Pediatrix Medical Group Inc (MD) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MEDNAX 2011 third quarter earnings call.

For the conference, all participants are in a listen-only mode.

There will be an opportunity for your questions.

Instructions will be given at that time.

(Operator Instructions) And as a reminder, today's call is being recorded.

Now, with that being said, I'll turn the conference now to the Vice President of Investor Relations, Mr.

David Parker.

Please go ahead.

Thank you, John, and good morning, everyone.

Certain statements and information presented during this conference 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, including the sections entitled Risk Factors, which is available on the investor's page of our website, www.mednax.com.

In addition, during this call, we will discuss certain non-GAAP items for the 3 and 9 month periods ended September 30, 2010.

This morning's press release contains a detailed GAAP reconciliation table, and that's available on the investor's page of our website, www.mednax.com.

Joining me on the call today are Roger Medel, our Chief Executive Officer and Vivian Lopez-Blanco, our Chief Financial Officer.

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

Thank you, David.

Good morning, and thanks for joining our conference call this morning.

As we take a look at our third quarter and year-to-date results, I'm going to focus my comments on 2 key areas that demonstrate the strength and efficiency of our model and our resources as we strive to take great care of our patients.

These areas are growth and operating momentum.

With our third quarter results, we've demonstrated strong growth and the continuation of our positive operating momentum.

Our revenue is up over 16% year over year, largely as a result of acquisitions completed in the past year and also reflects same unit revenue growth.

We also continue to expand operating margins as we successfully integrate new group practices into our existing operations and as we look for ways to improve the efficiency of our national medical group.

Supporting our growth efforts, we recently announced that we have expanded our credit facility by $150 million to $500 million and extended it for 5 years to 2016.

This was done for 2 main reasons.

First, we believe this was a good opportunity to access the credit markets to expand our availability of capital, and, more importantly, this highlights the confidence that we have in our ability to invest that capital by continuing to make accretive acquisitions.

This morning we announced the acquisition of Bexar Pediatric Surgery Associates in San Antonio, Texas.

This practice consists of 5 pediatric surgeons and 1 pediatric plastic surgeon.

This is the first pediatric surgery practice that we've acquired, and while this is a relatively small sub specialty, we believe it's a welcome addition to our pediatrics division.

Pediatric surgeons provide specialized care for patients ranging from newborns to adolescents for all problems or conditions affecting children that require surgical intervention, and also have particular expertise in the areas of neonatal and prenatal surgery.

From a continuum of care perspective, pediatric surgeons typically work closely with neonatologists and pediatric cardiologists.

Bexar Pediatric Surgery Associates has long-term relationships with the large San Antonio area hospitals.

Consistent with the existing and strong relationships, our pediatrics group has established in this same Metropolitan area.

This acquisition further strengthens our relationships with hospitals in the San Antonio area and provides the opportunity for a more collaborative patient-care approach and the ability to offer patients a broader continuum of care with our existing hospital partners.

We have further been active throughout the third quarter on the business development side.

During the quarter, we completed 4 acquisitions.

On September 30, we completed the acquisition of Midwest Maternal-Fetal Medicine in St.

Louis, Missouri.

This practice has long-standing relationships with 3 large area hospitals in the St.

Louis community.

The 6 physicians and 14 clinical and administrative staff are being integrated into our pediatrics medical group division.

As with many of our physician partners, Midwest Maternal-Fetal Medicine saw this partnership as a way to enhance quality improvement initiatives, share clinical outcomes data and best practices, and have a greater role in advancing health care while achieving the best possible outcomes for their patients.

We also had the opportunity to address the continuum of care advantages for our patients as our neonatal specialists currently provide services in 2 of the 3 hospitals served by Midwest Maternal-Fetal Medicine.

I will touch on the next 3 acquisitions only briefly since I mentioned them in our second quarter call shortly after we announced them.

Nevertheless, they are important new practices that we have added to our national medical group during this third quarter.

Pinnacle Anesthesia is an anesthesia group practice that staffs 2 hospitals in southern Palm Beach County, Florida -- just north of our headquarters -- as well as several office-based physician groups in the area.

The clinical and administrative operations of these 15 physicians and 16 nurse anesthetists are currently being integrated into our American Anesthesiology division.

Northwest Newborn Specialists is a large 20 doctor group based in Portland with annual patient volume in excess of 29,000 patient days which expanded pediatrics' neonatal physician network into Oregon.

Our fourth acquisition was a 1-physician, maternal fetal medicine practice in Austin, Texas.

We're very confident that we will continue to complete group practice acquisitions across all of our specialties and sub specialties.

There is a very strong interest in our practice management approach because we provide a level of certainly at a time of uncertainty.

We continue to see substantial growth potential for our American Anesthesiology division, and at the same time, we see further opportunities to expand our geographic presence within our pediatrics division.

Operating efficiencies should be expected of an organization that grows by acquisition.

