Pediatrix Medical Group Inc (MD) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MEDNAX, Inc 2009 third quarter earnings call.

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

Later we'll conduct a question and answer session, and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the call over to Director of Investor Relations, Mr.

Bob Kneeley.

Please go ahead, sir.

Thank you and good morning, everyone.

Before we open the call, I want to read our forward-looking disclosure.

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'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 MEDNAX undertakes no duty to update or revise any such statements, whether as a 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 sections entitled Risk Factors.

With that, let me turn the call over to our Chief Executive Officer, Roger Medel.

Thank you and good morning.

I'm pleased to share with you our results for the 2009 third quarter and to update you on the progress of our company.

This morning, we issued a press release that calls attention to the record quarterly financial results at MEDNAX.

Quite simply, these results reflect our model at work generating operating efficiencies as we grow.

Revenue grew by 24% to over $331 million for this third quarter over last year.

Importantly, operating income growth was 26%, as we realized practice and administrative efficiencies which led to operating margin improvement of 37 basis points.

Net income from continuing operations grew by 29%, reflecting lower interest expense and a lower tax rate for the period.

Cash flow from operations was over $106 million and a new quarterly record for us.

We used our cash to continue growing our organization through acquisitions and to reduce amounts outstanding under our line of credit, improving our ability to access capital to further propel our growth.

In looking at our solid results for this quarter, it's hard to point to any single factor as being the catalyst for our improvement.

Rather, these results are the product of our ability to improve the operations of a largely fixed cost business.

Our patient volume growth was strong and included a 4% increase in number of patient days at our neonatal intensive care units.

As a reminder, volume growth historically drives efficiencies at the administrative level.

Same-unit net reimbursement growth of 2.6%, which we achieved even with year-over-year and sequential growth in the percentage of our services reimbursed under government programs, historically drives both practice and administrative improvements, and that's true for this quarter.

Our ability to acquire practices within our historical subspecialties and to integrate them into our existing regional structure allows us to improve the revenue cycle management of those practices without significant incremental investments.

In fact, this has been a particularly good year for acquisitions within our historical physician subspecialty.

We've completed a total of nine acquisitions so far this year, exceeding the initial capital investment goals that we had established in late 2008.

Within our neonatal services alone, we've added more than 95,000 annualized patient days.

For some time, we've talked about heightened interest among groups to join us, and while this has been a good year, I will characterize our pipeline within the core groups as being full with continued interest among a variety of groups of different sizes.

We're also continuing to work our anesthesia pipeline, and while we have not closed a transaction at this point in the year, we have been moving through our disciplined due diligence process in looking at our next anesthesia practice acquisition.

We are enthusiastic about our ability to grow our footprint in anesthesia, and the experience we've gained managing these practices gives us more confidence to move forward within this specialty.

For both our core specialties and anesthesia, the challenging operating environment has been a reason for practices to join our national group.

We also think that uncertainty related to healthcare reform is yet another factor among many that attracts physicians to practice as part of MEDNAX.

While there has been a lot of energy expended this year on healthcare reform and I'm sure that many of you are following this as closely as we are, it is difficult for us to determine what the final impact, if any, of any of the proposals might be.

We're scouring the various bills with an eye toward how a new or revamped payer market might impact our business.

In particular, our focus on this point is on how any of the proposed bills would affect the payer/provider dynamic, and our objective is to ensure that there is some mechanism that [reconnects] with unique role of hospital-based providers in delivering patient care.

In this challenging economic and regulatory environment, we remain focused on growing our business and finding ways to manage more efficiently, and I believe that our continued success is evident in today's results.

At this point, I will turn the call over to Karl Wagner.

Karl.

Good morning and thanks for joining our call today.

As Roger said, this is a quarter that emphasizes our business model at work.

It also reflects sustainability of our model.

These results present a company that is growing revenue, improving operating efficiency, growing strong cash flow from operations, and using the cash to simultaneously execute a proven growth strategy and reduce debt levels.

With our cash generating capability, our strong balance sheet, and more than $250 million available under our $350 million revolving credit facility, we're in an excellent position to continue the expansion of our national medical group model.

I'm going to spend a few minutes discussing our results for the 2009 third quarter which were released today, as well as our outlook for the fourth quarter before we open the call to your questions.

Our third quarter revenue of $331.3 million was an increase of 24% from the prior year, and was driven largely by acquisitions.

Same unit revenue growth of 7.4% consisted of 4.8% patient volume growth and growth from reimbursement related factors of 2.6%.

Breaking down these components further, same unit patient volume grew across all of our hospital-based and office-based physician services as well as our hearing screen program.

