Pediatrix Medical Group Inc (MD) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX third-quarter earnings call.

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

Later, we will conduct a question-and-answer period.

Instructions will be given at that time.

(Operator Instructions).

Also, as a reminder, today's conference call is being recorded.

I would now like to turn the conference over to your host, Mr. David Parker, Vice President of Investor Relations.

Please go ahead.

Thank you, Anna and good morning and welcome to our 2012 third-quarter earnings conference call.

Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of today and MEDNAX undertakes no duty to update or revise any such statements whether as a result of new information, future events or otherwise.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the Company's most recent Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q, including the sections entitled Risk Factors.

With that, I would now like to turn the call over to our Chief Executive Officer, Dr. Roger Medel.

Thank you, Dave and good morning, everyone and thanks for joining the call today to discuss our 2012 third-quarter results.

As we reported in our release earlier this morning, we achieved strong earnings results for the third quarter, results we believe underscore our continuing ability to effectively grow through the significant contributions we are generating from our operations, as well us from our ongoing physician practice acquisition program.

I believe that our quarterly results also represent many of the attractive long-term investment merits that come with the MEDNAX model, including clear and well-defined growth opportunities, an industry-leading position in the market, attractive returns, a strong balance sheet, and superior free cash flow generation.

Our revenue growth for the third quarter increased by 16.1% with growth attributable to contributions from recently acquired practices at over 13% and the remainder coming from our same unit results.

This revenue growth exemplifies what the future of MEDNAX looks like -- our path forward developing the MEDNAX national group practice model, one that we have been deliberately building upon and methodically fine-tuning for over three decades now.

Based upon our successful track record within the pediatrics platform, our significant and proven infrastructure to support our practices and a focus on quality measures that is unparalleled, we are now effectively replicating and enhancing our core competency of a national medical group practice in the anesthesiology specialty.

To highlight the importance of anesthesiology as a long-term growth platform for MEDNAX, in the third quarter, we held our first-ever American Anesthesiology Analyst Day.

The goal of this Analyst Day was to provide a deeper look at our anesthesia division and outline our blueprint for growth in anesthesiology.

We covered several initiatives associated with our development of industry-leading anesthesia operations and through these efforts how we are effectively replicating our core competency of national group practice management.

The day also provided access to our American Anesthesiology leadership team coupled with an agenda centered around why American Anesthesiology is our future growth platform, an overview of the division, our initiatives and structure, a medical education and clinical initiatives update, and lastly, a very informative anesthesiology physician roundtable with a few of our practicing anesthesiologists.

In particular, we highlighted several initiatives we are implementing in order to continue to bring value within our physician services.

A couple of specific areas that exemplify these initiatives include our patient safety program and our quantum clinical navigation system.

The patient safety program is a comprehensive initiative designed to ensure that a culture of safety exists throughout our entire perioperative process.

We have chosen to build this program around the same principles found in high reliability organizations such as those found in the aerospace, aviation and oil exploration industries.

Our patient safety program was developed in conjunction with several former top gun pilots to use these principles everyday to ensure a culture of safety in their cockpits.

We have launched a pilot program in our Atlanta anesthesia group practice, which joined us in 2008.

They are implementing it within one of their large hospital systems in the Atlanta area.

The group is incorporating this training concept into their anesthesia practice with the understanding that safety is a critical first step in improving quality of patient care.

The concept is based on the foundational principles of communication and feedback, permission to challenge authority, correct use of the surgical [pause], appropriate checklist implementation and utilization of postoperative debriefing sessions.

Through this initiative, our anesthesiologists are gaining important perioperative safety skills such as team leadership development, skills-based training encompassing risk assessment and simulation, the measurement and management of clinician behavior and a culture of safety that touches every individual involved in the perioperative process.

Based on the very positive feedback and results received to date from our physicians, partners and colleagues, we plan on rolling out this initiative to our other American Anesthesiology practices.

The Quantum tool is a product that we have talked about previously and came with our acquisition of Southeast Anesthesia Consultants in 2010.

It is a rigorous quality improvement program that can improve outcomes, patient satisfaction and efficiency.

We believe that the Quantum Clinical Navigation System's CQI process will provide our anesthesia practices the opportunity to integrate a systems approach to clinical care with better outcomes for our patients.

