Pediatrix Medical Group Inc (MD) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and welcome to the Pediatrix Medical Group second quarter earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given to you at that time.

(OPERATOR INSTRUCTIONS).

Also as a reminder, today's conference is being recorded.

I would now like to conference over to your host, Mr.

Bob Kneeley.

Please go ahead.

Good morning, and thank you, everyone, for joining the call this morning.

Before I open the call up to Roger Medel and Karl Wagner, I do want to read a brief forward-looking statements.

Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based on assumptions and assessments made by Pediatrix's management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of today, and Pediatrix undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise.

These important factors could cause actual results, developments, and business decisions to differ materially from forward-looking statements are described in Pediatrix's most recent annual report on Form 10-K, including the section entitled risk factors.

Now let me turn the call over to our Chief Executive Officer, Dr.

Roger Medel.

Thank you, Bob.

Good morning, and thanks for joining our call today to discuss our 2008 second quarter results.

We're presenting a company that continues to grow and one that is on track with our strategic expansion.

I want to discuss several items today as part of this review, of our operations and growth strategy, and Karl Wagner will provide a detailed review of the quarterly result and our guidance for the second half of 2008.

I'll begin by talking about the area of greatest investor interest during the past three months, which is volume at our neonatal intensive care units.

Throughout the second quarter, we saw a continuation of the same unit volume decline that had started late in the first quarter.

For all of the second quarter, your same-unit NICU volume declined by 1.4%, and we continued to see low NICU volume through the month of July.

We are now at a point in which we have see five consecutive months in which same-unit NICU volume was lower than the prior year.

Based on this information that we have gathered from our hospitals, this decline is volume coincides with a lower level of births at our hospitals.

Other variables have remained relatively constant.

The percentage of babies born at hospitals where we practice who are admitted to our neonatal intensive care unit remains stable at a rate of 11 to 12%.

Length of stay is moving around within the range but is also essentially stable.

As you know.

a volume decline like this just hasn't happened in our history.

And so while there's considerable and understandable speculation about the possible reasons for lower volume, at this point it's hard for us to identify a specific cause with any certainty.

We have seen reports suggesting that births in several of our large states are down in 2008 versus 2007, and that corroborates what we're seeing in our hospitals.

I want to be careful, though, to avoid participating in any speculation on factors leading to fewer births, so while I can present to you our volume result, I can't provide any definitive cause at this point in time.

This was good quarter for growth for reimbursement with same-unit growth of 4.4%, which was the principal factor behind overall same-unit growth of 5.1%.

We continue to see better Medicaid reimbursement from Texas, associated with the fee schedule increase that was effective September 1 last year, and we're seeing improvements as a result of our ongoing managed care contracting efforts.

There has really been no change to our approach to managed care, or to the results we have achieved from this approach.

We're also growing through acquisitions.

We completed four physician group practice acquisitions during the 2008 second quarter, and so far in the third quarter, we have added Georgia Perry operative, our second anesthesia practice.

as well as a maternal fetal medicine practice based in Atlanta.

With transactions closed to date as well as what we have see in the pipeline, we're confident that we will meet our target of investing 70 to $75 million of our capital in accretive base business acquisitions.

Let me remind you that we consider base business to exclude anesthesia.

So this target does not include any additional anesthesia acquisitions.

When you look at the reasons these practices are joining us, we think we're in an environment that favors our proven national group model as a solution to problems facing physicians to date.

We're seeing groups drawn to us by the opportunities for research and education.

That was the case in Tampa Bay with the second quarter acquisition of one of the nation's largest independent pediatric cardiology practices, based on the benefits that accrue from being part of a national group that can conduct research and continuous quality programs in this subspecialty.

In other cases, the practices joining us are looking for an administrative partner that will help them to manage their growth.

That's true for our most recent acquisitions, our one doctor maternal-fetal practice as well as our largest acquisition this year, the anesthesia group practicing in the Piedmont system in Atlanta.

To be fair, the Atlanta anesthesiologists joined our group for both reasons, clinical initiatives and administrative support.

They see the opportunity to work with our physicians in Fairfax, as well as other anesthesia groups to identify best practices and enhance their existing quality initiatives.

We're excited about the Georgia anesthesia practice.

Introducing our approach to which managing the administrative side of hospital-based practices.

As we said in the press release announcing this transaction, we expect this group to contribute approximately $0.03 per share annually to our earnings.

In time, we expect that as we manage the operations of this practice, and of all anesthesia practices that we acquire, that we'll see incremental improvements through operations, and therefore to margins at those practices.

There are investors who might be seeking some pivotal point at which critical mass would lead lead to better margins.

I don't think it is going to happen that way.