This includes same-unit neonatal patient day growth of 4% for the period.

We're seeing strong volume growth from our office based maternal/fetal and pediatric cardiology practices as well as from our anesthesia services.

At this point, only one of our anesthesia practices, Fairfax, is included in our same unit base and volume at this practice is growing, contributing to our overall same unit volume growth.

Our same unit revenue growth related to reimbursement was 2.6%, which includes a slight year-over-year increase in our payer mix to more patient care reimbursed under government programs.

Despite that mix shift, we're seeing better reimbursement overall, and that's principally related to the improvement from third party commercial payers.

Beginning with the 2009 fourth quarter, the two anesthesia practice acquisitions completed in 2008, Atlanta and Raleigh, will be included as part of our same-unit base.

We continue to see good volume and reimbursement related growth from these practices.

Most of our revenue growth comes from our acquisition efforts.

So far this year we've completed nine acquisitions, all within our historical neonatal and other pediatric subspecialties as well as maternal/fetal medicine.

Continuing with the income statement discussion, profit after practice expense was $119.9 million and grew by 24.6%, slightly higher than the revenue growth for the 2009 third quarter compared against the prior year period.

Practice, salaries, and benefits grew at roughly the same rate as our revenue growth and the growth of practice supplies and other operating expenses was considerably lower than the revenue growth.

This led to profit after practice expense margin improvement of 19 basis points to 36.21% for the third quarter.

As we've said throughout this call, this margin improvement is largely the result of higher revenue particularly same-unit volume and reimbursement revenue growth.

Operating income was $78.3 million for the third quarter, up 26% from $62.2 million for the prior year period.

Operating margin expanded to 23.65%, up 37 basis points from the prior year, as a result of both practice and administrative efficiencies.

General and administrative expenses as a percent of revenue continued to decline and were at 11.36%, an improvement of 15 basis points over the 2008 third quarter.

Our net income grew by 29% to $48.1 million for the third quarter.

This is the result of the growth of our business and ongoing operating efficiencies as well as lower interest expense and a tax rate of 38.45% that was 80 basis points better than the rate for last year's third quarter.

Our tax rate was impacted by a reduction in certain tax reserves due to the expiration of a statute of limitations.

Our earnings per share in continued operations were $1.03 for the third quarter, a quarterly record, and that's based on a weighted average 46.7 million shares outstanding for the period.

This is up 27% from $0.81 from the 2008 third quarter based on a weighted average 46.2 million shares outstanding for that period.

On our balance sheet, at the end of the quarter, we had $20.9 million in cash and cash equivalents, and accounts receivable were approximately $164 million.

Accounts receivable grew by 8% year-over-year, or a rate that's considerably lower than revenue growth.

That's largely a product of our revenue cycle management.

On the liability side, we ended the quarter with $85.5 million outstanding on a revolving credit facility, which is a reduction of $66.5 million from June 30th.

Cash flow from operations was strong, a quarterly record of $106.7 million.

We used our cash flow to reduce amounts outstanding under our credit facility and to complete acquisitions.

During the quarter, we invested $41.1 million for acquisitions, including the Nashville Neonatal Group and a multispecialty group based in Las Vegas, as well as to make contingent purchase price payments on previously completed transactions.

Through nine months of this year, we've generated revenues of $955 million, up 24% from last year, operating income of $209.7 million, which is an increase of 19% over last year, and net income from continuing operations is up 16% at $125.4 million.

On a per share basis, net income from continuing operations was $2.71 through nine months of 2009, based on a weighted average 46.3 million shares outstanding.

This compares with $2.26 for the first nine months of 2008 based on a weighted average 47.6 million shares outstanding.

Through nine months of this year, cash flow from operations is $168.5 million, up from $113 million through the first nine months of 2008.

We've used $103.4 million of our cash to complete acquisitions and to make contingent purchase price payments through this year on previous acquisitions.

In addition to announcing our third quarter results, we also discussed our earnings per share outlook for the fourth quarter in this morning's press release.

We expect earnings per share for the fourth quarter of between $0.95 and $1.01.

The key variable to this outlook are NICU patient volume and payer mix.

We're anticipating that NICU patient volume could fall within a range of an increase of up to 1% to a decline of up to 1% on a year-over-year basis.

We also anticipate the percentage of our services covered under government programs could be flat or unchanged to as much as 2 percentage points higher on a sequential basis, meaning when we compare it to our 2009 third quarter levels.

The volume estimate is driven in part by what we're seeing during the first few weeks of the 2009 fourth quarter, but largely by the fact that we've now lapped our easiest comparable period.

