Pediatrix Medical Group Inc (MD) 2010 Q3 法說會逐字稿

Welcome to the 2010 third quarter earnings conference call.

As a reminder this conference is being recorded.

(Operator Instructions) I would now like to turn the conference over to our host, Mr.

Bob Kneeley.

Please go ahead, sir.

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

Before we open the call I want to read our forward-looking statements and certain statements and information made 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 to revise any such statements whether as a result of new information, future events or other wise.

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 10K and quarterly reports on form 10Q, including the sections entitled risk factors.

In addition, during this call, we will discuss certain non-GAAP items this mornings' press release contains a detailed GAAP reconciliation table and that is available on the investor's page of our web site at www.MEDNAX.com.

So thank you, let me turn the call over to our Chief Executive, Roger Medel.

Thank you, good morning and thank you for joining out call today.

We are happy to provide you with this discussion of our results for the 2010 third quarter and year to date.

These results demonstrate our ability to manage our organization effectively achieving administrative efficiencies as we support physicians and advanced practitioners caring for patients within our specialties.

What's not fully reflected in our third quarter results, are the great strides we are making with our American anesthesiology division as we build a national group practice in that speciality.

By now, I'm sure that you are aware of the acquisitions of Southeast Anesthesiology Consultant and Greensboro Anesthesia Physicians.

Southeast Anesthesiology is a 90 physician group working at 9 hospitals, 12 surgery centers and 10 pain management centers located primarily in the Charlotte, North Carolina metropolitan area.

They have the exclusive anesthesia contracts at eight of the Carolina's health systems hospitals, including its flag ship hospital, the 874 bed Carolina Medical Center, where the group has practiced continuously since its formation almost 30 years ago.

Greensboro Anesthesia is 23 physicians practicing in three hospitals and two surgery centers with about 38,000 annual surgery cases.

This group has a 25 year record of continuous service within the leading health care system in that community.

These are the latest in a series of very attractive acquisitions we have made as we continue to build our presence in anesthesia.

These groups share many of the positive attributes of our existing anesthesia practices and their decision to join us reinforces our conviction that we have a proven model.

We are acquiring established groups that have developed solid relationships with their hospitals and that practice in attractive metropolitan areas.

We are fostering a collaborative environment in which the best clinical and administrative practices are shared across all the American anesthesiology groups.

In fact, we believe these practices will contribute as much financially as they will in working with our existing American Anesthesiology practices to identify patient quality, and patient safety initiatives that improve care within this specialty.

This is a model we have employed for years within our pediatrics medical group division.

Acquire established groups that have long histories of delivering quality patient care in their communities and bring them the kind of administrative resources that gives them more time with patients and the clinical infrastructure to improve patient outcomes through care and evidence based tools.

It's a patient center model that aligns the interest of the physicians with those of the hospitals in a way that strengthens that relationship.

We are excited about the prospect of our historical operations.

We continue to manage our general and administrative expenses so that they grow at a rate that is lower than revenue growth.

We continue to generate strong cash flow which we use to finance our growth strategy.

Cash flow from operations exceeded $105 million, for the 2010 third quarter.

So far this year, we've acquired 10 physician group practices and we're working a strong acquisition pipeline that includes practices within all of the pediatric sub-specialties as well as American Anesthesiology.

At this time I would like to turn the call over to our Chief Financial Officer, Vivian Lopez-Blanco for a review of our financial results.

Thank you Roger.

Good morning everyone.

I am pleased to lead this discussion of our financial results for the third quarter and 9 months of 2010.

These results for the third quarter are within the expected range that we established last quarter.

Actually non-GAAP EPS of $1.06 was at the higher end of our guided range.

Of the two same unit variables that we present with our outlook, one was slightly better than our expectations which was same unit neonatal patient volume while the other the sequential payer mix shift within our expected range.

We continue to generate strong cash flow from operations which we then reinvest in the form of additional acquisition at attractive rates of return to drive the growth of our business which then generates capital for us to invest in our growth.

We believe that the path for growth is evident based on the acquisitions that we've completed throughout 2010.