It will also allow our physicians to demonstrate their value proposition to their various customers consisting of their patients, hospitals, surgeons, referring physicians, payers and the communities in which they practice.

The patient safety program and the Quantum tool are important initiatives that reflect on two key components of our national group practice model and help illustrate a few of the many reasons why MEDNAX is successful in driving national group practice excellence -- the ability to add value to our physicians and clinicians as they take great care of their patients and our ability to differentiate ourselves from the competition by providing valuable platforms for research, education and clinical quality initiatives.

In looking specifically at our acquisitions during the third quarter of 2012, we completed two anesthesia acquisitions bringing our total number of anesthesia practices to five for the first nine months of 2012.

As mentioned on our last call, Anesthesia Medical Alliance of East Tennessee joined us representing the first Tennessee-based practice to become part of American Anesthesiology.

They are a 45-physician group that practices as part of an anesthesia care team model that includes anesthetists working at five hospitals, eight ambulatory surgery centers and three hospital-based pain management centers located primarily in the Knoxville, Tennessee metropolitan area.

Also in July, Loudoun Anesthesia Associates of Leesburg, Virginia joined our group.

Loudoun consists of 12 anesthesiologists and 17 anesthetists practicing within the Inova Health System at Loudoun Hospital.

As many of you will recall, in 2007, our first anesthesia acquisition in Fairfax, Virginia practices as part of the Inova Health System, Inova Fairfax Hospital.

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

We also continue to successfully acquire and integrate physician practices within our pediatrics division specialty.

In mid-September, we announced the acquisition of Pediatric Cardiology of Austin, Texas, a group practice that provides pediatric cardiology services throughout the Central Texas region.

This group brings four cardiologists and 10 other clinical and administrative staff members to our national group practice.

The practice established in 2001 provides a full spectrum of inpatient and outpatient services and is affiliated with 11 hospitals within the Seton medical system and St.

David's medical system through Austin and surrounding counties, including the Dell Children's Medical Center.

Both the Pediatrics and American Anesthesiology divisions of MEDNAX are already established providers of specialty services in the Austin area.

With this one group added during the third quarter, that brings the total number of pediatrics acquisitions to five for the first nine months of 2012.

We are confident in our ability to deliver continued growth by attracting physician group practices to our national medical group model and are well on our way and very confident of completing our 2012 goal of investing approximately $300 million towards practice acquisitions across all MEDNAX physician specialties.

As we look forward, we are managing an acquisition pipeline that is as full and deep as ever.

We have increased interest among a variety of groups across all of our specialties of different sizes and at all stages in the pipeline.

MEDNAX offers these group practices security and stability with the freedom to take great care of their patients in this uncertain healthcare environment.

At this time, I will turn the call over to our CFO, Vivian Lopez-Blanco, for a review of our third-quarter financial results.

Thanks, Roger.

Good morning and thanks for joining our call.

As Roger mentioned, we are very pleased with our results for the third quarter and the first nine months of 2012, highlighted by our strong revenue growth and by our earnings results exceeding our guidance.

Net patient service revenue for the three months ended September 30, 2012 increased by 16.1% to $273.1 million from $407.7 million for the comparable prior year period.

Our revenue growth attributable to contributions from recently acquired practices was 13.6% while same unit revenue grew by 2.5% for the 2012 third quarter when compared to the prior year period.

Of this 2.5% same unit growth, revenue attributable to volume grew by 1.9% while net reimbursement-related factors grew by 0.6%.

Same unit growth attributable to patient volume includes growth in our hospital-based neonatal and other pediatric physician services, primarily newborn nursery services, as well as anesthesia services, partially offset by declines in our office-based pediatric cardiology and maternal fetal services.

For the 2012 third quarter, same unit neonatal intensive care unit patient days increased by 3.7% when compared to the prior year period, while the number of births at our hospital, also same unit, was slightly higher.

Our same unit revenue growth from net reimbursement-related factors was principally due to continued modest improvements in reimbursements received from third-party commercial payers as a result of the Company's ongoing contract renewal processes, the flow-through of revenue from moderate price increases and an increase in the administrative fees received from our hospital partners due to the expansion of our services as a result of internal growth initiatives, partially offset by a shift in payer mix to government payers from commercial payers year-over-year.

The percentage of services reimbursed under government programs increased by approximately 80 basis points during the 2012 third quarter compared to the prior year.

