Pediatrix Medical Group Inc (MD) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the MEDNAX fourth-quarter earnings call.

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

You will have an opportunity to ask questions after the presentation.

Instructions will be given at that time.

As a reminder, this call is being recorded.

I would now like to turn the conference over to our host, Mr. David Parker.

Please go ahead.

Great, thank you, Mary, and welcome everyone to our fourth quarter 2012 investor 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 it's quarterly reports on Form 10-Q including the sections entitled risk factors.

With that, I would like to turn the call over to our CEO, Dr. Roger Medel.

Thank you, David.

Good morning and thanks for joining our call today.

As we reported in our release earlier this morning, we achieved solid earnings results for the fourth quarter and full year of 2012.

These results are primarily driven by our proven national medical group practice model of attracting, acquiring and successfully integrating physician group practices.

And we're very encouraged by the strategic road map that we have planned out for 2013, which reflects our very full and robust acquisition pipeline.

Some of the key points that make the MEDNAX model different, such as an evolutionary rather than a revolutionary approach to growth, a determined focus on bringing value to physicians and hospital partners, extensive clinical research education and quality efforts, and a proven track record over decades, provides a solid foundation from which we continue to strategically grow.

In looking at a few highlights, our revenue for the fourth quarter increased by over 16%, with growth attributable to contributions from recently acquired practices at over 13%, and the remainder coming from our same-unit results.

We also have double digit net income growth for the fourth quarter and full year, and generated strong cash flow from operations for both periods as well, which was noted in our press release.

We have the financial strength and flexibility to fund future growth through internal cash generation, and our $800 million revolving credit facility, while at the same time building upon the solid foundation we've established to manage our existing operations.

We believe the success of our model, supported by a proven platform, and clearly defined long-term growth opportunities, continues to define the future of healthcare and to differentiate MEDNAX in this tumultuous healthcare marketplace.

What I will cover over the next few minutes is the progress that we continue to make, as we execute this proven long-term growth strategy from both our American Anesthesiology and Pediatrix Medical Group platforms.

We completed a very successful 2012 in terms of practices joining our national medical group, as we discussed on our 2012 acquisitions summary call a few weeks ago.

16 physician group practices joined MEDNAX in 2012, 8 as part of American Anesthesiology and 8 as part Pediatrix Medical Group.

These acquisitions reflect the depth of our pipeline, as well as the strength of our business development and integration efforts.

Focusing on late 2012 additions and future growth prospects for American Anesthesiology in November we added DeKalb Anesthesia Associates in Decatur, Georgia.

In December, we added two additional group practices, first South Oakland Anesthesia Associates, a group that provides services throughout Oakland County, Michigan, and were also the first Michigan-based practice to join the division.

We also acquired Anesthesiologists Associated in the Chattanooga, Tennessee metropolitan area, the second Tennessee-based practice to join our division.

With the 8 anesthesiology acquisitions we completed during 2012, our American Anesthesiology division now consists of more than 1475 anesthesia providers, including more than 600 physicians and 875 anesthetists, practicing now in eight states.

With respect to our recent additions to the Pediatrix Medical Group division, in November we added a pediatric hospitalist program in Orlando, Florida.

In December, we added a one physician, maternal-fetal medicine practice in the Atlanta area, and also in December we acquired Plano, Texas based Pediatric Surgical Associates, the second pediatric surgery group to join the Pediatrix Medical Group division, both in Texas.

With these three acquisitions in the fourth quarter, and the total of eight practices acquired during 2012, our Pediatrix Medical Group division now consists of over 1,400 neonatologists and related pediatric sub specialists practicing in 34 states.

Of the eight practices acquired during the year, two were pediatric cardiology, two were maternal-fetal medicine, one was neonatology, one was pediatric intensive care, one was a group of pediatric hospitalists and one was pediatric surgery.

Our additions to the Pediatrix Medical Group Division, throughout all of 2012 reflect an important point that I mentioned earlier.

That we continue to take an evolutionary approach to growth in the division.

On previous calls we've talked about expanded growth avenues, in addition to acquisitions, including organic growth via [starter] programs such as some of the pediatric hospitalist programs that we put in place.

While we've been pursuing these expanded growth avenues, the marketplace, our hospital partners, have evolved as well.

Healthcare reform, hospital provider consolidation, structural reimbursement changes and pressures, and impacts on margins, have led to a more competitive landscape for hospitals.

As a result of these structural changes within healthcare, our hospital partners are changing how they execute their strategies, and they are looking to providers, such as MEDNAX, to join them in addressing these changes.

In doing so, we continue to work with our hospital partners to develop integrated service programs, for which we become a multi-specialty provider of solutions within the maternal-fetal, newborn and pediatric continuum of care.

These integrated programs result in a broader cross specialty of care and patient service line extensions into our markets.

An example of this is our effort, in conjunction with our hospital partner at Centennial Medical Center in the Nashville, Tennessee area.

In 2009, we acquired Mid-Tennessee Neonatology Associates, a physician group practice that manages the neonatal intensive care unit at Centennial and other hospitals in the Nashville area.

This has been a successful partnership over the last few years, and one in which the discussion between Pediatrix Medical Group and our hospital partner evolved into looking at how we could work with them to put in place the building blocks around an integrated children's services program.

