Pediatrix Medical Group Inc (MD) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the 2009 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 at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Bob Kneeley.

Please go ahead.

Thanks, good morning, everyone.

Before opening the call I want to remind you that certain statements and information during this call may contain forward-looking statements.

These forward-looking statements are based on assumptions and assessments made by MEDNAX management in light of their experience and their perception of historical trends, current condition, 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 MEDNAX undertakes no duty to update or revise any such statements, whether the result of new information, future events, or otherwise.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the Company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the section entitled risk factors.

Thank you.

With that, I'll turn it over to our Chief Executive, Roger Medel.

Good morning.

Thanks for joining our call today.

We're pleased to report results for the 2009 second quarter that reflect the successful execution of our growth strategy, as well as the operating leverage of our business model.

In the next few minutes, I'll provide with you a brief update of the numerous factors that are contributing to our growth and to the efficiency of our operations before Karl Wagner gives you a detailed summary of our financial results.

First, though, I'll start with the topic that has consumed is so much of the national agenda over the past few months, and that's healthcare reform.

Since many of you are following the proceedings as closely as we are, I'm not sure that I'll have anything new to add, but I think it's important for you to understand our perspective thus far.

I will state an obvious point of view.

As a provider organization we have seen proposals so far that have been about what the mechanism for coverage will be.

There's been very little discussion about changing delivery of care and there's been very little discussion about ensuring adequate access to care once coverage is expanded.

To me, these issues need to be on the table if this effort is truly about healthcare reform.

So far, though, the effort is about expanding coverage.

The volume on the healthcare debate will be dialed back over the next month, if only temporarily, if congress recesses.

This is an opportunity for constituents to voice their opinions.

It's my view and maybe just my hope that the hurried state of the past three to five months will be replaced by a more deliberative process that considers all of the consequences of the proposals that have been made thus far, including access to care and delivery reform.

We are engaged in the process and we have weighed in when possible in order to protect our reimbursement for our specialties.

Of course, we can't know how the various proposals will ultimately take shape and so we will continue to be an active participant in the process.

At the same time it's possible that as the volume around performs subsides for a little while, attention may be brought back to the fundamentals to organizations that are adding value within the healthcare system and that have a role to play in improving the delivery of care.

Obviously I think we're one of those organizations and I think our highlights for this quarter not only our financial results, but also our acquisition activities and progress with our operations should confirm our unique position as a value-added provider.

We completed three group practice acquisitions during the 2009 second quarter and with the addition of a large Nashville neonatal practice in July, we are at seven acquisitions so far this year.

We have already slightly exceeded our total year estimates for capital invested in acquisitions that we set late last year and I want to assure you that we are continuing to manage a robust transactions pipeline and that we will bring more practices into our national groups throughout the remainder of this year.

As important as the number of transactions is the size of the practices that are joining us this year.

We have acquired two practices that have more than 20,000 neonatal intensive care unit patient days each.

As a point of reference our annual NICU patient days acquired year to date exceeds 70,000.

This is largely a reflection of the nature of our acquisitions mix this year and it suggests that there's continued opportunity for us to grow within this subspecialty.

We have demonstrated that our ability to integrate neonatal practices into our existing regional infrastructure and to quickly see improvements in those practices make them relatively safe investments.

We have also said we've been seeing interest from large neonatal practices, practices that we have been courting for sometime.

I'm happy to say that some of those groups are now part of MEDNAX's pediatrics national group practice and that we're still moving the acquisition process forward with other similar practices.

At the same time, we are working to complete an anesthesia practice acquisition later on this year and we continue to be very excited about building a national group within this specialty.

In fact, the 24% revenue growth that we reported for the 2009 second quarter was driven largely by anesthesia practices that were acquired during the third quarter of last year, Atlanta and Raleigh, and we are focusing our efforts on integrating our three anesthesia practices to improve efficiency.

And I will let Karl Wagner discuss that in a few minutes.

In addition to acquisition-related revenue growth, our results for the 2009 second quarter were helped by positive contributions from each of our physician specialties.

Patient volume grew by 4% on a same-unit basis and that included contributions from all of our physician specialties, including anesthesia.

Same-unit NICU volume grew by 2.5%, which was slightly above the range we provided in establishing our outlook for this quarter.

We are encouraged that NICU patient volume has grown for two consecutive quarters now and our outlook for the 2009 third quarter reflects a cautiously optimistic view that things will continue in that direction.

When looking at the $0.93 per share that we reported this morning relative to our outlook, a lot of the outside is related to the positive income statement leverage that results from higher patient volume.

We continue to be cautious about our payer mix given the general weakness we're seeing in the economy and specifically in employment.

Our second quarter government mix was slightly higher than we had experienced in the 2009 first quarter, but well within the range that we had contemplated when we gave our outlook for the second quarter.

