Pediatrix Medical Group Inc (MD) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX, Inc.

2010 second quarter earnings 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's Instructions) I would now like to turn the conference over to our host, Mr.

Bob Kneeley.

Please go ahead, sir.

Thanks, Tolan, and good morning, everyone.

Thanks for joining the call today.

Before I open the call up to our CEO, Roger Medel, I do want to read a forward-looking statement.

Certain statements and information made during this call may contain forward-looking statements.

These forward-looking statements are based upon assumptions and assessments made by MEDNAX's management in light of their experience and 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 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 annual report on form 10-K and its quarterly reports on form 10-Q including the sections entitled risk factors.

With that, let me turn the call over to our Chief Executive, Dr.

Roger Medel

Thank you, Bob.

Good morning, and thanks for joining our call today.

I'll be brief this morning.

Today we reported results from operations for the 2010 second quarter that reflects the continued growth of our organization, as well as an outlook for the third quarter that's based on what we expect in terms of growth of our business and same-unit contributions from our historical neonatal business and payor mix.

We continue to make excellent progress in executing on our clearly articulated strategy for sustainable long-term growth, drawing on the strengths of a company that now has more than 30 years of operating experience and a reputation for its successful strategic view.

Our revenue growth of 9% for the 2010 second quarter was driven largely by acquisitions.

We continue to see same-unit growth from net reimbursement, even after absorbing the impact of a higher percentage of our services being reimbursed under government programs.

We're negotiating reasonable rate increases for managed care payers and a large part of our portfolio of managed care contracts has built in annual escalators, so I don't see anything to suggest a change in what we've been generating from commercial reimbursements.

Operating income growth of 10% is driven largely from acquisitions, as well as our general and administrative efficiencies which is related to overall management cycle management systems for all of our physician specialties.

This continues to be a proven and effective part of the MEDNAX model and one of the highlights for this quarter.

In fact, we continue to do an excellent job on behalf of our practices, converting physician buildings into cash, with cash flow from operations for the 2010 second quarter of $91.7 million.

We continue to use our cash to reduce debt and to fund acquisitions that will drive future growth.

With three acquisitions completed during the second quarter, we're on pace for another strong acquisition year for our pediatrics division.

Our neonatal, maternal-fetal, pediatric cardiology, and other pediatric physician subspecialties.

We spent a little bit over $60 million to complete seven practice acquisitions through the first half of this year, an amount that includes some contingent purchase price payments on previous transactions.

We remain encouraged by the interest of the physicians in these practice areas to be part of our national medical group and our pipeline within these pediatric specialties remains strong.

We're confident that the pace of acquisitions that we've established over the past few years will continue.

What's not reflected in our results for the first half of this year is our level of excitement about the progress we continue to make in building our national anesthesia group practice.

We're measuring that progress on several fronts.

It includes an administrative improvement.

We've successfully applied our revenue cycle management approach to our current four practices, improving collective revenue and expanding operating margins at those practices.

We measure our progress in terms of the early efforts to establish the clinical infrastructure that will parallel what we're doing to improve outcomes within our pediatric practices and most particularly neonatology.

Physicians across all of our anesthesia practices are collaborating on patient quality programs that will add value to our existing strong hospital relationships, and we expect will attract more practices to our national anesthesia group.

We measure progress in anesthesia in terms of where we are in completing the due diligence process that's related to the next several groups that we expect will be practicing as part of American Anesthesiology in the near future.

I'm well aware of past statements I have made regarding the timing of the closing of our next transaction.

I'm also aware that we don't provide as much in terms of interim milestones that might give you the same confidence that I have at this time.

We're a profit driven our organization with the intent of building a durable, sustainable business that will add value to all stake holders within the anesthesia specialty and I can assure you that our processes are driving these transactions toward closing.

We'd rather do things right than with haste and we remain confidence that our goals of completing one or two anesthesia practice acquisitions this year will be met.

At this time, I liked to turn the call over to our CFO, Vivian Lopez-Blanco for our review of our financial results before taking your questions.

Vivian?

Thanks, Roger, and good morning everyone.

