go ahead.
- Analyst
Yes, I have a couple of follow-up questions.
First of all, just wondering, Karl, if you can give us any more specificity on the year over year pricing comp.
You said it was negative, but could you give us a magnitude of how negative it was and how much the payer mix shift impacted that, so we have some sense of where things might go once you annualize that?
- CFO & Treasurer
The total pricing impact for the quarter was about negative 900,000 dollars.
Clearly, that was the payer mix shift offset by improvements in our managed care contracting during the year.
We're not at this point breaking out the different components of the specific numbers, but in total it was about a $900,000 impact.
- Analyst
And then secondly, acquisitions are running at a rapid clip.
Has acquisition pricing been stable?
I mean, the only metric that we're able to track from the numbers you give is that it looks like the acquisition spend per acquired doctor has increased from last year, but I know that could be the nature of the practices.
So I'm just curious what's happening with pricing.
- CEO & Director
Yes, hi, Bill.
You know, we don't really look at it on a per-doctor bases.
We make the offers based on, you know, profitability of the practice.
And so as we talked about in the past, you know, we may have one group that has four physicians working in one hospital and be very profitable, and we may have, you know, another group that may have 10 physicians working, you know, in two or three different hospitals.
And so, you know, it just depends on volume per hospital and, you know, all the things that w've talked about in the past.
Now, our multiple, you know, we talk about paying three to four times forward-looking multiples of this contribution that we expect to generate from the practice.
And you know, we expect to finish the year as we did last year.
We finished last year -- I think our multiple was around 3.7 or something like that, average, for what we paid for the practices.
And we're expecting that this year we should come in somewhere around the same -- under four multiple for the practices that we acquire this year.
Although, you know, as I've said in the past, if we -- you know, if we need to increase, you know, for a specific practice, if there is a practice that we really want and we need to go to 4 1/2 or something like that, you know, we'll do that as well.
- Analyst
Okay, but in general, for what you've been doing year-to-date, it's been pretty much in line with the norm?
- CEO & Director
We expect the average at the end of the year to be within the four range, yes.
- Analyst
Okay.
And then, I just wanted to follow up a little bit, Roger on some of your comments sort of hinting at expansion -- or not hinting, even, at expansion into other specialties.
Just a couple of specific questions there.
Do you need to expand into other specialties in order to maintain your current growth rate, or if you did such an expansion, would that be intended to boost growth?
- CEO & Director
No, I think it was a little stronger than -- at least, that's what the guys were telling me.
You know, we -- our pipeline is very strong, and we're almost, if you add up the numbers, which I'm sure you've already done, we said we would do 50 to 60 million in acquisitions for this year, and you know, we're above 50 million right now, so clearly the pipeline is strong.
We don't see -- you know, and I only like to look out over 18 months, as you've heard me say in the past.
It's silly for me to sit here and say four years from now, you know, this or that's going to happen.
I -- you know, I have visibility that I have comfort with over the next 18 months.
And as I look out over the next 18 months, I think we're going -- you know, are we going continue to grow, you know, spending a hundred million dollars or whatever a year?
I don't know.
But am I comfortable with saying, you know, we'll continue to spend 50 to 60 million in acquisitions over the next 18 months?
I think, you know, the answer to that is yes.
And so, you know, we don't need to do something else to maintain our growth -- at least not over the next 18 months.
But I do feel strongly, as -- you know, and as you know, we've been looking at other opportunities for the -- we've looked at the labs that we brought on board and for three years, you know, we've been looking at a lot of other opportunities.
And I just, you know, sit here and scratch my head as I look at other practices, particularly, you know, the hospital based practices that, you know, have a lot of synergies with what we do in neonatology.
I scratch my head and I'm thinking, you know, as I've said before, neonatology and perinatology are not the only positions and the only specialties, you know, that benefit or could benefit from -- you know, from our expertise.
So you know, there are some opportunities out there.
And we are getting, you know, interested in some of them, and I just wanted to let you know that I do think that there are, you know, some opportunities here.
We're not anywhere near doing something else right now.
I'm not looking -- you're not going to hear from me next week that we bought a group of, you know, some specialty that's not related to what we're doing; but you know, as the year progresses and as we look out over next year, some of these opportunities are pretty interesting and, you know, we're going to continue to look at them and evaluate them.
