Pediatrix Medical Group Inc (MD) 2013 Q3 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX third-quarter 2013 earnings call.

  • (Operator Instructions)

  • As a reminder, this conference is being recorded.

  • I would like to turn the conference over to our host, with Westwicke Partners, Mr. Charles Lynch.

  • Please go ahead, sir.

  • - IR

  • Thanks you, Brad.

  • Certain statements and information during this conference 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.

  • At this point, I will turn the call over to Roger Medel.

  • - CEO

  • Thanks, Charlie.

  • Good morning, and thank you for joining our call today to discuss our 2013 third-quarter results.

  • This morning we reported strong results from operations for the third-quarter, which reflect a continued successful execution of our long-term growth strategy.

  • Our revenue for the third quarter increased by approximately 17%, and with growth attributable to contributions from recently acquired practices at just over 13.5%, and the remainder coming from our same-unit results.

  • Our same-unit revenue growth was favorably impacted by increases in reimbursement-related factors, including parity payments and a positive payor mix comparison, partially offset by an overall net volume decline.

  • We continued to see a good degree of variability in volumes.

  • We saw increases across our anesthesia, maternal/fetal medicine, pediatric cardiology, and other pediatric practices.

  • However, soft NICU volume, as well as tough same-unit comparisons contributed to the overall decline in volumes.

  • So despite it being a challenging quarter for NICU volumes, we generated solid operating income and net income growth for the third quarter, and continued to leverage our infrastructure as we integrated practices into our national group model.

  • Our acquisition pipeline also remains very strong.

  • As I mentioned on our second quarter call in late July, Sanjay Patel, and a neonatal physician group practice based in Odessa, Texas joined our Pediatrics Medical Group division.

  • In early August, Holston Anesthesia Associates joined our American Anesthesiology division, and it is our third Tennessee-based anesthesiology practice.

  • Additionally in September, Northern Westchester Anesthesia Services, based in Mount Kisco, New York joined American Anesthesiology.

  • This is the second New York-based anesthesiology practice we have acquired this year.

  • Following the end of the third quarter, Dayton Newborn Care Specialists based in Ohio joined our Pediatrics Medical Group decision.

  • The physicians at this practice provide service at several area hospitals, including Dayton Children's Hospital.

  • Pediatrics Medical Group is already an established provider of NICU services at Miami Valley Hospital, which earlier this year joined with Dayton Children's Hospital to form the Southwest Ohio Neonatal Collaborative.

  • Overall, for the year-to-date, nine physician practice groups have joined MEDNAX, five as part of American Anesthesiology, and four as part of Pediatrics Medical Group.

  • In terms of the volume trends we have seen so far in 2013, needless to say, we are somewhat frustrated at the lack of direction these patterns have shown.

  • But from a broader standpoint, we believe we are positioned squarely in the face of attractive longer-term trends.

  • Whether it be the demographics of women approaching childbearing years, baby boomers requiring more surgeries, or what we see as pent-up demand from an economic standpoint, we anticipate attractive growth for both Pediatrics Medical Group and American Anesthesiology in the coming years.

  • We also continue to invest in the operational, technological, and clinical capabilities that we believe will maintain MEDNAX, a market leader in our specialties in the future.

  • From an operational standpoint as I detailed last quarter, we have continued the development of our regional infrastructure and oversight for American Anesthesiology, as that division has grown to better support the needs of our physicians and hospitals, and to enable more efficient acquisition integration.

  • We have patterned this development off of our very successful growth of Pediatrics Medical Group.

  • And like that group, American Anesthesiology now has the capability to integrate not only larger acquisitions, but also multiple transactions simultaneously.

  • From a technological and clinical standpoint, we believe that our proven ability to provide broad benchmarking capability, improve outcomes, and implement CQI protocols at Pediatrics Medical Group, and increasingly American Anesthesiology, make us a valuable partner to hospitals as they prepare for the future.

  • While the implementation of the Affordable Care Act began in earnest only a month ago, in reality health systems have been working to adapt to the future of healthcare for quite some time.

  • Their efforts have spanned many areas, including information technology investments, participation in accountable care organizations, and changes in their service mix.

  • The overriding expectation though, is that these systems will be responsible not only for high quality clinical care, but for providing that care in an increasingly risk-based payment environment.

  • We are in a very favorable position to help them make this transition.

  • Take for example, our breadth of data.

  • As a national physician group practice, our Pediatrics Medical Group division sees roughly a quarter of all of the NICU births in the country every year.

  • Over the many years that we have built pediatrics, we have also invested in broad and deep data warehousing capabilities.

  • Today we house the country's largest repository of data on NICU births, and in a way that can be used real-time for benchmarking, for quality improvement protocols.

  • And perhaps more importantly, for research and education so as to improve outcomes, lower mortality, and enhance risk management and cost effectiveness.