Rather, as I said, we build the platform, we expect to see incremental improvements in margins, and we expect those improvements to come from higher collected revenue on those practices that we acquire specifically from better contracting and better collections.

We have significant precedent for this expectation, which is the performance of our core business throughout the decades.

The increased efficiency of our base business over time, meaning most of this decade, is the result of continuous improvements of constant evaluation or processes to improve efficiency.

While it's early, what we're seeing in anesthesia confirms our expectations.

We expected to see incremental improvements as we established processes for anesthesia as we learn more about this specialty, including staffing, contracting, and collections.

On the contracting side, we have negotiated with several of the Fairfax managed care payers and we expect that we will see reasonable rate increases.

I think in time and with more experience in anesthesia contracting, we'll have a better sense of continued opportunities for contracting improvements.

On the collections front, we're close to finalizing an agreement to license the patient accounts information system that will serve as the platform for all of our anesthesia practices going forward, and we hope to see efficiencies there as we roll out that system.

I'm sure that we'll continue to get the question about specific margin targets, and we'll answer them the same way we have answered the questions throughout the dead cake.

We hope to improve margins on this business, the indications are that there's opportunity to do so, and rather than working towards a specific target, we're going to look constantly at how we can do things more efficiently.

I hope that these comments restore some of your attention to the lock-term growth opportunities at Pediatrix.

We have a sound strategy.

We're executing on our strategy, and we remain focused on the attractive long-term opportunities that are available to us.

This will be a good time to turn the call over to Karl, our Chief Financial Officer for a review of the quarter's financial results.

Karl?

Thank you, Roger, and thank for participating in this discussion of our 2008 second quarter results.

The next few minutes, I want to run through a discussion of our second quarter numbers and the updated guidance that was issued this morning, before opening the call to your questions.

For the three months ended June 30th, our net patient service revenue increased by 15% to $257.7 million.

Growth from acquisitions completed during the previous 12 months accounted for about two-thirds of our growth this quarter.

Same unit growth from reimbursement and patient volume was 5.1% for the second quarter over the comparable prior year.

We continue to see positive reimbursement, which is principally from better managed care contracting, including the flow through of modest annual increases that we now negotiate as part of many of our contracts.

In addition, government reimbursement is slightly better, as a result of the Texas Medicaid increase that went in to effect September of last year.

Same-unit volume for all of our specialties was up slightly at 0.7% and a result from higher volumes at our office-based practices.

As Roger discussed, same unit NICU volume was down 1.4% primarily due to fewer births at our hospitals than in the prior year.

Overall our practice-related margins were affected by several factors including lower NICU patient volume, the impact of acquisitions, including anesthesia, and an increase number of office-based practices acquired during the past 12 months.

Office-based practices have higher practice-related expenses, both salaries and benefits, as well as supplies and other expenses relative to our hospital-based practices.

That's just the nature of that practice.

As a result.

the margin shift can be attributed to acquisitions.

both anesthesia and office base is expected.

We're pleased with how our acquisitions with performing relative to our models, and we're generating the results that we expected when we bought these practices.

Our profit after practice expense was $96.5 million for the second quarter.

up 9% from the prior-year period, and profit after practice expense margin declined by 229 basis points to 37.4%.

Our operating income was $62.5 million for the second quarter and was up 6% from $59 million non-GAAP for the comparable 2007 period.

For 2007, that non-GAAP number excludes expenses of $1.8 million associated with the stock option review, and for the rest of this discussion I'll refer to the 2007 second quarter on a non-GAAP basis.

Our press release this morning contained a detailed GAAP reconciliation table and that's available on our website at www.pediatrix.com.

We continue to see positive leverage of our management of general and administrative expenses, which continue to grow at rate that is below the revenue growth.

For this period, our G&A expense as a percent of revenue declined by 28 basis points when compared to the 2007 second quarter results.

After-tax income from continuing operations was $38.2 million for the second quarter, up 4% from $36.8 million for the prior-year period.

On a per share basis, earnings from continuing operations was $0.80, based on a weighted average 47.7 million shares outstanding for the second quarter.

This compares with earnings from continuing operations of $0.74 per share on a weighted average 50.1 million shares outstanding for the comparable 2007 period.

During the 2008 second quarter, the gain calculation related to the sale of our metabolic screening lab was revised, resulting in a loss from discontinued operations of $1.2 million for the period, or $0.02 per share.

Net EPS was $0.78 for the second quarter, which compares to net EPS of $0.75 for 2007 second quarter.

Our weighted average share count for the second quarter was down by approximately 2.5 million shares, which reflects the impact of three share repurchase programs.

One completed at the end of 2007, one completed in the first quarter of this year, and a modest benefit from the share repurchase completed in June.

Our share count for the 2008 third quarter and subsequent periods will reflect the full impact of the most recent share repurchase program.