Our profit after practice expense for the 2012 third quarter was $163.5 million, up 13.3% from $144.3 million for the prior year period.

Profit after practice expense margin decreased by 83 basis points, which can be attributed to increases in practice expenses primarily due to practice salary increases and the variability in margins due to the mix of practices acquired since July 2011.

We generated operating income of $107.4 million for the 2012 third quarter, an increase of 13% from $95 million for the prior year period.

General and administrative expenses grew by 12.1% for the 2012 third quarter, below our rate of revenue growth.

As a percentage of revenue, G&A expenses were 36 basis points lower for the 2012 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.

Depreciation and amortization expense for the 2012 third quarter increased to 1.7% of revenue from 1.5% for the prior year period primarily due to the amortization of intangible assets related to acquisitions.

Net income for the 2012 third quarter was $65.9 million, up 13.2% from $58.2 million for the 2011 period.

Our diluted earnings per share increased by 11% for the 2012 third quarter to $1.32 based on a weighted average 49.8 million shares outstanding, which compares with diluted earnings per share of $1.19 based on a weighted average 48.9 million shares outstanding for the 2011 third quarter.

Revenue for the nine months ended September 30, 2012 was $1.35 billion, an increase of $162 million or 13.7% from the prior year nine month's revenue of $1.18 billion.

Of this $162 million increase, over 77%, or approximately $125 million of the revenue growth, came from acquisitions while the remainder is from same unit growth, which increased by approximately $37 million for the first nine months of 2012.

Same unit revenue for the first nine months of 2012 grew by 3.2%.

Approximately two-thirds of that came from same unit volume growth, which was up 1.9% with volume growth in our hospital-based neonatal, other pediatric physician services, primarily newborn nursery service and anesthesia, as well as our office-based maternal fetal medicine services, partially offset by declines in our office-based pediatric cardiology services.

The other one-third came from same unit revenue growth from reimbursement-related factors, which was up 1.3% net with the driving factors being consistent with those that drove our third-quarter increased that I previously mentioned, offset by a shift in payer mix to government payers from commercial payers year-over-year.

Operating income grew to $286.5 million for the first nine months of 2012, up 8.6% from $263.9 million for the first nine months of 2011.

Net income grew by 9.5% to $174.8 million, up from $159.6 million for the same period last year.

We earned $3.53 based on a weighted average 49.6 million shares outstanding for the first nine months of 2012, up from $3.28 for the first nine months of 2011 based on 48.7 million shares outstanding.

Looking at our balance sheet, we had cash and cash equivalents of $66.1 million at September 30, 2012.

Accounts receivable at September 30, 2012 were $250.5 million, an increase of approximately $20 million as compared to December 31, 2011.

The growth in our accounts receivable is related to recently acquired practices, as well as same unit revenue growth.

Days sales outstanding decreased over 3.5 days for the 2012 third quarter as compared to December 31, 2011 primarily as a result of improvements at existing units, as well as the continued integration of our recent acquisitions.

We had $48 million outstanding on our $500 million revolving credit facility at September 30, 2012.

During the 2012 third quarter, we generated strong cash flow from operations of $134.7 million.

This is an improvement from the prior year when we generated approximately $100.1 million from operations.

The increase in cash flow from operations for the three months ended September 30, 2012 is primarily due to improved operating results and an increase in the cash flow related to changes in income tax accounts and accounts receivable.

We invested $137.5 million of cash during the 2012 third quarter to fund two anesthesiology and one pediatric cardiology group practice acquisitions and to make contingent purchase price payments for previously completed acquisitions.

For the first nine months of 2012, we generated cash flow from operations of $219.7 million, an increase of $38.8 million as compared to the prior year period.

Moving onto our outlook for the 2012 fourth-quarter, as we announced in this morning's press release, we expect that our earnings per share for the three months ending December 31, 2012 will be in a range of $1.27 to $1.32.

The range for our 2012 fourth-quarter outlook is determined by anticipated same unit revenue growth for the period, which we estimate to be 2% higher to 4% higher year-over-year on a total same unit basis.

This same unit growth range assumes combined volume growth across all of our physician specialties.

In addition, this range anticipates variability in the mix of services reimbursed under commercial and government payer programs, as well as improvement from commercial payer contracts.