Centennial was interested in further addressing their marketplace via services that would complement the hospital in terms of a women and children's program, while we were interested in organic growth initiatives, beyond our neonatal intensive care unit, that would provide additional patient care services to complement the NICU presence.

As a result, we've worked with Centennial to add pediatric intensive care, pediatric surgery and a pediatric hospitalist program to support their marketplace and provide them incremental growth.

While at the same time providing organic growth and patient service line extensions around our NICU presence at Centennial Medical Center.

We are currently executing this market partnership successfully in other metropolitan areas, and we're actively pursuing similar opportunities at the request of our existing hospital partners, as well as new hospital affiliations.

We believe we can successfully establish Pediatrix as a multi-specialty provider of solutions within the maternal-fetal newborn pediatric continuum of care.

For 2013, we've laid out a road map for the year, in terms of acquisitions for both American Anesthesiology and Pediatrix Medical Group.

We are employing our methodical and deliberate diligence to this road map, and it reflects the size, depth, and breadth of our pipeline, which we believe is as full as ever, as a result of the core competencies and strengths that bring practices to our national group model.

The evolving healthcare marketplace that we are addressing with our hospital partners, and the uncertainties in the ever changing healthcare and regulatory environment.

With that, at this time I'd like to turn the call over to our Chief Financial Officer, Vivian Lopez-Blanco, for a review of our fourth quarter and our full year 2012 financial results.

Thanks, Roger.

Good morning and thanks for joining our call.

Our results for the fourth quarter and full year 2012 reflect solid growth in revenue, operating income, and net income growth coupled with strong cash flow from operations available for investing back into our business.

And on that front, as Roger mentioned, we invested over $450 million during 2012 to complete 16 group practice acquisitions.

Net patient service revenue for the three months ended December 31, 2012, increased by 16.4% to $471.3 million from $404.9 million for the comparable prior year period.

Our revenue growth attributable to contribution from recently acquired practices was 13.3%, while same-unit revenue grew by 3.1% for the 2012 fourth quarter, when compared to the prior-year period.

Of this 3.1% same-unit growth, revenue attributable to volume grew by 2.2%, while net reimbursement related factors grew by 0.9%.

Same-unit growth attributable to patient volume was driven by growth in our hospital-based neonatal and other pediatrics physician services, primarily newborn nursery services, as well as anesthesia services and maternal-fetal medicine services, partially offset by a decline in our office space pediatric cardiology services.

For the 2012 fourth quarter, same-unit neonatal intensive care patient days increased 3% when compared to the prior year period, while the number of births at our hospital, also same-unit, was up 2.4%.

Our same-unit revenue growth from net reimbursement related factors was principally due to continued modest improvement in reimbursements received from third-party commercial payers as a result of the Company's ongoing contract renewal processes, and the flow through of revenue from modest price increases, 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 140 basis points during the 2012 fourth quarter compared to the prior year period.

On a sequential basis, same-unit payer mix shifted by approximately 20 basis points towards a higher percentage of services reimbursed under government sponsored programs.

Our profit-after-practice expense for the 2012 fourth quarter was $161.4 million, up 14% from $141.6 million for the prior year period.

Profit-after-practice expense margin decreased by 74 basis points, which can be attributed to the variability in margins due to the mix of practices acquired since October 2011, increases in practice expenses primarily due to practice salary increases, and increases in incentive compensation based on practice operational results.

We generated operating income of $103 million for the 2012 fourth quarter, an increase of 12.6%, from $91.5 million for the prior year period.

General and administrative expenses grew by 17.3% to $50.3 million for the 2012 fourth quarter.

As a percentage of revenue, G&A expenses were slightly up during the 2012 fourth quarter compared to the prior year period.

Depreciation and amortization expense for the 2012 fourth quarter remained essentially flat at 1.7% of revenue compared to the prior year period.

Net income for the 2012 fourth quarter was $66.1 million, up 13.3% from $58.4 million for the 2011 period.

Our diluted earnings per share increased by 11% for the 2012 fourth quarter to $1.32, based on a weighted average 50.1 million shares outstanding, which compares with diluted earnings per share of $1.19 based on a weighted average 49.1 million shares outstanding for the 2011 fourth quarter.

Moving on to our full-year results.

Revenue for the full year ended December 31, 2012, was $1.82 billion, an increase of over $228 million or 14.4% from 2011 revenue of $1.6 billion.

Of this $228 million increase, over 78%, or approximately $179 million, of the revenue growth came from acquisitions, while the remainder is from same-unit growth, which increased by approximately $49.4 million for the full-year 2012.

Overall same-unit revenue for the full-year 2012 grew by 3.2%.

More than half of this 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 services and anesthesia, as well as office space maternal-fetal medicine services, partially offset by a decline in our office space pediatric cardiology services.

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

Operating income grew to $389.5 million for the full-year 2012, up 9.6%, from $355.4 million for the full-year 2011.

Net income grew by 10.5% to $240.9 million, up from $218 million for last year.

We [ran] $4.85 based on a weighted average, 49.7 million shares outstanding for the full-year 2012, up from $4.47 for the full-year 2011, based on 48.8 million shares outstanding.

Looking at our balance sheet, we had cash and cash equivalents of $21.3 million at December 31, 2012.

Accounts receivable at December 31, 2012, were $248.1 million, an increase of approximately $18 million as compared to December 31, 2011.