Capital from operations in the second quarter was $57.3 million.

During this quarter.

we used our excess cash and credit facility to purchase $100 million in stock and invest $41.1 million in practice acquisitions.

At June 30, we had cash and cash equivalents of about $14.2 million, down from year end as a result of acquisitions, share repurchases, and reductions in accrued payables as a result of incentive compensation payments.

Accounts receivable were $148.6 million and our days sales outstanding were down slightly both sequentially and year-over-year.

On a liability side, we ended the quarter with approximately $57.5 million outstanding on our revolving credit facility, and we had less than $1 million of other debts including capital leases.

To provide a quick summary of our results for the first half of the year, our net patient service revenue was $503.3 million, up 16% from $434.2 million for the first half of last year.

Operating income was $114.5 million, and income from continued operations, which excludes results from the metabolic screening laboratory that was sold in early 2008 was $70.3 million.

Earnings per share from continuing operations was $1.46 for the first six months of 2008, based on a weighted average of 48.3 million shares outstanding.

This compares with operating income of $94.7 million and income from continuing operations of $60.7 million or $1.21 per share from continuing operations based on $50 million shares outstanding for the first half of 2007.

Through June 30th, we have invested $47.6 million in physician-group practice acquisitions.

Since then we have acquired our second anesthesia practice and a maternal fetal medicine practice for a combined purchase price of $45.8 million, which brings our total acquisition spending to more than $93 million year to date.

I'll go through the guidance that was announced in this morning's press release.

As we said, we're now expecting to earn between $0.84 and $0.87 per share for each of the third and fourth quarters of 2008.

We built in contributions from acquisitions and share repurchases that have been completed to date, as well as our estimates for based business acquisitions that are expected to be completed throughout the remainder of this year.

Our estimates do not include any contributions from additional anesthesia acquisitions.

Our same unit guidance assumptions for each period include 2 to 4% growth from reimbursement-related factors.

In addition, the guidance assumes that same-unit NICU parent volume will decline by 1 to 4% when compared to the prior year for each period.

I want to thank you for your patience as we've walked through this financial and operational overview, and this point, I'll turn the call back to Roger.

Thanks, Karl.

Let's go ahead and open up the call for questions.

Operator.

Certainly.

(OPERATOR INSTRUCTIONS).

One moment for your first question.

And our first question comes from Art Henderson with Jefferies & Company.

Please go ahead.

Hi, good morning.

Couple of quick questions for you.

On the share buyback, do you currently have an authorization in place right now?

Or are you fully -- is the authorization fully used up?

We completed our share repurchase that was approved by the Board last quarter in June, and we don't currently have any share repurchase program in place.

Karl, what should we be thinking about in terms of a share count, say for the next quarter to use.

Obviously, it's going to go down.

You had quite a few share repurchases to date, is there any guidance you can give on that?

We haven't given a specific number out.

We actually bought back not quite 1.9 million shares last quarter.

And we didn't start the buyback until we had announced the program in late May.

So most of it came through in June.

Most of it through June.

Okay.

Also, I know there's some things going out with MediCal right now as far as delays in payments and potential 10% decline in payments out there.

Could you talk about what they may mean for your business in terms of the 10% were to go in to effect what that would impact Pediatrix at all?

Yeah, the 10% reduction in MediCal payments actually went in place on July 1st.

There are a lot of initiatives to try to get back to be reimbursed.

One of which was through the courts at thats point.

The injunction was denied by the courts, but they are still moving forward -- the California Medical Association is still moving forward to see if they can get that done in other ways.

And the legislature seems to be looking to methods to do that.

But until they pass a budget it won't be addressed.

We believe when they pass the budget, there will either be a reduction in that cut or it may go away in total.

It's not a big number for us.

Any impact from that is included in our guidance.

Okay.

It is in your guidance.

As far as payment delays California did delay payments for MediCal at the end of June, as they were running out of funds, and they didn't have for the end of the fiscal year, but they do have a fund to pay starting in July, and we are receiving payments.

The big question on MediCal right now is there's a point in time if the budget not passed, that it may run out of reserve funds that they have set aside right now.

But that's not that they won't pay, it's just timing of when payments will come in, so that is something that we're watching, and we're hopeful that will budget, but we don't know at this point when that will occur.

Okay.

That's helpful.

And then one last question and I'll get back in the queue.

$57.5 million on the revolver is your intent to use cash flow now to pay that back or are you comfortable with having that on the balance sheet for a while.

Cash from operations to bring it up and down and we'll use the revolver when we are need it to do acquisitions, so, as you can expect after the end of the quarter when we did the acquisition in Atlanta, we had to borrow some more, but we have been paying that down from gaps from operations throughout the month of July, so it's going to go up and down.

