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Operator
Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX fourth-quarter earnings call.
At this time, all participants are in a listen-only mode.
Later we will conduct a question-and-answer session.
Instructions will be given at that time.
(Operator Instructions).
As a reminder, this conference is being recorded.
I would now like to turn the conference over to our host, Charles Lynch.
Please go ahead.
Charles Lynch - IR
Thank you, operator.
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 development, and other factors they believe to be appropriate.
Any forward-looking statements made during this call are made as of today, and MEDNAX undertakes no duty to update or revise any such statements whether as a result of new information, future events, or otherwise.
Important factors that could cause actual results, developments, and business decisions to differ materially from forward-looking statements are described in the Company's most recent annual report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled risk factors.
With that, I'll turn the call over to Roger Medel.
Roger Medel - CEO
Thank you, Charlie.
Good morning, and thanks for joining our call today to discuss our 2013 fourth-quarter results.
This morning, we reported results from operations for the fourth quarter, which marked a strong end to a successful year that positions us very well for 2014 as we continue our long-term growth strategy.
Our revenue for the fourth quarter increased by more than 20%, with growth attributable to contributions from recently acquired practices of 13% and same-unit results showing strong growth of over 7%.
In addition to same-unit revenue growth from parity, we saw moderate increases in commercial pricing, a positive payor-mix comparison, and value growth across most of our specialties.
Overall, we ended the year with strong internal drivers for growth and an increasing contribution from parity revenue, which Vivian will talk about in detail.
During the fourth quarter, three practices joined MEDNAX (inaudible) in our Pediatrix Medical Group division and one in our American Anesthesiology division.
In early October, Dayton Newborn Care Specialists, based in Ohio, joined our Pediatrix Medical Group division.
The physicians at this practice provide services at several area hospitals, including Dayton Children's Hospital.
In mid-December, we announced the acquisition of [immune ecology] center of Winchester and Neonatal Physician Group practice in Winchester Virginia.
Finally, in late December, Summit Anesthesia Associates, a group practice consisting of 37 anesthesiologists and eight anesthetists based in Summit, New Jersey, joined our American Anesthesiology division, and this [is] our second New Jersey-based anesthesiology practice.
In 2013, a total of 11 practices joint MEDNAX — 6 as part of American Anesthesiology and 5 as part of Pediatrix Medical Group.
Also since the end of 2013, we added the first Maryland-based anesthesia practice to our American Anesthesiology division.
Physicians Anesthesia Associates is a group practice consisting of 31 anesthesiologists and 17 anesthetists primarily based in Baltimore, Maryland.
Physicians Anesthesia Associates provides anesthesia services across a wide spectrum of sub-specialty areas, and the fact that this has been the sole provider of anesthesia services, at Greater Baltimore Medical Center since the hospital's inception in 1965.
The group also provides services at another area hospital as well as 4 surgical centers throughout the greater Baltimore metropolitan area.
As I discussed last quarter, our acquisition pipeline activity has been as strong as we have seen it, and that remains the case today.
Now, I know that our pipeline didn't near the number of closings in 2013 that we expected, so I want to address a few factors behind that.
There clearly is more competition for anesthesiology practices than there was when we began building American Anesthesiology.
That has added some time on the front end for us to reach agreements and signed letters of intent, as practices now have more conversations than they had in the past before choosing a partner.
So competition has always been a factor in our acquisition strategy, and that hasn't slowed our ability to build the acquisition pipeline that we have today.
The most impactful issue has been the hospital involvement following the signing of a letter of intent.
At MEDNAX, we have always included discussions with our hospital clients as part of the acquisition process, since they represent a crucial partner to our practices.
Hospitals have become much more active in the diligence process, which primarily has resulted from the pressures that they are feeling from the implementation of the Affordable Care Act.
Because of this increased level of hospital involvement, the time between the signing of a letter of intent and the completion of a transaction is being impacted and has extended the time it takes to close.
But I want to be clear that we still expect to close the majority of the deals that we have in our pipeline.
Overall, we continue to see a lot of growth opportunities for MEDNAX.
It's just important to point out some of the dynamics that have affected the timing of the transactions that have made it harder to predict.
Now, because I am such a fast learner, I'll point out that I'm not going to guide to a dollar amount of acquisition activity that I expect in 2014, as I had done for the past couple of years.
I do want to emphasize that, from a practical standpoint, we will continue to add practices aggressively and that removing this public guidance number doesn't mean that we have lowered our expectations from what we've guided to in the past.
We have a pipeline that is not only full, but one that continues to grow, diversify, and represent various [sizes] of practices and ownership structures.
We are seeing a continued escalation of interest across all of our specialties, representing many growth opportunities for the coming months and years.
We have strong cash flow and plenty of access to capital.
So I want to stress that we are in no way slowing the pace or expectations of our acquisition activity.
My decision not to give dollar guidance simply reflects the fact that predicting the timing of closing transactions is something I am not very good at.
Now looking at the year as a whole, we've passed a number of milestones that I think are important to point out.
In 2013, we exceeded $2 billion in revenue for the first time, thanks largely to our ability to add practices in both American Anesthesiology and Pediatrix Medical Group.
Also, from a financial standpoint, we generated over $400 million in cash flow from operations, which is a testament to our financial strength and the power of our economic model.
From an operational standpoint, we continue to develop the capabilities of our practices, particularly as they relate to data collection and analytics and the use of that data for quality improvement, research, and education.
With the growth of American Anesthesiology, we have continued to implement our quantum data collection tools throughout our practices to assess quality metrics and report those findings to our clinicians.