Lastly, our fourth-quarter forecast anticipates that same unit growth will be approximately one half volume and one half net reimbursement growth.

Now I will turn the call back over to Roger.

Thank you, Vivian.

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

(Operator Instructions).

Ryan Daniels, William Blair.

Yes, good morning.

Thanks for taking my question.

Roger, one for you on the M&A pipeline.

Certainly it sounds like, from your commentary, that it does a pretty good pipeline and I am curious if when you or your teams are out in the field if you notice a sense of urgency from some of the physicians or larger groups in regards to the potential tax law changes and if so, do you think that could bring the deals closer to 2012 timeframe versus spilling out into 2013 not knowing what the tax situation might be?

Yes, hi, Ryan, good morning.

Definitely we are not at a stage today where we can promise anyone that we will get anything closed before the end of the year.

So the deals that we have that are in the pipeline you know that we plan on closing before the end of the year are already set.

Any new groups that we are talking to, and a number of other groups that we have spoken, already know that we are not going to get those deals closed before the end of the year.

So our goal is to get a couple more deals done here before the end of the year and the remainder of the deals will get done in 2013.

Okay, perfect.

And then just as a follow-up, a little bit of a different topic, but I noticed in some of the high-tech stimulus, the stage 2 meaningful use regulations that they clarified that the physicians who worked in a hospital but actually use a separate system from that hospitals may be able to qualify.

So I am curious if you have done any works thinking about if BabySteps, which I know is certified, could potentially qualify and if so, what that might mean for you as you pursue those stimulus dollars.

Thanks.

Yes, we do -- we have seen that obviously and are very interested in it and we do believe that, since BabySteps is certified, that we would qualify.

There are some work that needs to be done in addition to what we have already done in order for BabySteps to qualify, so we are not there yet.

We need to work on some computerized order entry and other things that BabySteps does not provide at this point in time.

Do you anticipate adding those functions and then trying to attach for meaningful use?

We are evaluating what that would mean, how much work that would take and whether, in fact, we would be able to add that to our existing program.

I don't know at this point in time.

We are meeting on it and we are evaluating it, but, at this point in time, I am not sure whether we will get there.

Okay, we will stay tuned.

Thanks, guys.

Nice quarter.

Kevin Ellich, Piper Jaffray.

Good morning.

Thanks for taking the questions.

I guess, Roger, first off, could you give us any color -- what are you guys hearing out of Washington in terms of the final Medicaid to Medicare rate parity?

Any idea when that is going to come out or have you heard anything about what the final rule might entail?

I don't know any more than you do.

I think that it is in the law and they are saying that it is going to happen.

We don't have anything like that in our numbers, so we are cautiously optimistic, but I don't know anymore.

I'm sure, Vivian, do you want to add anything.

Yes, Kevin, as you know, we kind of probably are hearing the same things you guys are, which is last week and after elections, I mean all of these things that frankly have been the same that we have been talking about.

So we have no reason to believe, other than just the whole thing getting repealed, that there is anything different from what we have been saying over the last few months.

As you guys know, I have been cautious about it and even for the first quarter, I think we need to be cautious because when the bill hopefully does pass, then we will be able to start having conversations with the state Medicaid agencies and figuring out from a practical perspective how this is going to be implemented and when we can start seeing the dollars.

And so I am going to caution everybody on this call as it relates to first quarter because here we are at November 1 and we haven't seen the rule passed yet.

So there is a lot of practicalities to it.

Again, from a conceptual point of view, there is no question that we believe -- we have no further intelligence that there is anything holding it up.

So we really don't know.

Okay.

And then second question, looking at the deals you have done and the contribution that we saw this quarter and obviously mostly the same benefit in Q4, kind of looks like your guidance might be conservative.

We saw good G&A leverage this quarter.

Are there any significant cost items that we are looking at in Q4, maybe like early buying of supplies or anything that we should be thinking about Vivian?

No, what it is, Kevin, though it is the timing of the deals because, as Roger said, we are looking to close several deals here before year-end, but we are already one month into the fourth quarter.

And so the timing of the closing of the deals, as I said before to you guys, does impact the contribution.

So I don't really think that it is necessarily conservative; it is more about when we estimate our timing of the closing of the deals there.

Okay, sounds good.

Thanks.

Brooks O'Neil, Dougherty & Company.