If you recall, when we experienced volume softness throughout most of the 2008, the steepest year-over-year decline was in the third quarter.

At this point, I will turn the call back to Roger before we take your questions.

Thank you, Karl.

Operator, let's go ahead and open up the call for questions.

(Operator Instructions).

We will begin with the line of Sudeep Singh with Deutsche Bank.

Please go ahead.

My first question has to do with going back to the mix shift that you saw in the quarter.

I believe going from first to second quarter, you saw about a 40 basis point sequential mix -- sequential shift, and now this quarter you're seeing about 200 basis points.

Maybe if you could just talk about what's giving you confidence going into the fourth quarter in terms of the guidance that you have out there and essentially where do you really think the mix settles out at?

Well, when you look at the sequential mix of 1.9% increase, a piece of that we had clearly expected based upon where we ended the second quarter -- you remember in the last quarter call we talked about the end of the second quarter we had seen a spike-up in our payer mix change.

So it wasn't surprising that we ended up in this range.

Additionally, historically we typically do see a slightly higher level of government reimbursement in the third quarter as compared to the second.

For some reason there is some level of seasonality to payer mix.

I can't say that we've ever figured it out, but usually the third and fourth quarters are higher than the first and second quarters.

So on a sequential basis, while it was up 1.9%, on a year over year basis it was only up 0.6%.

So it wasn't significant growth year over year.

Based upon what we saw during the quarter mostly being flat throughout the quarter, we don't expect a big jump in the fourth quarter, based on what we're seeing at this point.

Okay, great.

Then just -- I wanted to delve into just the Fairfax practice.

I know that that's -- based on your comments, that's still the only one in the same-store group.

But my understanding was that GPC was closed earlier in July of 2008, and I'm just curious why it wasn't included in the same store group?

Our rule is if it's not there on the first day of the quarter, it's not included in the same-unit analysis.

That's why GPC wasn't.

It was closed a couple days into the quarter last year, so we wouldn't include that in this quarter, which would be our typical practice on all acquisitions.

On the Fairfax then, in terms of the improvement that you've seen that in practice with respect to revenue capture, obviously there's been a lot of progress that you've made on the billing and collecting side.

Maybe if you could just talk a little bit about what you are seeing in terms of revenue capture there, preacquisition and relative to the last couple years, like what have you been able to do in the top line there?

Well, I don't want to get into specifics about Fairfax.

I can tell you where we are in general, but we are seeing volume growth in that practice.

So we're seeing more surgical volume as well as volume outside the operating suite that the anesthesiologists cover at the practice in Fairfax.

In addition, on the revenue side, we have seen improvement from managed care contracting.

As you know, we moved the billing and collection process into our Raleigh regional location earlier this year, and we believe that's paying off through better turnaround, billing, quicker collections on the billing that we have, and we believe it's paying off by better overall collections.

We had a little bit more time to be able to quantify the impact of that, but we certainly are seeing that already at this point from what we've had there since the April 1st conversion into our billing process.

Okay.

And then just last one from me, and I will hop off -- I think late Friday, the final rule came out for the physician fee schedule.

I know you guys are not directly tied to the Medicare rates that are listed on that schedule.

But I noticed that for some of the codes, especially on the neonatal and cardiology side, seem like there are some differences between the final and proposed rule.

Is there any way you can give us some quick comments on your take of that final rule and to what extent your business is really pegged to that?

When you look at what came out on Friday and the limited time we've had to go through it, it's our expectation it's basically flat for us.

We do have some negatives in some areas and positives in other areas as we go through it, but we don't find anything substantial in there that will affect our business in a dramatic way either way.

Our exposure in general is clearly on the anesthesia side.

We would have a direct impact on Medicare.

But on our neonatal practices and other practices where Medicaid program key off of a Medicare rate, which some do, but they take time to phase in -- those would be impacted by this change.

Then some of our contracts are based upon Medicare, but typically it's a fixed year of Medicare, so it wouldn't impact those contracts.

So we don't expect a major impact either from managed care payers, because of how our contracts are structured, and we may see some change from the Medicaid programs.

But in general when you offset the positives and the negatives throughout the rule, it's not that big of a deal.

Thanks a lot.

We'll now go to the line of Ryan Daniels with William Blair.

Please go ahead.

Good morning, guys.

Quick follow-up question on the pricing.

Can you give us an update on what Medicaid is looking like for fiscal 2010?

I think at this point pretty much every state has started the new fiscal year either in July or October, so curious what pricing looks like there.