Quantum currently has over 500,000 audited patient encounters that our clinicians are using, along with evidence-based medicine, to develop and implement best practices and standard operating procedures, all with the goal of improving outcomes and efficiency and ensuring patient satisfaction.
This data collection capability will grow as we continue to implement Quantum.
As you know, in our Pediatrix Medical Group division, we have been able to use our BabySteps data warehouse to generate meaningful, sustainable improvements in outcomes by marrying our data with quality improvement protocols that have been developed by our physicians.
I will also point out that sometime next month we will add our 1 millionth neonatal intensive care unit patient to this database.
We believe there's tremendous value in this kind of data capability, and we will continue to invest in it to improve outcomes, to support our practices, and to enhance the value we provide to hospitals as they face continuing and emerging challenges.
Now I want to turn the call over at this point our Chief Financial Officer, Vivian Lopez-Blanco, for a review our financial results.
And then I'll follow up with some additional comments before we go to Q&A.
Vivian?
Vivian Lopez-Blanco - CFO
Thanks, Roger.
Good morning, and thanks for joining our call.
As we highlighted in our press release this morning, our results for the fourth quarter 2013 reflect consistent and strong revenue and earnings growth.
Net patient service revenue for the three months ended December 31, 2013 increased by 20.4% to $567 million from $471 million for the comparable prior-year period.
Our profit after practice expense for the 2013 fourth quarter was $190 million, up 17.8% year-over-year.
Profit after expense margins decreased by 75 basis points, which can be primarily attributed to the variability in margins due to the mix of practices acquired since October 2012, driven by the impact of anesthesia acquisitions.
We continue to generate operating efficiencies with our general and administrative expenses.
These grew by only 10.7% year-over-year, significantly lower than revenue, and G&A as a percent of revenue declined by 90 basis points versus last year to 9.8%.
Overall, we generated operating income of $124 million for the 2013 fourth quarter, an increase of 20.3%.
Our operating income margin of 21.8% was essentially the same as the prior-year period.
Our effective tax rate was 36% for the 2013 fourth quarter, up slightly from 35.5% in the prior-year period, and our effective tax rate for the full year was 37.4%, down 50 basis points from the prior year.
Finally, our 2013 fourth-quarter net income of $79 million was up 19.5% year-over-year and resulted in diluted earnings per share of $0.78, which increased by 18.2% as compared to the prior-year period.
For the quarter, weighted average diluted shares were $101.1 million, an increase of 868,000 shares year-over-year.
Weighted average shares include the impact from a 2-for-1 stock split authorized by our Board in December.
Turning to a more top-line detail, our revenue growth attributable to contributions from recently acquired practices was 13%, while same-unit revenue grew by 7.4% when compared to the prior-year period.
Of that 13% of revenue growth from recently acquired practices, American Anesthesiology practices contributed 79%, with the remaining 21% coming from acquisitions in the Pediatrix Medical Group.
Same-unit revenue grew by 7.4%, with revenue attributable to net reimbursement-related factors growth of 6.6%, while volume increased by 0.8%.
On the reimbursement side, roughly half of our same-unit growth in the fourth quarter was related to parity revenue.
The remainder of our same-unit growth and net reimbursement-related factors was principally due to continued modest improvements in reimbursements received from third-party commercial payors.
And the positive shift in our payor mix was a percentage of patients covered by commercial programs increasing by about 20 basis points compared to last year.
Same-unit volumes increased by 0.8% for the fourth quarter compared to 2012, driven by strong growth in our anesthesia services and other pediatric decision services, primarily newborn nursery services.
Volume in our neonatal and pediatric cardiology services was slightly positive, but we saw slight decline in volumes in our maternal fetal medicine services.
For the fourth quarter, same-unit neonatal intensive care patient days were up slightly when compared to the prior-year period.
Now I want to provide some details on our parity revenue.
During the 2013 fourth quarter, we continued to receive payments from a number of our states that are now paying at the Medicare rate for Medicare services.
Our fourth-quarter results include just over $17 million in revenue from parity, or approximately $0.05 per diluted share, net of the impacts from incentive compensation and income tax.
Of that $17 million, about $11 million represents payments received in the fourth quarter.
The balance, or about $6.5 million, represents accrued parity revenue in the fourth quarter.
This accrual represents the estimated remaining 2013 parity revenues due from payors from which we have received significant payments.
We ended 2013 with just over $31 million of parity revenue, or approximately $0.10 per diluted share, net of the impacts from incentive compensation and income tax.
As of the end of the year, we were receiving at least some parity payments from all but three of our 34 states.
But the specific amounts and the timing and frequency of parity payments continues to vary widely across both states and, more importantly, among payors within those states.
Because of this uncertainty surrounding the timing and frequency, we do expect that parity revenue will vary quarter-by-quarter in 2014.
For a quick recap of our full-year 2013 operating results, revenue grew by 18.6% to over $2 billion.
Net income of $281 million reflects growth of over 16% year-over-year.
We ended the year with earnings per diluted share of $2.78, an increase of 15% over prior year.
Looking at our balance sheet, we had cash and cash equivalents of $31.1 million.
Accounts Receivable at December 31 were just over $285 million, an increase of approximately $37 million as compared to December 2012.
Day sales outstanding improved by about two days to [46.3] for the 2013 fourth quarter as compared to the fourth quarter of 2012.
The total amount outstanding on our $800 million revolving credit facility was $27 million at December.
During the fourth quarter, we generated strong cash flow from operations of $139 million, a significant improvement from $106 million in the prior year.
The increase in cash flow from operations for the three months ended December 31, 2013 is primarily due to changes in our accrued expenses, primarily higher incentive compensation, and improved operating results partially offset by increases in our Accounts Receivable balances.