Good morning and congratulations on another terrific quarter.

I am curious -- we hear some talk about soft hospital volumes.

Obviously, we didn't really expect that to impact the neonatal business, but I am curious if you are seeing that across your covered hospitals and if so, what impact is it having on the business?

Hey, Brooks, we are not seeing what has been reported.

Our hospitals, as we have talked about in the past, just tend to attract more births because they have NICUs and so while the volume is not back to what it was four years ago, we certainly haven't seen the decrease in volume that we have seen (technical difficulty).

And is the same thing true, Roger, in the anesthesia business?

Yes.

Good.

And then I was just curious, obviously, there is one publicly traded emergency management company and one that was public, but now is private.

We have gotten some sense that they have interest in anesthesia.

Obviously, they come at it more from a hospital contracting perspective; you guys come at it from a physician perspective.

Can you just talk about that difference and what it means to you and what you think it might mean to the groups that are attracted to become part of MEDNAX?

Well, most groups we talk to don't want to be hospital-employed.

So we haven't -- I will tell you, we haven't lost any groups that we are interested in to an offer that has been made by the hospital.

Often, we will respect the hospital and wait until the negotiations with their group are done and then we will come in and offer to negotiate with the group.

But I will say that every single time where we have been in a situation where a hospital may have been looking to acquire their group of anesthesiologists, it just hasn't happened.

So I think as we have talked about for years, I think you are joining a group of your own peers where your interests are always going to be 100% aligned where there is never going to be -- if you are working for a hospital or a university or something, at some point, the interests are not exactly 100% aligned.

And so the big advantage here is just joining people that are on your side and that always are going to have the same interests that you have.

That's great.

Thank you very much.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning.

So you saw a nice sequential jump in the margins; still down a little bit year-over-year.

I guess when do you think you see that stabilize from a year-over-year basis?

And I guess as we start thinking about 2013, should we think about it as kind of continued top-line strength as you make the deals with some margin pressure or do you think we can see it flat or even expand?

Hi, Ralph; it's Vivian.

So yes, I mean as I have said to you guys before, we are happy with how it ended up this quarter.

The variability is going to be based on the composition of the deals that we get into from the anesthesia perspective.

As you know, there is variability and even in our own core deals, depending on whether it is hospital-based or office-based, as well as really what is happening with same unit and so this year, we believe we fared quite well considering that we have seen, as you guys know, for the first three quarters, we have seen increases in the P mix and we have still been able to offset that on the pricing side, as well as on the volume side.

So I think that there will be some slight variability there and so that will continue and it is hard for us to estimate that.

On the operating income line, we will expect to get continued positive momentum there as we effectively integrate these deals.

Obviously, at some point, we are making investments specifically in anesthesia to expand the infrastructure, but that will be a step function and so overall, we have been pretty happy with the margin where it is at.

And then I may have missed this, but did you give where you are in terms of the acquisitions relative to that kind of $300 million target that you had out there?

Well, we didn't, but I can give you the number because it will be disclosed here in our 10-Q once we file it.

So we are at about $206 million year-to-date.

$206 million?

Yes.

And the expectation of $300 million still stands?

Yes.

Okay.

And then just last one, if I could squeeze one in, in the release, you talked a little bit about declines in office-based pediatric cardiology and maternal fetal services.

So anymore just color there specifically?

No, I think -- I mean I think we have seen that some of our office-based practices, particularly in specific regions of the country, are seeing a decrease in their patient encounters.

We also have seen a decrease in reimbursements from our pediatric cardiology practices based on the fact that their reimbursement for some of their cardiograms, sonograms, echocardiograms have decreased.

So I think that is really what makes that up.

Okay, thank you.

Kevin Fischbeck, Bank of America.

Good morning.

This is actually [Joanna Gadjuk] today in for Kevin.

I have a question on the commentary in the press, I guess also from Vivian on the call, in terms of the drivers for price decreases, the average pricing.

I have noticed that this is the first time of this -- I mean I don't remember ever seeing it, but the statement about the flow-through of revenue from modest price increases.

So is there anything in particular there that you can highlight?

No, typically -- well, first of all, good morning, Joanna.

Typically, we look at our pricing every year and so really, every year, it continues to be there.