  • Under our operational and clinical leadership of Pediatrics Medical Group over the past 10 years, we have developed many quality improvement protocols, utilizing our data and focusing on the numerous areas of clinical care related to NICU births, such as nutrition, infections, temperature, and medications.

  • The improvement in outcomes through these protocols is significant, most notably surrounding mortality.

  • And as a result we have entered into collaborations with several academic systems, including Harvard and Duke to help them in implementing their own protocols using our neonatal database.

  • We will continue to expand our research and education activities not only in Pediatrics Medical Group, but also at American Anesthesiology.

  • With the addition of Dr. Catherine Grichnik as Director of Anesthesia, Research, Education and Quality as I discussed last quarter, and the continued expansion of our quantum data warehousing capability for our anesthesia practices.

  • These efforts will help to position both Pediatrics and American Anesthesiology, not as market leaders by size, but also as thought leaders within our respective specialties.

  • So like my discussion of infrastructure development at American Anesthesiology last quarter, I hope this brief, strategic overview gives you a sense, that while we continue to generate strong growth as we add to our existing scale in Pediatrics Medical Group and American Anesthesiology, we are also investing in the continued future success of these businesses, both through greater scalability and through the utilization of the data warehousing, analytical and clinical capabilities that we can offer.

  • Now I want to turn the call over to our CFO, Vivian Lopez-Blanco for a review of our financial results.

  • And then I will follow up with some additional comments, before we go to Q&A.

  • Vivian?

  • - CFO

  • Thanks, Roger.

  • Good morning, and thanks for joining our call.

  • As we highlighted in our press release this morning, our results for the third-quarter of 2013 reflect consistent and strong revenue and earnings growth, primarily driven by acquisitions over the last year.

  • Net patient service revenue for the three months ended September 30, 2013 increased by 17.3% to $554.7 million, from $473.1 million for the comparable prior year period.

  • Our profit after practice expense for the 2013 third-quarter was $188.4 million, up 15.2% year over year.

  • Profit after practice expense margin decreased by 60 basis points, which can be primarily attributed to the variability in margins due to the mix of practices acquired since July 2012, driven by the impact from anesthesia acquisitions.

  • Partially offsetting this impact, we continue to generate operating leverage with our G&A expenses.

  • These grew by 13.4% year over year, somewhat slower than revenues.

  • And G&A as a percent of revenues declined by 30 basis points versus last year to 9.9%.

  • Overall, we generated operating income of $123.3 million for the 2013 third-quarter, an increase of 14.8%, and net income of $77 million, up 16.8%.

  • Our effective tax rate was 37% for 2013 third-quarter, down from 38.5% in the prior year period.

  • Our tax rate was favorably impacted by changes in our tax-related reserves, due to the expiration of certain statute of limitations, partially offset by increase in tax-related reserves from uncertain tax positions.

  • Finally, our 2013 third-quarter net income of $77 million resulted in diluted earnings per share of $1.52, which increased by 15.2% as compared to the prior year period.

  • As you will recall, following the second-quarter, our Board authorized us to repurchase shares in order to offset the dilutive impact of our equity programs.

  • During the quarter, we used $59.1 million to buyback shares under this program.

  • For the quarter, weighted average diluted shares were 50.6 million, up 1.5% year over year.

  • Turning to more top line detail, our revenue growth attributable to contribution from recently acquired practices was 13.6%, while same-unit revenue grew by 3.7% when compared to the prior year period.

  • Of that 13.6% of revenue growth from recently acquired practices, American Anesthesiology practices contributed 78%, with the remaining 22% coming from acquisitions in the Pediatrics Medical Group.

  • Same-unit revenue grew by 3.7%, with revenue attributable to net reimbursement-related factors growth of 4.1%, while volume decreased by 0.4%.

  • On the reimbursements side, roughly 2.3% of our 4.1% growth was related to parity payments we received during the third-quarter of this year.

  • Remainder of our same-unit growth from net reimbursement related-factors was principally due to continued modest improvements and reimbursements received from third-party commercial payers.

  • And the favorable impact of our payor mix was revenue from government programs declining by about 30 basis points, compared to last year.

  • Same-unit volumes decreased by 0.4% for the third-quarter compared to 2012, driven primarily by declines in our hospital-based neonatal practices.

  • For the quarter, same-unit neonatal intensive care NICU patient days were down 3.5% when compared to the prior year period.

  • Recall that we face a difficult same-store comparison this quarter, with NICU volumes up 3.8% on a same-unit basis in last year's third quarter.

  • Offsetting much of this decline was same-unit volume growth across all of our other service lines, including anesthesia.

  • To give a brief update on parity, you will recall that during the second quarter of 2013, we started to receive parity payments from a handful of our states, that are now paying at the Medicare rate for Medicaid services.