This operating cash flow enabled us to fund both our acquisition activity for the quarter and the repayments of the borrowings on our line of credit.
Cash flow from operations for the full year of 2013 was over $405 million, an increase of $80 million, or 25% year-over-year.
Moving on to our outlook for the 2014 first quarter, as we announced in this morning's press release, we expect that our earnings per share for the three months ended March 31, 2014 will be in a range of $0.60 to $0.63.
The range for our 2014 first-quarter outlook assumes anticipated same-unit revenue growth of 3% to 5% year-over-year.
This same-unit revenue growth will be driven primarily by net reimbursement growth, including the impact from parity.
The forecast estimates volume to be essentially flat to 1% higher for the 2014 first quarter as compared to the 2013 first quarter.
Included in our 2014 first quarter is approximately $0.03 for Medicaid parity net of the impacts from incentive compensation and income tax.
For those who have followed MEDNAX for some time, you will 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 2014, these factors include impact on net patient service revenue because there are fewer calendar days than in the fourth quarter, as well as significant increase in expenses associated with Social Security payroll taxes that are higher at the start of each year when compared to the fourth quarter of the prior year.
These recurring items impact our operating income, net income, and earnings per share and are included in our financial outlook for the 2014 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 and the 401(k) plan-matching contributions that have accrued throughout the prior year.
Now I'll turn over the call back to Roger.
Roger Medel - CEO
Thanks, Vivian.
As I mentioned earlier, 2013 was a very solid year for MEDNAX, ending on a strong note.
Related to same-year growth payor mix, our financial strength, and our acquisition pipeline, and I am equally optimistic for 2014.
With that, let's turn the call over for questions, operator.
Operator
(Operator Instructions).
Ryan Daniels, William Blair.
Ryan Daniels - Analyst
Good morning, and thanks for taking my question.
Roger, I want to start with one for you just in regards to your commentary around the lengthening of the M&A transaction lifecycle.
Two-fold question.
One, can you talk a little bit how much this is extending it?
And then number two, just want to get a little more color when you talk about the hospital due diligence.
Is that you diligencing the relationship with the group and the hospital, or is it deeper looking at their long-term strategy and entering into ACOs and how that could impact kind of how physicians are paid?
Just a little more color there to help us understand what's changed.
Roger Medel - CEO
Sure, Ryan, good morning.
We have always gone to the hospital before closing an acquisition and just let them know out of courtesy what we were planning on doing and making sure the hospital is okay with our proceeding with the potential acquisition.
I'll say that some others haven't particularly done that in the past.
We find that over the last year or so, because of the Affordable Care Act, because of the interest that some hospitals have in maybe putting together their own ACOs, they are much more interested in having that conversation with us.
We are interested in determining what their contracts with the physicians is like, what their expectations for the future are.
And it just takes longer to set up the meeting.
It takes some follow-up meetings.
It takes some negotiation; sometimes there are things in the contract that we think we want to renegotiate before we move forward.
Sometimes there are things that the hospital thinks that they want to renegotiate before moving forward.
And so because we have been doing this for such a long time and we have been so successful accounting with the hospital as being our partner as well as the physicians that doing this, we continue to think that the best move is to get total agreement with the hospital before closing on any acquisition.
And clearly that has added a significant amount of time as we go through the different issues.
And each hospital has different issues depending on their community, their physicians, their market, and those kinds of things.
So that is definitely the bulk of what is making the timing of these transactions difficult to [predict].
Ryan Daniels - Analyst
Okay.
And then for my follow-up, I guess just continuing with that train of thought, I'm wondering if all your track record with data and outcomes and measurement kind of showing the improved quality is becoming therefore an increasing competitive advantage with you as hospitals look more at the partnership, as we approach these shared savings models.
Is that something that you are seeing yet that's kind of differentiating you in the market from a certain standpoint?
Vivian Lopez-Blanco - CFO
Ryan, hi.
It's Vivian.
So I do think that that's — as you know, that's been good for us in the past.
And yes, recently — and Karl's here, and I'm going to let him talk a little bit about a recent acquisition that we had that really — down in the negotiations with the hospital, they were wanting us to come to terms with some quality metrics.
Karl, can you expand on that a little bit for Ryan?
Karl Wagner - President, American Anesthesiology
Yes.
It's getting more and more common that our hospitals, even the ones that we are currently in, are putting some level of performance metrics in the hospital contract — looking for efficiency metrics, managing the OR process, as well as quality metrics that are important.
And we always pushed beyond (inaudible) measures and the like.
And I think that's real helpful to the hospitals.
But they want to get their arms around who their partner's going to be, as they try and figure out what's going on in the new world of healthcare HCO (inaudible) insurance product.
So there's a fair amount of work in that we're going to be a partner with them and looking at these bundled payment projects they're working on (inaudible) care.
That's really where the discussion centers are at (inaudible).
How are you going to make these more efficient, and how are you going to make sure my quality improves, and what metrics are you willing to put in place on that?
How do you do that?
And then it's around how are you going to be my partner in bundled payment episodes of care in looking to go forward in the changing world of how people are paid, how to move [towards] a population (inaudible).
Karl Wagner - President, American Anesthesiology
Okay, perfect.
Helpful color.
Thanks so much.
Operator
Kevin Fischbeck, Bank of America.
Kevin Fischbeck - Analyst
Great, thanks.
You mentioned — I guess in the past several quarters we've [gained] some positive data points from different sources saying that the birth rate is starting to improve, and you guys have been saying for a while you haven't really been seeing it.
The volumes — the trend start seems to be improving from recent quarters, and the mix has been improving the last couple of quarters.