Looking at our third quarter results revenue for the 2010 third quarter was $351.1 million, up 6% from $331.3 million for the 2009 period.

Same unit revenue grew by 0.8% largely from reimbursement related factors.

We continue to improve reimbursement from commercial payors through a combination of contract renegotiations and modest annual increases built in to contracts negotiated in the past.

Our payer mix shifted by 60 basis points year-over-year, towards a higher percentage of services reimbursed under government programs.

On a sequential basis, 2010 second quarter to third quarter payer mix shifted by 150 basis points towards government programs.

As I said, this shift was within our anticipated range and was consistent with historical patterns.

Same unit revenue related to base and volume grew slightly.

Increasing by less than 0.1%.

This includes patient volume growth in our anesthesia and pediatric cardiology practices offset by lower patient volumes at our neonatal and maternal fetal medicine practices.

For the 2010 third quarter, same neonatal intensive care patient stays declined by 0.6%.

Or as I said, slightly better than our expected range compared to the prior year.

For this most recent period we are running against our most difficult comparison in recent years which was 4% NICU patient day growth for the prior year period, same unit NICU patient volume on a two year stack comp- meaning compared against 2008 is actually 3.5% higher.

During the 2010 third quarter, births at hospitals within our same unit base, were down by approximately 3.5% compared with 2009 period which is improvement from the second quarter.

Length of stay remains within our historical range and admission rate, while down slightly from the second quarter is higher year-over-year.

For the three months ended September 30, 2010, profit after practice expense was $125.2 million.

Up 4% from $119.9 million for the prior year period.

Profit after practice expense margins declined by 55 basis points, which is largely a result of the lower rates of same unit revenue growth we experienced during the period.

Operating income for the 2010 third quarter was $81.4 million, up 4%, from $78.3 million, for the prior year period.

G&A expenses as a percent of revenue was down by 68 basis points to 10.7%, for the 2010 third quarter, compared to the prior year.

This is a result of continued administrative efficiencies, including incremental improvements related to the migration of our anesthesia collections from our outsourced billing companies to our administrate offices which occurred last year.

Depreciation amortization expense for the 2010 third quarter increased to 1.8% of revenue from 1.2% for the prior year period.

Due largely to acceleration of approximately $1.2 million of amortization expense related to the termination of a hospital contract associated with a prior acquisition.

For the 2010 third quarter, our operating margins was 23.2%, down 47 basis points from the prior year period.

Our affective tax rate for the 2010 third quarter was favorably impacted by a $10.9 million reduction in our income tax provision, resulting from the resolution of certain matters that were under review with taxing authorities.

Our tax rate for the 2010 third quarter was 24.7%, on a GAAP basis.

Excluding the impact from the resolution of these tax matters, our tax rate for the 2010 third quarter was 38.1%, on a non-GAAP basis.

GAAP net income was $61.3 million for the period, or $1.29 per share on a weighted average 47.5 million shares outstanding.

Excluding the impact of the tax resolution, non-GAAP net income was $50.3 million, or $1.06 per share which compared with GAAP net income of $48.1 million or $1.03 per share for the 2009 third quarter.

Through the 9 months ended September 30, 2010, our revenue has grown by 8% to over $1 billion.

Operating income growth is also 8%, and net income has grown by 10%, when excluding the impact of the tax resolution.

Same unit growth through the first nine months of 2010, was 1.8% and that includes growth from reimbursement related factors of 2%.

Same unit patient volume for our anesthesia and pediatric cardiology practices increased through the nine months of this year when compared with last year.

While neonatal and maternal fetal patient volume was down slightly.

Same unit NICU patient volume for the first nine months of 2010 declined by 0.4%, but when viewed on a two year stack comparison, NICU volume has grown by 2.1% through nine months of 2010 versus 2008.

Through September 30, 2010 our year-to-date revenue was $1.0331 billion, up 8% from $955 million through nine months of 2009, operating income was $227 million, through nine months this year, from $210 million in the prior year period or up 8%.

Operating margin was essentially flat, up 2 basis points.