  • This continued during the third quarter, and our third-quarter results include approximately $10.5 million in revenue from parity payments or approximately $0.06 per diluted share, net of impacts from incentive compensation and income taxes.

  • As the end of the third quarter, we were receiving some amount of parity payments from 23 of our 34 states in which we operate.

  • Although the specific amounts vary widely, both across those states, and relative to retro payments we should be receiving under parity.

  • We continue to expect that our parity payments will come in a relatively slow fashion, and will depend on a number of factors from state to state.

  • It continues to be the case that there is a fair amount of uncertainty surrounding the timing and frequency of any payments, so we have included our best expectation of dollars we anticipate receiving during the fourth-quarter of 2013 in our guidance.

  • Looking at our balance sheet, we had cash and cash equivalents of $16.2 million at September 30, 2013.

  • Accounts receivable at September 30 were $272.8 million, an increase of approximately $25 million as compared to December 31, 2012.

  • The growth of our AR is related to recently acquired practices.

  • Day sales outstanding improved by 3 days to approximately 45 days for the 2013 third-quarter, as compared to the fourth-quarter of 2012, primarily as a result of improvements at existing units, as well as the continued integration of our recent acquisitions.

  • The total amount outstanding on our $800 million revolving credit facility was $124 million at September 30.

  • During the third-quarter, we generated strong cash flow from operations of $157.9 million, a significant improvement from $134.7 million in the prior year.

  • The increase in cash flow from operations for the three months ended September 30, 2013, is primarily due to improved operating results.

  • This operating cash flow enabled us to fund both our acquisition activity for the quarter, and the share repurchases I mentioned earlier.

  • Moving on to our outlook for the 2013 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, 2013 will be in a range of $1.47 to $1.52.

  • The range for our 2013 fourth-quarter outlook assumes anticipated same-unit revenue growth for the period of approximately 2.5% to 4.5% higher year over year, on a total same-unit basis.

  • This same-unit revenue growth will be driven primarily by net reimbursement growth, including the impact of parity.

  • The forecast estimates volume to be essentially flat for the 2013 fourth-quarter.

  • Regarding Medicaid parity payments, we are including approximately $0.06 from parity in our outlook for the 2013 fourth-quarter, based on growth in revenue, net of incentive compensation and income taxes from the enhanced payments we expect to receive from those states that are currently paying.

  • Finally, I want to point out, that this morning we filed a universal shelf registration statement under Form S-3 with the Securities and Exchange Commission, that will allow for the issuance of either equity securities or debt.

  • Roger will discuss this in more detail, but the registration is intended to give us any flexibility that we may need related to our acquisition program.

  • And we do not intend to issue any new securities, except as part of such strategic growth.

  • Now I will turn the call back over to Roger.

  • - CEO

  • Thank you, Vivian.

  • Before I open up the call for your questions, I want to give some more color on our acquisition activities, particularly in light of where we stand at this time of the year, and the S-3 that Vivian just noted.

  • In terms of our overall acquisition goals, we remain confident in the size and strength of our pipeline.

  • At this time, we have a number of transactions currently under Letter of Intent that would get us to at least our overall acquisition goal of $400 million for 2013.

  • Of course, the issue with these acquisitions is always one of timing.

  • You may recall last year, we closed one on the last day of the year.

  • And we may have one go down to the wire this year as well, but we remain confident that we will reach our $400 million goal, even if there is some slippage into early January.

  • Related to the S-3 filing, we believe it makes sense to have one, for the purpose of increased flexibility in our acquisition program.

  • And given our business development activity, we want to be sure that we can act quickly should a transaction come about that might include equity consideration.

  • But I want to be clear that we have no intention of merely selling stock, for the sake of selling it.

  • With that, let me open up the call for your questions.

  • Operator?

  • Operator

  • (Operator Instructions)

  • And our first question is going to come from Kevin Ellich of Piper Jaffray.

  • Please go ahead.

  • - Analyst

  • Good morning, thank you for taking the questions.

  • Roger, could you start off by giving us a little more color on the acquisition environment?

  • Has it become more competitive?

  • And then, does the shelf kind of signal that you may be looking at some larger deals, and has the market changed to where you might need to provide some equity as part of the deal?

  • - CEO

  • There is definitely some more competition.

  • We have seen a number of private equity firms jump into this specific specialty.

  • And so, there definitely is some increased competition for these practices.

  • We consider that there are some practices, that because of the difference in ages in the composition of the group, some of the younger physicians might be more willing to take equity as opposed to our historical model of just all cash.

  • So we think that it is prudent for us to be prepared, to offer -- to have the ability to offer some equity in MEDNAX to those younger physicians who may be more interested in going down that path.

  • I am not really going to comment very much on other larger potential acquisitions.

  • We look at everything that is available.