The fundamentals of our business are solid.

We're growing across all of our physician specialties and subspecialties.

We continue to manage our general and administrative expenses more efficiently.

Cash flow from operations were strong.

We're using our cash for acquisitions and we are reducing our modest debt, which gives us more capacity under our credit facility to continue to execute our acquisition strategy.

All in, I'm pleased to present results that reflect the continuation of our focused approach towards executing our growth strategy.

At this point, let's have Karl provide you with a detailed review of our financial results for the second quarter and our outlook for the third quarter.

Karl?

Good morning.

Thank you, Roger.

We reported another solid quarter for MEDNAX with the three month ended June 30, 2009, delivering growth from across all of our physician specialties as well as effective management of our business.

Drilling down to the financial results for the second quarter, revenue was $319.8 million, up 24% from the prior year of $257.7 million.

Revenue growth was driven largely by acquisitions completed during the past 12 months and a considerable percentage of that acquisition related revenue growth was from anesthesia practices that joined us in the third quarter of last year.

We also continue to benefit from the contributions from acquisitions within our historical specialties and we're in the midst of a particularly strong year for acquisitions in this area.

Our same unit revenue growth of 4.4% can be broken down as growth related to volume across all our specialties of 4% and growth of 0.4 of 1% related to reimbursement.

On the volume side, neonatal intensive care patient volume increased by 2.5% for the second quarter over the prior year.

Same-unit revenue related to reimbursement factors for the quarter is really the product of several offsetting factors, reimbursement growth from third party commercial payers was in the low single digits, which is consistent with our historic levels.

While the percentage of our services reimbursed under government programs increased by 180 basis points on a year-over-year basis.

In fact, our government payer mix for the 2009 second quarter increased sequentially by about 0.4 of 1 percentage point.

Practice salary benefits were up 27% for the second quarter and this largely reflects the change in our business mix, as we've added anesthesia practices and more office-based practices during the past year.

The growth of practice salaries and benefits was offset during the quarter by a lower malpractice insurance expense net of bonus of $1.8 million.

This is related to retrospective premium adjustments for historical malpractice insurance premium and is based on favorable claims experience from when those policies were in effect.

Profit after practice expense for the 2009 second quarter was $115.3 million, up 19.5% from $96.5 million for the prior year quarter.

Profit margin after-practice expense declined by 140 basis points to 36% for the quarter and this is largely related to our acquisition mix.

As we said during previous calls, staffing requirements for our anesthesia and office-based practices are higher than for neonatal practices and our office-based practices have higher practice supply expense.

The margin decline was partially offset by lower malpractice expense as a percent of revenue for the quarter.

Our general administrative expenses were up 17%.

We're at a rate that remains below revenue growth.

This continues to be a source of operating efficiency.

G&A expense as a percent of revenue actually declined by 69 basis points to 11.3% for the 2009 second quarter, largely due to the positive leverage associated with patient volume growth, as well as the ongoing expense management efforts.

Operating income grew by 19.6% to $74.8 million for the quarter, from $62.5 million for the 2008 period.

For the second quarter effective tax rate was 41.9%, or approximately 265 basis points, higher than the rate of 39.25% that we've experienced over the past couple of years.

The higher rate is the result of a nondeductible loss and an increase in the reserve requirements for uncertain tax positions.

As we said in the past, we do expect our tax rate will fluctuate as a result of specific tax positions.

For the second quarter, income from continuing operations and net income were $43.2 million.

Income from continuing operations increased by 13% for the 2009 second quarter from $38.2 million for the prior year period.

On a per share basis, income from continuing operations was up 16% to $0.93 based on a weighted average 46.3 million shares outstanding for the second quarter.

From $0.80 based on a weighted average 47.7 million shares outstanding for the prior year period.

Through six months, we've generated net revenue of $623.7 million in 2009, 24% higher than the $503.3 million reported for the same period in 2008.

Operating income is increased by 15% to $131.4 million for the first half of the year from $114.5 million for the prior year period.

Income from continuing operations is up 10% to $77.3 million, from $70.3 million for the first half of 2007.

Earnings per share from continuing operations increased by 15% for the first half of this year to $1.68 based on weighted average 46.1 million shares outstanding.

And this compares to $1.46 per share based on 48.3 million shares outstanding for the first half of 2008.

In the course of 2008, we had discontinued operations of $22.5 million, or $0.46 per share related to the sale of our metabolic screening lab.

We have a solid balance sheet that allows us to continue to execute our growth strategy.

At June 30, 2009, we had $18.6 million in cash and cash equivalents, accounts receivable were $163.4 million, which is down by $1.8 million from March 31, and resulted in a DSO decline from the first quarter of this year.