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

Days sales outstanding improved by approximately 4 days to 48.4 days for the 2012 fourth quarter, as compared to the fourth quarter of 2011, primarily as a result of improvement at existing units, as well as the continued integration of our recent acquisitions.

We had $144 million outstanding on our $800 million revolving credit facility at December 31, 2012.

For the full year ended December 31, 2012, MEDNAX generated cash flow from operations of $325.7 million including cash flow from operations of $106 million for the 2012 fourth quarter.

This is an improvement from the prior year, when we generated approximately $271 million of cash flow from operations for the full year ended December 31, 2011, including cash flow from operations of $90.1 million for the 2011 fourth quarter.

The increase in cash flow from operations for the full year and three months ended December 31, 2012, is primarily due to improved operating results and an increase in cash flow related to accounts receivable.

We invested over $450 million of cash during 2012 to fund 16 group practice acquisitions, of which $244 million of cash was invested during the 2012 fourth quarter to fund 6 group practice acquisitions, and to make contingent purchase price payments for previously completed acquisitions.

Moving on to our outlook for the 2013 first quarter.

As we announced in this morning's press release, we expect that our earnings per share for the three months ending March 31, 2013, will be in a range of $1.05 to $1.10.

The range of our 2013 first-quarter outlook assumes anticipated same-unit revenue growth for the period, which we estimate to be 1% higher to 3% higher year over year on a total same-unit basis.

The same-unit growth forecast is expected to be divided evenly between patient volume, assuming growth across all of our MEDNAX physician specialties, and net reimbursement growth including improvements from commercial payer contracts, offset by variability in the mix of services reimbursed under government payer programs.

As a reminder, we have experienced increases in the percentage of patient services being reimbursed under government payer programs in recent periods.

We are also expecting that our effective tax rate for the 2013 first quarter will be consistent with that we experienced in the comparable 2012 period, which is higher than that for the 2012 fourth quarter.

For the full-year 2013, we expect the tax rate to be in line with 2012.

Throughout all of 2013, MEDNAX expects to invest approximately $400 million to complete practice acquisitions across all MEDNAX physician specialties, the majority of which we expect to invest in our American Anesthesiology division, and the remainder in our Pediatrix Medical Group division.

As a result of the acquisitions that we've had completed in recent years, we've experienced variability in our operating margins.

Consistent with this trend, we expect this variability in our operating margins to continue as a result of the mix and timing of acquisitions.

This impact is included in our financial outlook for the first quarter 2013, and is expected to continue to have an impact in future periods.

For those who have followed MEDNAX for some time, you'll remember that our results for the first quarter of every year are impacted by some timing issues that affect our results on a sequential basis.

For the first quarter of 2013, these factors include impacts on net patient service revenue, because there are fewer calendar days than in the fourth quarter, as well as a significant increase in expenses associated with Social Security taxes that are higher at the start of each year when compared to the fourth quarter of the prior year, due to the significant number of our employees, primarily our physicians, exceeding the level of taxable wages for Social Security during the first and second quarters.

These recurring items impact our operating net income and earnings per share, and are included in our financial outlook for the 2013 first quarter.

It's also important to remember that we typically have negative cash flow from operations during the first quarter of every year, as we use cash and amounts under our revolving credit facility to pay bonuses based on our practice operational results as well as discretionary matching contributions for participants in our 401(k) plans that have accrued throughout the prior year.

As a result of these uses of cash in the 2013 first quarter, and the acquisitions that we completed late in 2012, we will incur an increase in interest expense associated with the higher borrowings outstanding under our revolving credit facility.

This additional interest expense is also included in our financial outlook for the 2013 first quarter.

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 with William Blair.

Roger, first off a question for you.

You talked a little bit about establishing the pediatric continuum of care with your hospital partners.

Two questions there.

When you look to do that, are you acquiring those physician groups?

Just trying to employ doctors or may be taking them from the hospital?

And then second question related, do you have any data yet to show what kind of same-store uplift you might see on the organic growth basis when you put those continuum of care programs in place?

Typically, we don't acquire these practices.

These are typically practices at the hospital either asks us to put together for them or so assume the responsibility for, but these are not typically acquisitions.

I don't yet have a same-store number for that side of the practice that I can give you.

Okay.

And then just as a quick follow-up on the Medicaid to Medicare parity.

Can you talk a little bit about your impressions of how that is going to take place?

It seems like the states individually need to pass legislation, and retroactively make that back to January 1. Any color you have on how that's going to roll out and if you think all the states will come on mid year, if it's going to be sporadic through the year?

Any color you had there.

We have done a lot of work on that, and we do have some information.

Basically each state is going to do it differently.

Right now, I think Utah is the only one that has met the requirements.

So all of the other states are still working on their issues and some are planning on doing it lump sum.

Others are talking about just increasing the payments to the physicians.

Other than just saying that we do think we're going to get paid, we probably will see some money during the second quarter.

And each state is going to have its own process to go through.

We really can't say much more than that at this point in time.

Vivian, do you want to add anything to that?

Yes, so, Ryan, it's basically what we've been saying, we're all over it.

We have a work group here that's comprised of a lot of different functional areas, namely patient accounts and managed care folks, that are reaching out to each one of our states.