In discussing our results for the 2010 second quarter, I am pleased to present a Company that continues to grow.

One that continues to achieve operating efficiencies and one with strong cash flow characteristics that allow us to execute on our proven growth strategy.

During the 2010 second quarter, our revenue grew by $29.3 million,or 9.2%, to $349.1 million from $319.8 million for the prior year period.

Revenue growth, attributable to acquisitions with 6.9% and same-unit revenue growth grew by 2.3% for the second quarter.

Within the same-unit revenue growth, reimbursement related factors contributed 2.7% revenue growth, and we saw a slight decline in overall patient volumes year over year of 0.4%.

As Roger said, we continue to see modest increases from commercial payors as we negotiate rate increases for managed care payors, and as we benefit from periodic escalators that are built into many of our contracts.

Through the first half of the year, we're on track of achieving the objectives we've identified as part of our annual work plan.

The rate of revenue growth from reimbursement related factors was negatively impacted by our payor mix.

On the same-unit basis, our government payors, as a percent of revenue, increased by approximately 90 basis points year over year.

On a sequential basis, however, our payor mix actually improved from the first quarter by approximately 150 basis points.

All in, we continue to achieve net reimbursement related growth that is within the historical range of 2% to 4% even after factoring for payor mix.

As I said, combined patient volume across all of our services declined by 0.4%.

Neonatal patient volume was virtually flat at 0.1% negative.

Profit after practice expense increased by $11 million, or 9.6%, to $126.3 million for the 2010 period from $115.3 million for the prior year period.

Profit after practice expense margin improved by 13 basis points to 36.17% for the 2010 second quarter largely as a result of lower incentive compensation for practice level bonuses, which are tied to practice profitability.

Operating income for the second quarter was $82.1 million, up 9.8%, or $7.3 million from $74.8 million for the 2010 second quarter.

Operating margin improved by 14 basis points to 23.52% for the 2010 second quarter from 23.38% for the prior year period.

Operating income growth is attributable to acquisition growth, as well as on going general and administrative expense management efforts.

General and administrative expenses continue to grow at a rate that's lower than revenue growth.

For the 2010 second quarter, G&A expenses grew by 7.9% from prior year levels.

This reflects efficiencies in our revenue cycle management processes, including the integration of our anesthesia practices into a single administrative office during last year and on going expense management efforts.

This improvement was partially off set by expenses associated with our annual medical director's meeting which, as we said during our last investor call, occurred during the 2010 second quarter, but within the first quarter of last year.

The combined impact of all those elements resulted in a 14 basis point operating margin improvement year-over-year.

Our effective tax rate for the quarter was 39.25%, or 265 basis points lower than the 41.9% for the 2009 second quarter.

Last year's tax rate included the recognition of a nondeductible loss, as well as an increase in reserves related to uncertain tax positions.

We are net income of $49.4 million for the 2010 second quarter, up 14%, or $6.1 million from the 2009 second quarter.

On a per share basis, we are $1.04 based on a weighted average 47.5 million shares outstanding.

This compares with earnings per share of $0.93 based on 46.3 million shares outstanding for the 2009 second quarter.

Through the first half of 2010, we generated net revenue of $682 million, 9.4% higher than $623.7 million in the first half of 2009.

Operating income has grown by 10.8% to $145.7 million through the first six months of 2010 from $131.4 million for the first half of 2009.

As we continue to successfully drive our growth from acquisitions, we're also achieving operating efficiencies with general and administrative expense growth of 5.9% for the first half of this year versus the prior year.

Operating margin has improved by 29 basis points through the first half of this year compared to 2009.

Our operating margin is 21.36% for the six months ended June 30th, 2010.

Up from 21.07% in the same point in 2009.

Our net income through the first six months of 2010 was $87.6 million, which compares to $77.3 million for the comparable 2009 period.

And earnings per share have grown to $1.85 for the first half of this year from $1.68 for the first half of 2009.

Moving to a brief discussion of our balance sheet, we have cash and cash equivalents of $26.1 million and accounts receivable were $179 million.