General and administrative expense growth of 3.8% from nine months of 2010 compared to 2009 was at a rate considerably lower than revenue growth.

G&A expense, as a percent of revenue, was 47 basis points lower through nine months of this year as compared with last year.

Through nine months of 2010, our net income is $148.9 million, on a GAAP basis.

Non-GAAP net income was $138 million, up 10%, from $125.4 million, for the nine months of 2009.

On a per share basis, MEDNAX earned $3.14 for the first nine months of 2010, on a GAAP basis or $2.91, non-GAAP based on weighted average 47.4 million shares outstanding.

This compares with GAAP EPS of $2.71, through the first nine months of 2009.

At September 30, 2010, we had cash and cash equivalence of $61.4 million, and no amounts outstanding under our revolving credit facility.

Accounts receivable were $174.7 million.

Cash flow from operations for three months ended September 30, 2010 was $105.4 million, and we generated $155.5 million in cash flow from operations through nine months this year.

Maintenance capital expenditures through September 30, 2010, are just over $10 million.

So the overwhelming majority of our cash flow is available to grow our business.

Through September 30, 2010, we used $65.7 million, for practice acquisition, and contengent purchase price payments for previous acquisitions.

Since October 1, 2010, we used cash on hand and our revolving credit facility to fund the acquisition of anesthesia practices in Charlotte, North Carolina and Greensboro, North Carolina.

We have now invested a little bit more than $312 million in acquisition and contingent purchase price payments across all of our specialties so far this year.

The most we ever invested in a single year.

As of November 1, we had about $166 million outstanding on our $350 million revolving credit facility.

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

We expect that earnings per share for the three months ended December 31, 2010, will be in a range of $1.10 to $1.14 per share.

This range includes estimated contributions from the two anesthesia acquisitions completed in the fourth quarter.

We also expect that our payer mix for the 2010 fourth quarter when compared on a sequential basis, will be in the range 0.5% higher government services to 0.5% lower government services from the 2010 third quarter.

Our 2010 fourth quarter outlook also expects that NICU patient volume with be in a range of 1% higher to 1% lower than for the prior year period.

In summary, we present a company that continues to build its operating and financial strengths, one with a clearly identified growth strategy with the combination of our internally generated cash flow and amounts available under our revolving credit facility, we are confident we have access to capital to execute on that strategy.

On that note I would like to turn the call back to Roger.

Thanks Vivian.

I want to make a few additional comments before we take your questions.

It was more than four years ago that I first introduced the idea of building anesthesia as a new growth platform for our organization.

It's been a little bit more than three years since we acquired our first anesthesia group, Fairfax Anesthesiology Associates Today, American Anesthesiology has more than 650 physicians and advanced practitioners working in 22 hospitals, 25 surgery centers and 16 pain management centers in six metropolitan areas.

In this relatively short span of three years we've grown to become one of the nation's largest providers of anesthesia services.

But as many as you know, we are just beginning the process of building our national group.

American Anesthesiology now employs a little more than 300 anesthesiologist.

That is still less than 1% of a specialty that consists of more than 47,000 physicians.

Three years into our efforts we have a much better sense of how to manage these practices.

How to support the growth opportunities within their communities and how to improve operating efficiencies.

With that comfort and with the resources that we have built to support the practices, we are comfortable with moving forward with anesthesia practice acquisitions in a steady deliberate manner that will establish more consistent growth rates for our organization.

At the same time, we will continue to complete acquisitions within the pediatrics division, including neonatal, maternal fetal medicine, pediatric cardiology and other pediatric sub-specialties.

There has been a lot of attention placed on same unit growth issues including patient volume and payer mix.

And although we can't control these variables, what we can control is how we manage through this period.

And our numbers today, demonstrate that we continue to remain focused on improving our operations across all of our specialties.

I also believe that the factors causing challenges today will eventually reverse and that we will be better positioned for the eventual turn.

To that end, one factor we can control that in fact we are controlling, is our ability to grow our platform within all of our specialties.

This remains a very difficult environment for physicians in a traditional group practice model with little administrative support.