It's particularly encouraging that we're seeing those efficiencies within our anesthesia division where our vertically integrated management processes are proving to be more efficient as we bring practices into our administrative infrastructure.

We treat the practices that we acquire as our partners and provide these physicians the opportunity to continue to take great care of their patients.

This patient-centered model aligns the interest of the physician with those of the hospital in a way that strengthens that relationship.

We believe that when these principals are being practiced, it is much easier to attract groups who are interested in joining our model.

For these reasons, as well as many others, we continue to be encouraged by our ability to grow through acquisitions.

We also continue to benefit from same unit revenue contributions on our operating momentum.

Same unit revenue growth for the 2011 third quarter was 5%.

Incrementally, this was driven by strength in net reimbursement-related revenue growth and volume growth across all patient service lines in the quarter.

We saw an increase in same unit NICU patient days and a slight increase in births for the third quarter, which was part of that solid same unit volume growth for the business.

Another area of growth I want to speak to is organic growth.

We've recently placed renewed emphasis on opportunities to grow our existing practices.

During the past few months, our pediatrics division has expanded its maternal fetal medicine physician services, establishing new practices in Salt Lake City, Utah and the eastern Idaho area.

Within both our pediatrics and American Anesthesiology administrative offices, we have the breadth and depth of management working with physicians in our metropolitan areas to identify additional ways to expand our existing physician services and to look into new areas of patient care for the Company, and we will continue to pursue these opportunities.

In concluding my remarks, I want to underscore the value our national group practice brings to physicians providing care in their communities.

There are many challenges that small group practices face, and the ability of our national group to adapt effectively continues to attract these groups to our models.

This patient-centered model aligns the interest of the physicians with those of the hospital and provides the resources and infrastructure support necessary to practice medicine in today's difficult environment.

In turn, physicians can focus on taking care of their patients.

At this time, I would like to turn the call over to our CFO, Vivian Lopez-Blanco, for a review of our financial results before we open the call to take your questions.

Thanks, Roger.

Good morning, everyone, and thanks for joining our call.

As Roger said, we're reporting a strong quarter with growth coming from both acquisitions and same unit practices, positive operating momentum and the strength of our financial model as we integrate acquired practices into our existing infrastructure.

Our revenue for the 3 months ended September 30, 2011, grew by 16.1% from the prior year to $407.7 million.

Approximately 7% of our revenue growth came from acquisitions while the remainder is from same unit growth which increased by 5% for the 2011 third quarter from the prior year.

Same unit revenue growth included net growth of 3.1% from reimbursement-related factors.

This includes continued modest improvements in the rates were paid by third party commercial payers, partially offset by an 80 basis point shift in payer mix to government payers from commercial payers year over year.

Same unit revenue growth attributable to patient volume was up 1.9% for the 2011 third quarter and includes volume growth across all of our physician service lines.

The number of NICU patient days increased by 1.3% for the 2011 third quarter from the prior year period on a same unit basis, while the number of births at our hospital, also same unit, was slightly higher.

Profit after practice expense for the 2011 third quarter was $144.3 million, a 15.2% increase from $125.2 million for the prior year period.

Profit after practice expense margin decreased by 27 basis points which can be primarily attributed to net increases in operating expenses partially offset by the positive impact of acquisition-related growth.

General and administrative expenses grew by 14.7% for the 2011 third quarter below the rate of our revenue growth.

G&A expenses as a percent of revenue were 13 basis points lower than a 2011 third quarter compared to the prior year period as a result of our model of acquiring and effectively integrating practices into our existing administrative infrastructure.

Our operating income was $95 million for the 2011 third quarter, which is a 16.8% increase from the prior year period.

Third quarter operating margin improved by 13 basis points to 23.3% year over year, primarily due to acquisition related growth which drove efficiencies across our operations infrastructure.

As we compare the 3 months and 9 months ended September 30, 2011, to the 2010 period, we believe it more meaningful if the 2010 GAAP net income and earnings per share for these periods are presented on a non-GAAP basis by increasing the income tax provision and decreasing net income by $10.9 million to exclude the impact from the favorable resolution of certain tax matters that took place in the third quarter of 2010.

For the 2011 third quarter, MEDNAX's net income grew by 15.7% to $58.2 million as compared to non-GAAP net income of $50.3 million for the 2010 third quarter.

GAAP net income was $61.3 million for the 2010 third quarter.

Earnings per share was $1.19 for the 3 months ended September 30, 2011, based on a weighted average 48.9 million shares outstanding, which compares with non-GAAP earnings per share of $1.06 based on a weighted average 47.5 million shares outstanding.

GAAP earnings per share was $1.29 for the 2010 third quarter.

Through the first 9 months of 2011, MEDNAX generated revenue growth of 14.6% and operating income growth of 16.2%.

MEDNAX earned net income of $159.6 million, or $3.28 per share through September 30, 2011, based on a weighted average 48.7 million shares outstanding.