I'll now touch down on our revolving credit facility reduced by $29 million during the second quarter.

At June 30, we had $152 million outstanding on our $350 million credit facility.

Cash flow from operations of $83.8 million for the second quarter can be attributed to the Company's growth, as well as changes in our working capital accounts.

Both lower accounts receivable and higher accounts payable, primarily related to accruals for physician incentive bonus payments that will be made next year.

During the 2009 second quarter, we used $50.7 million of our cash to complete three physician group acquisition, two neonatal practices and a maternal fetal medicine group.

In July, we completed the acquisition of a large neonatal practice, our fifth acquisition in this subspecialty this year.

With that transaction, we've now slightly exceeded our original estimates for acquisition spending this year.

We're confident that we'll continue to complete acquisitions within our historical specialties that comprise pediatrics medical group and we also expect to expand our American anesthesiology footprint this year through acquisition.

With our cash, anticipated cash flow, and availability under our revolver, we have the available resources to continue to bring practices into our national group.

Moving on to a brief discussion of our outlook, as you have seen in our press release this morning, we believe we'll earn between $0.94 and $1 per share for the 2009 third quarter.

The key variables behind this outlook include same-unit neonatal patient volume growth between 1 to 3%, when compared with the prior year period.

We also think same-unit revenue could be affected by a higher percentage of services reimbursed under government programs.

Our earnings per share range considers reimbursement from government payers as a percentage of our total same-unit revenue, potentially increasing by 1 to 3 percentage points on a sequential basis when compared with the 2009 second quarter.

Our (inaudible) outlook considers our experience during the second quarter, which is an increase in the percentage of service reimbursed by government payers throughout the period.

Finally, as Roger and I have mentioned, a considerable portion of our revenue portion has come from anesthesia practice acquisitions we made during the 2008 third quarter.

Each of our three practices are growing and I think that's largely a function of where we are.

Fairfax, Atlanta, and Raleigh.

Fairfax is the only practice that's included in our same unit base, but each practice has seen higher patient volumes and better reimbursement than the prior year.

So we're pleased with the financial contributions from our anesthesia practices.

On last quarter's call, I discussed our plan to migrate billing and collection functions at our Fairfax and Atlanta practices to our Raleigh administrative office.

The transition at Fairfax was completed during the second quarter of this year and starting last week, August 1, billing for services at our Atlanta practice will be managed from Raleigh as well.

It's our expectation that we'll see some efficiencies as we bring our billing system and in-house collection processes to these practices.

We should collect a higher percent of our charges and improve the revenue cycle management for both of the Atlanta and Fairfax practices.

Given the normal billing and collections cycle, it's too early to talk about the progress at this point, but we're pleased with what we're seeing.

At the same time, we continue to build out the infrastructure for American anesthesiology to allow us to see some benefits from scale as we expand.

We're making modest infrastructure investments, leveraging some of the administrative resources that we acquired with each of the practices, most notably Raleigh, and we're able to draw on some of the resources available to us as part of MEDNAX, such as risk management and information technology.

All the anesthesia practices are working together to identify appropriate outcomes and measures that will ultimately lead to the development of clinical best practices.

We're also sharing information across our practices to improve the operational efficiency of our anesthesia services.

There are numerous projections suggesting there will be strong demand for anesthesia providers in the country, as expected growth of surgical procedures continues.

We have a long history of supporting physicians and working with them to grow their practices, while improving efficiency of the administrative functions.

We think this is a good time to be expanding our model to the practice of anesthesia.

With that, I would like to turn the call back to Roger.

Thank you, Karl.

Operator, at this time, let's open up the call for questions.

(Operator Instructions).

Our first question comes from the line of Ryan Daniels with William Blair.

Yes, good morning, guys, and congratulations on a good quarter.

Karl, just a quick housekeeping question up front.

I know the tax rate will fluctuate, but should we consider it slightly over 39% for the back half of the year?

Yes, our expectation of the tax rate is that 39.25% is our ongoing tax rate.

That will fluctuate based upon any specific items that come in that we need to reserve for.

But our standard tax rate is still 39.25.

Okay, great.

And then I think in the last few calls, you provide a little visibility on the prior month, so meaning the month of July.

Is there any commentary you can provide there on volumes that you saw during July, or what the payer mix looked like during that month?

For the month of July, and we're not going to get into the specifics of the numbers, we're still working on the numbers, the month's not final.

But we are seeing the trends of positive volume growth continue that we saw in the first and second quarters, that continued from the second quarter into the month of July at this point.

And from a payer mix standpoint, it's indicating we're going to be based on what we saw the trends in the second quarter, which was a little bit higher at the end of the quarter than the beginning of the quarter.

But not a dramatic change.

So that's why we built in, a little bit of a growth into the third quarter of the 1 to 3% potential movement.