So, to answer your question, it would be additional growth.
It's not something that we would need, you know, to do right now to continue our growth.
It would be an additional growth kind of opportunity.
- Analyst
Sure.
Okay, and then just switching gears, you mentioned the ongoing discussions with the FTC.
Have you been in ongoing discussions all along, or are those discussions a more recent development, sort of a resumption of activity?
- CEO & Director
No, as you -- you know, as you might remember from our previous phone calls, you know, we really hadn't heard from them for a year or more, and then, you know, within the last couple of months, there has been some recent activity.
- Analyst
Okay, so, it would not be safe to assume that this issue is -- has died at the FTC?
It's still very much alive on their agenda?
- CEO & Director
The issue is not dead at the FTC.
- Analyst
Okay, that's too bad.
All right.
Okay, and then just the final question, in your press release, you said it was -- the increase in the reserve for the Medicaid settlement was -- can you tell us what the total reserve for the Medicaid settlement is at this point?
- CEO & Director
We haven't disclosed that and we generally like to stay in a position where we're not going to be negotiating this, you know, potential settlement in the public.
So we purposely haven't put out the total numbers at this point.
- Analyst
Okay, thank you.
- CEO & Director
All right, thanks, Bill.
Operator
Thank you.
And once again, if you do have a question, you can press star and then one at this time.
Next, we'll go to the line of Brooks O'Neal of Doherty and Company.
Please go ahead.
- Analyst
Good morning.
I have a couple of questions, can you hear me okay?
- CEO & Director
Fine.
- Analyst
Number one, just following up on Bill's questions, I am assuming, Roger, that any move you would make outside of your, you know, core area of in neo and peri would be a small sort of test-the-waters type of approach as you have done, you know, historically with all new endeavors.
- CEO & Director
Yes.
I mean, historically, that's exactly how we have done it.
You know, we haven't made any decision, you know, to go after any practice in particular.
We've seen opportunities that are both, you know, small and large, and we just -- we just haven't made any decisions as to what we would do if we had -- if we were to do so.
- Analyst
You're just are looking at the whole landscape of 600,000 doctors and recognizing you bring certain things to the party that they don't have today?
- CEO & Director
You know, we're basically looking at hospital-based practices.
I mean, we're -- as you know, we're not really an [INAUDIBLE] of the office-based practices.
Although, you know, we have some experience with our cardiologists and we feel pretty good about the models that we have in place.
But I would say that, you know, if we were to do something, it most likely would be within the hospital-based specialty.
- Analyst
And it would likely be not a capital-intensive area where you would have to put out all the dollars to -- to run the practice.
Is that right?
- CEO & Director
And that's one of the advantages of the hospital-based specialties, you know, that the hospital really is responsible for the majority of all -- of the overhead and, you know, supplies and equipment and all that kind of stuff.
So that's one of the areas that makes, you know, hospital-based specialties -- one of the reasons why hospital-based specialties are attractive.
- Analyst
Yes.
On another topic, you talked a little about the Latin American opportunity with the lab.
How is -- is there a domestic opportunity, and how is that going?
- CEO & Director
The domestic opportunity is going fine, you know.
It's within our budget.
And, you know, we're very happy with the acquisition.
But we do think that there are some pretty awesome international opportunities as well, and this is just one -- this South American initiative is just one of the opportunities.
Clearly, we're talking with people in Europe about, you know, some similar, you know, arrangements and even in Asia.
So, you know, we're -- we don't have anything to report there yet, but we think that the international -- you know, the international opportunities are pretty great.
- Analyst
Significant?
- CEO & Director
Yes.
- Analyst
And then lastly, not to belabor the pricing environment unduly, but, you know, obviously most state governments are under tremendous pressure.
Are you seeing anything different from the state Medicaid programs, or do you get a sense that pricing there is likely to be stable in the area you're seeing today, or would you expect any changes going forward?
- CFO & Treasurer
In general, I would expect that the pricing for Medicaid will be -- will continue to be stable.
You know, a lot of states are still in their legislative sessions and our proposal's going both by ways -- some increases, some decreases -- but there's nothing that looks to be of substantial size in any of the states that we have a substantial presence in that we're concerned about.