This compares to the first 9 months of 2010 when MEDNAX generated non-GAAP net income of $138 million, or $2.91 per share based on a weighted average 47.4 million shares outstanding.

GAAP net income was $148.9 million, or $3.14 per share for the first 9 months ended September 30, 2010.

Revenue for the 9 months ended September 30, 2011, was $1.18 billion, an increase of $150.3 million from the prior year period's revenue of $1.03 billion.

Of this $150.3 million increase, 75%, or approximately $112.7 million of revenue growth, came from acquisitions while the remainder same unit growth, which increased by approximately $37.6 million for the first 9 months of 2011.

Same unit revenue for the first 9 months of 2011 grew by 3.7% with almost two-thirds of that coming from reimbursement-related factors which contributed net growth of 2.3%.

For the first 9 months of 2011, we continued to see improvement in reimbursement from third party commercial payers.

Same unit patient volume increased by 1.4% with volume growth driven by our same unit neonatal, anesthesiology and pediatric cardiology practices.

Operating income grew to $263.9 million for the first 9 months of 2011, up 16.2% from $227 million for the first 9 months of 2010.

We ended the third quarter with approximately $36 million of cash on our balance sheet.

Accounts receivable were $207.1 million, an increase of $25.7 million compared to December 31, 2010.

The growth of our AR is related to same unit revenue growth as well as the billing of receivables related to recently acquired practices.

As a reminder, we do not buy historical accounts receivable when we complete practice acquisitions.

Our DSO increased slightly to 47 days at September 30, 2011, primarily due to the increases in AR from recent acquisitions.

As of September 30, we had a total of $50 million outstanding on our revolving credit facility, which as Roger mentioned, we recently expanded to $500 million and extended it for another 5 year term.

The expanded facility is comprised of a syndicate of 10 financial institutions, most of which have been long standing banking partners of MEDNAX and have supported the growth of the Company.

Coupled with our strong cash flow from operations, this expansion of capital puts us in a solid financial position as we continue to grow our operations by acquiring established physicians' practices in our specialty.

During the 2011 third quarter, we generated strong cash flow from operations of $100.1 million.

For the 9 months of 2011, we had cash flow from operations of $181 million.

Consistent with our strategy, most of our cash flow from operations is invested back into the growth of our business.

At this point, I would like to move to our outlook for the 2011 fourth quarter, which we announced in this morning's press release.

We expect that our earnings per share for the 3 months ending December 31, 2011, will be in a range of $1.15 to $1.20.

The range for our 2011 fourth quarter outlook is determined by anticipated total Company same unit revenue growth for the period which we estimate to be 2% higher to 4% higher year over year.

This same unit forecast is expected to be evenly divided between patient volumes across all MEDNAX physician specialties and net reimbursement growth including improvements from commercial contract rates as well as variability in the mix of services reimbursed under commercial and government payer programs.

At this time, I would like to turn the call back to Roger.

Thank you, Vivian.

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

Certainly.

(Operator Instructions) First, from the line of Darren Lehrich with Deutsche Bank.

Hi, thanks and good morning.

This is Brian Zimmerman in for Darren.

My first question is regarding your press release this morning with pediatric surgery.

I was wondering how you're viewing these types of practices from a market opportunity standpoint.

And then can you make some comments what type of a market profile you look at when you decide to acquire these types of practices?

Okay, well, pediatric surgery.

This is our first acquisition of a practice.

It's an area that I've been looking at for a long time.

Pediatric surgeons work closely with neonatologists and pediatric intensivists and pediatric cardiologists.

It is a different specialty, and it's one that we don't really have any experience in.

As we always do, we will acquire 1 practice.

It's a small practice, only 5 or 6 physicians, and we will learn how to integrate it, how to run it, how to bring value to it.

And once we feel comfortable that we can, in fact, bring value to these physicians and their practices, we'll make a second acquisition.

Having said that, it is an area that's very attractive to us.

It fits some of the same parameters that our other pediatric sub specialties fit into.

They tend to be smaller groups, there's a small number of these specialists, probably under 1,000 pediatric surgeons, and they provide valuable services within the neonatal intensive care unit and the pediatric intensive care unit.

We believe that we can bring them some advantages as far as their back office functions are concerned, and that's what we're going to be focusing on over the next year.

Also, this was the right market.

This is a market in which we have a large presence of specialists, different specialists within our MFM neonatology and pediatric cardiology partners.

We felt that given the kind of hospital partners that we have here as well, we thought that this was the right market and the right time to pull the trigger on this acquisition.

So, that's what we're looking at.

Okay.

Thank you.

And then my second question is looking at margins, I guess EBITDA margins were a little bit lower than our expectations.

Can you comment on any factors you might have seen besides mix?

No, I think, again, we've talked about that that's going to fluctuate from time to time as we kind of look at the mix of the practices that we're bringing into the equation here, but overall, we don't believe that it was a big swing there.