  • We have our business development team constantly bringing those ideas.

  • So we are in a position where we can consider anything that would be available at this point in time.

  • - Analyst

  • Got it.

  • No, that's helpful.

  • And then, you commented about the soft NICU volumes, and I guess, kind of the challenging environment with a tough comp.

  • Just wondering if you have any update on what the birthrate looked like at your host hospital this quarter.

  • - CEO

  • Actually, the birthrate at all of our hospitals was basically flat.

  • It may have been up slightly in some hospitals, but basically -- I don't know -- less than 0.5% or something.

  • So that -- it is frustrating.

  • We thought that by now we would see some of the effects of the improved economy -- have an effect on that, but it takes nine months for us to see any kind of results from it, so maybe that's what it is.

  • It is frustrating and I am hopeful that we will see a turnaround sometime in the near future.

  • Operator

  • And our next question will come from Ryan Daniels with William Blair.

  • - Analyst

  • Yes, thank you.

  • a couple quick ones, Vivian, regarding the Medicaid parity and then the outlook for Q4.

  • I guess first off, on the tax rate, we have seen the last two years, that dip down to the kind mid-30% range, 35%, 36%.

  • So wanted to get your thought on that, kind of what your guidance is predicated on?

  • And then number two, in regards to parity, curious of the $10.5 million this quarter, how much of that was actually for services rendered during the quarter versus catch-up payments?

  • - CFO

  • Good morning, Ryan.

  • Yes, for the tax rate first, we think the fourth-quarter tax rate will be in line with what it was last year.

  • So basically, as you said, the tax rate was 35.5%, so it should be roughly in that range.

  • So for the year, our tax rate will be relatively lower than last year, about 60 basis points or so based on what the run rate is.

  • That is what we expect going forward.

  • As you know, there are fluctuations in our rate during the quarters, because of the discrete items related to the statute of limitations, et cetera.

  • - Analyst

  • Yes.

  • - CFO

  • That is really what is going on with tax rate.

  • On the parity side, yes, for the year really, as I mentioned last quarter, even though we are seeing a lot more states, we still don't see any consistency in these payments.

  • So for the year -- we have had of the $13.4 million or so that we had received, a lot of that has to do with one of our larger states, which is Florida.

  • And then, basically a lot of the retro payment came from Florida, so the other states are really a lot less catch-up to them.

  • So we are hoping that they will eventually catch up.

  • As I have said, the reason why I am saying there is inconsistencies, is because some of them are paying retros, some of them have paid retros not to January 1. Some of them were seeing the straight Medicaid being paid.

  • Some of them we are seeing managed Medicaid being paid.

  • So there is a combination of all of the above.

  • I can't really figure out what the pattern is, yet.

  • That is really what is happening with parity, but we are encouraged with the number of states that now have started to pay, versus last quarter as you saw with 23 of our 34 states.

  • So we continue to see progress there.

  • - Analyst

  • Okay.

  • That's very helpful.

  • And then, Roger, a quick one for you.

  • You mentioned you have a number of deals under LOI, and the answer probably, it varies significantly.

  • But I am curious what you typically see from time frame, in regards to when you sign the LOI to when you have the ability to close a transaction?

  • - CEO

  • Yes, as you said, it does vary.

  • But it also has increased with the number of other private equity firms that are now in the space.

  • Because people are taking their time to look at the other suitors, and so just take longer now to get anything done.

  • Operator

  • And our next question is going to come from Kevin Fischbeck with, I believe it is Bank of America Merrill Lynch.

  • - Analyst

  • Great, thanks.

  • I just want to go back to this shelf registration again.

  • Is the desire to have flexibility and potentially doing equity, related to the LOIs that you currently have under -- signed, or is this kind of anticipation of the 2014 potential transactions?

  • And then just want to get from you -- because it doesn't feel like equity would be any way shape or form be needed to fund any kind of reasonable sized transaction, just because you have almost $700 million on your revolver.

  • Just want to make sure I am thinking that correctly.

  • And maybe just provide some thoughts on what kind of leverage that you would be comfortable operating at, if a larger transaction did to come through?

  • - CEO

  • Well, I am not going to answer most of that.

  • (Laughter) The deals that are under the current LOI are not equity deals.

  • Beyond that, like I said earlier, we are looking at everything, and we feel that we are progressed enough in our experience with these acquisitions and the integration of these acquisitions that if a larger deal were to come along, we would be interested in looking at it.

  • Beyond that, I really don't want to comment.

  • Operator

  • And our next question will come from Ralph [Giacobbe] with Credit Suisse, please go ahead.

  • - Analyst

  • Thanks a lot.

  • I had two questions.

  • First on the acquisition side, just staying with that theme.

  • You mentioned more competition, you mentioned the sort of private equity involved.