But we're comfortable.

Okay.

Great.

Thank you, nice quarter.

Thank you.

Thank you, and our next question comes from Bill Bonello with Wachovia.

Good morning, guys.

Hi, Bill.

A couple of questions.

I guess the first thing is just, again on the NICU volume, it -- it sounds a little bit -- and maybe I'm just getting too cute in reading you, but it sounds a little bit like you are hedging and saying it's not 100% burse.

I guess I just -- if you could elaborate a little bit more on your comments in the length of stay and percent of admits.

Is that at all part of it?

I just couldn't quite tell what you were saying.

As far as the admit rate goes, our admit rate is right in where we have continued to see it.

There's really no change, it remains very steady over the periods.

The comments that Roger made on length of stay, it's something that bounces around quarter-to-quarter and up and down, and while on a comparable basis from a year ago, it's a little bit lower.

It's within the range that we have seen over time.

So -- you know, that's going to have a fluctuation, every quarter it has some impact it to, but predominantly what we saw was a reduction in births at our hospitals, and that kind of tracks with when we have seen growth we have seen growth in births at the hospitals we're in.

Just to be clear, we saw the reduction in births, it's not like we're seeing increases in births in hospitals and a reduction in patient days, we did see a reduction in births at our hospitals during this quarter, but just to be clear, there is this movement in length of stay, which every quarter has some impact, it just hasn't had the focus in the past.

But it is in the range that we would expect it to be in.

Okay.

So the predominant impact is still the reduction in births.

Yes.

Okay.

And thin just on the cash flow, down a little bit year-over-year, and I'm -- I'm having trouble sort of from the balance sheet data you gave figuring out where that -- why that is.

On a year-to-date basis, it's down for a couple of reasons.

One, we're not getting the growth in bonus accruals that we got, so when you look at the cash flow, which will be in our 10-Q you'll see not the same -- you'll see more money spent on a reduction in payables during the year than we saw last year, because of the fact we're not increasing our accruals.

In addition, we have made higher tax payments this year as we have gone through, so your taxes are up a little bit, so that's where we're see an offset.

And the reduction in the accruals, can you just expand on that a little bit?

It's not a reduction, it's just last year we had a significant growth over what we had paid in the prior year, and right now we're running at about the same rate from an accrual standpoint.

So last year in the first half, I accrued -- say $50 million on -- I think it was $90 million in payments, and this year it's roughly $50 million on what we paid $110 million in bonus payments, so there's a $20 million swing there.

Okay.

So you literally -- you are paying out more -- or so far you have paid out more bonuses than you had last year?

Yes.

We paid out more in the first quarter for incentive comp than we paid out the prior year.

But as you know our bonuses are paid in the first quarter predominantly.

Okay.

Our run rate for bonus accruals is about the same as the prior year.

Okay.

That -- I think that makes sense, and I think you might have mentioned this, but I want to be perfectly sure, no -- still no evidence of any payer mix shift?

No, I don't know if we said that actually.

But no, there's no change in our payer mix.

Okay.

And then, I guess just one more thing on the volume, and I'll hop off, but when you guided to the revised guidance for the quarter, at that point, you were sort of seeing a 2% decline.

You ended up seeing sort of a 1.4%.

It sounds like we should not read anything in to that.

You're not seeing any sort of improvement in trend as the quarter progressed?

Throughout the quarter week to week the numbers kind of bounce all around, so one week we'll see it be below the 2% we had guided last time, and another week it will be minus 0.5%.

So it just kind of bounces around, so at the point we gave you guidance for the 2% last time it was about where we were running.

Things came back.

But weeks in there, we're worse than that.

Okay.

Thank you.

Thanks.

Thank you.

And our next question comes from Kevin Ellich with RBC Capital Markets.

Hi, good morning, guys.

Thanks for taking my questions.

Karl, I was wondering if you could tell us how much the Texas Medicaid rate increase impacted pricing for the second quarter?

I don't know if we have typically given out the Texas Medicaid increase as a percent and breaking that out separately.

It is a component, but I don't think they have broken it out separately in the past.

Go ahead.

We had the last couple of quarters being out of that 2 to 4% range.

We're going to start overlapping it partly through the third quarter and into the fourth quarter, so I think we'll be pulling back into that range, and we expect we'll be in that range for the year.

Okay.

And your 2 to 4% guidance includes the annualization of when you lap that effect?

Yes.

Okay.

Excellent.

And then given the MediCal issues that were just implemented, what is the outlook -- or have you guys identified any other problematic states where reimbursement for Medicaid could get cut?

We really haven't seen anything.

And as you can expect, we're looking at it very closely.

I think the real question is going to be what is going to happen next spring when the legislatures come back in place.