Okay, and have you attempted to quantify maybe the effect that integrating the anesthesia practices has been on your operations?

No, we have -- as you guys know, we haven't disclosed that again.

We have kind of given some information directionally that we're pretty happy with the integration of these practices, but there is variability in the margins within the anesthesia practices as we talked about before, depending on whether the CRNAs are employed by the practice or employed by the hospital.

But we look at separately from that.

Internally, we look at how we're doing as far as the integration grows just from the back office prospective, and again, we're happy with it.

We're not ready to disclose that, but everything is going very well.

As a matter of fact, we basically integrated our Charlotte practice into the billing platform that we're using for all anesthesia practices as of the beginning of September.

Okay.

Thanks a lot, guys.

Our next question is from Kevin Fischbeck with Bank of America Merrill Lynch, please go ahead.

Good morning, actually this is Joanna Gajuk for Kevin here today.

Question for you.

I didn't hear you talking about your outlook for anesthesia deals this year.

Do you still continue to believe that you can close 1 to 2 anesthesia deals this year?

I do.

I know the timing is a little off on that, and I know we're all disappointed that we didn't get that deal done in the third quarter.

But I remain confident that we will get the deal done in the fourth quarter.

In fact, I remain confident that we will do 2 deals in anesthesia, as I said, in this fourth quarter.

We have a long history of acquiring practices when they're ready to be acquired.

Sometimes people are not on the same time schedule that you're on.

There's a lot of different contracts and issues that need to work through.

A lot of different physicians and nurse anesthetists and hospital administrators and managed care companies and stuff, and not everybody is on the same time schedule as you are.

We're going to wait until the deals are ready to be done.

We're not going to rush to do deals or do them before they're complete or ready, that's the history that we've had.

We've been very successful at it, and when this deal is ready to be done, we'll get it done, and I believe it will be ready in the fourth quarter.

That's great news.

And also, can you maybe give a little more color.

I heard you mention that the birth trends in the quarter were positive.

So, can you comment on any variation between the different regions that you might have seen?

Well, I think we have been encouraged this year.

I think we've been talking about this pretty much since the first quarter.

We've seen less negativity in the birth rate overall.

We are encouraged by that and certainly in the third quarter, it was positive.

And so when we look at this on a region by region and practice by practice, we still believe that there is some variability, but nonetheless, the overall trend is positive for us.

We're encouraged by that.

Thank you, and on this topic, I believe last quarter you were talking about maternal fetal practices being weaker, maybe, than the rest of the sub specialties.

It seems like this quarter it's better.

Any color on what's driving that?

Well, I think again, overall volumes and overall same unit, as you know, was basically 5% for the quarter, and we did have 1.9% up in volume for all of our specialties.

So I think, again, it's all related to we're seeing more favorability, and we're very encouraged with the overall volume trend for the quarter.

All right, and then also in terms of -- can you talk in general in terms of seasonality of fourth quarter versus third quarter?

Well, yes, I think, and several of you guys have put that in your reports.

Typically, we see the third quarter in line with the fourth quarter, and so that's what we're projecting and what's included in our fourth quarter guidance.

All right, thank you very much.

Our next question's from Ryan Daniels with William Blair.

Please go ahead.

Yes, good morning, and thanks for taking my question.

Let me just ask a quick follow-up on the M&A front.

Roger, can you talk a little bit about the pipeline?

I know you provided more details last quarter in the breadth of the pipeline, size of deals that you're seeing.

That would be number one, and then maybe as a follow-up to that, what the competitive environment looks like for transactions.

I guess in particular on that anesthesia side.

If you're seeing more entry there from operators or private equity as you continue to look at that market.

Okay, our pipeline remains very full.

We are looking at a number of different deals across the country in many different geographic areas.

We're very encouraged by the interest that we are seeing from different groups throughout the country, and we believe that next year we'll do more deals than we did this year, which is one of the reasons we went out and got our line of credit extended, because we think we're going to use it.

I just think this is a great time to be in this specialty, and we've been able to prove to ourselves that we can bring value to these practices, that we can provide them with the kinds of infrastructure and support that allows them the opportunity to take better care of their patients while we're helping them take care of their business.

And I think this is going to continue, and I think it's going to grow.

On the competitive front, we haven't really seen a lot of competition from any of, I'll say, the other sort of companies out there that are saying they're in the anesthesia business.

We've completed the deals that we wanted to complete and that we were after.

We did see one group that we were interested in that appears to have made the decision to go with a private equity firm, but we expect -- I don't know if they'll be able to get that deal closed or how that will develop.

But we did see one group go with a private -- or make the decision to go with a private equity firm.

We'll see how that develops, and we expect -- we have said it other times.

We expect that there's going to be real competition, that it will be on that private equity front.

Okay, that's helpful.

Maybe two, a little bit broader questions.

The first is, with the final ACO regs coming out and looking a little bit more favorable for providers, it looks like more entities may enter into accountable care organizations.