Do you think that we are starting to see a rebound, or is there anything that you would point to either way about whether this is a changing trend or —
Roger Medel - CEO
Well, like you, we are hopeful that that's what it means.
Certainly it is encouraging to see that, for the last couple of quarters, that direction in which things are going.
I'm not ready to call it a trend yet, but it's very helpful and it's very encouraging to see that that is absolutely the direction in which we are going.
Kevin Fischbeck - Analyst
And I assume that's a broad-based number, it's not —
Roger Medel - CEO
Yes.
Vivian Lopez-Blanco - CFO
Yes.
Kevin Fischbeck - Analyst
Okay.
And then my second question has 27 parts to it.
Parity; just wanting to understand.
I think in the past you had talked about it ramping up more, potentially into Q1.
But it sounds like maybe a little bit more in Q4 versus than you thought, so I don't know what that was just kind of pointing forward you have a Q1 number would look like?
And the 31 of the 34 states, does that include Texas and California, or are those two states coming online for Q1?
And then finally, as far as parity goes, any progress in trying to get that extended past 2014, either with conversations with Congress or at the state level?
Vivian Lopez-Blanco - CFO
Okay, Kevin.
So let me see if I remember the three prongs of the question here.
But yes, for the first one, as you know, we have been talking all along that there is still a lot of variability with the timing of these payments.
And so in the fourth quarter, because we have seen some payors more than states — payors consistently paying, we were able to get to a methodology that we were comfortable with; so accruing a piece of that.
So that's really what happened in the fourth quarter.
And so we still think — and that's why I was very pointed to make that remark in the script in the prepared comments that I do think that there's still variability with the payment streams.
But again, as soon as we see some consistency with the payor, then we try to approve for it.
So it is a mix of current payments and some that are still from the rest of the year.
As far as states, yes, we have some movement as we go through our — with our government relations folks.
We do see some movement in some states that have wanted to — rumblings that they want to extend it.
Nevada, Maryland I think is one, and I think there might be one other one that I am forgetting.
But no, there is no Texas money in any of the parity that we've reported.
Texas is saying that they are going to pay maybe in April or May.
And California, we did see a little bit of it, but we can't really apply it because we don't know what it relates to.
And so pretty much those — we still believe that Texas will pay because that's basically what they have said.
But so far, nothing yet.
Now, remember with Texas — I do want to make sure everybody understands that Texas is a large state for MD, but it's not really one where the payment differential is that high between Medicaid and Medicare because they did have that adjustment three or four years ago.
Kevin Fischbeck - Analyst
And then outlook post-2014 for continuing these payments?
Vivian Lopez-Blanco - CFO
So there's, like I said, a few states that have started to talk about that.
Nevada is one, Maryland is one, and I think there might be another one but there's nothing on the books yet for that.
They still have to figure out how they are going to be paying for that because then that's going to be on their ticket.
Roger Medel - CEO
That is, [Ryan], the focus of our government relations efforts this year, is to focus on states and start talking about the need for them to extend the parity.
Kevin Fischbeck - Analyst
Great.
Thank you very much.
Operator
Kevin Ellich, Piper Jaffray.
Kevin Ellich - Analyst
Thanks for taking the questions.
Roger, we all understand the lengthening process of getting the deals closed because of the hospitals.
But I was just wondering if there's anything else qualitatively that you can provide to us to give us a sense of how big the pipeline is, and just trying to help us understand the growth potential and opportunities for the Company in 2014 and even over the next few years.
Roger Medel - CEO
Hi, Kevin.
Well, everybody around the table is cringing because they are very worried about how I'm going to answer that.
Our pipeline is, as I said on the call, is very full.
We have some larger deals in the pipeline; most of the deals are medium-sized.
There's a couple of small ones.
We think — when we talked — last time we talked about there being a number of deals in the pipeline.
There are more deals now and [close] more [LOIs] than when we talked the last time.
So without making my General Counsel flinch, we — we're very happy, not only with the amount of deals that are in the pipeline but with the quality of those deals.
With the hospitals — this hospital that we just announced in this last week in Baltimore, these people have been there since 1965.
There is just a huge amount of confidence in the hospital, in that relationship, in that contract, and the opportunities there; the partnership created between the physicians and hospitals.
And that kind of quality doesn't translate when we talk about number of deals in the pipeline.
But that's what I'm talking about, the fact that these are groups that are well-established in good communities, that have excellent relationships with their hospitals, and we are just very excited about the possibilities are here.
Kevin Ellich - Analyst
Great, I appreciate that color.
And then just thinking about your — you guys still have that shelf filing out there.
And given this lengthening process in anesthesia, have you given further consideration on adding maybe another leg of growth, a third specialty, and maybe that would help you win even more business with the hospitals?
Roger Medel - CEO
Yes, we talk about it.
We haven't explored it seriously.
We do hear that some hospitals some hospitals are requiring — or requesting, a better word — that some of their hospital-based physicians provide different types of services.
We think that eventually that might happen.
We haven't come across — we've had conversations where hospitals say, would it be easier if you were running my AR or whatever.
But we haven't had any serious conversations about doing that.
We think that might happen.
I'm not saying it's not going to happen, but it's not front and center on our radar screen right now.
Kevin Ellich - Analyst
Got it.
And speaking of the shelf filing, have you used much equity in deals yet since you (multiple speakers) —
Roger Medel - CEO
We have not used any equity on deals that we have closed.
Kevin Ellich - Analyst
Got it.
Okay.
Thank you.
Operator
Ralph Giacobbe, Credit Suisse.
Ralph Giacobbe - Analyst
Thanks.