We ended the quarter with $58 million outstanding on our revolving credit facility, down $71 million in the last three months alone.

Our ability to reduce amounts outstanding under our $350 million line of credit is the result of our strong cash flow generation.

For the quarter we have cash flow from operations of $91.7 million.

In addition to reducing debt, we used approximately $20 million of our cash to complete three physician group acquisitions and make contingent purchase price payments related to previous acquisitions.

Through this year we've acquired seven physician group practices, investing a little bit over $60 million for those transactions, as well as to make continued purchase price payments.

At this point I want to discuss our third quarter 2010 outlook, which we announced in the press release this morning.

We expect that earning per share for the three months ended September 30th, 2010, will be in a range of $1.03 to $1.07 per share.

This range assumes our weighted average share count will be 47.9 million for the period.

In addition, we anticipate that the same unit patient volume at neonatal comprehensive care units will decline by 1% to 3% for the 2010 period when compared with the three months ended September 30th, 2009.

For this period, we're coming up against a difficult comparison.

NICU patient volume for the 2009 third quarter rose by 4% from the 2008 third quarter.

Our outlook also assumes that our payor mix will shift by 1 to 2 percentage points to a higher percentage of services reimbursed under government programs when compared on a sequential basis, or when compared against the 2010 second quarter.

During the third quarter of every year, we typically see a payor mix shift toward a higher percentage of our services reimbursed from government programs.

Finally, our outlook does not incorporate contributions from practice acquisitions within our anesthesia physician services specialty.

As Roger said, we are in the process of completing due diligence on our next anesthesia practice acquisition, and assuming no surprises during this process, we expect to complete that transaction during the 2010 third quarter.

With our strong cash flow from operations and amounts available under our revolving credit facility, we're well positioned to continue to take advantage of the opportunities that are available to us to continue to acquire physician group practices across all of our specialties.

On that note, I'd like to turn the call back to Roger.

Thank you, Vivian.

Let's just proceed to questions at this point, Operator?

Thank you, sir.

(Operator Instructions).

Our first question is from the line of Gary Taylor with Citigroup.

Please go ahead.

Hi.

Good morning.

Hi, Gary.

Good morning, Gary.

Good morning, Gary.

Just a couple quick questions.

I just want to go into the third quarter a little bit.

I guess typically we would expect, just given seasonality, that third quarter revenues would decline sequentially.

That looks like it's almost always been the case.

Except for the very strong results we had last year.

I don't know if you want to talk about your expectation on total revenue.

But then corollary to that same question is, have you seen any unseasonal slow down in volumes exiting the quarter, or as you laid out as the expectation for volume in Q3, almost entirely driven by that plus 4% comparison.

Let me answer that first and second part.

We are not seeing anything unusual.

We continue to see significant variability from one region to another as we have over the last two years.

We see variations as high as10% growth in one region and 7% shrinkage in another.

It just continues to be variable from one region to another.

But nothing that we haven't been going through for the last couple of years.

As far as -- I'm sorry.

Remind me?

Revenue.

Yes.

I don't know that we have any more comments to make on that.

Vivian?

No.

I mean, I think what we said on the press release and what I reiterated in the script was that we are basically, as you know Gary, comping up against a very difficult comp from last year.

So I think it's a reflection of that as well as we haven't included in our revenue expectations as we customarily don't, anything regarding the anesthesia acquisitions?

Right.

I may have overstated the seasonality, looking at that model now anyway.

And then just one other question I think for Roger.

Just a broader question.

A lot of the publicly traded hospital companies talking about slower OB volumes.

Then we had also seen a few months ago a study that I think was lagged a couple years that talked about slower NICU conversion along those lines.

I'm not recalling exactly what that was.

From a macro sense, anything about this quarter feeling any different than this general slow down we've seen for a couple years now?

No.

Gary, the issue continues to be volume.

It's all volume driven.

We have absolutely -- our percentages, our length of stay, our admissions, the intensity or how sick these children are.

We're not seeing anything different in our business than it's always been.

It's driven by volume and the percentages remain -- they're a little bit high for this quarter, but they remained the same.

We're not seeing anything different.