We mention it depending on really in any given quarter as I think I have mentioned to most of you what the drivers are, whether it is more dollars or less dollars in this quarter specifically because we did have a P mix shift that was highlighted as dollars.

But theoretically we will have that in any given quarter because every year we look at our price increases.

So it really was more affected in this quarter because of the other metrics that drive the net pricing.

And also on the payer mix shift in the release, you said there was an 80 basis point shift towards the government reimbursement year-over-year, but what was it sequentially the change?

Yes, yes, it was sequential, as well as year-over-year.

So sequentially it was also down or rather move towards government payers by 80 basis points?

No, it was slightly higher than that, about 100.

Okay.

So 80 bps year-over-year and maybe more than 100 sequentially?

Yes, 100 sequentially, yes.

All right.

I guess that is all from me.

Thank you very much.

By the way, just one other thing on that P mix is, as you guys probably -- for those of you that know MEDNAX for a while, typically we do see there is some seasonality to it and typically from the second to the third quarter, we do see a shift towards government.

We don't really know why, but historically that has been the case.

Great, that's helpful.

Thank you.

Rob Mains, Stifel Nicolaus.

Thanks, good morning.

Vivian, I wanted to follow up on your comments about the G&A leverage that you saw in the quarter.

When you look out at anesthesiology, you mentioned that G&A could be kind of a step function as you make investments in the infrastructure.

Does that kind of imply that, and I know that this isn't necessarily something you're going to see in the fourth quarter, but going forward we could see kind of a G&A stepup and that would be followed by cost improvements elsewhere on the income statement?

Well, as you know, MEDNAX is an operating company and as some of you have written in your reports, we are always looking to manage costs.

I mean I do think that, in anesthesia, I said that because I want to set the stage for that because I think we have had here pretty good positive momentum on that line and as you know, we look to expand this division.

I do think, at some point, we will have and we have had it this year too, we have had some expansion there.

So we are always looking at that.

So I can't tell you specifically, Rob, that it is going to be one line item or another, but definitely we are always looking at that to see what benefits we can have as we continue to grow.

Okay.

And then my second question was you mentioned the seasonality that MEDNAX typically encounters.

In terms of kind of the revenue seasonality -- typically I think third quarter tends to be your biggest one for births.

Should we expect kind of earnings pattern, other than what goes on in the first quarter with payroll taxes and bonuses and whatnot, to shift at all due to the increased concentration in anesthesiology?

No, we haven't seen that so far yet.

As you can see from our fourth-quarter guidance, it is relatively in line with third quarter and that is -- so far, we haven't seen that change, no, other than what you mentioned throughout the first quarter.

Okay, very good.

Thank you.

Darren Lehrich, Deutsche Bank.

Hi, good morning.

This is Dana Vartabedian in for Darren.

I just wanted to get an update on length of stay in the quarter and I guess any trends you have seen or expect with length of stay.

Thanks.

Yes, length of stay is up just very, very slightly.

Do you have the number there, 0.1 or something?

Yes, it is very moderate.

0.1 (inaudible).

It's basically flat.

Okay, thank you.

Kevin Ellich, Piper Jaffray.

Hey, guys.

I just had two quick follow-ups.

First, going back to the pricing, what do you guys usually see from managed care rate increases?

It seems like you have always built in annual escalators into some of the contracts and are you still seeing slight increases?

Yes, we are, Kevin.

I think we have talked about that here.

I mean we haven't seen -- I mean you know the environment is challenging as always, but we are still seeing our escalators and we are definitely still doing our strategy -- as you guys know, have multiyear contracts and so we haven't really seen that materially change.

Sure.

So safe to say, Vivian, that you are not seeing any increased pressure from the managed care companies?

Well, I didn't say that.

I said the environment is challenging, but I think we do a pretty good job at that and we have managed care professionals in each one of our regions and it is one of the core competencies that the Company has.

But the environment out there is challenging, but we are certainly making it.

Got it.

And then the other thing, it seems like you have talked about administrative fees that you collect from hospitals.

How big are the fees or what percent of your revenues?

Has it become material yet?

No, I mean total -- I mean, as I said, that total line on the net revenue, we typically don't break it out, but just to let everybody know, it has been in the 6% range on total consolidated revenue.

And so it will be slightly up this year, about 60 basis points or so, but it is not really material in the big scheme of things, but it is a contributing factor on that net pricing line.