So I think we believe we're consistent with that at this point.

Okay.

That's very helpful.

Then maybe a couple broader ones and I'll hop back in the queue.

First on SCHIP expansion, I know there's about 13 states that have expand.

I know you don't have heavy exposure to any of them.

But have you taken a look at that and seen what the anti crowd-out provisions would be if there's premium support and what your updated thoughts are on that looking forward.

Well, I think your comment is correct.

It really doesn't affect any of our major states at this point.

So we're not expecting to see a major change.

At this point I think most of our focus on the political side after seeing the states didn't make major changes on most places in our reimbursement on SCHIP has been focused on the federal side on that.

As far as SCHIP at this point, we don't expect to see a major change there.

Okay, great.

Then just a couple on the acquisition front.

Obviously a great year, and I'm curious if you guys want to lay a new target out there, sounds like you've already exceeded the 70 million to $75 million in capital allocation for M&A transactions.

Is that something we could consider going to the $100 million-plus level just in the core business?

It's really difficult for us to put a number out there, especially when we have a back half of the year, timing's going to impact that a lot.

A deal can be pushed off for any number of reasons or accelerate.

So now that we're comfortable putting out a number there, we're comfortable saying we'll do more deals before the end of the year in the core business and we do expect to get a deal done in anesthesia before the end of the year, but I don't think we're comfortable at this point putting a number out there.

How about anesthesia, since you mentioned it, any color on the size of that?

I know you talked about before a couple small one, maybe one big one.

Are we heading towards maybe a larger one in the back half of the year?

I think our expectation was trying to get multiple deals done this year, and I don't think we've hit that at this point.

But we are looking at larger deals than some of the ones we've looked at at this point and I think that's probably what we'll expect to see in the second half of the year.

If you don't hit the multiple, which it sounds like you may not, is that just given the strength in the core business and the lower risk nature of that acquisition model, or has it been actually a tougher market to find or get those deals at a good price?

I think there's a lot of demand on the anesthesia side and I think there's a lot of interest of what we're doing, the high quality practices that we've brought in clearly has contributed to the interest in being part of American anesthesiology.

That's been very helpful.

It's just very -- their variable sizable deals take a long time to get through on the due diligence and a lot of issues come up that we have to be concerned about and the business specialty, in a lot of ways, we're still learning.

We've learned quite a bit over the last couple of years, but we have to be extra cautious in our due diligence to be sure we're comfortable moving forward with these deals, so it just takes us a lot longer to get through them, and the size would be much bigger than the (inaudible) practice, even a large one for us is 10 physicians or so.

So it's much more conflicted.

Okay.

Fair enough.

Thanks a lot, guys.

Next we go to the line of Sudeep Singh with Deutsche Bank.

Thanks for taking my questions.

Karl, I was wondering if we could just spend a little bit of time on the G&A line item.

Obviously in terms of the revenues, there's a pretty nice sequential pickup in revenues, yet on an absolute dollar basis, it looks like G&A remains somewhat flat from the first quarter to the second quarter.

Can you maybe just go into a little bit more detail about what's driving that?

Well, first quarter to second quarter, we have a little bit of the same phenomenon we have on the practice side, not to the same degree.

But by the end of the year and we start hitting into a pickup in the taxes and 401K matching as people maxed out, some people maxed out on that.

So that does impact some extent in the first quarter.

So we try to manage the costs pretty deliberately.

Now, the practices we brought in didn't bring dramatic amounts of G&A costs that sequentially would add to that, unlike in last fall, you would have seen a big increase in our G&A from the function of the G&A we brought in from the anesthesia acquisition that Raleigh brought and that the other practices had some G&A structure.

So just being very cautious on how we're spending our money on the G&A side and not bringing in acquisitions that brought significant G&A has let us have that be much closer to the same level quarter to quarter, sequential basis.

And could you maybe comment on -- you mentioned that the Fairfax billing consolidation was completed in the second quarter.

Any way to kind of size up either, on a margin basis or even on an absolute dollar basis how much that contributed to the savings in G&A, if any?

We really didn't have savings on G&A during the quarter.

On that as we were at the transition -- the old billing company is still providing services, a collection of the old ARs and the costs associated with that.

We think the biggest benefit about these is they are going to be in the dollar side, although we do expect overall we'll see dollar improvement, we do think it's going to be on better processes, better data coming to us and improved collections of the dollars that we actually bill or it.

Okay, great.

Other question I had was on the guidance for the third quarter.

Obviously you're embedding 100 to 300 basis point sequential mix shift.

Just trying to get a sense for the impact that the Medicaid mix is having on your margins.

We haven't seen as much of a shift and your margins have been holding up pretty steady.

So can I assume kind of 100 to 300 basis points, does that all flow to the margin line, or just help me think about what the spread of margins is between that 100 to 300 basis point mix shift.