Okay, good.

And then finally, on the payor trend, understanding the typical seasonality into the 3Q.

Any material comments to make on trajectory of payor trend through the quarter?

Obviously look pretty benign compared to our expectations for this quarter.

Was that pretty consistent, getting better or worse?

Anything you want to say on that?

Yes.

I mean, it's just based on, as we said, the historical trend.

We're certainly happy that we saw that decrease in the second quarter.

And that's also to be expected.

It was a little bit better than we had in the guidance.

But nonetheless, we do see the seasonality of it move up.

So that's really why we put that in the guidance.

The guidance is just merely based on historical.

We saw nothing coming out of the second quarter that would make us feel any differently.

It's just what has happened historically.

We thought it would be prudent to be included.

Okay.

Understood.

Just wanted to see if there was anything on a monthly basis that was driving any variability.

Sounds like not.

So I appreciate it.

Thank you.

Thanks, Gary.

Thanks, Gary.

Our next question is from the line of Darren Lehrich with Deutsche Bank.

Please go ahead.

Thanks and good morning.

This is Brian Zimmerman in for Darren.

Hey, Brian.

Just got a couple quick questions here for you.

First one, can you give us an update by service line in particular.

Have you seen any trends in anesthesiology on the volume side?

And how are surgery center customers trending?

Okay.

The volume on the outpatient services is down a little bit.

The same store volume in the hospitals is up.

Okay.

That's what we're seeing.

We're seeing volume down slightly in the outpatient services and up slightly in the inpatient services.

Okay.

And can you give me some comments on your acquisition pipeline for the remainder of the year?

What are you seeing in the market right now?

Our pipeline remains, as I said, strong.

We feel good about the likelihood of adding some practices here, certainly within the quarter.

We've got some internal fetal medicine practices that we're working on.

We're excited about some large group practices in Texas.

Some pediatric cardiology, some ICU.

Our pipeline remains strong and we think we'll have a good year, similar to what we had last year.

Okay.

Thanks.

That's it for me.

All right.

And our next question is from the line of Kevin Ellich with RBC Capital Markets.

Please go ahead.

Good morning.

Thank for taking the question.

Just wondering if you could provide a little bit more color on the nonNICU volume that was down about 40 basis points this quarter?

I understand some of it's probably related to the outpatient volume, but are you seeing anything else unusual on the maternal-fetal medicine or pediatric cardiology business?

Like I said, the outpatient volume for anesthesia was down in the outpatient surgery it was up in the hospitals.

That internal medicine feel volume is definitely down.

I think that's just a reflection of fewer births and fewer eccocardiograms being done.

The cardiology volume is actually up for the quarter.

So that's how the 0.4% came to be.

Understood.

Thinking about the acquisition environment and your pipeline.

With the birth rate down and changes in the economy and what not, have the multiples stayed the same or are you seeing any pressure on the valuations?

Well the multiples for our basic pediatric business, as I said last year, came down.

So we finished the year at a multiple of under 4 for all of our pediatrics business.

We're not seeing any changes in that.

If the multiples hold, which they should, we'll probably come in around the same point for this year.

The anesthesiology multiples are definitely coming down.

Okay.

And then, uses of free cash flow.

Is the number one use still acquisitions and any updated thoughts on buybacks?

Yes.

Absolutely.

Our preferred use for the cash is acquisitions.

If we run out of acquisitions, then there's no doubt we'll do what we've done in the past, which is to buy back shares.

But the acquisitions puts the money to work.

You're buying operating and net income.

You're buying cash flow.

So there's no doubt in my mind that what I would prefer to do is put it to work by applying these practices.

Understood.

Then last question.

On the same-unit pricing growth, it's been strong 2.5%, 2.7%.

Just wondering if we should expect that type of growth going forward, if that's a good run rate?

Yes.

There's no changes there.

As we said on the call, escalator is built in to our contracts.

So we're pretty certain that we're going to get those.

Okay.

Thank you.

Thanks.

Our next question is from the line of Kevin Fischbeck with Bank of America.

Please go ahead.

Good morning.