So, as Roger mentioned, they really have until the end of March to turn in these applications.

And then after that, CMS reviews these applications and agrees to the method that they're saying, that this is how they're going to be reimbursing the providers that basically have said that they're part of the program.

So we're in the process with all of that, as Roger says.

There's only one or two states that have submitted their applications, and so we will see how it goes.

Right now, we don't anticipate any issues with it other than from a practical perspective.

I agree with Roger, we probably will not see the money until the second quarter because it's just not going to be practical based on this timeline.

But other than that, it's just how they're going to implement the rules.

Okay.

That's helpful color, thanks, guys.

Kevin Ellich with Piper Jaffray.

I want to start off with the same-store growth.

It was good to see same-store and NICU up 3%.

I was just wondering what you're seeing?

Obviously, Vivian, you have good detail on the hospitals.

But what about the non-NICU volume growth?

It seems like that might be under some pressure?

As I mentioned, all of our specialties, with the exception of pediatric cardiology, had pretty good volume growth.

We're really happy with the volume in all of them.

The NICU, for the last couple of quarters, as we have talked about, we've been encouraged with the birth rate et cetera.

But the other specialties all have had very respectable volume growth.

Okay, nope, that's helpful.

Sorry I missed that.

And then, now that you guys have done a number of anesthesia acquisitions, Roger, I was wondering if you could tell us how they're performing.

What type of same-store growth are you seeing out of those practices?

Are they living up to your expectations?

And any color you could provide would be helpful.

Well, the first thing I would talk about is the quality of the groups that we have.

I'm just so proud of these guys.

It's really a pleasure for me to see how interested they are in their specialty and in providing great care for their patients.

And that's just really exciting for me to see.

From an operational standpoint, I would say in general, overall, they're doing better than we thought they were going to do.

We may have been a little conservative internally.

But overall, all of the practices grew, all of our anesthesia practices grew on the same-store basis during the year; some more than others, but we didn't see shrinkage from our practices.

So overall, we're very happy, which is why I said we're going to spend $400 million this year and hopefully, more.

And we're going to do as many of these deals as makes sense for us.

And this is our specialty.

We're in it.

And we're going for it.

Got it.

And then just following up on that for the deals.

Do you have any updated thoughts on timing?

I know you took a little hiatus in January.

But do you expect to get some deals done here in February?

We do.

We think we will get at least one, if not more deals done in February.

Okay.

Excellent.

Thank you.

Ralph Giacobbe with Credit Suisse.

Can you maybe help us with the acquisition revenue run rate for the first quarter?

I know you gave the same-store guidance but given all the deals that you've done in '12, especially at the back end of '12, is there a way to give us what that run rate would be in the first quarter?

Typically, we don't break that out other than we say that our range for the first quarter top line includes 1% to 3% same unit and the rest coming in from acquisitions, which -- non same unit -- which most of that will be the 2012 acquisitions.

Because, obviously, in 2013, as Roger said, we will potentially do some deals in February.

But the vast majority of that will be the 2012 acquisitions.

And just remind me, because I think most of the deals in '12 were backend loaded.

I don't know that there were many deals at all in the first quarter.

So, is that fair?

Well, we did have some deals throughout the year, and we did have some deals in the first quarter, yes.

But the big deals, there was several of the big deals that occurred in the fourth quarter, but we did have some of the deals throughout the year.

I'm sort of back of the envelope, based on our assumptions around some of those revenue contribution in the first quarter.

It just looks like EBITDA margin levels would drop to that 19% level in1Q, to just get to your range within guidance.

I know 1Q is always seasonally lighter.

But that base just seems a little bit lower than what we've seen historically.

I'm just struggling.

Is that a function of new deals at lower margins that ramp up over time?

Or pressure on existing business given the mix?

Help me reconcile that lower margin.

So that's a good question, because I think that's a lot of the discussion around the first-quarter consensus.

I'm glad that you bring it up.

Because I tried to be as explicit as I could in the script.

And we've been saying that as we continue to expand the anesthesia base, but really even some of these other continuum of care specialties within the pediatrics division, we have seen that those margins are typically not in the range of the NICU margins usually.

Again, there's some exceptions to that with some of the anesthesia practices depending on their payer mix and their models.

But for the most part that is correct.

That we will continue to see some of that margin pressure because of the fact that we do have the mix of our practices changing.

And once we look at what we're going to be disclosing in our 10-K, basically, we're going up to about 27% related to the percentage of revenue related to anesthesia.

So that's a good point that you bring up.

Because I think that will be helpful as all of your guys put out some of the consensus for the year, and going forward.

I think we have to look at the margins that way.

Okay.

So trying to extrapolate that for the full year, exclusive of parity, and exclusive of further deals, am I reading too much into think that margins on a year-over-year basis should be down year over year because of the acquisitions within the mix of business where there's lower margin?

Yes.

But it's a lot of things also.

I've been saying this for a while now, too.

There's a lot of factors going in, in a lot of different ways.

Yes, overall, we added a lot of providers, obviously on the anesthesia basis we added over 61% increase in providers.

So there are going to be some infrastructure builds as well, on the G&A line, as well as basically what's happening on the same-unit line with increases in volume.

And last year we had pressure on payer mix, so that was another thing that I highlighted because the year before we had actually had some favorability in the payer mix.

That would be '11.