Good morning.
I guess first just to clarify, I just want to make sure — the process of completing the deals is getting longer.
Or are there examples where either you or the hospital is sort of walking away?
Roger Medel - CEO
There are no examples where we or the hospitals have walked away.
Ralph Giacobbe - Analyst
Okay.
Alright.
Great.
And just want to go to the margin side.
I know the margin showed a little bit of a bump-up; parity I think helped that, and otherwise margin would've been down.
Now, I know you've done a lot of deals, so just wondering if you expect that to sort of stabilize, or maybe if you could help us at all think about the trend in maybe same-unit margin kind of ex-the parity benefit.
Vivian Lopez-Blanco - CFO
Good morning, Ralph.
It's Vivian.
So, yes, what I've said to you guys before is just, generally speaking, directionally, we are not going to give a specific number.
But generally speaking, same unit being north of 3% is something that we would need for margin expansion, again.
So parity, you're correct, helps, but obviously with the G&A, the more deals we bring in there, the more we have as it relates to operating efficiencies there.
So it's a combination of that.
But remember that parity was also shared with our physicians, and so we did have also an increase in the bonus accrual.
And in spite of that, we still had some positive expansion there.
So it does need to be north of three, and it fluctuates depending on if that's coming from volume or if it's coming from pricing, etcetera.
Roger Medel - CEO
Let me verify, Ralph, is that there are practices that we have walked away from, mostly related to evaluation and other issues.
So it's not that we haven't walked away from practices.
Ralph Giacobbe - Analyst
Okay, alright.
Got it.
Just my last one.
In terms of the managed-care book, can you give us a sense of what percentage is out of network versus in network and maybe what your collection rate is on out-of-pocket?
Roger Medel - CEO
Yes.
We don't like being out of network.
We don't think that that serves any purposes.
We know that that is a strategy that some others utilize.
But we don't think that serves the patients, it doesn't serve the hospital, and it doesn't serve the physicians.
So our goal is always to be in network, and I don't know what the percentage is of —
Vivian Lopez-Blanco - CFO
It's very low.
I mean, most — we use that as a last resort, but it's not to say there aren't any.
But it's not a large percentage at all.
And as it relates to patient responsibility, as you know, we have — that's a low percentage for us.
Certainly on the neonatology side, most of that is considered emergency care.
And then on anesthesia, there is some of that.
But right now, it's a pretty stable, low percentage in the 2% overall for the Company.
Ralph Giacobbe - Analyst
Okay.
Alright.
That's helpful.
Thank you.
Operator
Rob Mains, Stifel Nicolaus.
Rob Mains - Analyst
Thanks.
Good morning.
Two questions.
I'm kind of piecing things together.
The pipeline is larger, but there's also more competition for deals.
Could I surmise that the universe of practices out there looking to collaborate has grown as well?
Roger Medel - CEO
Dramatically.
Rob Mains - Analyst
Okay.
And then I think that — and you would attribute that to the same factors you have been talking about in the past in terms of how the marketplace is evolving?
Roger Medel - CEO
I think the marketplace, I think the Affordable Care Act, I think the fact that there are more buyers now interested in this sector, yes.
I think they are seeing that their friends are getting involved with some other companies.
And I think that there's — we just got back from the American anesthesiologists meeting last weekend, and it's a huge amount of interest from a number of groups that in the past weren't even interested in talking.
Rob Mains - Analyst
And then from your perspective, pricing isn't changing in terms of what the types of returns that you require?
Roger Medel - CEO
Well, I'd like to tell you that, but for competition — the reality is that it always affects pricing, particularly those practices that you really want, that are special, and that you want to go after.
So I can't say that it has not affected the price.
Rob Mains - Analyst
Okay, fair enough.
And then just one numbers question for Vivian.
Could you give us an idea where you see tax rates shaking out through the four quarters of next year?
Vivian Lopez-Blanco - CFO
Yes, remember — good morning, Rob.
Remember that our tax rate does vary quarter-to-quarter because we have some of those discreet items.
But for the year 2014, we should see it in the same rate, give or take 30 or 40 basis points.
So anywhere between 37.4% and 37.8%, we should be in that tax rate for the whole year.
Rob Mains - Analyst
Okay, great.
Thank you very much.
That's all I had.
Operator
Gary Taylor, Citigroup.
Gary Taylor - Analyst
Good morning.
A couple questions.
I want to make sure I didn't miss something.
Vivian, when you talked about the $17 million in Medicaid parity payment booked in revenue for the fourth quarter, and you said some of that was accrued, did you break out how much of that was cash versus accrued?
Vivian Lopez-Blanco - CFO
Yes.
$6.5 million was accrued, Gary.
Gary Taylor - Analyst
Okay.
Thanks.
And then that kind of takes me to DSO, which has actually been coming down all year, including the fourth quarter even with this accrual.
So where are you seeing the better revenue cycle performance even though you've got a little bit of Medicaid accrual?
Vivian Lopez-Blanco - CFO
Well, government does pay pretty good, other than these things related to parity, because they have to get it in their system.
But overall, we've seen it for all of our lines because we do break that out.
So on the neonatology side, they have continued to improve, but anesthesia has improved as well.
And so as that gets bigger, that does have a bigger impact on our overall DSO.
So overall, we have seen an improvement in our DSO on our contract revenue piece, etcetera.
All of that has improved office based.
So when I look at the schedule with the details, it is just an overall improvement for the Company.
Gary Taylor - Analyst
Okay.
And then first-quarter Medicaid parity, you said $0.03.
I guess that implies roughly $10 million of revenue, is that —
Vivian Lopez-Blanco - CFO
Yes.