Actually this is [Joanna Gadruch] for Kevin.

I guess the question that I have is, in terms of -- you have been discussing in other hospitals, also talking about slow birth rates.

So the question that I have for you is then, in periods when you are seeing those slow birth rates, what can you actually do to manage costs?

Well, the biggest cost management tool that we have is our physician bonus plan.

Our physicians generate about a 50% bonus, based upon the profitability of their practices, after a certain level of profitability contribution to the Company.

As the volume and the profitability of the unit fluctuates, so does their bonus component.

Any impact to the Company above that threshold really is only 50% of what the overall decrease might be.

All right.

Makes sense.

Thank you for that.

And then in terms of the guidance for NICU results, it looks like the branch of the guidance got wider again, 200 basis points versus 100 basis points range guidance for the second quarter.

Is there any particular reason for this wider range?

There's something that maybe is lowering visibility in the trends you're seeing?

No.

It's just that we have a difficult comparison with the third quarter of 2009.

That's the only thing that's driving that number.

Third quarter of 2009 was a 4% growth.

And we're certainly not expecting that this year.

Right.

And then the last question that I have is just, can you give us an update on where you are in cost cutting and integration of the anesthesiology deals?

Is this a good run rate that we have seen so far, or is there more opportunity going forward?

Well, I think the results reflect that we do have improvements based on what I said, because we did transfer the billing services for anesthesia into one location.

That certainly proved to be very profitable as we expected as we continued to put their processes into the one that we've had in the pediatrics division for a long time.

Certainly we'll continue to see some benefits from that.

And also, Carl Wagner is working on looking at other things similar to our PDX Division which is a little more challenging than anesthesia regarding just scheduling and things of that nature.

As we go through those, we will continue to improve the cost in whatever area we can.

Those are the two big ones.

As Roger said on the call, we're very happy with the results so far because we do believe we've made a lot of progress, certainly on the big one, regarding the billing system.

So we'll keep working on that.

Great.

Thank you so much.

That's all for me.

And we have a question from the line of Ryan Daniels with William Blair.

Please go ahead.

Good morning, everyone.

I don't know if you want to provide this, but I think over the last call or two you've talked about the birth rates at your host hospitals.

I'm curious if you have that data available for the second quarter?

Let's see here.

We are down 4.6% in birth in our hospitals.

Okay.

And then that's obviously a little bit greater decline, and I guess more consistent with what we're hearing.

The follow up question would be, are you guys doing more given some of the pressure on birth rates to go out and try to get more referrals, or try to emphasize your Level III NICUs, or get patient transfers?

It just seems like you've been able to weather the storm, if you will, a lot better than the underlying birth trends would lead us to think.

Yes, we certainly are.

We've always done that kind of outreach and transport.

But we are focusing on that very much so over the last 18 months or so.

We've got some programs that we are additionally working on at this point.

We also have a very strong growth in our hearing screen program and in our well baby program.

So all of those things are contributing.

Are you seeing a lot of volatility if you look at your different levels of NICU?

Level III's are a lot stronger in off-setting some of the weakness and lower acuity NICU'S because of those transfers, or is there not that kind of deviation?

The vast majority of our units are Level III units.

They do have some step down Level II units in the hospital.

Vast majority of our Level II units are just part of our Level III network.

I would say no, we're not seeing anything unusual.

Okay.

Maybe a quick question for Vivian.

I could probably look this up.

But when you talk about the payor mix shifting sequentially 1% to 2%, I know that the normal Q3 phenomenon.

What would that be on a year-over-year basis?

Does that mean it's actually pretty stable year-over-year given that Q2 actually took an uptick?

If it goes down by 2%, basically we'd be roughly 90 basis points from the prior year.

Okay.

So reasonably stable even year-over-year then?

Right.

I think it will be something that's within the range, Ryan, that we've seen historically.

Other than the blip that with saw, remember, in 2008, we certainly factored that out of the equation because I do think, hopefully, that will be -- not repeated again.

Okay.

Couple more bigger picture ones.

One just -- Roger, you mentioned earlier, responding to a question that the multiples on anesthesia definitely come down.