Your point in terms of margin, and -- when we look at it we look at in dollars.

When you look at a mix shift change, a 1% mix shift change is about $11 million on annual basis.

A little less than half of that would get eaten up on a bonus adjustment on that.

So that's how it would flow flew the numbers.

We've been able to keep our margins strong through this period, it's been in through the first half of this year, we've seen strong volume growth and we focus mostly on neonatal because that's where we had the issues a year ago.

We're seeing strong volume growth across all our specialties.

Our office-based specialties had extremely strong office growth over the last couple years and that continues.

So that is helping us maintain our margin.

Then just the last one here, in the quarter on the neonatal side, with respect to commercial contracts, were rates more or less kind of in line with what you saw historically, or anything you can add there would be great?

No, our renewal on commercial contracts are running as we anticipated.

There's really been no change from our historical contracting the rates we've been seeing in our renegotiated contracts.

We're right on plan with that.

Okay, great.

Thanks a lot.

And next we go to the line of Kevin Ellich with RBC Capital Markets.

Good morning, guys.

Thanks for taking my questions.

Karl, I was just wondering if you can -- I might have missed this but which line item goes to Mednow falling into it, is that G&A?

No, the Mednow cost we've always roll up is a benefit to our physicians, so it's in salaries and benefits on the practice side.

Got it.

Okay.

That's helpful.

Then I was just wondering if you could, or would be willing to break out how volumes trended monthly throughout the quarter?

I know you guys said on the last call April was up 2%, I believe?

Right.

I don't think we want to get into talking about month by month sequential changes in exact numbers by month, but they were pretty consistent.

We didn't have dramatic swings.

It's not like we were 2% in April and down or flat in May and then huge in June.

It wasn't like that.

It was pretty constant.

Got it.

Okay.

And then thinking about the same store volume, have you seen any impact or a positive benefit from other hospitals closing or shrinking in NICUs and might push volume to you guys?

No, we're not seeing that in any of our markets, it's nothing that's come to our attention, nothing to report about.

I don't think we're really seeing that NICUs closing and hospitals closing that had large NICUs.

Got it.

Then just lastly on the acquisition front, the last few NICU deals you guys have done have been pretty sizable, given the patient days and number of physicians relative to your historical averages.

I was just wondering, I know this has been brought up in the past, but is this a paradigm shift?

Have you guys chomped through all of the 2 to 3, 5 physician practices that are attractive and now we should be looking at larger deals going forward?

It's Roger.

No, it's -- I think it's just a reflection of the times.

There's a lot of smaller deals out there that we're working on and we hope to get some of them done here before the end of the year, but there are some larger practices that we've wanted to bring in as part of MEDNAX and pediatrics for a number of years.

And I think that a combination of some of the leaders of those practices are now getting older, plus the economy is making them be willing to talk, where in the past they weren't interested in talking.

Roger, just kind of following up on that, just for example, the national practice that was just done in July, is that a -- are you guys going back to the same list that you've been kind of talking to in the past and do you see more willingness in selling some of the owners?

Yes, that's right.

I mean we know these practices.

The leader of that -- I've known that guy for 20 years.

It's not that we don't talk.

It's just that when we talk, we're happy to go to dinner.

We have dinner and we talk and then they know we're not ready yet, we'll go to dinner again next year.

And, but, the list of practices we talk to I would say almost every major neonatology practice every year, at least touch bases with them on the phone and there just is a greater interest this year in not only going to dinner, but following through and sending in information so that we can make an offer and put a pro forma together and then one thing leads to another and then negotiation and you get a deal done.

Sounds good.

Thanks, guys.

(Operator Instructions).

Our next question comes from the line of Brooks O'Neil with Dougherty and Company.

Hi.

That's Dougherty and Company.

Good morning, and congratulations on another terrific quarter, guys.

Thanks, Brooks.

I'm just curious, last year everybody seemed a little bit flipped out about lower number of births in the United States and there was considerable effort to track census and hospitals.

Do you guys have any comment on what's driving the volume growth this year?

Do you think it's just reversion to the mean?

Is there any regional variation?

Any color could be very helpful.

Not really.

As we said -- precluded last year, we had a lot of different theory and speculation as to what might have been going on.

At the end of the day we felt it was difficult to pinpoint because we saw a lot of variability region to region and on a quarter to quarter basis.

One region would be up and the next one would be down.

So, it's not anything that we can give you a definitive answer on.

We have seen some stabilization of that.

We're not seeing quite as much variability and so when we're seeing the increases in volume, they are really coming across most, if not all of the regions.

Do you think it could be economic impact, people have a little more time on their hands?

Well, I don't know.