$11 million.
You're pretty close.
Gary Taylor - Analyst
$11 million, okay.
Sorry, I missed that.
Last question.
So commercial mix was up year-over-year now for two quarters in a row.
I think that's the first time in five quarters you have had — I'm sorry, five years where you have had two straight quarters where the commercial mix has been up.
First, I just wanted to understand if when you disclose that, if that's the same practice basis.
And then also is that being more driven by Pediatrix or American anesthesia?
Vivian Lopez-Blanco - CFO
Well, it's an overall number that we put out there.
But overall, we did have a favorable mix for the year, not for the quarter.
So I agree with you on that.
We did have a favorable mix back in 2011.
In 2012, we had over 100 basis points.
And, again, we are just very encouraged.
But it's basically an overall mix shift, but obviously pretty much more driven by the Pediatrix side of the house.
Gary Taylor - Analyst
So it's more pediatric.
But when you talk about, I think you said 20 basis points a quarter, that's a total revenue metric?
That's not a same-practice or a same-revenue metric?
Vivian Lopez-Blanco - CFO
Yes, that's pretty much same unit.
Gary Taylor - Analyst
Okay, that's what I thought.
Okay.
That's it.
Thank you.
Operator
Darren Lehrich, Deutsche Bank.
Darren Lehrich - Analyst
Thanks.
Good morning, everybody.
I wanted to just ask a couple more things as it relates to how you are interacting with hospitals as you go through the due diligence of the deals.
First, I guess, just when you get through that process, are you finding that your — the contract length is longer than what you've typically seen in the past?
In other words, you get to know each other better, is there any result where you end up with just a longer, more durable contract?
Roger Medel - CEO
There have been instances where we have renegotiated the length of a contract as part of our negotiations with the hospital.
But most of these contracts have — or all of them probably — have like 90-day termination clauses in them.
You've got some time to remedy issues and whatever.
But at the end of the day, none of these contracts are ever really per se long-term contracts.
Darren Lehrich - Analyst
Okay.
Thank you.
And just as it relates to subsidy, I know anesthesia practices have some level of that.
I'm just wondering how that discussion factors in here and whether you are seeing any change in how hospitals are thinking about subsidy.
Anything to note along those lines.
Roger Medel - CEO
Yes, that definitely is a topic of conversation, particularly when there are large subsidies involved with the anesthesiology practices.
Our (inaudible) practices, as you know, don't really come with typically a lot of subsidies.
But anesthesiologists are spread out through so many different areas of the hospital that it's not unusual for hospitals to pay subsidies.
It is a conversation that we have, and there have been times when we have been able to help the hospital out with subsidies.
It's a clear area of focus that these hospitals are having when they already know what their Medicare cuts are going to be like, and so that's an easy area for them to focus on.
And it is part of an ongoing conversation with the hospitals.
Darren Lehrich - Analyst
Okay.
And then if we can just shift gears a little bit to volume trends and maybe just wanting to get a little more specific in what you have seen in the various lines of service you're offering.
I guess in our survey work, we definitely saw further stabilization of births but, more interestingly, a bit of a second-half pickup in surgical volume.
And I'm just wondering if you can maybe give us some perspective on what you are seeing.
And then you did mention, I think, some pressure in maternal fetal.
Just some commentary on how you're thinking about that outlook there.
Vivian Lopez-Blanco - CFO
Okay.
So basically, it's fluctuated throughout the year because maternal fetal for the year is positive.
And so we did see some negativity, Darren, that I mentioned in the fourth quarter.
And certainly in the fourth quarter, anesthesia was positive and really pretty much, like the NICU, was turning around.
And so, as you know, that's something that we had.
In the earlier part of the year, it was more negative.
It ends up being negative for the year, but primarily because of the trajectory throughout the year.
So, again, with some of the volume, I still think there is volatility for — again, for anesthesia, we saw a pickup.
So to your point on surgical volumes, we did see a pickup on anesthesia in the fourth quarter.
Darren Lehrich - Analyst
And Karl, maybe a question just for you just to round out the anesthesia question on volume.
It seems like there are some key areas like cardiology and ortho where some of the surgical volumes may have kind of been washing out.
Any feedback from the anesthesiologists that you guys work with about how they are thinking about that?
And maybe some commentary would be helpful.
Karl Wagner - President, American Anesthesiology
Well, we look at the volume we had across all of our hospitals.
And we saw a mix of growth both inpatient and outpatient in all different types of procedures.
So, but I wouldn't say we are seeing a big movement away from the cardiac procedures.
And the ortho, I think there are some areas in the cardiac area that we are actually seeing more (inaudible) [used] anesthesia in some of the procedures that they are doing.
So we haven't really seen a big change in that as we go forward.
We continue to watch by specialty level what we are seeing, but we are not seeing a big movement in our practices at this point.
We continue to see that there is upside in the outpatient surgery center areas and moving some procedures into the surgery center side as (inaudible), but nothing clear that says those are dropping dramatically.
Now, that's kind of the whole hope with the Accountable Care Act; we do less procedures on the patients.
But we are also looking at the part of those bundles and how you make sure everybody is getting paid to see their part in a bundle of these procedures or (inaudible) care kind of counteract some of that potentially (inaudible).
Operator
Brian Zimmerman, Goldman Sachs.
Brian Zimmerman - Analyst
Thanks, and good morning.
My first question is regarding acquisitions.
Now, you mentioned in the anesthesia practices have been more competitive and the pricing is up.
How should we be thinking about multiples for both anesthesia practices and NICU practices?
Has that really shifted at this point?
Roger Medel - CEO
Well, the NICU practices have not shifted.