And I'm curious if any of your host hospitals have thought about that and if you internally have thought of what that could do on the payment front for either your anesthesiologists or the neonatologists in that type of environment.

We think about it all the time, and we try to follow it, and we try to understand exactly what's going to happen there.

As you know, it's just all in the very early stages and basically, the outcome is really unknown.

We do see hospitals that are our partners that talk about it.

We do have our own participation, both with our government relations people up in Washington and our partners across the country, but there's really no granularity I can give to that at this point in time.

It's just too early.

We're very focused on keeping an eye on that.

Okay, thank you.

And the final one, just quickly, given that you do your own revenue cycle management for both businesses, wanted to get your thoughts ENC50-10, ICD10.

A lot of things that are upcoming on the revenue cycle management front.

I'm curious if you made the IT investments there to manage those transitions as they happen over the next few years, if we're going to see any uptick in your investments looking forward to make sure you can manage that appropriately.

We're always -- Ryan, hi, this is Vivian.

We're always pretty much always on the forefront of that.

Definitely there's been a working group on that for a while, but we don't think it should significantly impact the investment.

We have pretty robust systems.

That's one of, as you know, one of our core competencies.

We're all over that.

Okay, perfect.

Thanks a lot for all the color, guys.

Let's go to Bill Bonello with RBC Capital Markets.

Thanks, guys.

Couple of questions.

First of all, and I apologize if you highlighted this and I missed it, but there was some mix shift to government this quarter.

I think that's pretty typical for Q3.

Is there anything beyond the normal seasonal mix shift?

Bill, that's right, you have it correct.

As you know, typically, for whatever reason, if we go back to historical patterns barring what's happened in the last 18 to 24 months in our shift of mix.

But yes, we see it well within that range, so we're actually pretty encouraged by that.

Okay.

And then on the -- just one more question on the pipeline, and Roger, you sound very enthusiastic, which is encouraging, and you cited the expansion of the credit facility.

Just curious if there's any color you want to, or could provide, sort of on size of deals.

Should we think that there might be some big deals coming because of this expansion of the credit facility and because it's taken a long time to get some of them done, or is that reading too much into it?

I'm a neonatologist, so a big deal for me is 5 guys.

We come from a world of small groups.

We're not going to do any 300 or 200 anesthesiology acquisitions for the foreseeable future.

There are groups out there in the 20, 30, 40, 50, 60 physician range, and that's kind of the range that I would say we're probably going to be seeing.

Some smaller groups in the 20 range and some larger groups in the under 100 range, and I wouldn't read anything more than that into it.

Okay, and then just a final question.

Physician compensation.

Is there anything going on there?

And the only reason I ask is we've seen some other practices that have been reporting increases in labor costs.

I think that's probably specific to those specialties, but I thought we better check.

No, we haven't seen -- our physician compensation is -- first of all, as you know, we typically have the ones that have been in the system for a while have contracts with us.

And so we haven't seen anything as we're renewing some of the contracts that have been out of the ordinary on either side of our house whether it be anesthesiology or the pediac side.

As you know, Bill, we tend to rely more on our bonus program.

One of reasons we instituted that program years ago was to get away from the annual increases in base salaries.

And so as you know, we paid $100 million and, whatever, $130 million in bonuses at the beginning of this year to our physicians, and so we think that, that takes care of the need for these continuous base salary increases.

They have their appointment contracts with the base salary, but they look forward to their bonuses as a way to get their annual increases.

Okay, great, that's all I had.

Thank you.

And next go to Rob Mains with Morgan Keegan.

Please go ahead.

Thanks, and good morning.

Good morning.

Vivian, I want to circle back to a comment you made earlier about mix.

Did I hear you say that you thought that part of the issue could be the groups that you took on and their mix business affecting the overall mix in the quarter?

Well, no.

I wasn't specifically referring to mix when I was talking about that.

I think we were talking about margins in general.

I was talking more about the mix of practices, Rob.

That's what I was talking about there.

Okay.

And so -- and that would explain then the margin differential, and so I would assume if we have a static mix of practices the sort of margin trend that we would see in this quarter would be the one we would have going forward subject to the types of movements you can make for your practice enhancement efforts.

Yes, but remember the other thing I always talk about is -- it is affected by several things, namely being volume, because of what Roger was just saying to Bill that we do have a predominantly -- our physicians that are on a same unit base, they share in that bonus program.

Right now, this third quarter, as you know, we're up 5%.

So, needless to say, we're accruing bonuses at that rate.

That does impact it as well.

There's a few several -- these factors that impact the margin in addition to just the mix of the practices.

Okay.

And then I actually wanted to go back to one of Bill's questions about -- specifically about where we saw seasonally with the mix shift.

Do you feel that we're kind of back to where we were pre-recession, where if we get level shifts one way or another in mix, they're likely to occur when state fiscal years start in July 1, and therefore, we'd see most of the impact in third quarter and not see things bounce around as much as they did in the last couple years?