Well, when you look at the Medicaid pricing that we've seen for this fiscal year, which would end next July or into an October 1 date, it really hasn't been major changes.

There have been some places we've seen some [light] decreases.

In general, there haven't been any major changes to our Medicaid reimbursement.

But it is something we're looking at going into next year, with a big concern of the state's budgets going in, and many cases it's a sizable component of that.

We're looking at -- and it's clearly on our political agenda, working with our lobbyists and our physicians and our states to make sure that we're being heard on what we [think].

Okay, great.

If we think about that environment, is there any opportunity to achieve better rates in the business if you're seeing more pressure on the Medicaid side?

I'm sorry, see better rate on the managed care?

Get better -- I think I said Medicare -- managed care rates if you're seeing more pressure on Medicaid?

On the Medicaid managed care rates, we do push for better rates, but typically they are tied to the state Medicaid.

So it's going to follow what the Medicaid does.

What about broader commercial pricing?

Can you take a tougher stance with negotiations going into next year with some of the commercial payers?

We certainly take a tough stance all the time on the commercial players and work hard to get what we can.

Clearly a component is what we're seeing in the mix of our business.

As we see a bigger mix, we have to make sure that we're covering any cost increases that we're seeing, any impact on that.

So that clearly is a consideration that we have when we go in to talk to the payers.

As you can see, with strong pricing growth despite the change in our payer mix year-over-year, we had some nice pricing growth this year.

I think that shows that we're working hard with the managed care companies.

As we've said in the past, typically we have a first-year renewal, which we'll see an increase of high single to low double digit rates, and then try and do escalators year over year.

And that's becoming a bigger part of our business of contracts with escalators, and that's really helping us out as we look forward for the future.

Maybe two quick ones, I'll hop off.

The first is given the strength in cash flows, I think your revolver -- you mentioned before you've got about $250 million to $260 million.

With the free cash flow and the cash, have you thought at all about use of those proceeds?

I know acquisition probably remains the number one priority.

Given that you've got nearly $0.5 billion if we think of what you might look like on a free cash flow basis for 2010, any thoughts on another share repurchase or what you might do with that cash?

Right now our focus is on acquisitions, both in our core business specialties as well as the opportunities that we see in anesthesia going forward at the end of this year and into next year.

We had no thought at this point to talk about a share repurchase.

At this point we're just going to be looking at doing acquisitions.

We're just not going to borrow money from our line of credit for this year.

Okay, fair enough.

Last question, and I will hop off, just regarding the NICU volume, obviously a good quarter off a fairly easy comp.

I'm curious if birth rates were up in your facility or if this was a phenomenon of more NICU admissions and a little bit longer length of stay?

Any color there you might have would be helpful.

On a year-over-year basis, we actually saw a slight decline in births at our hospitals, and we saw improvements in our length of stay, slight improvement in admission rates.

Remember last year we did see negative movements in both those indicators in the third quarter of last year, which made the big drop.

So we are currently within the range of what we typically see.

Nothing unusual, consistent with what we've been seeing on a year basis.

So there was nothing unusual in the third quarter of this year.

It's comparable to what we saw on a full-year basis last year, so nothing unusual in our length of stay or admit rates this quarter, although last quarter in the third quarter they were pretty weak.

Thanks a lot, guys, nice quarter.

Thank you.

We will now go to the line of Kevin Ellich with RBC Capital Markets.

Please go ahead.

Thanks for taking my questions.

Going back to the anesthesiology side of the business, I was wondering if you guys would be willing to tell us what same-unit growth would have been if the other two anesthesiology practices were part of the same-unit base?

Well, we don't have all that information because we don't include the revenue in our historical basis, so we haven't calculated what same-unit would be with those in the base.

But I will say both of those practices are growing nicely.

So it would have been higher than the 7.4% then?

Having not done the calculation, I don't want to comment on that.

Okay.

Then thinking about the anesthesiology M&A market, could you give us characterization, has that gotten more competitive?

Are the valuations coming down yet?

And given -- since you guys haven't done any anesthesia deals yet this year, is that really due to valuation or is it really because of the healthcare forum discussions going on and potential changes to reimbursement?

This is Roger.

I wouldn't say it's gotten more competitive.

I think we're seeing the same level of interest from other potential players as we've seen in the past, which in a nutshell is very little.

We are very interested, and we continue to do our due diligence in other practices that will become part of MEDNAX in the future.

We do continue to think that we'll get a deal done if not in the fourth quarter, then in the first quarter of next year.

The reason we haven't closed any anesthesia deals this year is that we've been focused on our core business, as I've said.