We continue to pay along the lines of the historical multiples that we have paid for those practices.
On the anesthesia side, we don't typically disclose what multiples we pay for those practices because there is competition there, and we would rather not put out that for our competitors.
Brian Zimmerman - Analyst
Okay.
And then going back to margins for a second and how we are thinking about them for 2014, obviously you have a number of moving pieces.
You have parity from the — some acquisitions that put pressure on margins.
But how should we be thinking about 2014 margins compared to maybe 2013, and are there any areas that you've identified where there could be additional cost-cutting opportunities?
Vivian Lopez-Blanco - CFO
As you know, in our business, the cost-cutting opportunities is not as dramatic because of the largest expenditures — physician cost.
And so we have a quality-of-care issue there.
It's — especially on the NICU side of the house, it's really hard to — if volumes are down in any given NICU, we can't just remove a physician.
And so just overall, I think you have to look at it, they — there will be some slight movement downward on the gross profit line unless we have, as you know, a bigger increase on the same unit which I've said needs to be north of that.
But as you saw on the operating-income line for the quarter, it was basically flat because we had a big piece of that, [7.5] or so, related to same unit — about half of it was related to parity.
And so it depends on where that fluctuation is coming from, if it's coming from pricing or volume.
And so I'm not trying to evade your question, but even for us internally when we look at that, it does fluctuate depending on the factors that are moving within same unit even prior to the acquisitions.
Brian Zimmerman - Analyst
Sure.
That's fair.
And then my final question is I know it's incredibly early, but have you seen any early indications that health reform is having an impact on your business?
And then can you just confirm that your guidance doesn't include any impact from reform?
Vivian Lopez-Blanco - CFO
So as we have said in the past, we haven't seen anything significantly impacting it on a negative basis.
Actually as you know, parity is positive for us.
On the exchange side, it's really too soon to tell.
We have had very limited experience with exchanges, and right now, frankly, that's been neutral.
There hasn't been any downward pricing movement on the exchange products that we've seen.
But, again, that's a little bit too soon to tell.
Brian Zimmerman - Analyst
Okay.
Thanks a lot.
Operator
Brooks O'Neil, Dougherty.
Brooks O'Neil - Analyst
Good morning.
After 20 years, I've finally found something Roger is not good at.
(laughter) I wanted to check in with you.
I think you had initially said you hoped to get to around $400 million of spend on acquisitions in 2013.
Were you light years away from that, or did you get pretty close?
Roger Medel - CEO
Yes, we got within striking distance; 75%, something like that.
Vivian Lopez-Blanco - CFO
We were $251 million, Brooks (laughter).
Roger Medel - CEO
I'm including what we --
Vivian Lopez-Blanco - CFO
Striking distance (laughter).
Roger Medel - CEO
I'm including what we generated and what we closed recently, which was [obviously] (inaudible) work we did in [2013].
We're getting [closer].
Brooks O'Neil - Analyst
So you said that the pipeline hadn't fallen off any.
So there's a good chance that this year is an even better year than what might be sort of the run rate kind of trajectory?
Roger Medel - CEO
Well, I'm a slow learner, but I learned fast enough to not answer that question.
(laughter)
Brooks O'Neil - Analyst
All right.
Well, good luck this year.
I am looking forward to a good year.
Operator
Matt Weight, Feltl and Company.
Matt Weight - Analyst
Thanks.
Vivian, you guys recorded nearly a 30 million in parity revenue this year.
If everybody had paid appropriately and on time, do you have any kind of estimate what that would have been?
And then the $6.5 million that you accrued this quarter, do you expect to collect that in the first quarter?
Vivian Lopez-Blanco - CFO
Good morning, Matt.
So we are — the $31.2 million, it includes our best estimate, which is the $6.5 million or so that we estimated.
Should there be more coming?
Yes.
But, again, given that some payors haven't paid necessarily — more specifically on the managed Medicare side, it's hard for us to predict that.
And so my best estimate is basically the $31.2 million, which a lot of it was in the bank but the other piece is in accrual.
And so we will continue to keep you guys updated, and I do hope that I can continue to accrue more in 2014 as we get more consistency with the payments.
But that's my best estimate at the moment.
Matt Weight - Analyst
Okay.
And then just a quick last one here.
[Mixed-signal] was up year on year.
What was it sequentially?
Thanks.
Vivian Lopez-Blanco - CFO
Sequentially, it was basically up slightly on the government side.
Matt Weight - Analyst
Thank you.
Vivian Lopez-Blanco - CFO
I want to say 20 or 30 basis points, I can't remember precisely.
But it was up slightly.
Operator
Gary Lieberman, Wells Fargo.
Gary Lieberman - Analyst
Good morning.
Thanks for taking the question.
With your comments regarding sort of the trend on anesthesia acquisition prices, would it be reasonable to expect that you might try to accelerate your acquisition pace in anticipation of multiples continuing to move higher, or how are you thinking about that?
Roger Medel - CEO
Well, we — I don't think that that's a factor that would make us — I mean, it's not going — the multiples aren't going up.
I don't want to give you the impression that multiples are off the wall.
I was just asked if they had gone up any at all, and I said I couldn't say that in some practices that were desirable for us.
But we hadn't [paid] a little higher multiple than we wanted to originally.
But I don't think that that is a factor that is making us want to move faster.
So I would say no.
Gary Lieberman - Analyst
Okay.
Is there a — what do you consider sort of the key gaining factor in terms of closing deals?
Is it just on the business development side, going out and finding them and getting them done, or sort of how should we think about that?
Roger Medel - CEO
No, not at all.