So all in all, I mean, I think our view at this point is it's probably going to end up being a flat Medicaid revenue unit -- from a pricing [INAUDIBLE].
- Analyst
Yes.
Okay.
Thanks a lot.
Operator
And next we'll go to the line of Bob Stafford of Stafford Capital Management.
Please go ahead.
- Analyst
Good morning.
Why did the mix shift occur -- or begin occurring -- in the third quarter of last year?
- CFO & Treasurer
There have been a lot of -- you know, we can't nail it down to a specific item, but what we have been able to see in kind of the components that we've been able to look at.
One, there was some eligibility changes in some of the programs in states where we have a large presence, particularly Texas, which would cover more patients than previously would have been covered.
So we think that, along with, you know the moving towards employees paying more of the premiums that some parents that now qualify under that program would have selected to go on Medicaid for their newborn rather than being on -- paying the premiums that were required under the general -- the employer plan.
You know, that, coupled with the whole economic environment, you know, has been going on -- sluggish economic growth.
Some of our states don't have big employers that have strong benefit plans, but are smaller employer based that don't have -- or sort of don't provide benefits.
So we think all of those things came together, but one of the biggest factors was the eligibility requirement changes.
- Analyst
And then secondly, I'm afraid I was not that aware of the FTC issue, and when does that date from?
- CFO & Treasurer
We completed the acquisition of Magella in May of 2001.
In June of 2002, the FTC requested some information from us on that, and it has been continuing since that point with its ups and downs during the period -- during that period, as far as communication goes.
There have been times where there's lots of communication, and then it would slow down and be quiet and then pick up again.
- CEO & Director
And I should add that back when we acquired Magella in 2001, we did file with the FTC and got a no review from them; and then, you know, a year later they came back and asked for this retrospective analysis.
That's what they've done.
- Analyst
And then what gave rise to the $6 million charge in this quarter as opposed to why it didn't happen earlier and so forth?
- CFO & Treasurer
The amount of the charge was determined based upon where we were in our settlement discussions and offer that we made to the investigators; and based upon what that offer was, we made the adjustment up until the point at which we made an offer.
We had no basis to change that [INAUDIBLE] to what we offered.
- Analyst
Okay.
What was the basic issue in that?
- CFO & Treasurer
The Medicaid and TriCare investigations, as we have talked about over the years, have been going on, you know, either in various states or on a national basis since 1999.
We've worked through several of them, and all of them revolve around coding for neonatal services and the services that were provided.
The services that we provide are based upon specific CPT codes with definitions of critical patients, although the definitions are not great in those areas.
So, you know, there's been a lot of question and discussion about what's the right definition in -- for those services that we provided.
- Analyst
Is this investigation related to a historic time period or does it also apply to current practice?
- CFO & Treasurer
We believe that our current practices for coding are clearly appropriate, and we have no issues with that.
I don't really want to speak for any of the U.S. attorneys involved in this investigation.
- Analyst
Sure.
- CFO & Treasurer
But we're very comfortable with all the efforts we have put forth.
- Analyst
Okay, I got it.
- CFO & Treasurer
Putting guidelines together in the [INAUDIBLE].
- Analyst
Sorry for the history question, and thanks a lot.
- CFO & Treasurer
And there's also information in our filings.
- Analyst
Great.
Thank you.
Operator
Thank you. (OPERATOR INSTRUCTIONS).
And we have a follow-up question from the line of Anton Hee.
Please go ahead.
- Analyst
I wanted to see if we could get the gross versus net patient service revenue for the quarter.
- CFO & Treasurer
That's not something typically that we break out on a quarterly basis.
- Analyst
Okay, it's only for the end of the year?
- CFO & Treasurer
Right.
- Analyst
Okay.
Fair enough.
Thank you.
- CFO & Treasurer
Thank you.
Operator
Thank you.
And there are no additional questions at this time.
- CEO & Director
Okay, if there are no additional questions, then we thank you for participating this morning and we will -- we will update you next quarter.
Operator
Thank you.
Ladies and gentlemen, this conference will be available for replay starting at 1:30 p.m. eastern standard time -- eastern daylight time -- today until May 10, 2005 at midnight.
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