We see plenty of opportunities to continue to acquire these neonatology and cardiology practices, and that's what we've been focused on.

We have looked at a couple of anesthesia deals and decided that this is not the right time for us to complete those acquisitions, but we remain very focused.

And I do think that the multiples that we are seeing for anesthesia practices are starting to come down.

Okay.

That's helpful, and then transitioning is over to the neonatal side or the newborn side of the business, it seems like all year long, you guys have been doing larger sized practice acquisitions.

Could you talk about the valuations there?

Is that still within historical three to five times EBITDA or is that trending towards the lower end of the range?

We are seeing -- we are paying lower multiples than we have historically for these practices, and I believe at the end of this year, the cumulative multiple or the average multiple that we will have paid for our practices will be below four.

What do you think is causing that trend?

Is it really the neonatologists nearing retirement age, or is there any phenomenon that you can think of?

I think it's a combination of all of those things.

I think the neonatologists are reaching retirement age, the senior ones.

I think the economy has played a role, and people are looking at their 401(k)s and whatever, and are impacted by what's happened there.

I think that the prospect of health reform, the idea that taxes could be going up next year, I mean, we see a combination of all of those things.

I wouldn't point to any one thing specific.

That's helpful.

Then last question on the payer mix side.

You guys have baked in another 0% to 2% deterioration.

Is that based off of the trends that you've seen so far this month?

Then looking forward into 2010, have you looked at the ceasing of COBRA benefits and as people -- as the recession took hold over the last 18 to 24 months, have you guys look at how that will play in when people roll off COBRA and what impact that will have on the mix?

In looking to the fourth quarter we took a lot of information into account, historical trends third quarter to fourth quarter, how our third quarter developed month to month as far as payer mix and with a payer mix, and for the month of September as as well as what we've started to see in the month of October, which is at this point we don't have have a lot of detailed information on the payer mix, but we are working through that.

So all those things were considered in the factors there.

Wouldn't surprise us if we were flat to minus 2%, but nice to see it leveling out quarter to quarter, having some confidence that maybe it will actually be flat during the fourth quarter.

As far as looking out to next year, it's really hard for us to tell.

We are monitoring what's going on economically and thinking through that, but it's hard for us to tell who is on COBRA, what the impact of COBRA changes will be going into 2010.

I think if you look at our prior guidance, I think this is the first time that we have said that the number might actually be flat.

I think it's the first time we've done that with that number.

Oh, so you're saying -- oh, flat versus being down, got it.

Flat to minus 2% is the range, and I think it's the first time we've included flat in the range.

Okay.

Got it.

Thank you.

And we'll now go to the line of Brooks O'Neil with Dougherty & Company.

Please go ahead.

Great quarter, guys.

I guess it may seem ludicrous in this environment with the challenging economy and whatnot, but as you guys look at your company and the outlook going forward, do you think the company and the business can perform better?

And if so, how are some of the things -- or what are some of the things you might look towards in terms of improvement?

That's not ludicrous at all.

Of course we think we can perform better.

I think what drives the business is going to be payer mix and volume.

We think that as the economy recovers, the payer may [pull] through.

Clearly there's a lot of people out of work, and those people are suffering because of their lack of health insurance, and we believe that there is an opportunity there.

Additionally, we're going to continue to acquire practices.

We have access to the cash that we need to acquire these practices, and there is as I said my prepared remarks -- there's a full pipeline on the core business side of our business, as well as on the anesthesia side, by the way.

So we think we're going to continue to grow the business, and as payer mix and volume improves, we should be able to drive our margins better as well.

That's great.

That's -- honestly, Roger, not a surprise to me, but I just wanted to hear you say it.

Lastly, I'm just curious if you could talk to us a little bit about what the impact of the larger deals has been in terms of the core business.

Is that a positive to margin?

Do you get more leverage there?

Just how do you look at those larger deals?

It's just really a hard dynamic to say, because there are so many factors that face into what does it from a margin standpoint.

In general, I would say a larger deal versus a smaller deal in the same market would comparatively perform better from a margin standpoint, but really comes down to payer mix in a market, and that's a key driver of that.

So comparing it to the whole is very difficult to say how would be, but clearly we believe that larger practices give us an opportunity for better margins than a practice where it had several multiple units covered by separate practices in doing those.

I would expect we'd get a better margin by a large practice covering all those units is probably the best way to compare it.

The other thing it's really going to depend on, as Karl touched upon, is how many units the group is covering.

So if you have a large group that's covering one unit, that group will be more profitable than a large group that's covering two or three different hospitals.

Sure.

So that will play a role as well.

Sure is.