I'm curious if you're actually seeing the pure multiple come down or if you're seeing the multiples that have come down for MEDNAX.

Because if you look at forward expectations with your staffing and revenue cycle management, you're now more comfortable pro forming those under your operations.

Yes, both the counts.

We're definitely more comfortable with our pro forma calculations.

But as far as actual multiples or current multiples that is what we have always talked about that we paid.

Those multiples have come down.

Okay great.

Last one.

I guess big picture, maybe a little bit longer term question.

But it sounds like a lot of the insurers are talking about tightening their networks more going forward.

And I think MEDNAX has historically been in some of the more critical or more important hospitals in each market.

I'm curious if you think that as a longer term trend that could benefit you, that you're going to be in the best facilities.

Those it will be in network and it will drive more volume in regards to total birth to your partnered hospitals?

It could be.

That's not easy to do in [unicology].

There's only 4,000 [unicologists] in the country.

There's already a selective group of hospitals that have Level III NICUs.

I think it would be difficult on both sides -- on the one side to cut us out of any network, but I also think it would be difficult -- I mean, there may be some small hospitals that get cut out, but we're not including any projections for anything like that in our outlook.

Okay.

Thanks a lot for all the color.

Yes.

And our next question is from the line of Dawn Brock with Kaufman Bros.

Hey Dawn.

Good morning.

How are you?

Fine thank, you.

I don't want to beat a dead horse on guidance.

It looks like, I just want to make sure that I'm clear.

It looks like on the volume side, if we look at two year stacked comps, we're looking at volume growth of relatively flat to up modestly if we look at 2008 levels.

Is that a fair way of looking at it?

Yes.

That's how we're looking at it, too.

Yes.

And then on the payor mix I just want a little bit of your thought around this.

You're expecting more government in the third quarter.

That's seasonal.

Can you talk a little bit about whether this is strictly on the NICU side, or better yet, how anesthesiology plays into it?

There's a little bit of anesthesia.

There's not that much Medicaid work in anesthesia.

The bulk of what we're talking about is on the pediatric side.

Okay.

Fair enough.

And you made some comments about MFM, pediatric cardiology, I think you mentioned some ICU programs.

Can you help us think about your growth strategy just on the core business?

And looking at your existing NICU markets, it looks as though you're continuing to go along the lines of filling the NICU with referrals based on the sister practices.

And I guess my question is whether or not you're looking at this as more of a continuum of care model that allows you to capture revenue for the whole episode of care for the pregnant woman?

Or if this is actually driving additional volume, or both?

I mean the overall statement would have to be both.

As I look at our pediatric practice mix, I would say neonatology continues to drive the significant percentage of our growth.

But there are some additional surrounding services that we provide that are growing pretty dramatically.

They're small, but they're growing pretty dramatically.

Our hearing screen business, as I mentioned earlier, grows tremendously as does our well-baby programs.

So we look at those as an extension of our NICU business.

Our pediatric intensive care business grew by over 80% last year just based on the fact that we made a very large acquisition from another group practice.

But we see that as different from our NICU practice.

We don't see it as a continuum.

We see it as a continuum of services within a hospital, but we certainly don't expect that kids that are in the NICU will end up in the PICU.

Those are two separate patient populations.

Cardiology is very interesting.

A lot of the cardiology growth is driven by the fact that we have these NICUs and a number of children, babies that are admitted to the NICUs, have structural cardiac lesions.

So we are able to then direct those patients, when appropriate, to our own cardiologists.

That continues to provide growth in that arena.

You have to look at each practice individually, decide what makes sense as far as helping -- trying to improve the growth.

Okay.

All right.

Thank you.

That's helpful.

My second question is, in anesthesiology.

Just to, I don't know, clear this up maybe just in my mind.

But the anesthesiology acquisition announcement, can you talk a little bit about whether or not that same practice you had in mind on the first quarter call is still the group you expect to add first?

And maybe secondly, can you talk about whether or not there was just more due diligence, or a longer time frame to conduct your review than you expected, or whether there were other issues?

The answer to both questions is yes.