In '12, we did have some pressure with the payer mix.

Again, at about 120 basis points increase year over year, and about 140 in Q4.

So all of these things together, it's what's creating that pressure in the margins.

Okay.

And then just one last one here.

Maybe remind us of the target multiples for your deals within NICU, as well as anesthesiology, and if there's been a change in the marketplace due to competition?

Yes, there hasn't been any change.

We're very disciplined about the multiples that we pay on the pediatrics, neonatology side, that multiple is typically 4. A multiple of pro forma EBITDA, 4.

Pro forma?

Okay.

Yes, pro forma.

We look at the practice and we say, if we were managing this practice, knowing the kinds of efficiencies that we can bring to the practice, what kind of contribution could we expect from it, and then we will put about a 4 or so multiple on that, and that's what we're paying for the practices.

On the anesthesia practices, we really haven't disclosed the multiples that we're paying because there is more competition there, and we don't really want to highlight that for our competition.

But, I will tell you that we are very disciplined on the multiples that we pay for our practices, and we're not going outside of our model.

Okay, and just to sneak in one more, the NICU, the 4 times pro forma, have you given, or can you talk about what that would look like on a trailing basis?

Well, it could be infinite, right?

These practices are, typically take all the money out.

If they're a partnership, they distribute the money out to the partners at the end of the year in forms of bonuses, et cetera.

So it could be an infinite multiple on that on a trailing basis.

All right, thanks.

Brooks O'Neil with Dougherty & Company.

Even though I've covered you for a long time, I'm about to ask some dumb questions, and I apologize in advance.

Firstly, I'm just curious.

Obviously, you had a pretty robust acquisition experience in the fourth quarter, but looking at it sequentially, which I know probably isn't the right way to look at it, revenue and earnings were about flat 3Q to 4Q and I'm just curious if you could comment on why that might be?

Well, most of those acquisitions were done right at the end of December.

So they didn't have much impact?

That's one thing.

There's the other thing, Brooks.

Remember that in the first quarter we basically have two less calendar days.

So that was the other thing that I spoke about at the end of my discussion that, for the first quarter, it's not a comparable--

He was talking about comparing third quarter to fourth quarter.

Oh, I thought he was comparing fourth quarter to first.

What okay.

Yes, that's what I was asking about, Roger.

So, to me the answer for that is just most of the acquisitions, the significant acquisitions in the fourth quarter were done right at the end of December.

Right.

Yes.

And we should still assume that you're doing acquisitions on a basis you consider to be immediately accretive, right?

That's correct.

We would not do a dilutive deal.

That's what I thought.

And then I'm assuming guidance for the first quarter, did not assume any positive impact from the parity adjustment at this point?

That is correct also.

Cool, and then, I'm just guessing, but you tell me the answer to this, that you're not seeing any secular changes in the way we're managing babies, the percent of premature babies as a component of the overall birthrate or any of that stuff or maybe that's changing now?

No, not at all.

We're seeing, actually, a little bit of increase in births, as I'm sure you know.

Our [mid-rate] for the fourth quarter is right in line, as is our average length of stay.

So those are the two variables, as you know, that we follow pretty closely.

And they're moving up and down a few basis points here and there, but basically all within normal ranges.

Cool.

And then, the mix shift -- you're not seeing anything you consider startling in that.

It's just been a gradual mix shift, partly.

I mean no one, I guess, knows exactly what it's all about, but we assume may be related to the softer economy, et cetera.

But is there anything that really raises your eyebrows in that?

No, we've looked at that numerous times, and we're not sure what's going on.

Vivian?

I agree with Roger, Brooks.

It's just basically that continued variability because, frankly, in 2011 we were quite happy with the fact that we had a favorable payer mix shift all throughout the year.

And the prior year to that, we had seen increases.

And now last year, again, we saw some increases.

And so it's just that continued variability.

I do think, to your point, we do have an overall sentiment that it's related to the macro economy.

Obviously, we can't prove that, but it just intuitively makes sense.

Sure.

Just one or two more quick questions.

I'm curious if you have comments about how you feel about your debt levels, where you'd be willing to take it if the right opportunities presented themselves?

How you feel about your balance sheet at this point?

Particularly in light of the pipeline, obviously.

Yes, well, as far as our line of credit is concerned, I'd like to tap it out here (laughter).

And as we have said in the past, if the right -- I'm not opposed to putting some long-term debt on our books for the right reason.

And if the right opportunity comes along to do a deal that would require us to do that, we would do it.

That hasn't happened, and we're not going to do it for financial exercises.

I get a couple of financial, investment bankers in my office a year, talking about doing a convert with a flying saucer and a double back flip or something and, we're just not going to do that.

But for the right reasons, we will put some [dent] in our books.

Okay.

Well congratulations on continued great execution, and I'm looking forward to 2013.

Thanks, Brooks, appreciate your support.

Kevin Fischbeck with Bank of America.

Just wanted to confirm the acquisition number you talked about.

The $451 million, obviously, included earnouts from prior deals.

Did the $400 million number you look at include earnouts from last year's deals?

Or is that just pure new spending do you expect?

No, that's pure new spending.

We wouldn't include that.

Yes, I agree with Roger.

It could have, though, for the current year, it could have contingent payments, though.

Well, there'll be some contingent payments, if that is what you are asking--

On the current--

In our estimates, for what we will spend this year,

Right.