Those are the groups that continue to be drawn to resources available to them when they join our national group.

For these reasons and many more, including the foundation that we have built as a national medical group, I believe we are at a very exciting time for our organization.

And we are looking forward to continuing to drive our growth as we develop our national physician group practice.

With that let's open up the call for your questions.

Operator?

(Operator Instructions) First question is from the line of Art Henderson of Jefferies and Company.

Please go ahead.

Hi thanks for taking the question.

You've done some really good work here.

A couple of questions for you.

Roger, in your opening remarks you talked about the pipeline acquisition pipeline being pretty robust, can you kind of characterize for us just how mature that pipeline is in terms of opportunities that are coming to fruition?

On the anesthesiology side obviously, pun intended, it's premature.

There is a lot of opportunities there, and we are talking to a lot of different groups and as I said, in my remarks, I think that we are just starting to scratch the surface for what is available out there.

neonatalology and pediatrics pipeline is more mature, clearly there are a number of groups there that we would like to get on board and, in fact, I'll say I will be disappointed if we don't get a couple of more acquisitions on the pediatric side completed before the end of this year, I think that we have--for timing reasons, not flow standing in the last couple of months, I don't think there is anything trending in that.

In fact, there are a number of practices that are in our pipeline that I would expect to close within the next year, that we have been trying to bring on board for a long time and they are now interested in talking with us and in moving forward and doing the analysis, et cetera.

I am very bullish on our pipeline.

I think that we will continue to do deals both on the core business and obviously on the anesthesiology side.

The future growth opportunities here over the next ten years are clearly within the anesthesiology specialty.

Okay, that's very helpful and then my follow-up question, just with respect to the acquisitions you've done in anesthesiology could you talk a little bit about the administrative infrastructure behind that what your capacity is on business development and just administration in general there?

One of the things we done with our business development team is we didn't want to have any specialists.

So we have spread our business development team across all of our specialties.

Which means that anyone of our business development executives is capable of doing--has experience, doing either cardiology or anesthesia or neonatology.

So we feel good about where that is our sourcing continues.

One of the things that is interesting to me continues to be the number of inbound calls that we are getting from anesthesiologist.

And every time we complete one of these anesthesia deals, it seems that we get some phone calls from people saying "wow we know those guys and if American Anesthesiology was the right decision for them, we are going to want to talk about that as well for us." So, but having said that our business development team I think is totally prepared to deal with all of the different groups that are in the pipeline, different specialties.

So on an administrative standpoint, clearly as we continue to grow, we will need to add more personnel.

Particularly in the revenue cycle management area where whether manager contracting, the billing, the collections area, one of the things that our head of our back office likes to say, "as you grow I get to grow." That's an area that will continue to demand more investments be made.

But I feel good about Karl and his team, Bill and some of the other people that are working there with him.

We will continue, as we grow, to make investments in that management team because the growth will require it.

Okay that's great, thanks, congratulations.

Thanks.

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

Good morning this is Brian Zimmerman in for Darren.

Just sort of a follow up to the last question, I was wondering- you guys have made some progress with your SG&A ratio, can you give us an update on where you are in regard to transitioning away from outside billing and collections and what kind of impact that could have on the fourth quarter?

We have most of our practices, not all of them, particularly the large one in Charlotte is not yet in our billing and back office functions in Charlotte.

But-- or I mean in Raleigh.

But the one that we just completed, the plan is to integrate that one immediately into the one in Greensboro into our Raleigh offices.

So the Charlotte one will take some time, we expect that over the next four to six months that one will get absorbed into the Raleigh offices, as well, but because of the size and some of the individualiaties of that practice it's going take a little bit longer to get that one integrated.

Thanks.

Given your recent M&A activity in anesthesia, we are hoping could you provide update with Pro Forma revenue and earnings contribution from American Anesthesiology?

We historically have not broken that out.

We think that there is some competition for these practices and we prefer to not break that out for the time being.

Do you plan on breaking that out in 2011 or at some future date that you can foresee?

I'm going hold out as long as I can.

All right.

Fair enough.

Thanks, guys.