And the pipeline that you alluded to for the core business, does it look roughly the same as maybe the mix of acquisitions you've had this year, some larger deals, some smaller deals?

Yes.

There are large deals left in the pipeline and smaller deals as well, yes, and medium sized ones, too.

Congratulations again on a terrific quarter.

Thanks.

We'll now go to the line of Arthur Henderson with Jefferies & Company.

Most of my questions have been answered.

I just had a quick question on the tax rate.

Should we expect that to be in the range of where it was this quarter, or does it return to normalized levels?

That's all I had had, thanks.

Okay, the tax rate, which came down this quarter, was a function of some statute of limitations fell off on some reserves we had under the uncertain tax positions that were required reserve.

Under those accounting rules, we are going to see some volatility in our tax rate year to year, especially in the third and fourth quarters with these statute issues.

I expect that our average tax rate will be at that 39.25%.

That's what we project when we do our budgets, and do our projections on that 39.25% rate, knowing that will fluctuate based upon any specific items that we're required to reserve for or where the statutes fall off based upon accounting rules.

The expectation under the accounting results was that there would be volatility in tax rates on a go forward basis, quarter to quarter.

Thanks, Karl.

We will now go to the line of Rob Mains with Morgan Keegan.

Please go ahead.

If I could just clarify that last answer, does that mean there's going to be an average 39% in the quarter or it would be higher in Q4?

39.25% is what our standard tax rate is, short of anything related to statute drop-offs or changes because of a tax change in a state where we have to make a reserve adjustment.

Last quarter, we had a couple of specific items, one of which was a state tax law change on a reserve we had, which caused to us to have to increase our tax rate.

This quarter was statutes falling off.

Our average tax rate, meaning what we would book on our results if we didn't have these statutes, these unusual items is 39.25%.

So our base business is at 39.25%, but there may be items that make that go up or down quarter to quarter.

So you're saying that's the average we should use per quarter.

Yes.

One other little nitpick number and question.

You answered a question earlier about the Medicare rates that came out Friday.

The changes that you saw -- am I correct that that's just related to the four year phase-of in the practice expense changes, or is there something else going on that would affect those rates for you?

That's in general what it is.

There are some RBU changes on other things that might be going on, but there's a mix of things going through that.

But that's in general the biggest piece.

When we talk about not having a big impact, we're making the assumption that any SGR changes will be eliminated before the end of the year.

Right.

In terms of when you look at the government mix of business, you're not seeing -- what movement are you seeing on the anesthesia side?

We're not seeing a whole lot of movement there.

Very good.

Thank you.

We'll now go to the line of Gary Taylor with Citigroup.

Please go ahead.

Good morning.

Nice quarter.

Thanks.

Couple questions.

Wanted to clarify -- the NICU volume in 4Q -- the primary factor there was the comp getting more difficult, correct?

Yes, in the fourth quarter, when we look at it compared to last year, the fourth quarter was down just a touch over 2007.

When we look at our numbers compared to 2007, we would -- based on how all the other quarters have fallen out, we would expect to be in the range of flat for the fourth quarter, and based upon what we're seeing at the end of the third quarter moving into the fourth quarter already, we think that that range of plus 1% to minus 1% is the right range to be in.

Any thoughts about when you might come off giving only the quarter ahead guidance -- just conceptually where, do you feel like you need to be to move back to doing annual guidance?

I guess you're getting closer.

I don't know that we've gotten to that point.

Clearly there's a lot of volatility going on, a lot of question what's going to happen quarter to quarter from volume from payer mix.

When I look at this year and what our expectations might have been going into the year versus what we've seen, clearly you have change throughout the year, and to move to an annual guidance at this point doesn't make sense to us.

We need a little more sight into what's going on with the business each quarter to know what we might expect the next quarter, so I think that's a difficult move for us at this point.

Given your comments about the pipeline, any reason to think you do lower dollar amount, lower acquired revenue in 2010 versus 2009?

You think you might actually do more?

We'll come out with some guidance for that at the beginning of the year, but we exceeded our guidance this year and we think that the pipeline is full.

We could do just as well next year as we've done this year.

Okay.

Last question.

Just want to think about your reported 2.6% pricing/mix for the quarter.

Medicaid year-over-year I think as a percent of revenue you're saying was 60 basis points higher, so that might been a 40 basis point drag on that year-over-year pricing number.

If you look at this third quarter over third quarter of 2008, your average Medicaid pricing and mix is what?

Flat?

Up a little?

Are you saying the average reimbursement rate from Medicaid year-over-year?

Correct.