It is exactly the same practice that we have targeted during the first quarter.

And it's just a large practice, as you heard me say in the past.

And so there are a large number -- It's not that you're dealing with five or six neonatologists.

Your dealing with a large number of anesthesiologist, so it's just a more complicated process.

I'm still very bullish on getting this thing done.

I still think we'll get it done in the third quarter.

My lesson is to learn not to predict when these practices will actually be closed on.

Right.

It is fine.

It's all moving in the right direction.

We love the practice.

We think it's going to be an awesome acquisition to our anesthesiology group.

Okay.

And at the same time, we're dealing with the second practice that, and here I go predicting again.

But I still predict that we'll get that second practice done before the end of the year.

Okay.

That's great.

All right.

Take it for what it's worth, though.

Yes, right.

And then the last thing.

I know we don't usually talk about specific acquisitions, but the CHN acquisition from I think it was the third or fourth quarter of last year was very big.

It was multispecialty, which is different for you guys.

Could you just give us a little bit of color around how the integration has gone.

Just how it's performing based on what you were expecting, and maybe how it's different than a straight up NICU acquisition?

It's going very well.

Because one of the things that we love about the practice was a practice leader.

That was a guy who was a strong competitor.

One that we had a lot of respect for.

Part of the reason we wanted to bring him on board was because he was bringing not only his group, but also his ability to manage that line of work.

We have given him our line of work in addition to his that he brought on with his acquisitions outside of the neonatal practices that he brought.

We're just very, very happy with it.

I'll tell you.

It's gone beyond our expectations.

He really brings a higher level of management than those general pediatric and pediatric ICU practices.

So we're very happy with that.

Okay.

Thank you very much.

Your next question is from the line of Brooks O'Neil with Dougherty & Company.

Please go ahead.

Good morning, guys.

I'm just curious as you think about the acquisition pipeline and all its dimensions, are you thinking that acquisitions are likely to be accretive or dilutive in short and longer term?

Our acquisitions are always accretive.

We do not do acquisitions, and they are accretive from day one.

At least as far as our pro formas are concerned.

We wouldn't do a deal that wouldn't be accretive from day one.

I didn't think so.

Thank you very much.

Secondly, I'm sure we've talked about it ad nauseum over the last several years, but could you just update us on any impressions or conclusions you've drawn relative to the impact of let's call it health reform, for lack of a better term, on your business going forward?

Well, we don't really count on a lot of impact either way.

Health reform it's more about coverage.

We don't usually have problems getting coverage for our patients.

We do see that because babies are born in the United States are immediately classified as U.S.

citizens, they're immediately eligible for Medicaid.

So we don't have a lot of problems with unpaid bills or anything like that.

If there is an improvement, as we talked about in the past, it has to be not in coverage, but in access to care.

And that's the big issue.

If more patients are eligible for Medicaid will they still have access to care?

Because few pediatricians who are working in general offices actually accept Medicaid.

That would be the big improvement for us, if in fact there were increases in Medicaid reimbursement.

As far as coverage is concerned, we think it's not going have any impact on us.

Right.

And unless I'm mistaken, you're not terribly worried about the impact of Medicaid creep related to health reform as it's currently con figured, is that correct?

As it's currently configured, we're not seeing anything that makes us feel that we have to be worried about the Medicaid creep.

Remember, the law is 133% of the federal poverty level.

And all of our states are at least at that level already.

So we're not thinking there's going to be any creep.

And many of our states are at 150% levels.

So we don't think we're going to see anything there.

Yes.

Just lastly, and I hate to bring this up, but I have seen recent inquiry from Department of Justice in another hospital based physician group practice.

I'm just curious if you've seen any changes in interest from regulators, etc as it relates to MEDNAX at this time?

No.

We saw that, too.

We looked at it, saw that that was happening.

Fortunately, or unfortunately for us, we feel we've already been through it.

So we haven't had any inquiries or seen anything that would make us feel that we're on anybody's radar screen at this point.

Great.

You guys are doing a great job.

Keep it up.

Thanks, Brooks.

Thanks, Brooks.