That was obviously the conversation last year, but of course we have to go back eight months to really figure out what happened and as we go back, last year if we went back eight months when this thing started to, the volume started to slow down, it would have been that sometime in 2007 people had figured out that there was going to be an economic downturn and we didn't think that that really made a lot of sense.

Sure, absolutely.

I'm curious, and I'm guessing I know the answer to this, but is there any way you could track whether the COBRA extension is having any impact on your payer mix shift or any other factors you might point to there?

We believe that it is, but we really can't pinpoint it because a COBRA patient does not look any different to us than an insured patient.

Okay.

In other words, if your company provides you with whatever, United Insurance, and you get laid off and you go on COBRA, you just show up as having United Insurance.

Sure.

We can't identify who is on COBRA.

We just know that you have United.

Yes, that makes sense.

I'm just curious, too, you started off, Roger, talking about health reform.

One thing that seems to be a bit of a theme out there is the potential for increased Medicaid across the country.

Some percentage of the, I guess 47 million people I assume will be picked up on Medicaid.

I'm curious if you're tracking that, if you sense the same thing and where you think that stands, obviously still a very big moving target as we head into the fall.

But any comments would be interesting.

Well, actually we are tracking that very, very closely.

In fact, I think that our, some of our lobbyists were instrumental in putting some language into some bills that would be very favorable to us.

By the same token, we've heard from the senate side that they are not really contemplating that.

So it's just too early to handicap, but we have seen at least significant interest from our partners in the lobby and the legislature to improve access to care.

And we believe as we've talked about in the past that improving access to care for these Medicaid patients really happens by improving the reimbursement rates.

As you know, Medicaid reimbursement on average across the country is about 70% of Medicare.

Yes.

It's something we're watching closely.

Absolutely.

Go ahead, Karl.

On the expansion of the Medicaid, one, expansion is a percent of the federal poverty level.

In a lot of instances states have already done that for the first year of life or for pregnant women, so those changes won't have as dramatic effect.

For those people that are uninsured currently they walk into the hospital, typically they are trying to find insurance.

So I think the people that currently they say are eligible for Medicaid but aren't on it, when they get into the hospital in this situation, the hospitals qualify them and getting them put on Medicaid rules.

As far as the expansion, I think unless it gets dramatically higher, I think either through the SCHIP programs that the states have or the programs that the states already have that expanded the eligibility, I don't know that we're going to see a huge change.

Sure.

That makes total sense.

As you think about sort of the longer-term picture for your core business, do you guys think there's any limit in terms of the let's call it market share, for lack of a better term, that you can control in the neonatal intensive care space?

Well, I mean as far as the nonuniversity practices are concerned, we don't think that there are any limits.

Obviously there will be some, but we don't look at that.

We don't see any reason why if you are a nonuniversity practice that you wouldn't want to come be part of what we're doing.

But there are the academic centers out there, and as we've talked in the past, we think that it's difficult for them to come be part of what we're doing.

So the limit would be those academic centers.

Can you refresh my memory what's the mix between the academic centers and more general practices in the United States now?

We estimate that of about 4000 neonatologists, maybe 25% or so of them are in academic.

Great.

Thanks a lot, and again, congratulations on a terrific quarter.

Thank you.

Next we go to the line of [Nicholas Jansen] with Raymond James.

Good morning, guys.

Can you talk about the state Medicaid picture?

I know a bunch of the budgets just closed.

And then are you seeing anything in your key states that should be of note of increase or decrease?

In looking at the state Medicaids, we had some effects, but nothing that we are really concerned about.

We did see a few states cut their reimbursement in Medicaid.

But it was nothing that made us take a major concern.

There weren't major states for us.

So we don't expect to see any impact from that.

And turning to the anesthesia side, with the debt markets kind of improving somewhat, have you seen competition heap back up from private equity or are you guys still the only guys really out there now that you (inaudible) in being levered and not much interest from -- what's the competitive landscape and with multiples supposedly falling, you don't have to comment on specific numbers, but are they 5% less in the Fairfax, 10%?

What's your sense on the multiple?

Thanks.

There are rumblings of private equities doing some things.

Nothing we've seen in any direct deals we've talked to, but there are reports of mumblings out there that are -- that private equity is looking at some areas of anesthesia, so I can't get much color beyond that.

We're not going to get into the specifics of how much they've dropped to that but we're being disciplined and as we said before, our first several deals, which we're glad to have on board were more expensive as we got into that but we're being very disciplined as we head into this market going forward on multiples we're willing to pay on a go-forward basis to be sure that they are the right deals at the right prices, is accretive to our earnings in a strong way.

Lastly, on big picture healthcare reform, what do you guys hearing in terms of the public plan?

I know there's some concerns there with the rate differential for the neonatology industry.

What are you guys hearing at this level?

I know it's probably early but.