I wish I could have a crystal ball on that.

And like I said, we're pretty encouraged with this quarter, but honestly, can I call this quarter a trend?

I'm not sure yet.

We do typically see this, like I was saying before, in the third quarter.

We do think it potentially is related to you what said.

But as far as going back to historical patterns and are we out of the woods with some of this more macroeconomic factors, I can't really say that for sure.

We're just encouraged overall where we're at for the quarter and where we're at for the year.

But I wouldn't be able to say if we're out of the woods with this yet or not.

Okay, fair enough.

Then just one last mix question and I'll let it go.

You describe the impact of a mix shift being the same in neonatology and anesthesiology because the difference between commercial and Medicaid, Medicare rates respectively.

The deterioration that you saw in this quarter, was that across all specialties, or was it more one than the other?

Well, we doesn't talk about specific specialties, as you guys know, but when I talk about the shift, it's overall Company-wide mix shift, but it's not going to be -- we don't want to get into anesthesia or pediacs when we talk about that because we haven't disclosed that.

But remember, our practice is currently in anesthesia, which is something I said, albeit I don't know if we can continue this as we continuous our expansion into anesthesia have a very good mix.

That means obviously less government just because of the areas where they're at.

They're in very good demographic areas.

So, the payer mix for them is really good.

But overall, I am not going to talk about one mix versus another mix for these divisions.

Okay, fair enough.

Thank you very much.

Our next question is from Art Henderson with Jefferies & Company.

Please go ahead.

Hey, good morning.

It's actually Paxton Scott in for Art.

Roger, I wanted to go back just briefly to your commentary on the acquisitions in the anesthesiology space.

You had mentioned a range of 20 to 40 to 60 physicians.

Can you remind us of the 2 acquisitions you're looking at for the balance of this year, where those fall out in that range?

And then secondly, given the expansion of the credit agreement and your commentary on the pipeline, is there any reason to believe that we should expect more than 2 to 3 anesthesiology acquisitions as we look to 2012 and beyond, or are we still looking at 2 to 3?

Thanks.

Nice try on the first one.

They'll fall somewhere within that range.

I don't want to get into predicting business that we'll get -- I believe that we will get 2 acquisitions done this year.

One will be larger than the other one, and that's all I really want to say about that.

Yes, I do think that next year, as we have discussed I think prior to this, I do think that next year we'll get more acquisitions done than we did this year.

If we complete the ones I want to complete this year, we'll have done 3.

I think we'll do more than 3 next year.

We've got a lot of interest.

There's a lot of practices in our pipeline, and I think that we will do more than 3 next year.

Whether it will be 5 or 4 or 6, I don't know, but we'll -- I believe we'll do more than 3 next year.

Okay, that's helpful.

And then one housekeeping, just in terms of the guidance, according to my numbers here.

I guess your same-store volume growth last year in the fourth quarter was about 1.6%, and the pricing was down about 1.4%.

So, more of a difficult comp on the volume and easier comp on the revenue, and yet you're expecting it to be kind of split evenly.

Any color you can provide there in terms of how we should be looking at that?

Yes, basically it's that that's kind of where we're at year-to-date.

Last year we had more volatility than this year.

So, this year, if you look at where we're at, total year-to-date at 3.7%, we have volume growth of 1.4% and rate growth of 2.3%.

So, other than that, frankly, there's no other magic to that.

I think it's more in line with the current trends that we're seeing.

Okay.

Thank you.

That's all I had.

Our next question is from Ralph Giacobbe with Credit Suisse.

Please go ahead.

Thanks, good morning.

Good morning.

So, just wanted to go back to some of your comments about your contracting efforts.

Seem to be going well, and even with the rise in the government pricing, it seemed like it was the best result we've seen in a few years.

Can you maybe help us understand, give us a sense of the average rate increases that you are getting and help us understand your contracting cycle?

About managed share contracting, we talk about 2% to 4% annual increases in managed care contracting.

We think that's a good area for us to be at.

Some months or quarters may be better than others, but that 2% to 4% is what we like to talk about.

We see nothing that is changing, that makes us feel like that's not going to continue for the foreseeable future.

Just as a reminder, when we talk about 2% to 4%, we're talking about net across all of our business.

And as you know, half of our neonatology business is Medicaid which is a business that we don't get increases from.

So, on an overall basis, 2% to 4% really, on a Company-wide basis, translates to 4% to 8%, so that we can be comparing apples-to-apples.

But the cycle for us is just an ongoing thing.

We've got contracts across the country that -- typically our contracts are 2 to 3 years with built in escalators.

And so when we talk about feeling comfortable that we'll continue to see that 2% to 4% over the next couple of years, it's because many of these contracts already have these escalators built into them, and so we think we'll continue to see those.

But the cycle is -- they just -- whenever they expire -- every year, we look at the beginning of the year which contracts will expire that year.