Based upon the fee schedules at the state, I would say in general it's probably down a touch, as we saw some states come down, but not significantly.

I didn't quite understand -- I think someone had asked earlier about fiscal 2010 Medicaid rates.

I didn't quite understand what you were saying about that.

So as we move forward, is it -- is your expectation that those look any different year-over-year than this -- what you saw in the third quarter here?

I think you have to break the 2010 numbers into two components, one being what we would expect based on all the budgets that came out throughout this year that affect the first half through the first three quarters of next year, and in general I wouldn't expect that to be much different than what we've seen in the third quarter from a reimbursement standpoint.

As I said, we were down slightly on Medicaid reimbursement rates, but not a significant change.

Going into next year, that's going to be one of the things we're going to be very focused on is looking at how the starts responding to their budgets and what impact that may have on Medicaid reimbursement, and getting involved as we have been over the last several years in our state budget process to make sure that the legislatures understand the services we provide and the need for access to care for all pediatric services.

Some states have clearly recognized that.

In some cases, they have carved out pediatric services separately and have done cuts in Medicaid, but some of the pediatric services are actually carved out so that they don't see the reduction.

We've seen that places by continuing to make the argument to the state based upon the volume of Medicaid services that are provided by some of these specialties and the need to make sure there's access to care to these children in the state.

And we expect to keep making that argument, and we hope that that continues to work with the state legislatures.

That makes sense.

Got it.

Last question.

Just looking at the commercial pricing year-over-year, I guess with Medicaid flattish to slightly down, that number has to work out to be in the 5% range.

Is that -- does that make sense?

Roughly.

Thank you.

(Operator Instructions).

We'll go to the line of Alan Fishman with Thomas Weisel Partners.

Please go ahead.

Thanks for taking my question.

Could you speak a little bit about the operational improvements that you may be making on the NICU practice level to improve that admission rate?

I hear there's some personnel changes over the past six months -- what impact that might have had?

Thank you.

As far as our admission rates and length of stay at the units, that's not really a function of any of at the units, that's not really a function of any of our management structure and going to a divisional structure that we announced earlier this year, with Frederick taking over the Pediatrix division along with David Clark.

Really didn't have a change in that.

In looking at the changes in the admission rates and average length of stay which we saw in the third quarter, it really took to a comparable period last year that was really down in the third quarter of last year, down from other levels.

So we saw a very low level, quite a low end of the range we would typically we would see in both those in the third quarter 2008, and in the third quarter 2009, it came into the average range of what we had been seeing through all of 2008 and what we had been seeing through 2009 in general.

It wasn't a specific operational issue that changed that.

It just was a dynamic that changes.

A couple reasons that our days were so negative last year was because of some of that change.

I guess have there been any -- I'll phrase it a different way.

Have you seen any benefits from the change in the operational structure as you announced earlier this year?

I would say the changes -- the benefits there have been more in the freeing up the senior management team to look at these other opportunities to establish the anesthesia management team to look at growth, the acquisitions, et cetera.

So by having a management team now in charge of the Pediatrix side of the business, and a management team for the anesthesia side of the business, it allows the senior management team to spend more time strategizing, et cetera.

So when -- speaking to what Dr.

Miller has done, have you expanded any ancillary services that have been based around the particular NICU practices?

Or given the compensation structure for the physicians, how does that management team really incentivize NICUs to go out and improve their business?

Yes, there's a focus on, A, transporting patients into our units from smaller hospitals in the communities that may not provide all of the full neonatology services.

There's a focus on doing outreach.

There's a focus on growing our Well Baby program, which is now seeing routinely over 1,000 well babies a day.

They're also focused on growing the hearing screening programs, which is growing quite nicely, and contributed to our same-unit growth as well.

So their focus is, as far as growing the practices is really centered around, as you said, these ancillary services that are being provided at that the NICU level.

When you look at the admissions improvement, you noted that year-over-year births at your hospitals slightly declined.

To what extent does the outreach and transferring patients really fill in that gap, obviously because admissions improved?

Right.

So the focus really is on doing this outreach and getting more patients transported into our units, and that's working at some level.

But a lot of our units are also in areas of growth anyway.

And so a lot of the sun belt areas historically where the growth has been -- the percentage of NICU admissions has not increased, so we're still admitting basically the same percentage of births into our NICUs, as well as the length of stay has not increased.

So the rise and fall of the growth is really related to the number of births and the number of transports.

Okay.

Thank you.

We'll now go to the line of Nicholas Jansen with Raymond James.

Please go ahead.

Quick question for you, Karl, in terms of your transition to the President of American Anesthesiology.