Like I said, I think on the business development side, getting deals and establishing relationships and all that, I think that's ahead of schedule.
What the game factor is are the — meetings that we have with hospitals and trying to understand what their strategies are and what they are thinking about for the future, what their projections are.
And they want to talk to us about how we can help them, as Karl has stated.
And sometimes it takes two or three meetings to get agreement with the hospital; it could take a couple of months.
So it definitely — as I said in my comments, first of all, because there are more potential acquirers, groups that are thinking about being acquired are looking at all the possibilities, which is what anybody would do.
So that prolongs the process of getting to the letter of intent because you want to see what group A, B, C, and D have to offer.
Once that is done, then it is the meeting with the hospitals and coming to a consensus about what we're going to have in the contract and what kind of help we're going to give the hospital and what they can expect for us.
And that's all pretty new.
In the past, many of those meetings were just really an hour meeting and the hospital just agreeing to move forward.
So that has changed drastically.
Gary Lieberman - Analyst
Okay.
Thanks for the details.
Operator
John Ransom, Raymond James.
John Ransom - Analyst
Sliding in here.
Couple things.
Private equity has obviously been heavily involved on the buy side of these anesthesia deals.
Have you seen any of these deals yet boomerang, and anybody decided to become a seller after not having made it work?
And if not, when or if you expect to see that?
Roger Medel - CEO
Without getting into details, we have — there are rumors out there that we — that don't surprise us.
The majority, as you know, of these [PE] deals are just [stamp] collections.
They are not integrating the practices into — and bringing value to their hospitals and their aggregators.
And their goal is to aggregate as many of these practices as they can and bring them out to the public market.
And that's — that compares with our 20-years, next-year history of integrating these practices and building our national group.
John Ransom - Analyst
How is this any different than what we saw in the 1990s with thirtysomething public EPMs and a lot of them at the end of the day being financial plays?
Roger Medel - CEO
You tell me.
(laughter).
We are seeing a lot of the same symptoms, I think.
But there are lessons that have been learned.
And some of these PE firms have stellar track records of having done exactly that.
So I'm not trying to knock them.
I'm just telling you that our strategy is different from theirs.
We're not putting together stamp collections.
John Ransom - Analyst
Okay.
That's (inaudible).
The other question, you have an idea of your approximate exposure in states that are expanding Medicaid, and do you expect that to have any impact on the anesthesia side?
Roger Medel - CEO
Our anesthesia Medicaid business is small; the percentages there are small.
So it could have some impact.
But all of the states in which we practice are already — for pregnant women and children are already at 130% of federal parity levels eligibility for Medicaid.
John Ransom - Analyst
Even Texas?
I don't think Texas was.
Roger Medel - CEO
I think the information that I have is yes, Texas included.
All of the states where we practice are at that level, yes.
And I'm getting a lot of nods from around the table, so I think we are.
John Ransom - Analyst
Okay.
Roger Medel - CEO
Yes, and people from Texas are coming (inaudible).
John Ransom - Analyst
Okay.
So it's a nonissue then.
Okay.
Operator
Brian Tanquilut, Jefferies.
Brian Tanquilut - Analyst
Good morning, guys.
Roger, just a follow-up on John's question earlier.
As the acquisition landscape has gotten more competitive, are the discussions expanding beyond just your usual strength as a Company into more of a financial decision for the doctors?
Because I know when you did your last investor day, we talked about how you guys are differentiated and how doctors are choosing MEDNAX for a reason.
But is that dynamic changing?
Roger Medel - CEO
Well, there's no doubt that finances play a role, and the [factor] that these private equity firms has to offer is two bites of the apple.
Right?
You — we will pay you some cash now, and we're going to go public in X amount of time, and our stock is going to be worth 5 times what it's worth today.
And you'll get to cash out a second time back then.
That's basically what we are competing with.
On any other issue, they are not able to compete with us.
They are not competing with us on the valuation, liquidity from a financial standpoint.
Multiples — we are not losing too many deals because of multiples.
But you take a group with 100 physicians and 50% of them are 40, and they feel like they are more able to take those kinds of risks.
So that's really the factor.
The other stuff — research, medical, education, quality, and all that stuff — there's just not any comparison there.
Brian Tanquilut - Analyst
Okay.
And then last question.
You alluded to some of the hospitals asking about ER.
Is that a risk to the model where as hospital CEOs start thinking about bundling, and you are in NICU and anesthesiology provider, and at least for now you're not willing to go into ER or hospital as your other lines of services, that those CEOs could look somewhere else to bundle their services?
Roger Medel - CEO
It's a risk.
But I don't want to give the impression either.
We do have some ER contract — or pediatric ER contracts with the hospitals that have asked us to run their pediatric emergency rooms.
We have pediatric intensive care; that's also hospital-based.
So there's a lot of help that we are able to provide our hospitals.
We haven't had anybody come to us and say, hey, if you don't cover my ER, we are going to cut your contract.
We do think that that would be a nice thing to be able to offer a hospital if they are looking to cut down their subsidy.
You can say, well, if you let me have your emergency room or your radiology or whatever, we can talk about reducing subsidies.
So I think that's more of a strategic discussion for us going forward.
But, again, although that threat could happen, we have — we are not feeling any pressure across the country at this point in time to enter into emergency room or pathology or radiology.
We might do that, but it's not because of pressure that we are feeling right now.
Brian Tanquilut - Analyst
Got it.
Thank you.
Operator
We have no further questions.
Please continue with any closing remarks.
Roger Medel - CEO
Okay.
Well, thanks very much for attending our call today.
If there aren't any more questions, then we will just look forward to speaking with you next quarter.
Operator
Thank you.
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