We've not included that.

(multiple speakers)

So if you are $400 million, we should expect you to say that you spent $430 million or something, or some other, some number higher than that.

That's right.

That's right.

If we could just go back a little bit more to the commentary about you're trying to deepen the relationship--

We lost you there, are you still there, Kevin?

Yes, I'm here.

Can you hear me?

Yes, now we can.

We lost you.

Repeat the question.

We lost you there at the end.

Sure.

I wanted to go into the commentary you made earlier about trying to deepen the relationships with existing customers.

The Centennial example was interesting.

What percentage of your customers do you feel like you have this opportunity to really go in and add a meaningful new business line?

And where are you in that process?

It sounds like -- you've been doing this for a while, but it sounds like maybe you think that there should be an acceleration of those types of conversations.

Yes, we do think that it's accelerating right now.

As hospitals prepare themselves for whatever the ramifications of the Accountable Care Act are.

They prepare themselves to be more medical homes, whatever that means, et cetera.

So, historically, we have always done that.

We do, as you know, pediatric intensive care is something that we've done for decades.

Newborn nursery, well newborns is another thing that we've done for a long time.

Now hospitals are saying can you, can we do pediatric hospitalists or can we run pediatric ER.

And we have some of those, across the country, and in Vegas and in other places.

I think it's just a matter of helping the hospital think through their strategies, and helping them with the physician component of the services that they want to add.

I think it's a good opportunity for us.

I think that given the relationships that we have with a lot of our hospital clients, we will see some valuable increase in those opportunities.

Some of the metrics were pretty good in Q4, but were maybe a little bit counter to what I might have thought.

The volume number was good on the NICU side.

But the payer mix is going in the wrong direction.

I would have thought that if volumes are getting better it would be the commercial volume that's coming back through.

Do you have any sense of why that's not going that way?

No, you're looking at it exactly the way that I was looking at it.

I was thinking that if volumes started to come back that it would be more on the commercial side.

But that's not what is happening.

I don't have an explanation for that.

It doesn't have anything in relation to what you, to this service line extension, but maybe you're getting into something that is more heavily weighted?

(multiple speakers)

No, that's too significant of a ship for that to happen.

Okay.

And then, last question.

Same-store pricing actually was okay, but improved sequentially, despite the payer mix getting a little bit worse.

How do we think about what happened there?

Are you seeing a little bit better commercial pricing that might flow through the next year?

Or how do we think about that.

Yes, we continue to be able to renegotiate these contracts.

Although it is never an easy thing to do.

It is a thing that we put our plan together at the beginning of the year, and what contracts need to be renegotiated, and we go out and do that.

I would say that, in general terms, things are about the same as they've been in the past.

And because the contracts do have escalators built into them over year over year we feel pretty comfortable in saying that it looks to us like this pricing growth will continue over the foreseeable two to three years.

Okay.

All right.

Great.

Thanks.

Gary Taylor with Citigroup.

A couple questions.

First, on the same-store revenue growth in the guidance for the first quarter, 1% to 3%, coming off this pretty strong 3.1% this quarter.

I know you're contemplating in that range the potential for some more payer mix shift.

But anything else as to why you're guiding more conservatively sequentially?

No, we're just cautious about -- we're just not ready to call this situation over.

So, we just want to be cautious about how we guide you.

Got it.

And when you talk about, historically, whenever you talk about government payer mix shift, that was always in the neonatal business, commercial moving to Medicaid, which obviously paid at dramatically lower levels.

And I presume when you talk about that shift, that's still what we're talking about?

Because, obviously, every anesthesia deal you do also has lower Medicaid, but has, obviously, Medicare.

So just doing an anesthesia deal, I think, takes the consolidated payer mix towards government pay.

So when you have the commentary about the sequential changes in mix shift are we still primarily talking about Medicaid growth in neonatal?

Primarily, Gary.

So, obviously, there is some, as you mentioned, Medicare business on the anesthesia side.

Some Medicaid, but very slight.

There is a slight piece of it, but, yes the predominance of it is still as you described it.

And am I right?

In general your average anesthesia practice, Medicare and Medicaid together would be a higher percent of revenues than just this NICU Medicaid percent of revenues, right?

No, I wouldn't say revenue.

If you're talking about volume, the answer is probably 50/50 depending on the practice.

But not on a revenue basis.

The bulk of the revenue comes from managed care.

Their payer mix is better, is what --

Right, I was thinking you'd probably have similar to a hospital mix of maybe 30%, 35% Medicare, 10% Medicaid.

But have you ever disclosed where Medicare, Medicaid is for anesthesia, percent of revenue?

No, we haven't, but the Medicaid piece is low.

All right.

Okay.

I think you said this and I just wanted to clarify.

So the $144 million of debt that's on the balance sheet as of the end of the fourth quarter, that includes all the deals including Chattanooga, which got announced in January, but closed on 12/31.

All those are in that figure?

Yes.

Whatever we had outstanding right as of year end.

Got it.

And I was --

Whatever we paid for.

Right.

Roger, can you remind us what's going on in pediatric cardiology?

I know some of the office space volumes have been weaker for a few years.

And, I guess, it's a smaller piece, and I've just forgotten what's driving some of the trend there?

Yes, it's a smaller piece.