If we look at 2010 in terms of deal transaction, should we anticipate more of a focus on anesthesia next year in terms of the number of deals completed now that you have ramped up and built a further infrastructure, or does it really just depend on the pipeline and both specialties at the time?

Clearly we expect to do more deals going into anesthesia next year.

We're excited about the pipeline.

There's been several deals we've been talking to.

We're looking forward to getting some deals going forward.

We have spent the time this year to work through some of the infrastructure, bringing in the practices that we have under one billing system, doing the billing and collection in-house, improving on managed care contracting.

So I think we've done a lot this year to set us up well going into next year on the anesthesia acquisitions.

As Roger said, we do expect to get something done in the next couple quarters so that we can move forward with that.

Our expectation at this point is that would be one for the year and more than that going into next would be our expectation.

Secondly, on managed care, have you guys seen any push-back in terms of length of stay now that the managed care guys are struggling somewhat with reimbursement changes?

Thanks.

We are not seeing any push-back on length of stay, anything different than we've ever seen from time to time.

You might get a call from a case manager or something, but nothing has changed in that dynamic in trying to change length of stay.

Great quarter.

We'll return to the line of Kevin Ellich with RBC Capital Markets.

Please go ahead.

Hey guys, just one quick followup.

In the past you have given us same-unit volume, how it has trended in the first month of the next quarter.

I know it's only November 2nd, but any chance that you guys have that number yet?

That's not something we're giving out at this point.

I think last quarter we said we weren't going to give out month to month numbers any longer.

It is built into our expectations as we go forward, and as you might expect, we don't have full month numbers at this point, so we didn't want to start giving partial months.

Got it.

Going back to how things trended throughout the quarter, does that hold true for -- you guys won't break out how the quarter trended?

That's correct.

Got it, thanks.

And we'll go to the line of Gary Taylor with Citigroup.

Please go ahead.

Thanks.

Just a follow-up.

I wanted to give you a chance to talk a little bit more about the margin trend, which you talked to a little bit.

But the year-over-year progression I think you were down [240], down [130], and now up [30] this quarter.

Is that primarily integrating that North Carolina anesthesia that was I think 4Q of 2008?

And on your outlook for margin going forward, I guess barring another sizable anesthesia deal, which sounds like maybe one is coming, should we anticipate that you continue to grow that margin?

While we saw impact across all our specialties on the margin as we look forward through the quarter, I wouldn't say any one of the specialties drove it beyond strong same-unit volume growth and pricing growth during the quarter, and that really helped the margin.

As you would expect you would see a better flow-through when you see those improvements in any quarter.

We believe that we'll continue to work towards margin improvement, and that's something clearly if you look at all our quarters we've continued to do that on the G&A line.

We'll continue to strive to do that going forward.

On the practice side, I think a big driver of that is going to be the integration of acquisitions and how same unit volume and pricing impacts those numbers.

Thanks.

When you bring in your NICU acquisitions, even if they're sizable, do those come in at fairly comparable margins?

Is there much drag on newly acquired neonatal practices?

It really will depend upon the specifics of an individual practice, based upon a payer mix of that practice, the market that's in, and what the payer environment is in that market will be a big driver of what our expectations would be for the margin compared to the rest of the business as we go forward.

We don't expect to see a drag in margins because of that.

Typically in our quarters, we haven't seen a drag because of acquisitions.

Thanks.

(Operator Instructions).

Thank you.

Before concluding, I want to update you on an announcement that we made earlier this year about the transition of several members of our management team.

Beginning January 1st of next year, Karl Wagner will be the President of American Anesthesiology, and Vivian LopezBlanco will be our Chief Financial Officer.

Karl has been our CFO since the summer of 1998.

If my count is accurate, this is his 45th quarterly conference call.

We've come a long way together in 11 years when our group was fewer than 350 physicians and annual revenue was was just over $185 million.

Throughout this period, Karl has been an integral member of our executive team and that won't change as he moves into his new role at American Anesthesiology.

In fact, I look forward to his continuing contributions as we build our anesthesia group practice and find ways to improve patient care and operating efficiency in that large specialty.

Our transition will be complete at the beginning of the new year with the promotion of Vivian LopezBlanco from Treasurer to Chief Financial Officer.

Vivian has been with us more than 1.5 years.

During that time, she's managed a number of high-profile projects and worked with Karl and the rest of our management team to ensure this transition will be a smooth one.

We're looking forward to working with Vivian in her new role here at MEDNAX as well.

Operator.

There are no further questions in queue at this time, sir.

Thank you.

If there are no further questions, let's terminate the call.

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