Thanks, Brian.

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

Please go ahead.

Good morning everyone, maybe a couple of quick ones for Vivian, out of the box.

First just on D&A, I know you saw the little bit of a spike because of the amortization acceleration during the period, but how should we look at that in the fourth quarter, will that trend back to kind of the $5.8 million, $5.9 million range once we account for the recent anesthesia deals.

Does that sound reasonable?

Yes, it goes up slightly because, some of these deals have contracts that we value, but it will be more in line with what the growth pattern that we seen, Ryan, this quarter, as I said, the big chunk of it was related to the $1.2 million, so it will come in back more with our trending because these two deals especially that we did, are not ones where there is a high valuation of related to contracts.

It will be back in line.

That's helpful.

And then, just to be clear, I think the answer is yes, but when you mention the revolver is tapped at $166 million, that includes both of the anesthesia deals including the one that was announced yesterday was in that figure?

Yes, that's affective November 1, right.

Do you have CapEx for the quarter?

Yes we said that it was roughly over-- well for the quarter we said it was $10 million year to date.

For the quarter, I can get that for you.

For the quarter, the CapEx was basically a little bit less than $3 million.

Okay.

Perfect.

Then, maybe a couple of other questions just on anesthesia, Roger you talked about in the past, that the anesthesia multiples were coming down both given that you are able to capture synergies and integration and that fact that just the pricing has come down a little bit.

And I know you probably don't want to give us multiples for these two deals, but does the general concept still ring true based on the spending for the acquisitions?

Yes, absolutely.

The concept is absolutely valid.

Great.

Then I guess last one just sounds like you talked about the pipeline still very robust, both on the NICU and anesthesia side.

I'm curious on anesthesia, this is a chance to take a little bit of a breather over the next four to six months as you integrate the bigger practice into Raleigh or will you continue going forward on the M&A front for anesthesia as well over the next quarter or two of opportunities arise?

Yes, we feel good about our ability to manage these practices and we are targeting our next anesthesia acquisition probably late in the first quarter.

Okay.

Thanks a lot, guys, and good quarter.

Question from the line of Dawn Brock with Coffman brothers.

Please go ahead.

Good morning guys.

First on the NICU volume side, how are the birth rate levels in your host hospitals?

Hi Dawn, I think the birth down to 3.5%.

About 3.5% this quarter, Dawn.

Okay.

Do you have any idea, Vivian, what that was against from a comp?

We had said in Q2 the births were down about 4.6%.

Yes, I was looking at the year ago for, so the year ago for 3Q '09.

I would have to get that for you I don't have that here.

Okay.

No problem.

Sequentially, that's definitely a little bit of improvement I was looking for a little bit of color there, that's great.

Then, Roger, you made some really optimistic prepared remarks about acquisitions.

On the anesthesiology side, as we move forward, is it fair to look at the activity now that you have some large anchor acquisitions that can benefit from some tuck-ins is that the way we should be looking at it, you really penetrated that mid-atlantic region, is that going to be a continued focus?

We are looking at practices all over the country, these practices that we have acquired--first of all there are a lot more practices available in North Carolina.

But we are not really focusing.

It just happens that you pick up a practice and then you get calls from some of their buddies in that area and it just kind of develops that way.

The next practice we are looking at is probably not going to be in that area.

Okay.

From that perspective then, as we look out, would we be expecting maybe another mid to large size acquisition and therefore that's going--we should be looking at practices that probably have again the infrastructure base and or you guys building out the infrastructure so kind of again mid to large?

Yes.

As we look at practices, one of the things that is attractive, like this practice in Greensboro, as I said earlier the plan is just to integrate that directly into our Raleigh offices and it's easy to do that, 20-some positions and they don't really have too many nurse anesthetists and so, that I would call sort of a tuck-in because it's easier to integrate the practice.

If you look at a larger practice, particularly in a different area, one of the things that we would consider is whether they have administrative infrastructure or not because at some point the practice that we have-- the office that we have in Raleigh sort of becomes like a regional office on the neonatology side.

There is only so much you can squeeze out of one of those offices, so we are looking at everything.