  • I guess, just wanted to understand what you're seeing in terms of the multiples, and what you would have to pay, if that has changed from historical?

  • And then, I had a second question.

  • - CEO

  • Okay.

  • We remained disciplined in the multiples that we pay.

  • We are not going to go out and pay an increase.

  • So, we are not going to compete on the basis of price.

  • I think, we think that we offer a very unique 30-year experience.

  • We think there is no risk in coming with us -- of being flipped or sold at some point a few years from now.

  • We think that people know who we are.

  • We have built a Company that does research, that provides value for physicians, that provides medical malpractice that, we think we have a track record and we compete on the basis of our track record, and not the basis of price.

  • We have seen crazy multiples being paid or offered for some of these practices, and we just step out when that happens.

  • We are not interested in that.

  • I am sorry, what was the second?

  • - Analyst

  • Yes, a second question.

  • I just wanted to go back to volume a little bit, down 40 basis points.

  • You talked about pressure in the hospital base, neonatal.

  • I am just hoping you can to give us a better idea of the volume trends more broadly for neonatal, versus anesthesiology, what those rates look like?

  • And then, just how you are thinking about healthcare reform?

  • Would you expect to see more volume, particularly obviously on of the anesthesiology side?

  • - CEO

  • Yes, well, we do continue to see a lot of variability on a region to region basis, and even a state to state basis.

  • And so some are up, and some are down, which is been our frustration all along, because it doesn't allow us to really make any kind of trend statement that we are seeing in different parts of the country.

  • It is not related to immigration, it doesn't seem to be related to anything like that.

  • We did see volume down -- I think Vivian has the numbers there.

  • - CFO

  • Yes, so volume for the other specialties and service lines I we talked about, Ralph are good.

  • Anesthesia is up over 2%, and cardi was up 3%, and [MSM] is up.

  • So I mean, they are all up.

  • So really the driver volume was related to the NICU days.

  • But we have seen some variability in the other service lines, but we are really encouraged with them at the moment.

  • Operator

  • And our next question will come from Gary Taylor with Citigroup.

  • - Analyst

  • Hi, good morning, just a couple of quick ones.

  • Vivian, on the third quarter tax rate, was a little lower than we expected.

  • And obviously the 4Q tax rate, as you have already discussed, is often lower than what you see in the first three.

  • When we think about heading into 2014, is there a reason to think that the 3Q tax rate could also be trending lower?

  • It was also slightly lower last year, but how would you characterize that?

  • - CFO

  • Yes, I mean for -- good morning, Gary, first of all.

  • For the year -- I think Ryan was asking me that.

  • You should just use the run rate, which is about 60 basis points better than what we ended 2012 at.

  • I mean, there are fluctuations between our quarterly rate, so in the first and second quarter, it is higher than the third and fourth.

  • But about 60 basis points better for 2014 is what -- which is where we anticipate ending up 2013 -- is what you should use going forward at the moment.

  • That is what -- the best estimate I have.

  • - Analyst

  • Okay.

  • And then just going back to volumes, I guess, I was sort of back of the envelope calculating that the non-NICU volumes must have been up at least mid single-digits on a same-store basis to kind of, to tie back to the overall same-store volume.

  • But it sounded like some of the numbers you were just calling out weren't quite as high as that.

  • Is my math off, on how much same-store volume growth you had in the non-NICU volume?

  • - CFO

  • Yes, I mean, I don't -- like I said, our volumes in anesthesia were over 2%, cardi and MSM was over 3%.

  • So you have other NICU services, remember that we have talked before that we have well baby care, and delivery room services, and that was positive as well.

  • So, maybe that is the piece that sometimes isn't quite obvious to folks on the volume side.

  • Operator

  • And our next question will come from Darren Lehrich with Deutsche Bank.

  • - Analyst

  • Thanks, good morning, everybody.

  • Just two things here.

  • On -- back to the volume topic, I just wanted to hear an update whether you saw any other changes, in terms of the drivers of NICU days, like stay, pre-term rates?

  • Could you just shed some light on that, and what kind of impact that may have had, relative to what sounds like a flattish birth trend at your host hospitals?

  • - CEO

  • Yes, as you know the two things -- the two variables we look at are length of stay and the percentage of birth admitted to the NICU, and both those are well within our historical ranges.

  • So we don't see any trends there.

  • - Analyst

  • Got it.

  • Okay, that's helpful.

  • And then, just the other follow-up I had relating to parity.

  • I guess, the question, Vivian, I have is, are there any notable states here, you are just simply not getting paid.

  • I think there has been discussion that Texas has pushed this out.

  • I am just curious, if you have any updated timelines in some of your really key states, and whether you think there is any hope that you will be able to get retro in some of these bigger states?

  • - CFO

  • Good morning, Darren.

  • So yes, we do have some -- I think I have mentioned some of this before, with Texas there is no new news other than they have said they will pay, but they will pay in 2014.