And we put our recontracting strategy in place and then we know what we want to get from each of the payers whose contract expired that year, and just our work plan, and we work through it for the year.

Okay, all right, that's helpful.

And then just my follow-up, did you guys give or do you guys provide same unit EBITDA margins?

No.

No, we don't.

We don't provide -- same unit, basically what we provided is top line.

All right, that's all I had, thank you.

We'll go to Kevin Ellich with Piper Jaffray.

Please go ahead.

Good morning.

Just a couple of quick questions.

Roger, I was wondering on the anesthesia front, is there any fundamental changes in deal structures, private doctors?

Are your physicians demanding more or anything like that?

Nope.

We're -- we've got a strategy, we're sticking to our strategy, and we're not seeing any changes in multiples or anything like that, nope.

Got it, okay.

And then in your prepared remarks you made a comment about organic growth, and I was just wondering if you could expand on any opportunities or other opportunities you see on that front, maybe expansion of service lines or incremental physician hiring?

Yes, we see some of those and historically, we don't talk about it very often.

It just seems like we're always talking about acquisitions, and I just wanted to remind everyone that there are other opportunities that are constantly popping up.

They're not as big or as significant as these acquisitions are.

But we do get requests from our hospital partners that take over their emergency -- their pediatric emergency rooms or their PICUs or to build MFM practices.

So, I just wanted to highlight that this specific quarter we were asked to build an MFM practice in Salt Lake City, as well as in Idaho.

And we see those requests, I would say on an ongoing basis.

We've also seen a request to build OB hospital services in a couple of our practices across the country and a lot of requests for pediatric hospital services, PICU services and those kinds of things, particularly in these hospitals with whom we already have good-standing relationships.

They'll ask us to provide some of that.

Understood.

Thank you.

And then just going back to the pediatric surgery since that's a new specialty for us to look at.

I guess on average, how many cases does a typical pediatric surgeon handle in a year?

I don't know.

I don't have those numbers right at my fingertips.

I'll find that out for you.

But these guys -- a fixed practice group of pediatric physicians is a good sized practice.

But I don't know, I'm just hemming around.

I'll find out what the numbers are.

Okay, thanks.

And then just one housekeeping for you, Vivian.

Can you remind us, should the tax rate in Q4, is that seasonally lower?

Yes, Kevin.

What's happened here in the last couple of years is we have had variability in the quarterly tax rate, primarily the first couple of quarters, it's higher than the last 2 quarters.

I still estimate, I think you guys have asked me before, and I'm still sticking to the annual rate will be in the range of 38.4 to 38.5.

The reason for the differences in the quarters is related to discrete items which we have to book like that, that's based on accounting for income tax itself.

Yes, it will be lower.

Got it, okay.

Thank you.

Thanks.

Our next question is from Brooks O'Neil, Dougherty and Company.

Please go ahead.

Good morning, terrific quarter, terrific update.

I like David a lot, and I'm going to miss my buddy, Bob.

So -- (laughter)

Here's a shout out to Bob.

Just a couple of questions.

Obviously, you've covered a lot already.

I understand that last year in the fourth quarter you benefited from a couple of anesthesia acquisitions, but it looks to me like with your guidance you're projecting sort of maybe below 10% earnings growth in the fourth quarter.

A, am I doing the math right?

And B, can you just comment on why you're being so conservative for the fourth quarter?

Well, as you know, we build our acquisition into our guidance, and we're just being conservative as to how much contribution we're going to get from these acquisitions and what -- when the acquisition will get done.

We're just trying to be realistic and conservative.

Yes, that makes sense.

I'm curious, Roger, I know you don't want to get into guidance for 2012 or beyond, but as you think about the Company and where it is today, would you be willing to sort of talk a little bit about what you hope the Company can grow at in terms of sort of a long-term picture at this point?

You ought to see the faces on the people across the table right now.

Saying, no, no, don't go there.

You should see my general counsel right now.

He's having a stroke over there.

Right.

Obviously, I'm very excited about this whole anesthesia thing.

I've said it before, I think this is going to be a home run for us.

I think as we get more and more experienced with this specialty, we get more and more comfortable that we have chosen the right specialty, that we have the right people in place, that we have the right systems in place.

And it's a specialty that's 10 times the size of our neonatology specialty.

And so I think all of the opportunities are there.

We need to execute, and we need to continue to bring value to these practices.

But my hope is that we can double our size here in the next 3 to 5 years.

That's great.

I was thinking that would be possible, and I'm glad to hear you focused on trying to get there.

That's tremendous.

Last question is --

Excuse me just a minute, I have to call 911 here.

(Laughter) Yes, I'm just curious if you guys are seeing in your surgical practices any change in volume or demand or activity levels.

It sure doesn't seem like it, but I'm curious what you see anecdotally.

No.

I would say we're not seeing any changes at all in our demand for our anesthesiology practices.

No.