As you have seen in the past we have done some, what I would consider large practices and some medium and smaller size practices and I think that's what we will continue to do in future.

We will do some larger practices and some smaller ones that we will be able to bring in, to tuck in to the billing and business offices.

Okay that's great.

And then, sticking with acquisitions just for a minute, you had talked previously about targeting some groups in Texas, about particularly maternal fetal medicine and potentially ICU's and really rounding out this cluster strategy whether it's market based or whether its just providing a continuum of care for the pediatric neonatal care continuum, are you looking at things that way, and does the pipeline reflect that right now.

Yes, we are still interested in Maternal Fetal pediatric intensive care, pediatric cardiology and the pipeline has all of those practices in them and, as I said before, I believe that we will do more acquisitions in that division of pediatrics before the end of the year.

Okay.

Lastly on acquisitions, just inpatient versus outpatient trends in your practices in specific on the anesthesiology front.

Any trends there?

We saw growth both in the inpatient and the outpatient areas of our anesthesiology practices for the third quarter.

Clearly the elected procedures are now being done with the same frequency as they were being done before, we still saw growth both in hospital and ambulatory practices.

Okay.

Am I mistaken is that a little bit of a more positive trend than we saw in the second quarter on the outpatient side?

I would say yes, a little bit more positive, yes.

Okay.

And then, Roger just overall like big picture, anything structurally in the third quarter performance trends, either pricing or volume that makes you incrementally more positive or negative as you look to the fourth quarter or even into 2011?

I mean, it's just a gut feel.

It feels like the economy is getting a little bit better.

It feels that the gloom and doom that was around last year has cleared somewhat.

We are looking at all kinds of statistics and all kinds of numbers and analysis and looking at everything from interest rates to housing starts and there is nothing that I can point towards to tell you that this is going to turn around in the near future.

But I just, -- it feels to me that clearly things are not as bad as they were a year and 18 months ago.

Okay.

Thank you very much, nice quarter, guys.

Next question comes from the line of Kevin Ellich with RBC Capital Markets.

Good morning, thanks for taking my questions.

Just going back to the same unit neonatal volume that was down 60 basis points, just wondering what caused-- what led to the better than expected result?

I think your guidance was negative one to negative three.

Well, more sick babies.

I think that as the -- look, as the (inaudible) deteriorate I think we see fewer mothers getting good prenatal care, which in turn translates into more NICU admissions.

I don't have the statistics behind that.

It's just a feeling that clearly if you are not going to your obstetrician early on during your pregnancy, if you are not getting your vitamins and your blood pressure checked and all of these things, then it's more likely that you will have diabetes that goes undiagnosed or high blood pressure that goes untreated so you might end up with a child in the intensive care unit.

To me that's the single biggest reason why we have not seen a drop in our admission rate consistent with the drop in birth percentages.

I guess that makes sense.

Has anything changed- what about length of stay?

Has that remained steady or has that changed, too.

No, length of stay has not changed.

Okay.

That's helpful.

And then, just switching over to anesthesia.

Wondering what type of pricing growth are we seeing in the anesthesia practices that you have acquired over the last couple of years?

I'm sorry, what type of practice what?

Pricing growth in terms of contracting with the managed care payors?

Well, that's another area we are reluctant to talk about again, Kevin, because of the potential competition in that area.

We are just not happy talking about that right now.

We haven't broken that out Kevin, but there has been favorability in pricing and anesthesia it's just not broken out because we include that in our overall metrics.

Got you, that's fine.

And then just wondering what the pair mix shift that you experienced and also what's in your guidance how much of that is related to anesthesia?

Again, we don't break out anesthesia as you know, anesthesia would have more Medicare versus our neonatal which is Medicaid.

The reimbursement there is better just because of that, so again we haven't seen the deterioration like we did in our own-- on the PDX side of the house, but it's a lot less.

Right.

But as you add more anesthesia that is going to lead to natural more government related reimbursement, right?

No.

I don't think so.

Not necessarily.

First of all the practices that we have currently including the last two that we have, really have a pretty good pair mix.