That volume is starting to come back, although not as much as the neonatal volume.

The big hit that we took there, though, was related to echocardiograms.

And what happened last year was that, and this was related to adult cardiology, that the reimbursement for echocardiograms was reduced.

And that impacted our pediatric.

Although it was aimed at adult cardiology, it had an impact on our pediatric cardiology practices.

So the bulk, I would say, of what we saw there, which is starting to come back, is related more to the echocardiograms than actual patient volumes.

Okay, great, thank you.

Darren Lehrich with Deutsche Bank.

Just going back to the parity topic, just so I'm clear.

Are you guys going to be, basically, accounting for that on a cash basis as opposed to an accrual?

Is that how we should be thinking about it?

Well, once I get the first money in the door, then we can revisit that.

But right now, it's cash because I haven't seen any of it yet.

And the plans aren't in to exactly how it's going to work on a state-by-state basis.

So, Darren, we will continue to revisit that.

But at the beginning, I can't tell you that I'll do anything other than cash.

There's just so much uncertainty with all the different states, right now, each one talking about doing it differently, and having their own methodology et cetera, that it's just really hard to get the auditors to sign off on doing anything.

Yes, all right, I hear you.

For us, we're some of us are trying to make reasonable estimates on that.

And do you think it's a bad idea to include it for 2013?

I know you are not including in your guidance.

But, do you still think it's highly probable that you're going to see all that money in 2013?

Oh, yes, we're going to get it.

I mean barring some change, unforeseen change, we're counting on it.

Okay.

And then, I wanted to go back.

Roger, you talked about the market partnerships, like you're doing in Centennial in Nashville.

Just to clarify, as we see more of those going forward.

Is that going to be included in your same-store pediatric metrics?

How are you going to be characterizing the growth from those situations?

Well, no, I don't think that we would include that in our same-store calculations.

Vivian, help me out here.

Yes, some of them, if it's a program that's in an existing unit, potentially could be.

But the majority probably are not.

And so, if it's a new program that's a stand-alone program, than it would not be.

Okay.

That's helpful.

And then a couple other things here.

I wanted to go back to the variability of margins in your commentary.

I think you've been very clear about business mix and payer mix.

But I just want to make sure there's not something else here that you're trying to message to us, and maybe too much of a read into the comment.

Are you suggesting that the practices' own variability of margin, whether it's month to month, quarter to quarter, due to case loads or other factors in anesthesia, its just something you're still trying to get a handle on, or is it really just about the mix of the anesthesia business that you're acquiring and how that impacts the overall numbers?

And then the care team model that might be different from one deal to the next.

Can you help me flesh that out, please?

Sure.

So, yes, it's really more about the change in the mix of practices.

So there's nothing more there.

It's not really about variability in case mix or anything, although obviously that impacts just the overall same-unit volume just like NICU would.

For that piece, Darren, it's not really any different.

I think the discussion with the margins that we're trying to drive home is just the change in our business mix, which does impact the margins and coupled with that, on a same-unit basis, it just depends on what is happening with that volume and pricing at any given time.

And so, obviously, the 120 basis points for the year on the P mix is a lot to swallow, and, in spite of that, we still had net reimbursement growth.

But nonetheless it's a big nut to crack.

And so, that's happening on that side of the house.

In addition to just expanding some of the other service lines which, obviously, the biggest part of it is anesthesia, but there's other of these service lines as well.

Okay.

And on that, in just helping us think through.

You gave us the 27% of revenue as anesthesia.

I think that's the number that we're going to see in the K for the calendar year.

That compares to 21% last year.

What was it on a run rate basis in Q4?

Because I think to what you're saying here about variability in business mix, I think it would just be awfully helpful to us to level set that.

And so in Q4, what was the mix?

Was it 27% or can you give us a sense for what it was?

Remember that as Roger mentioned, a lot of these big deals just happened basically at December 31, December 21.

So for the most part, in 2012, that included what we had done, because the other two deals at the end of the year don't have much revenue to them.

One doesn't have any.

Okay.

So maybe I'll take another stab.

What was the trailing revenue that you acquired in 2012?

And how did that break out between anesthesia and pediatrics?

Other than this percentage, that's basically it.

It's a 6% increase from 2011.

For the year.

Yes, right.

When we disclose this, that you guys will see it soon, when we file our K. It's the same table that we had in there last year.

So it's roughly a 6% increase, and that's basically for the whole year.

Got it.

Okay.

So we're just going to get the annual numbers is what you're saying?

Yes.

Okay.

And then the last thing here on managed Medicaid.

I was hoping to get just a brief update, Roger.

A lot of states had big growth in 2012, and I'm just curious how that's played out for you.

Any change that you're seeing from that trend?

No, really managed Medicaid has no impact on us.

We are able to generate the same kinds of revenue from either traditional or managed Medicaid.

That has no impact whatsoever on us.

Occasionally, you can get a little bit better, half a percent better or something because of the cut in the administrative hassles.

But it's basically the same.

Great.

Okay.

Thank you.

John Ransom with Raymond James.

The open question I have is as we think about second quarter and modeling, what puts and takes do we need to think about that are not in your first quarter numbers?

I know you mentioned some things; I just want to make sure we have a complete list of all those things that will not recur in the second quarter that are in the first quarter.

The bigger piece is just the seasonality.