I know a lot of states are having struggles with their budgets, so going in to the spring of '09, we'll be watching it very closely again.

But for the rest of this year, going into the first half of '09, it appears things are going to stay relatively stable excluding California.

As we said, last quarter we had some slight upticks in a couple of places that will offset some of this California decline.

But I don't think we're expecting anything next year from an uptick standpoint, and when the legislature is coming in the spring, we'll being looking at it very closely.

That's helpful.

You said your year to date acquisition spend is I think around $93 million.

That's correct.

How much of that was coming from the base business?

We don't break this out separately.

Okay.

I had to try.

And then just wondering how the anesthesia pipeline is looking?

You know, I know you guys are pretty active discussions.

Do you think we could get one to two more anesthesia deals closing by the end of the year?

It's been our desire and we said earlier this year, to try to get two done this year, and that's still on our plans, so we're looking through that.

We didn't have a an expectation that we would get three done this year.

We want to be deliberate as we move forward and not try to do too much to quick.

But the pipeline is good.

We like our pipeline going in to '09 based on what we're seeing and the practices we're talking to at this point.

So I'm really happy with the way that's developing.

With the integration process for Fairfax and Georgia, since Fairfax is coming up on 12 months now, has your increase in estimates or how much it is going to add to EPS changed at all?

I mean, could it be a little bit more accretive than what you guys first expected?

We're not going to go through giving EPS numbers on Fairfax.

I would say we're happy with the growth.

We're seeing growth like we expected in the fourth quarter.

They'll start rolling in to the same unit number for us.

And we're happy with how Fairfax is performing.

I would say in general, they perform a little better than we had for our first year budget.

Excellent.

Thanks, guys.

Thank you, and our next question comes from Brooks O'Neil with Dougherty & Company.

Good morning, I have a couple of questions.

Roger, you mentioned all of the factors that you believe are influencing your same-unit patient volume growth in the NICU.

Do you believe there is anything you can do to influence that growth yourself?

Or are you pretty much constrained by what happens in the hospitals themselves in terms of volume trends?

No, I believe that we can influence somewhat by putting together transport programs to bring in babies from outlying hospitals that may not have neonatal intensive units.

They believe, might be the greatest opportunity.

We always have done that, of course, and that is one of the programs that put in place when we acquire new practices, but we are going through a very special push right now, and a review of what we're doing, and a more formal program to be put in place on a more national level to see if there are ways that we can improve transfers from babies who are born outside of our units in to our hospitals.

I think that's the biggest thing we can do is to bring in more patients.

Sure.

Maybe you could comment as well on any impact you believe you can see from the other practices that you have affiliated with around -- at neonatologist in terms of the work you are doing with pregnant moms and what not.

Is that having any positive impact in the markets where you have overlapping coverage?

Well, definitely.

I mean, the perinatologist of course is the integration strategy that we put in place some years ago, to try to get more sick babies in to our units.

The cardiology is also positive, but perhaps, I would say not as positive as perinatology.

By the time the cardiologists get called, the baby has already been born and most -- unless those children are in hospitals where they don't have neonatal intensive care units, where we would transport those babies to our units, but if they are born in hospitals with NICU, it wouldn't increase the number of admissions to the neonatal intensive care unit, they would just get transferred in to that NICU.

Sure.

And then Karl just to be sure I am tracking your guidance, would it fair to say the low end of your reimbursement expectations and the low end of your NICU volume would correspond to the low end of your EPS guidance and vice versa on the higher end?

Yeah, I think that that's an appropriate way to look another it.

Okay.

Good.

And then last but -- would it seem reasonable for us to assume that additional share repurchase authorization might be a consideration going forward, or should we not think about that at this time?

I don't think that we're considering any additional share repurchases at that point in time.

I think like we always do, towards the end of the year, we'll look at -- you know, how much we have spent in acquisitions, and what our cash position is like.

What our projections are like for the coming year, and we'll make those decisions, you know, later on in the year, but there's nothing that we're contemplating right now.

Great.

And then I guess the other question is, in terms of the commercial reimbursement, I think Roger, you mentioned that you are continuing to see the same kinds of trends that you have seen in the past.

Is that in the range of that 2 to 4% you are seeing just overall on the national base in terms of the commercial side, or is it better than that?

What we're seeing from a reimbursement standpoint on managed care, on the contracts that we negotiate each year is better than that.

We need to cover everything to get to that 2 to 4% range.

So we're seeing better than on the contracts that we can negotiate.

In addition we are having a lot of success with the payers, and working through multi-year contracts, rather than having to get an upfront number and nothing for a few years until we renegotiate.

The message there is we get a lot of questions about -- you know, cutting back on reimbursement, and payers cutting back, and there's some concern about that, and as far as we can concerned, we just aren't seeing it, and we are continuing to be successful with our strategy of getting those contracts renegotiated.