When you look at one of the ways you can look at that, Kevin, is when you look at our 10k it has metrics for the pair mix that includes everyone.

So I don't necessarily believe that having more anesthesia will deteriorate that at all.

Okay.

We will take a look at that.

And then, Vivian since I have you, now that you are starting to use the balance sheet a little bit, can you remind us what the is interest rate on the revolver?

I'm happy to remind everybody of that.

That's liber plus one.

Okay.

Yes, that doesn't mature until 2013.

Okay.

Roger, I was wondering if you could talk maybe a little bit about the trends that you are seeing on the pediatric side of the house, could you take us through monthly to tell us how the birth rates trended and volumes trended.

We continue to see, Kevin, the same variability on our month to month basis we have been reporting all along.

I'm not seeing any trends that I could point towards which continues to be the reason why I just have a hard time thinking this is related to the economy.

If you look at early in the quarter, one of the reasons may have been up 4% in same unit volume, while another reason was flat and another reason was down 2%.

And the following month the reason that was up 4% is now down 2%, and the one down 2% is now up 3%, it's all over the place and it just continues to be, not only on a region to region basis, but within each region on a hospital to hospital basis, you see that in Texas there maybe a hospital that's up 2%, and within that same city, another one maybe down 3%, you really can't reach any conclusions.

It just becomes a lot of variability on a month to month basis.

Understood.

Okay and then last question, as you do more anesthesia acquisitions, and the sizeable deals, thoughts on your capital structure and maybe using long term debt?

Yes, absolutely.

One of the things that I always said is I don't love debt but I'm willing to put debt on our books for the right reasons.

And I believe that anesthesiology acquisitions would be the right reason to put some debt on our books.

So, when it comes to that, we will be absolutely willing to look at it and to do it if the numbers make sense.

One of the things to keep in mind as we acquire the practices and you saw that from our cash flow report this morning, these practices not only come with earnings, but they come with a lot of cash flow so as we complete each one of these practice acquisitions, we are also adding cash flow which of course we would then utilize to acquire the next group.

So far we have not felt the need to do that.

But it is definitely possible that at some point in the future we will.

Sounds good.

Thanks again.

(Operator Instructions) Next question then comes from Kevin Fischbeck with Bank of America.

Please go ahead.

Hi, good morning.

This actually is Josh [Marin] filling in for Kevin.

You guys mentioned some improvement in the reimbursement from commercial payors partly through contract negotiations -- can you just comment on how those are going?

Some of the hospitals have been talking about managed care companies becoming a little bit more aggressive on the pricing side.

No major changes yet, but some of the hospitals are noticing a bit of a change in response to the rising cost trends and the need to keep cost trends down.

Could you comment on how the renegotiations have been going.

You know, we have not seen any difference in our ability to negotiate or renegotiate managed care contracts.

We talk about historically getting 2% to 4% growth from pricing and we have not seen anything different to this point in time.

A lot of our contracts are multi-year contracts and they have step up increases in pricing so we are pretty comfortable because of that fact ,tell you that we don't expect-- over the next 12 months we don't expect to see that growth slow down as we -- as we have depicted it.

And when those contracts are coming to the end you have to renegotiate them the process has there has been no change in the process when you encounter managed care company.

That's right Josh.

So far there have been no change in our ability to renegotiate the contracts.

Okay.

And then on the payer mix, obviously continues to work against you a little bit beyond your control, you guys have done a nice job on the cost side of things particularly G&A, how much more room is there on the G&A front have you gone most well hanging fruit or is there still room to go there.

This is Vivian, I believe that as we said before, there is still incremental improvements to be had.

Not only with anesthesia as we move through the revenue cycle management because we basically just lacked getting the four practices that we initially had there, now we are still working on other pieces of the revenue cycle management process.

So, we do believe that we will continue to see some improvement there as well as we just look at our whole business in general and we have seen some of the administrative efficiencies come from the pediatric side of the house as we negotiate some supply contracts and things of that nature.

So basically we are always looking at ways to continue to get administrative efficiencies certainly in times where we have other factors that we cannot control.