And so that is why we have highlighted it for the last three quarters or so.

Great.

And can you remind me, does that come from the newborn business, the pediatrics business or more from anesthesia or both?

For both because, right, a lot of the increases that we are seeing there is because the dynamics of the hospital are changing and so we have had -- we have partnered with them to do several hospitalist programs and typically those programs do require a subsidy.

Got it.

Okay, thank you.

Nicholas Jansen, Raymond James.

Hey, guys.

On the anesthesia front, you are hearing a lot of the hospitals seeing surgeries shift from inpatient and outpatient and I was just wondering is there any reimbursement dynamics that are different for the anesthesiologist when you do an inpatient procedure relative to an outpatient procedure?

No, the billing is the same independently of where the services are being provided.

Okay, that's helpful.

And then lastly on the commentary surrounding the comfort with $300 million of spend for 2012, I think in the beginning of the year, it was tilted towards $200 million of anesthesia and $100 million of core.

But obviously the core has been a little bit slower relative to initial expectations, at least from our end.

Are you still comfortable with that mix or is it perhaps going to be tilted a little bit more towards anesthesia relative to your prior views?

Thanks.

We still have a couple of things in our pediatrics division pipeline that we hope to get done before the end of the year.

So we are still hopeful that that will happen, but, if not, we will more than make up for it by our anesthesiology acquisitions.

That's great color.

And just lastly thinking about next year, I know you guys don't want to put out any kind of comments surrounding guidance, but $300 million is -- considering your strong cash flow and all the acquired acquisitions come with more cash flow, what are your thoughts surrounding the ability to replicate $200 million to $300 million each year in annual spend given what the current environment looks like today?

Well, we like our -- I am just going to say this.

We like our pipeline very, very much.

We are very, very confident in our ability to continue to do deals and I will be disappointed if we don't do more deals next year and spend more money next year than we are spending this year.

By next quarter, we will give you a more definite answer, but I will be very disappointed if we don't do more deals next year than we have done this year.

Thanks for the detail, Roger.

Matt Weight, Feltl & Co.

Yes, just a question, same unit NICU patient days obviously was quite strong, up 3.7% this quarter.

Was there any -- one, was there any regions that stood out for particular strength?

And then also typically there is a tighter relationship with that growth percent and your overall same unit patient volume growth.

In this quarter, they diverged quite a bit and I understand that the pediatric cardiology was down.

But am I thinking about it wrong?

It would seem that the other areas, maybe anesthesia, the volume also was quite low during the quarter as well.

Hi, Matt; it's Vivian.

So yes, I mean one of the things I have been trying to tell everybody is that, years ago, we talked about NICU as it related to same unit.

So now exactly.

As anesthesia grows and the other specialty grows too, that is all a contributing factor.

So that does bring home the point that you are saying.

However, the volumes were a positive for anesthesia and really what we said is exactly what it is.

It is -- year-to-date, we are still favorable in anesthesia for sure and maternal fetal services are also favorable year-to-date.

They were more negative in the quarter, but certainly on a year-to-date the only one that continues to be negative in the quarter as well as year-to-date is pediatric cardiology for what Roger mentioned.

We are seeing some pressures there on the pricing side, as well as on the volume side.

But we are happy with the volumes in the other specialties and certainly in anesthesia for the quarter, as well as for the year.

One of the things that we saw this quarter was sort of that variability in volume starting to decrease across the different regions.

And to answer your question, we did see some nice growth out of our Texas region in same-store volume for NICU patients.

Okay, thanks.

And then just last question quickly, obviously you had some nice G&A leverage.

It was flat actually sequentially dollar wise.

Was there anything that was excluded that you pushed off or are these levels really sustainable kind of going forward?

Well, like I was mentioning to Rob, I do think that we are a pretty good operating company and that is reflected in that line item on G&A and we are going to continue to manage that the best we can and there will be some steps in it as we grow that platform given Roger's comments on the acquisitions, right?

But basically I think we have always managed that pretty well and I do see us doing that going forward.

Thank you.

And I will now turn the conference back over to your host for any closing remarks.

Thank you, operator.

If there aren't any more questions, I will just thank everyone for being on the call this morning and we will look forward to speaking with you next quarter.

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

Thank you for your participation and for using AT&T executive teleconferencing.

You may now disconnect.