I think what we're hearing from our lobbyists is it's going to take some time.

You see the house and the senate are very different at this point.

The public plan seems to be easing at some point.

Whether it's from no public plan to the movement from the house the other day to a public plan that has to negotiate rates rather than we said Medicare.

So I think there is movement.

I don't know that anybody is comfortable picking it, but I think the senate has been very much focused, especially the finance committee, on the co-op answer rather than the public plan.

So I think we're just sitting here watching it, trying to stay involved to the extent we can, getting involved with the associations that the physicians work with, whether it's the American Academy of Pediatrics, the American Society of Anesthesiologists, and make sure that we're all working in concert because we all have the same goals in the end.

Okay.

Thanks so much.

Great quarter, guys.

Thanks.

Next, we go to the line of Gary Taylor with CitiGroup.

A few questions.

Actually, I got interrupted when, I think Karl was answering the questions about the G&A run rate on the dollar (inaudible) which looked pretty flat sequentially.

I missed what you said about the second hand?

We would start to try and keep our G&A costs.

We will grow some as we continue to invest the infrastructure and add based upon the acquisitions that we've done.

As you've seen, most of the acquisitions we've done this year have been in the second quarter, so we'll expect to add to cover the resources we need for those from a dollar standpoint.

So we would expect to see that grow from a sequential basis, but not dramatically unless we do an acquisition that brings with it a sizable amount of G&A, similar to what we did last year at the end of September, we acquired the Raleigh practice that had substantial G&A infrastructure.

That had a big pick up in G&A on a sequential basis.

But we're focused on making sure that we're not going to grow our G&A anywhere near the rate that revenue is growing.

Okay, and your same-unit volume growth, 4.4%, and you had, this 40-basis point shift, which is -- the 40 basis point mix shift is disclosed on a revenue basis, correct?

Or is it percent of your revenue mix?

From a revenue standpoint, but it's Q1 to Q2, just to be clear.

Right.

Basis points--.

Okay.

I was just trying to kind of think about, and I guess since that number was sequentially not year-over-year, I need to rethink it, what does your mix like -- look year-over-year?

The 180 basis points.

That's the 180.

Okay.

I'll come back to you on a calculation.

I'll have to do the 180.

Last question then is same-store revenues was up 4%, I know you don't disclose same-store margin, but can you kind of talk about maybe what factors may have impacted same-store margins year-over-year just so you can kind of get a sense of how much EBITDA and earnings growth is coming from the same-store book of business?

Well, I mean the impact on the margin's going to be a function of outside of the revenue pieces of it, on the cost side.

Clearly revenue growth has an impact from us.

From an expense standpoint just from the bonus expense for the bonus program that we have in place.

And we will continue to see that number grow, so you will see some impacts from that.

Also, as we grow because of volume, we're seeing volume growth in all of our specialties that requires an increase in staffing levels.

So we are seeing an increase in staffing levels based upon volume growth, particularly in the office-based practices, which you need the physician in place.

On the neonatal, typically as we've talked in the past, you see growth and then later it's added.

In this case for the office-based practice we've growing -- and the anesthesia, I need the resources there.

So either we're paying for the resources through contracting for the labor to come in, somebody providing extra services in a different unit or helping out a practice or hiring more people.

So that's impacting it.

But we are seeing, revenue flowing through in our same unit business.

But it sounds like maybe the same-store margins are down.

Is that what you were trying to describe?

No, that's not what I'm saying.

Okay.

Final question, just on the SWB line, I think in the first quarter, just year-over-year as a percent of revenue that line was up about 220 basis points and then the 2Q was only up about 200, even adding back the Med Mal benefit.

So just sequentially, looking at it sequentially, the year-over-year comparisons looked much better.

Was that just -- was that just some fixed staffing leverage from the revenue growth, productivity gains?

Were there any reason in particular why that SWB number looked better than it did in the 1Q year-over-year?

Well, part of it is going to be, well, year-over-year Q2 to Q2 last year, part of it is a little bit of the leverage we get from the growth that we were just talking about, so that's helping us on the percentage of salaries, benefits as compared to revenue.

There's no particular reason or major change other than the malpractice that we talked about and other than that, things are pretty much the same.

Okay.

No changes in, in merit pay increases or anything, no material changes in '09 versus '08?

No changes in our historic levels on those, no.

Okay, thank you.

Next we go to the line of Rob Mains with Morgan Keegan.

Thanks, good morning.

Just want to make sure I got two things right, Karl.

First of all, if I wanted to do a normalized earnings calculation, I add back the 1.8 to practice, salaries and benefits and I use 39.25% tax rate?

That would be correct.

Okay.

Then when you look at the NICU volumes, are you still feeling that the percentage of births are winding up in your units?