  • And first-quarter, some payments, really second quarter for some of the managed Medicaid.

  • Texas, even though it is a large state for us, from a differential and parity payment, it isn't one of the largest states.

  • And then you have California -- I believe just got word from our government relations last night, that I think that their summary document was finally approved.

  • But I think they are not going to start paying until 2014 either.

  • And then really, those are the only ones that we have some definitives on.

  • The rest of them is just -- slow to come.

  • Like I said, there has been just a hodgepodge of how they pay.

  • And some of them some pay quarterly.

  • Some of them pay monthly.

  • Some of them pay retros going back for the full year.

  • Some of them are paying straight Medicaid.

  • Some of them are paying some Medicaid and managed Medicaid.

  • So it is just a combination of all of the above.

  • Operator

  • And our next question is going to come from Brooks O'Neil with Dougherty & Company.

  • - Analyst

  • Just following on that, Vivian.

  • I am curious if, as you interpret the law, do you see variability related to the various states in terms of what the law is requiring them to pay?

  • - CFO

  • So good morning, Brooks.

  • I try not to interpret the law too much, but -- our general counsel isn't here in this morning.

  • In any event, no, I don't think there is really any differences interpretation of the law.

  • I really do think this whole parity, and how it was rolled out, and really the practicalities that I have talked about before related to states updating their systems, and making sure that they are paying the right amounts.

  • And then, managed Medicaid getting on board with that.

  • ¶ I really think it is more that than anything else, so I don't believe there is an interpretation of the law at this point, as it relates to most of the states.

  • There could be certain programs maybe that they are debating, but for the most part there really -- I haven't really heard a lot of that.

  • It is primarily timing and frequency.

  • - Analyst

  • That's what I thought, so I am expecting sooner or later they will get around to paying you.

  • - CFO

  • Well, I would hope so, yes.

  • - Analyst

  • Okay.

  • So, one other question.

  • You mentioned, I think in the published remarks, that there was a little bit of a mix shift towards the commercial payers.

  • And it is in my recollection that historically went the other way in the summer months.

  • And I am curious if you, A, had any explanation for that; and B, if you were scratching your head a little bit like I am?

  • - CFO

  • Well, you have a good memory, because you are absolutely correct.

  • The third quarter is typically one where we see it go up.

  • But I am happy to take it, because as you know, the payer mix another metric for us that has been very volatile.

  • And so, we are just happy that it went positive.

  • I haven't been able to explain one way or another why there has been a shift.

  • Again, you would think that it is the overall economy, but then that doesn't translate to the volume on the NICU side, although there is a delayed effect as Roger mentioned.

  • We are happy to take that one.

  • Operator

  • And our next question will come from Matt Weight with Southland Company.

  • - Analyst

  • Good morning.

  • Roger, going back to the NICU volumes.

  • Was there any trend geographically that you saw within the quarter that you could call up?

  • - CEO

  • No, like I said our frustration all along has been just the variability on a, state to state and region to region basis.

  • Where one month a state will be up, and another one will be flat.

  • And the next month, the one that was flat will be up, and the one that was up will be down.

  • And so, we are not and haven't for the last four years been able to see any trends.

  • We get a lot of questions about infertility treatments.

  • We get a lot of questions about the illegal population coming across the borders.

  • Some of the border states really happen have to have some of our best rates, as far as same-unit growth is concerned.

  • It doesn't seem to be any of those things, and it is just frustrating.

  • - Analyst

  • Okay.

  • And Vivian, I understand it sounds like in terms of parity, states are kind of paying all across the board, all different metrics.

  • But are you able to identify of the $10.5 million how much of that was a retroactive payment, even if it was not back to the full first of the year?

  • - CFO

  • Yes, it was mostly, like I mentioned to Ryan earlier, it was mostly on the retroactive side, and mostly one state, and mostly Florida that was paying.

  • I don't remember the exact amount, but there was a big piece of it that was Florida.

  • Operator

  • And our next question comes from Rob Mains with Stifel.

  • - Analyst

  • Yes, Vivian, a follow-up to that question, when you talk about what the guidance that is embedded for the fourth-quarter.

  • Is it that -- you said 23 of 34 states are paying.

  • Does your guidance for the fourth quarter Medicaid parity assume that you are going to get more states on board?

  • Or is this kind of taking, basically adjusting for retroactive payments, the third-quarter run rate, and applying to the fourth quarter?

  • - CFO

  • Yes, we are taking pretty much a run rate on states that are currently paying, and we do have a little bit of an estimate on anything that could come in new.

  • But we are adjusting for what I just said earlier, which is that, a big retro in Florida, but we expect still some other large retro dollars as well.

  • But, yes, we look at the run rate, and the majority is related to run rate.