And our next question comes from Sudeep Singh with Deutsche Bank.

Hi, guys, good morning.

Hi, good morning.

Just a couple of questions here, the first one has to do with anesthesiology.

I think just recently, a larger hospital-based company announced its entry into anesthesiology through a managed services agreement, and just curious to get your thoughts on what you are seeing within any competitive landscape within that space, and how does your strategy change in light of newer public companies possibly entering the space?

Yeah.

Yeah, we saw that.

It looked to me -- you know, and I haven't spoken with anyone at the company, so I don't have any information other than what I read.

But it looked to me like it was more of a management services organization that they were -- that they had acquired.

I don't -- it didn't look like they had acquired any groups of anesthesiologists.

It doesn't affect us at all.

We have our strategy in place.

We're very confident in what we're seeing.

We're getting a lot of interest from a number of different anesthesiology groups across the country.

We're very excited about our position, and so that doesn't have any impact on didn't on our strategy for moving forward.

Okay.

And then just the second question is, as I look back historically I think in terms of top-line growth, the companies typically relied on acquisitions for roughly 5 to 6% of your overall top-line growth.

Is there anything as you look in to your pipeline, anything or any reason to believe that this could change in the future in terms of the contribution from acquisitions?

Well, our contribution to acquisitions this quarter was, you know, two-thirds of our growth came from acquisitions, and one-third came from same-unit.

All of that is going to depend on timing of deals.

But also from a top-line growth, they are going to add more to that top-line number from a growth standpoint when we do those acquisitions.

So, that's helping to accelerate that number as well.

And then just the last one I had was -- I think Karl you mentioned in terms of the lower margins were due to three things, lower volume acquisitions, as well as the office-space practices.

Can you just give us a sense for just contribution from each?

It is a third is coming from volume or how should we be thinking about how each of those three impacted overall margins?

I would say it's probably in the order that we went through.

The NICU volume would be down.

Probably the biggest impact on margins.

Then the anesthesia practices as we talked about were lower margins.

We expect to bring those up over time as we implement improvements in those practices, but they are impacting margins, and the office-based practices, we said over time their margins are lower.

They have a lot more cost to run an office with personnel as well as supplies.

As we have done more and more of those deals, it has brought down -- you know, this year as you look at our model for the last year, we have seen more of the office-based practices in the acquisitions that we have done.

So that has impacted margins.

Okay thanks very much.

Thank you.

And your next question comes from Rob Mains with Morgan Keegan.

Your line is open.

Thanks, good morning.

I might want to parse the guidance just a little bit more here Karl.

2 to 4% pricing is that for each quarter you expect to be in that range?

Yes.

Can I infer from the comments that you have made about how you have seen NICU volumes bounce around that the range you have given here, negative 1 to negative 4%, you have kind of see that maybe on a weekly basis, and those are the parameters that you used to elect that level of guidance.

I would think the level of guidance were something that unless things were to change pretty dramatically that we would be at or above that.

I don't want to get in to commenting on every single week's numbers -- but it was more of a function of we have seen bounces around from March until now, and we just wanted to be comfortable that the range we were giving on the low side, it would be unusual for us to see something below that.

Okay.

Fair enough.

The volume slowdown you are seeing is in the NICUs, it's not in the office-based specialties.

The office-based specialties we are seeing growth in the specialties, both pediatric cardiology and maternal-fetal medicine.

Did you have the same volume drivers in MFM as you would in neo-Natology?

I'm not sure.

I mean in some ways the volume drivers would be the same, but also in the maternal fetal medical practices in a lot of places, if you can bring physicians in, they are able to add to the volume, because there is a need for the subspecialty, and as we add physicians, we can grow volume.

So it's more of adding locations and physicians that allow us to grow that practice, because there's a need out there that, you know, not being completely filled.

As we have said in the past, it takes a while to find some of these maternal fetal medical positions, a lot of hospitals to employ them over the years as well.

So, , that's kind of the -- what is causing the growth in there, even though driver would

I'll also add to that, Rob, that, sometimes we see the growth in maternal fetal medicine, et cetera, related to more malpractice issues than birth.

So if there's been a bad case in a hospital, all of a sudden you start getting a bunch more obstetricians asking the MFMs to come and sort of care for the patient alongside of them.

Okay.

So Karl, you're saying that instead of adding practices, you've been adding doctors, in addition to the acquisitions that you announced over the last few months.

Yes, that's correct.

Okay.

Teams that good to know.

Thanks a lot.

Thank you, our next question comes from [Nicholas Jensen] with Raymond James and Associates.

Hey, guys.

Back to drill a little deeper on the length of stay issue, one of the larger hospital chains was talking about they had some revenue pressure in any quarter press release managed care companies trying to force NICU stays down.