It's really about the same, our rate, it varies through the period slightly, but it's in the range we historically see, typically see.

Okay.

Then obviously if you look at where the NICUs are, I can infer that the volume growth you're getting outside the NICU are pretty strong.

Curious what you might attribute that to on the anesthesiology side, given that your kind of volume takers.

Is it something that your hospitals are doing, their markets, but why do you think volumes are holding up when the hospital industry seems to be at a lower level?

Well, let's be sure we're on the same page on this because from the (inaudible) standpoint Fairfax is the only facility that's in same-unit, in that transition.

And we've seen growth in Fairfax.

They are in very strong hospital in that market, high end, tertiary care, transplants, everything at that hospital and it's been a driver that they provide high level of service and that hospital has been very busy.

When you look at the other two markets that we're in and just looking at what we know there, volume has been what we're seeing, they are seeing growth in those markets and I really think a lot of it's market driven and the hospital system that they are in in those markets that are driving the growth.

In Raleigh, for instance, they have gotten some additional outpatient facilities since we've acquired them.

In Atlanta, they are in a hospital that's been growing and in a strong tertiary care hospital in Atlanta.

So I think it's just a function of the practices, the high quality of practices and the high quality of the hospitals that they are in, we're getting that growth.

That being said, they have seen declines in areas that you would expect to see.

The plastic surgery has been very difficult in this market for them, so they have seen an impact to that as they have gone through it.

Okay, and then the office-based specialties, the growth there, how much of that would you attribute to more patients coming into the practices and how much is it addition of new doctors?

It's a combination of both.

Lot of these cases we're having to add doctors to increase their volume, so there is this demand there, but once we get the physician, then we can get them up and running fairly quickly, but there is a demand for those specialties.

Okay.

So even practices that have their doctors are still seeing increases?

Yes.

Great.

Thanks a lot.

Thank you.

(Operator Instructions).

Our next question comes from the line of Art Henderson with Jefferies & Company.

Hi, good morning.

Once again, very nice quarter.

I'm sorry I jumped on late, so apologize if I'm asking something that somebody's already asked.

On your guidance, obviously you've given out one quarter.

Things seem to be improving on the neonatology volume side.

Is it payer mix shift that's sort of giving you some hesitancy to extend the outlook or do you need maybe another quarter of data to confirm that everything is okay in general with neonatology volumes?

What's holding you back there, Karl?

I think it's all of those.

Right now we've had a couple of good quarters.

Second quarter was better on volume growth than the first quarter was, but it doesn't mean we're saying it's going to sustain, so we want to get some comfort on the sustainability of the volume.

And payer mix is a real question that we have out there.

We can't ignore what's been going on in the economy from the unemployment rate and what impact may be out there in watching that.

We're just not comfortable putting out numbers throughout, beyond a quarter at a time at this point.

That's fair.

Karl, historically I know you've already forecast in your guidance some degree of payer mix deterioration towards Medicaid.

In light of what you have out today, the 1 to 3%, can you remind me what you typically put in there, just in terms of your guidance historically, what -- is this an acceleration of it?

I assume it is.

I'm just trying to get a context.

Typically we haven't built much movement in our Medicaid mix on a year-over-year basis in prior years.

Okay.

You have not.

It's been basically flat?

Basically flat from a same-unit standpoint.

We would have built in payer exchange.

It was a function of acquisitions had different payer mix and year-over-year, we would see payer mix changes as a function of the acquisition mix, not as much as a function of the same-unit mix.

But we're seeing an acceleration of that last year in the third quarter and we've seen that continue.

As I said, we were 180 basis points higher in the second quarter than in the prior year going into the third quarter, we have built in some in that 1 to 3% range.

Okay, okay.

Last question, capital structure, I saw you paid down a nice slug on your debt.

Looking at sort of your cash flow after acquisitions, is it mostly the debt repayment?

I know historically in the back half of the year you guys have contemplated share repurchases.

Can you remind me if there's anything outstanding on an authorization or kind of where you're -- what your view on uses of cash after acquisitions?

We've not had any contemplation on the share repurchase.

I mean we're really excited at this point about the opportunities that are out there from an acquisition standpoint, both on the pediatric side and on the American anesthesiology side.

So right now we're going to leave what we have available under our line of credit and the cash flow that we generate will pay down the line of credit so it's available to use in the acquisition environment we're in right now.

So, Karl, we shouldn't expect any more debt repayment beyond what you did here?

Well, we'll continue to pay down the line of credit when we have cash if we haven't used it for an acquisition, but acquisitions out there, we're going to draw on the line of credit.

Okay, very good.

Thanks very much.

And there are no further questions.

Please continue.

Okay.

Well, if there aren't any further questions, then we can go ahead and terminate the call.

Thank you, operator, for your assistance this morning.

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