  • - Analyst

  • Right, okay.

  • And then a question for Roger, related to the shelf.

  • There is a few of us here on this call, who hear about using stock to buy physician practices, and we start getting shakes or whatever.

  • (Laughter).

  • You have seen the pitfalls of that in the past, could you describe how you see avoiding them?

  • - CEO

  • Well, we have been around for a long time as you know, and we have seen it.

  • And I think one of the major reasons for our success has always been that we only utilize our cash as a currency, and don't use our stock.

  • The only time that we ever used our stock as a currency was when we bought Magellan, which was a private equity-backed company that was put together by Wells Carson to compete with us.

  • So we do see some groups, as I said earlier, where maybe larger groups with a smaller percentage of the population is a younger population, and they are willing to take some stock and kind of roll the dice.

  • We try very hard to talk them out of that.

  • We want to have the ability, if there is something out there like that, that becomes attractive to us, and that we are willing to, with certain parameters -- and I just don't want to give our strategy way right now.

  • Within certain let's say, with certain protections, et cetera we might be willing to utilize our stock as a currency.

  • Operator

  • And our next question comes from Brian Tanquilut with Jefferies.

  • - Analyst

  • Good morning.

  • Roger, just, as we do channel checks with of a lot of these hospitals, especially the nonprofits and the other hospitals out there, we are hearing more and more about pressures on in-patient pediatrics, and how some hospital CEOs are having to decide whether or not to shut that down.

  • I mean, is that something that concerns you, as it relates to where you are with your footprint?

  • - CEO

  • Well, as you know we are not really big in general pediatrics.

  • We have always elected not to complete with our clients, which happen to be general pediatricians.

  • So we are not really big into that.

  • We think hospitals do like their newborn services, because it does attract mothers to the hospital.

  • And there are a number of studies that show that within the family structure, it is the mother that chooses which hospital they will utilize, not only to give birth, but when somebody breaks an arm, or one of the kids has appendicitis or whatever.

  • S

  • o I think that -- I don't see any pressure across the country in any of our regions to shut down the newborn services.

  • We are not seeing that at all.

  • - Analyst

  • Got it.

  • And then second question for you, as we think of some of these other anesthesiology groups, especially the publicly traded guys who are more vertically integrated, who have got ER and hospitalists, getting more aggressive, offering hospitals better pricing, if they sign-up for a more vertically integrated contract.

  • I mean, how do you think about that strategically given that in these hospitals your presence is NICU and anesthesiology?

  • - CEO

  • Well, we do see some of that going on.

  • We do offer to our hospitals our ability to help them with whatever their needs are.

  • And so for example, we now own three groups of pediatric surgeons.

  • Different hospitals in Texas, and those were all requests that we got from our hospital partners to help recruit these pediatric surgeons.

  • A total of 16 pediatric surgery programs -- or a total 16 pediatric surgeons in our pediatric surgery programs in three different hospitals.

  • We have had hospitals ask us to assume some responsibility for some pediatric cardiologists that they had brought on board, that they weren't able to manage efficiently.

  • We have developed some pediatric hospital programs and some pediatric ER practices in other hospitals, et cetera.

  • So we see that.

  • We are seeing hospitals ask for help.

  • But remember, our strategy always was, we had a double strategy, that we wanted to take great care of patients, and we wanted to not cost the hospital anything.

  • And we pretty much figured if we are taking good care of our patients and we are not costing you anything, we ought to be able to keep the contracts forever.

  • Because those are the two reasons why you would lose a hospital or a contract.

  • You are either not taking good care of patients, or someone else is willing to offer -- do the job $0.30 cheaper than your are.

  • And if you look our subsidy, our hospital subsidies make up less than 5% of our revenues, or around 5% of the revenue.

  • So -- and particularly coming from the neonatal side of the business is probably even less than that.

  • So we don't think that we are at danger, because as opposed to emergency room and some of the other larger services that do require significantly higher subsidies from the hospitals, that has never been our strategy.

  • - Analyst

  • And our next question will come from Gary Leiberman with Wells Fargo.

  • - Analyst

  • Good morning.

  • This is Ryan Halsted on for Gary.

  • I guess, following up with a question about your payer mix.

  • If I look at your net reimbursement growth, ex the parity, it looked to be consistent with past quarters.

  • So I guess, is there any -- was there anything as far as your business mix, or any other types of net reimbursement pressures that might offset the favorable payor mix?

  • - CFO

  • No, I mean when -- we had someone else ask us about that.

  • When you look at the parity, it would impact positively reimbursement.

  • And when you look at payer mix, we are looking at it from gross billing perspective.

  • So it doesn't have to do with the reimbursements.

  • I mean --

  • - Analyst

  • Okay.

  • - CFO

  • It doesn't have to do with the billing, pardon me.

  • - Analyst

  • Okay.