Okay.

Thank you.

Our next question comes from the line of Rob Mains with Morgan Keegan.

Please go ahead.

Thanks good morning.

The Greensboro acquisition since you are going to be integrating that into Raleigh, do I surmise that the accretion you talked about in the press release yesterday does include the benefit of that integration?

No.

I wouldn't surmise that at all.

That would be accrued on top of that?

Yes it's just our -- historical numbers which is what we are always getting.

Fair enough.

Then Vivian I didn't write fast enough.

Could you repeat the number you gave about cash paid for acquisitions to date.

Basically, what we said is for-- we basically have about $312 million that we paid through November for acquisitions as well as deferred continued purchase price payments throughout the year.

And that does include the last deal that we announced which was the Greensboro deal.

Okay.

And in the press release $66 million number that's through 9/30.

That's right.

That's all I needed, thank you.

Yes.

We have a question from the line of Nicholas Jansen with Raymond James and Associates.

Please go ahead.

Hey guys.

Just a quick question on the competitive landscape with anesthesia, I know one of your private peers down the road is increasing their debt load to perhaps pursue some acquisition.

So we are wondering if you are just seeing any uptake in competition on anesthesia.

Thanks.

You know, whenever we go do a deal, it seems that as we are negotiating price with the potential group acquisition they talk about how many other offers they have.

But when we actually complete the deal, there doesn't seem to be nearly as many potential acquires out there.

We haven't seen any increase in the competition for acquisition of the practices and as I said before we have acquired every practice that we wanted to acquire at what we considered to be the right multiple.

Thanks, one more on Medicaid, have you guys seen additional comments relative to- Roger, your last comments last quarter about state by state any unexpected or positive developments on the Medicaid front?

Nothing that we haven't talked about.

No, we haven't seen anything new coming there.

Sounds good.

Great quarter, thanks guys.

We have a question from the line of Brooks O'Neil with Dougherty and Company.

Please go ahead.

This is [inaudible] filling in for Brooks O'Neil.

Vivian, do you have the number for patient volume growth across all physician services and the pricing increase during the quarter?

For what?

For pricing increase during the quarter.

Yes.

So basically that we said that on the same unit basis, for the quarter, we grew 80 basis points.

Which was basically 74 basis points coming from the net pricing effect and then we had and then the rest was the volume piece.

Okay.

Just one follow up to the anesthesia discussion, Roger Obviously we appreciate all the color here, as your pool of available anesthesia related properties expand and more and more folks are talking to you, does your required profile of anesthesia practice change in terms of profitability, expected return on capital, et cetera, or is that stay the same.

I'm just trying to figure out how big or how small what different kind of anesthesia acquisitions you could potentially make down the road.

No.

Our strategy and our plan remains the same.

We are looking for good solid practices that are in good communities that have strong relationships with their hospitals.

And that we see an opportunity to help them improve their administrative functions and whether those are small ones or larger ones that we are not changing our strategy there.

Thank you, I appreciate the color.

Last question comes from the line of Jeff Horniman with [Felton] Company.

Please go ahead.

This is Ben [Hayner] on behalf of Jeff Horniman.

There is a recent Research Triangle Institute study on the cost safety profile of CRNA versus doctors that stirred up quite a bit of controversy recently.

What is you guys take on that?

Basically, we have looked at that study I think that there is a lot of controversy with that, I mean our position is that as you know most of these anesthesia practices we focus on having an anesthesia care team, so we do have both within our six practices that we have-- the article there as we talked through it with our anesthesiologists is partly the modifier that they compared in the article which is a modifier that is not used consistently throughout all of the anesthesia world.

And so, it could be that there was a physician there an anesthesiologist managing medically supervising more than four CRNAs.

And so, basically for us, I think it's something that we look at, but there is a lot of I guess uncertainty with that because of the way that the modifier is currently applied.

There isn't any risk to volume in facilities to employ CRNA's is there?

There's no what?

I'm sorry, repeat that.

Risk in volumes.

No.

Thank you very much.

Thanks.

(Operator Instructions)

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