We are wondering if you guys have seen anything along those lines?

No, and I don't know what they could do to control that anyway.

But no.

The answer is no.

Okay.

On the S-chip possibly up for renewal maybe after the election.

Wondering if you guys are monitoring that, and any discussion around that would be great.

Yeah, we're monitoring the S-chip and what is going on with that.

Right now the expectation has been that that will come up after the election.

There is some thought that that could come up before that as a political move, to bring that issue up to a forefront again.

As we talked about in the past, one of the things -- one of the biggest concerns for us in the S-chip program, which is currently a small piece of our business, is that there aren't appropriate safeguards in the program to prevent people that have commercial insurance and are available in managed care plans, there is nothing to prevent them from moving to S-chip, which would be lower reimbursement for us.

All of the legislation in the last round of trying to get changes in the S-chip program had language in it that would work to try and prevent crowd-outs, out of managed care plans and move them in to S-chip, which I think the government should be striving for based upon the way their budget is at this point.

To not put more of those people on the government when they have acquisition to the commercial plans.

Provided that language stays in there, we're comfortable with the direction that's moving.

Lastly, on the Medicaid front, are you -- excluding Texas Medicaid, and I guess the negative impact from the California, is the business flat?

Is it 0 to 1%, negative 1 to 0?

Can you give me thoughts on that.

We're looking at our Medicaid to be flat.

We don't expect any more pricing to come from any of the Medicaid programs where the state budgets are.

This year, there really weren't many places that talked about something from a pricing standpoint, we'll see what goes in to next year, as the budgets are going to be tough next year.

But I think the legislatures have found it very difficult to look at physician compensation as a place to cut, because of the issues, one of the issues California is facing is access to care for their patients.

And that's one of the reasons there has been a lot of pushback on the MediCal program.

Thanks very much.

Good quarter, guys.

Thank you and our next question comes from Gary Taylor with Citigroup.

Hi, good morning.

Most of my questions have been answered.

Wanted to go back to volume just for a moment, and Roger you have had made a couple of comments about a couple of your larger states looking like they were seeing declines in births year-over-year.

Is there anything else geographically you can give us there, just about kind of the -- what variance there may exist between states or markets where you are up, versus you are down, or maybe just an example of some states where volume is better than others?

But anything else you can do to help us geographically.

A big part of the problem that we're having, Gary, is that -- you know, we ire seeing, you know, our volumes move from quarter-to-quarter and from state-to-state, and so while overall volume is definitely down, there are states where the volume is up -- is up, you know, a good part of our Atlantic region is up, and -- and we might have seen volume up during the second quarter or during the first quarter in another state.

It's down in the second.

So we're not seeing any rhyme or reason or any kind of geographic concentration.

We're seeing it go up and down and -- and it's just hard for us to pinpoint exactly what is going on.

Okay.

Can you maybe talk a little bit about -- I guess what is kind of intriguing about what has happened here, is if you look over the last five years -- if you look over the last decade, where the number of births has grown a little better than 1%, and lots of years in the '90s when overall births in the US were negative, yet NICU and your NICU days in particular were growing in that 4 to 5% range.

It must suggest that the hospitals that you're affiliated with, so to speak, because you are staffing the NICUs have really been able to take some market share in terms of NICU days and potentially births over that period, because you have just grown, consistently faster than the birthrate would imply.

So as you look at it now, and the hospitals you are working with are showing lower birthrates, is there anything that would suggest that -- that they may be losing some share, or that you may be losing share?

Or just that - share isn't growing as fast as it once was.

Because it just seems like birthrate going from 1 to 0, 1 to -1.

Doesn't swing your volumes from plus 4 down to minus 2.

Gary let me remind, you know, births don't happen in a linear fashion.

I mean, you know --

Right.

A big part of our growth, you know, has been related to the fact that we are -- a lot of our hospitals are in the sun belt areas.

I mean there are -- there are -- the population.

The number of births may be dropping there, but there are areas where there's significant population growth, and so we have enjoyed the fact that we have a lot of our hospitals are in those sun belt areas.

We have no reason to believe that we have lost any market share, that our hospitals have lost any market share.

As we, you know, look around.

I there may be one specific situation where a hospital was created or was built across the street a second hospital, but that would have no impact on our -- on our business.

So we -- we have no reason to believe that we have lost market share or that any of our hospitals you know -- that our hospitals are losing market share.

Okay.

Just kind of a administrative kind of question.

You beat the Street revenue pretty handily, and our own estimates pretty handily.

Is there an acquired revenue number in the quarter?

Was that something somebody else had already asked for on the call?

Somebody asked something similar, and I thought maybe you wouldn't provide that, but -- is there either one of those two numbers we could have to just kind of get the revenue run rate a little better going forward?