  • But I mean -- so as far as the growth in the other service lines, would they have boosted your net reimbursement growth?

  • Or was it more of a -- would it have offset the weakness in NICU?

  • - CFO

  • No.

  • I mean, I think the net reimbursement -- we have seen it just be impacted slightly positive, because of the uptick in the reimbursement that we are getting from the government, reimbursement rate being better because of parity.

  • So the other ones haven't moved much, the regular reimbursement rates.

  • I think there -- what I was trying to explain to somebody else today, was that they were trying to make a translation on the payer mix to reimbursement.

  • And I was saying that the payer mix we calculated on gross charges, okay?

  • And the reimbursement is obviously is what you are getting paid, which that is what parity impacts.

  • It does not impact what we billed.

  • - Analyst

  • Okay.

  • And then one more if I could.

  • On next quarter's guidance, again excluding the parity, it looked like -- I'm sorry, it looked like sequentially you were guiding to better same-store revenue growth than last quarter.

  • Anything that we should read into there, I guess just in terms of your organic business?

  • - CFO

  • No.

  • What it has to do with is that last quarter when we put out the forecast, we did have a better parity payments that came in, from what we had in the forecast, roughly from about $3.5 million or so.

  • And so we are factoring in, as Rob asked me, we are factoring in the parity payments to the third-quarter run rate.

  • So that is a big impact of it.

  • We are still, as I said in the press release, we are primarily, the increase is coming from all of the net reimbursement factors, because we are still going to have to have a volume be flat, even though we have a less higher comp in the fourth quarter.

  • But NICU was still, volumes during the fourth quarter of last year was still 3%, versus 3.8% in the third quarter.

  • So it is still up, a high hurdle.

  • Operator

  • (Operator Instructions)

  • We have a follow-up from Kevin Ellich from Piper Jaffray.

  • - Analyst

  • Just two quick follow-ups.

  • First of all, Roger, you talked a lot about your data warehouse, your kind of IT capabilities.

  • Was there any meaningful use payments this quarter?

  • - CFO

  • No.

  • - Analyst

  • Okay.

  • Thank you.

  • And then just kind of, Roger, even though the quarter you said your host hospital births were flat, we have heard from some other companies kind of more diagnostic-related, indicate they think the US birth rate is growing to the low single-digits.

  • Do you think that is pretty good information?

  • - CEO

  • That birthrates are growing in the low single-digits?

  • - Analyst

  • Yes.

  • - CEO

  • No, we haven't seen that.

  • - Analyst

  • You haven't seen that?

  • Okay, thanks.

  • - CEO

  • Okay.

  • Operator

  • And we have a follow-up from Brian Zimmerman with Goldman Sachs.

  • - Analyst

  • Thanks, and good morning.

  • In looking at the quarter, you bought back about $52 million in stock.

  • How should we be thinking about buyback going forward?

  • Is $52 million a good benchmark?

  • And then, are you including buyback in your EPS guidance for Q4?

  • - CFO

  • Good morning, Brian.

  • No.

  • So, how you should look at the buybacks as basically -- we announced last quarter, we are really looking to just buyback enough to offset the dilutive impact of our shares.

  • Unless we see a very good opportunity out there and hopefully not, because that would mean our stocks went down a lot.

  • Fourth-quarter typically, we wouldn't need to buy any, because what has happened is that -- from a weighted average perspective I really didn't get the full benefit of the buyback in Q3, because I started buying back in August.

  • So we will see the full benefit in Q4 like I said, barring anything that we feel is a good opportunity for us to go buyback shares.

  • The idea of the program was to buy back the dilutive impact of the equity programs, which I think as we have talked about before was roughly in the 2% to 2.5%.

  • So that is really what we are looking at doing.

  • - Analyst

  • Okay.

  • That is helpful.

  • And then, my follow-up is, how should we be thinking about potential equity offerings?

  • I know you have answered several questions on this, but how about these offerings compared to drawing on debt?

  • Do you have a priority in that sense?

  • Would an equity offering only be something you would explore, after you draw on debt?

  • Just any update there would help?

  • - CEO

  • Yes, I mean we always want to use cash.

  • We -- equity, as I have said before, was a cause for failure of some physician practice management companies in the past, when they use equity as their only currency, and interest rates are pretty low right now, and it is not dilutive.

  • So there are a number of reasons why cash makes a lot more sense.

  • So we will continue to use our line of credit whenever possible.

  • - Analyst

  • All right.

  • Thanks a lot.

  • Operator

  • (Operator Instructions)

  • - CEO

  • Okay.

  • If there are no further questions, I thank everyone for participating this morning, and we look forward to speaking with you next quarter.

  • Thank you.

  • Operator

  • That does conclude our call for today.

  • Thank you for your participation and using AT&T teleconference.

  • You may now disconnect.