That's basically it.

The other thing that I pointed out in this quarter, because I felt that it wasn't included in the average consensus, is this idea that we do now have some debt, and so when I was looking at those line items that didn't seem to come through.

And so we will start paying some of that off.

But depending on the acquisition activity you'll still see a big chunk of that in the second quarter.

So that will remain.

Other than that, like I said with parity right now, I'm just still waiting to see what happens with that.

So, I don't know.

I think some of your guys potentially have that in there.

I'm being cautious on that--(multiple speakers)

Other than states being sluggish and bureaucratic and fumbling around, is there a structural reason why you wouldn't be getting the new revenue by April 1?

Yes.

Because CMS has to approve those applications.

And so they have to go through that process.

They have until March 31 to file it, and then CMS has to review it and see if they agree with their plans.

Okay.

And so you'll just collect on cash, but potentially, assuming everybody got approved, you could have a big catch-up cash payment in second or third quarter or something?

Yes, we're hoping, right, it's supposed to be, as you know, retro.

So we're hoping to get that.

And they have 90 days to review it.

And so, as you know, I mean, I don't know how long they'll take, but they have 90.

Doesn't mean that they'll meet the 90, but they have 90.

Right.

Okay.

And then lastly, exploring your payer mix for a minute.

Historically, you've talked about commercial to Medicaid on the neonate side being something like five to one.

Is that still a good way to think about it?

So, as you shift 100 basis points it's like losing 80% of the revenue on an apples to apples basis?

Is that a good way to think about it?

I think we've said over three to one, if I recall.

Yes, but, yes, I don't remember it being five to one.

Okay, so three to one.

And what about on the anesthesia side, the difference between Medicare and commercial.

What does that look like now?

Well, remember for anesthesia they get paid, even though it's Medicare, they get paid a lot less than the other Medicare payments.

And so it's roughly about the same, Karl, is it?

Yes, the differential, I mean, the ASA will go out and say that Medicare is about 33% of the average commercial reimbursement.

Yes.

That's a baseline you can use.

That's really going to vary based upon the state situations, as far as the managed care situations are, but I think that's a good number to use.

Are we seeing any, you may have addressed this, and I apologize if I missed it, but is the payer mix in anesthesia fairly stable?

The payer mix in anesthesia has had some slight increases as well.

But not, I mean obviously, as I think Gary asked me, the shift is predominantly pediatric.

But there's a slight shift in anesthesia, but not, it's just not that weighted here.

Okay.

I know what you talked about with your hospital partnership, but could you just expand on that a little bit.

Are we, on a 1 to 10 is this an 8, is this a 3?

How many, potentially, hospital partners of yours are eligible for this kind of partnership?

What does it mean in terms of taking the revenues from X to Y?

Not that we're going to put it in the model and start beating you up to demand that.

But how significant could this be as you move into doing more stuff for your partners?

Well, I think it's just one more tool that we have.

I would say right now, I mean just totally off the top of my head, maybe it's a five, as far as hospitals where we might have opportunities to help them out with.

What's changing is the volume of hospitals that are now wanting to talk to us about this.

And in some areas, even the specialties.

Pediatric surgery is one, for example.

Because last year we acquired two different pediatric surgical groups.

That's a new specialty for us.

And that is driven by the hospitals.

There's a few, a small number of pediatric surgeons, and hospitals compete with them, et cetera.

So that's one area where I think we will see some increased opportunities.

And then, the rest of it is, is really like I said, it's either hospitals that want to open up PICUs or that are unhappy with their group of pediatric hospitalists.

Or that group we saw in Orlando last year, late last year, is an example of that.

So I think the opportunities are there.

I think that probably I'd say a five, as far as number of hospitals where the opportunities might present themselves.

Do you see yourself getting into any risk-sharing arrangements with payers and hospitals, and going sub-capitation?

Three years from now are you still going to be 99% fee-for-service?

Yes, we haven't talked about that.

We're not getting any requests to do that.

And we're just not going down that path at all at this point in time.

Rob Mains with Stifel Nicolaus.

Just a couple mop-up type questions.

G&A, Vivian, was up $2 million sequentially.

Is there anything in the fourth quarter that was unusual, or is that a run rate we should use going forward?

Yes, well, we did all those deals so I got to expense those acquisition costs, and there's not, as we said, some of those don't even have any revenue in the fourth quarter.

So yes, we did have a lot of acquisition costs related to the deals flow.

And you're not thinking of breaking out transaction costs?

No.

It's not material enough to do it.

But, if you want to know, year over year it was up roughly, the fourth quarter, over $600,000.

Okay.

And, then tax rate, what should we be using to model this year?

And will it be as it's been last few years, higher in the first quarters and then drift down?

Yes it will be.

And what I'm saying is that the tax rate for the year will be consistent with what you saw in 2012.

So I think it was [3794], something in that area.

Yes, okay.

And then a last Medicaid parity question.

Are you getting any indication of states wanting to pass on it, not taking part?

No.

Okay.

All right.

That's all I have.

Thank you.

We have no more questions in queue.

Okay, thank very much, if there aren't any more questions.

I appreciate everyone's attendance this morning, and I look forward to speaking with you next quarter.

Thank you, Operator.

Thank you.

And ladies and gentlemen, that does conclude our conference for today.

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