Well, we can give you -- it is going to take me a second -- our revenue for the quarter, we saw revenue growth of $34 million during the quarter, and of that, 23.2 million of it was from acquisitions and the rest from same unit.

Perfect.

And then final question, just on -- looking in to next year and -- you know, this would probably be something that -- if we did see S-chip expansion in '09, it could likely really have more impact on '10 than on '09, I guess, but if you look at some of the crowd out estimates from the GAO or the CBO or whatever without sort of the protective language, do you have -- have you -- do you have any sense on what type of revenue shift that might cause?

Is there anyway at this point, where you could kind of say worst case it could shift our payer mix a couple of points or any thoughts on quantifying what that could be?

Yeah, we don't really know what that's going to be.

I think one of the things that is going to be an issue in the S-chip program going in to next year is while they want to expand it, the states have to come up with their share of the money to expand the programs.

So just because the federal government gives them the ability to do that, doesn't mean they are going to do it.

Going through this budget cycle and the issues that the states where facing, I don't know in the short-term that you are going to see significant expansion in the S-chip programs.

Unless they can kind of loophole ways to create some matching funds or something?

There are matching funds from the Federal government --

Crimp them back on that.

Thank you.

Our next question comes from Dawn Brock from JPMorgan.

Good morning.

I just wanted to talk a little bit about anesthesiology, and your thinking of the build-out of the growth arm.

You have done two platform-setting acquisitions, they both had critical size, they were in great growth markets with attractive demographics.

Is it fair to think that you might look for another one or two targets like this to set culture?

And then tuck in from there once that culture and the electronic data and billing systems are in place?

Is that a fair way to look at it?

I think our strategy is to do both things.

We're looking for tuck ins, that might fit our current groups, and we're also looking for groups larger groups that mayhem us to establish beachheads in different parts of the country.

So I think your strategy continues to be -- to look for both things.

It just makes sense for us to continue to acquire larger practices and tuck in smaller ones as they become available.

Roger, are you looking for something in specific?

I mean, both -- both Fairfax, and Georgia -- they were well regarded, you know, in the industry, again, kind of just had very, very similar growth characteristics.

I mean, is that what you are looking for is something who is going to be able to kind of just establish a culture or a platform for you that you can grow off of regionally, and then maybe you'll take on practices that might need some more help once you got it to offer?

Well, absolutely, you know, we're looking for great practices, and these are two great practices.

I mean, they are -- I can't begin to tell you the positive feelings that have accrued to us from bringing these two practices onboard.

We get a number of calls from groups across the country, saying, hey, if these are the kinds of practices that you are bringing onboard, we want to talk to you about it.

So these are two practices that have wonderful reputations.

They are in great markets that are in growing areas that are in hospitals that have had very significant long-term relationships with their hospitals, that we're very lucky to have been able to have brought onboard.

And, we're going to continue to look for those practices that are great reputation in growing areas with great hospital relationships, long-standing ties to the community, and then, as I said, as we -- as we bring those onboard, you know, we'll continue to look for, you know, smaller practices that we, you know, add to our local, you know, large practice.

Great.

And I know it was rather serendipitous that they both ended up on the same electronic billing and collections system.

Is that the system that you plan to go with, or are you working on something more proprietary?

Yes.

They are building collection systems, they are not on the same billing system.

Actually -- we're still saying, you know, as Roger said on this call we decide where we want to go from a billing systems standpoint and negotiating the contract, but currently they are both under different billing companies.

What they are on is they are both on the same clinical system.

Okay.

The hospital has implemented and Fairfax has been on it quite a while, and Atlanta recently got on it.

And I think there's going to be some good discussions between the two practices about how best to use that from a clinical standpoint within their own practices, and how to use them to combine to improve the care across both practices and how they look at different parameters when they revaluating the care of their practices.

That being said, I'm not sure from a clinical standpoint, that we're going to be able to make determination of what systems use.

I think our focus over the next few years as we add practices is going to be how to take the different systems out there and get information out of them for both the billing purposes as well as for clinical research purposes.

It's just -- it's a product that is well ingrained within the hospital and the hospital puts in place, and is used in other than just ER.

It's used in the recovery area, and preop area.

So I don't think it's something we're going to be putting a system together like we were able to in neo-Natology and the EMR we are putting in place for our pediatric cardiology I think it's a going to be less like that, and more interfaces to pull that out of them.

Okay.

That is what we want.

The database is what we're interested in.

And we're fortunate both of these hospitals are using the same clinical system, and that of course, gives an advantage.

But at the end of the day, what we're interested in is just the data.

Absolutely.

Okay.

Thank you.

That was really helpful.

Thanks.

Thank you.

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