And our next question is from the line of Rob M.

Mains with Morgan Keegan.

Please go ahead.

Thanks.

Good morning.

You said that your hospitals were seeing a 4.6% decline in births.

Obviously that's a lot less than what you're seeing.

Did I hear you earlier saying your percentage of births that are winding up in the NICU is still within the normal corridor for MEDNAX?

Yes.

It's high, but it's still within some historical range.

Our admin rates are a little bit higher than what they have been.

Not outside of any range, but I think I want to clarify.

What did you say at the beginning?

Because we did say that the births in our hospital systems were down 4.66% in this quarter.

Right.

That's right.

Okay.

Yes.

Okay.

And then if we can look out a little beyond third quarter here.

I know, this is a guidance question.

But looking at 2011, couple reimbursement issues want to know what your feelings are.

One is, we get the new RBRVS weights for the Medicare reimbursement to the degree that that affects anesthesiology.

Then, potentially we don't get FMAP extended.

What your feelings would be about those two issues.

Well, FMAP of course, is up in the air.

I don't want to try to guess what's going happen in Washington.

Our best intelligence suggests that FMAP will be extended.

But in any event, it only affects the second half of the fiscal year.

F map is already authorized through the end of December or through the end of this year.

I mean, it's hard for us to get -- just depends on how it goes.

Medicare we -- most of our contracts that have a basis on Medicare are on a specific year basis.

And so, any impact is blunted by the fact that all the rates are not tied to Medicare period.

They're tied to Medicare reimbursements for 2008 or 2010.

So that's not going to change.

As far as our anesthesia business is concerned there is a summary table.

(inaudible) register that would suggest a 2% cut to anesthesia.

We're having a hard time finding the information that actually drives that calculation because their conversion factor is missing.

The American Society for an Anesthesiology is working on that.

There just isn't enough information based on what is proposed in the schedule.

As far as any impact anesthesia based to Medicare, would be directly impacted.

Our commercial contracts are based on our fee schedules, not on Medicare rates.

But the Medicare business would be impacted.

Okay.

Just to circle back on the FMAP.

Granted we don't know how it's going to play out in terms of congress nor how it would in certain states.

But I imagine, potentially, if we didn't get the extension there could be some Medicaid rate pressures in some of your states.

I would agree with that.

It always is important to remember that the access problem is a big problem, and when Medicaid reimbursement to physicians is cut a lot of physicians just opt out of the Medicaid program.

80% of Medicaid dollars goes to adults.

Most of that is care for the elderly.

What we've seen in the past, when they make cuts, they're typically to hospitals and long term facilities, etc.

Having said that Texas is looking at a 1% physician rate cut effective September 1st.

Florida has a contingency plan in place if FMAP is not approved.

We expect that the biggest loser will be the hospitals.

They'll have to absorb a 7% reduction in Medicaid payment.

Arizona had a sales tax increase which delayed any Medicaid cuts for fiscal 2011.

California had some proposed reductions to physician fee schedules, but they have all been enjoined by the courts three different times.

First proposed a 10% cut, then a 5% cut and then a 1% cut.

Georgia, their state has the hospital tax that put off any proposed cuts to physician fees for fiscal 2011.

South Carolina introduced a tobacco tax in fiscal 2011 which they expect will raise about $500 million for Medicaid.

Virginia didn't include any FMAP in its bi-annual budget for fiscal 2011 or 2012 in their budget.

And North Carolina has contingency plans in the event enhanced FMAP is not extended.

They are calling for provider cuts of 1% to 2%.

That's a great summary.

Thank you very much.

Our next question is from the line of Nicholas Jansen with Raymond James & Associates.

Please go ahead.

Hi.

Yes.

Thanks for all that Medicaid detail.

Just one quick question on the anesthesia.

I'm not sure if you're willing to provide this.

But is the acquisition you're discussing for the third quarter, is that going to be in the same geographic area as your current four practices?

Are you looking to establish a platform in a different geographic region?

Thanks guys.

No.

We're not going to comment on that one, thanks.

That's all for me.

Thanks.

Okay.

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