Yes, revenue -- the volume growth for anesthesia is positive.

So, they've actually done very well this year.

Perfect, thank you, Vivian.

Thank you, Roger.

Talk soon.

Thank you.

Our next question is from Matt Weight with Feltl & Company, please go ahead.

Thanks.

You guys hit on most of the questions I had, and I appreciate all of the color on anesthesiology, especially the pipeline.

I'm just curious, in terms -- relative to the pediatric space, is anesthesiology more laborious due diligence process or integration, or is there anything structurally that results in a slower pace of deals?

Yes, basically they're larger groups, right?

So, a large group of neonatologists, maybe 6, a group -- a classic, typical group, average group of anesthesiologists maybe 40 if not more.

And then you've got nurse anesthetists and all of that.

And if they're working in a couple of hospitals, and you've got 2 different hospital contracts to deal with.

It is more laborious because each physician has to have an employment contract and of course, they have to have time to review the employment contracts and to make their comments and have their lawyers and all of that stuff.

So, yes.

From a negotiations standpoint, it's not that different.

It's just from due diligence.

We have to get in and check their -- do their coding review and all those kinds of things which, just because they're bigger practices, makes it take longer.

Okay, perfect.

And then the other question, if MedPAC is successful in getting SGR repealed and you see the kind of cuts of specialists that they're recommending, how do you see that impacting your anesthesiology practices?

And are these cuts great enough to spur an increase in consolidation maybe in the industry?

I give you Karl Wagner.

Thanks, Roger (laughter).

The MedPAC proposals are pretty difficult for anesthesia to take.

As has been said, nationally, anesthesia, from a Medicare standpoint, is underpaid when you look at relative to other specialties from Medicare as a percent of commercial insurers.

For example, Medicare is roughly 80% of commercial insurers from most different specialties, but from anesthesia, it's about a third of commercial payer rates.

So, you take that low reimbursement rate as it is and reduce it by what they're proposing to reduce over a 3 year period.

It's pretty egregious and pretty difficult to see that actually being enacted.

If it does, it would have an impact on us, more on maybe some other practices as Vivian mentioned.

We have a pretty good payer mix in our practices from the percent of Medicare, but it certainly would have an impact on us.

And I do think it would push towards consolidation in anesthesia.

The real question is, is how is the whole anesthesia marketplace going to react to this and dealing with this issue?

So, it's really unclear at this point.

I don't know that the MedPAC proposal -- it does not have a lot of support out there in the physician community.

The way they're structuring it, I think even the primary care physicians are happy that the proposal is to keep them flat for a few years.

But you're looking at a proposal that says let's cut the physicians by almost 17% over the next several years and then keep it flat when -- so there's no increase and there's been no increase in physician compensation from Medicare to speak of over the last 10 years.

Basically, inflation is going up and the reimbursement for physicians is going down.

It doesn't make any sense, that that's a sustainable model that will keep people seeing Medicare.

So, I think there's a lot of concern whether that will happen, but I do think it will spur consolidation as to what that looks like if that were to happen, but it's a pretty significant impact to anesthesia.

Great, I appreciate it, that's all I had.

And having time for one more question, we'll go to Kevin Fischbeck.

Hi, this is Joanna again.

I'm sorry, just to follow-up to some previous discussions around mix shift here.

So, our read here was that it seems like it's not really pressuring results, and I guess our read here is that it's decided that the volumes are actually better.

So, it seems like it's actually volumes on the government side increasing rather than just pure shift from commercial into Medicaid.

Would you agree with that statement here?

Yes, like we've said, we don't -- I don't understand your question specifically other than for us.

We believe that -- we have volume growth.

We haven't seen, other than what we said, the 80 basis point shift to government mix is what we historically have seen in this third quarter.

So, I'm not sure if you're getting at anything else, Joanna, there.

That's what I was getting at.

I was trying to get a sense of the -- confirm the side that 80 basis points is worse than the decline in the second quarter, but still is seasonally expected to see this kind of financial pressure here.

But at the same time, what I was getting at to that volumes continue to be strong versus maybe in 2010, volumes were flat to down.

So, it seems like there was just more of Medicaid volumes coming in versus just being flat, but just shifting from commercial to Medicaid.

No, we don't believe that.

Year-to-date, basically we're flat on the government mix.

And so I think, as we've said in the past, there's been variability in this payer mix, and yes, we had basically flat increase in the P mix in Q2 and basically a favorable impact in Q1.

So, versus what we had seen in the last year when we had an overall 150 basis point deterioration to government mix.

We're encouraged with both volume and movement on the net pricing, because for what we talk about here, I know that we focus a lot on government mix, but when we talk about pricing, we basically talk about net pricing, and that's up 2.3 year-to-date.

All right, thank you very much.

And I'll turn it back to the presenters for any closing comments.

Okay.

If there are no more questions, then we're finished.

Let's go get some deals done.

Thanks, guys.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.