Pediatrix Medical Group Inc (MD) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX second quarter earnings call. For the conference all participants are in a listen-only mode. There will be an opportunity for your questions, instructions will be given at that time. (Operator Instructions). As a reminder today's calling is being recorded. I will now turn the conference over to your host, Mr. Charles Lynch, Vice President, Strategy and Investor Relations. Please go ahead, sir.

Thank you. Certain statements and information during this call conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by MEDNAX's management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and MEDNAX under takes 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. Now I will turn the call over to our Chief Executive Officer, Dr. Roger Medel.

Thank you Charlie. Good morning, and thanks for joining the call today to discuss our 2014 second quarter results. This morning we reported results from operations for the second quarter that demonstrated strong growth, and continued to be driven on largely by our successful execution of the long-term growth strategy. Our revenue for the quarter grew by 12.5% with contributions from acquired practices of more than 9%, and same year growth of over 3%. Same units NICU days were up year-over-year continuing the growth we have seen there in recent quarters, and so were same-unit anesthesia cases. We also saw good margin trends with operating income and net income growth both exceeding 14%, and EPS growth of more than 16%, all faster than our revenue growth. We continued to add practices through acquisitions, with three groups joining our American Anesthesiology division during the quarters. In April we added two groups, one in Fredericksburg, Virginia and one in Kingston, New York.

And in May we added an anesthesia and pain management group in Millburn, New Jersey. Anesthesia and pain management provides ambulatory anesthesia and pain management services for outpatient procedures at Shorthill Surgery Center and Hudson Crossing Surgery Center, including general and regional anesthesia, pediatric, cosmetic, and acute pain management for postoperative pain.

Finally, today we are announced the acquisition of Associated Anaesthesiologist's of Joliet and its affiliated entities, which on a combined basis employ 88 full-time anesthesia providers, and serve 13 locations in southern Illinois and northern Indiana. With that to-date in 2014 we've added a total of seven practices to MEDNAX, six in American Anesthesiology and one in Pediatrix Medical Group. So I am happy with the success of our acquisition pipeline and confident that we will continue to be active through the remainder of this year.

But in addition to these practice acquisitions which we will continue to pursue, and for which we continue to have a very active pipeline, I want to talk today about how we're thinking strategically of ways that we can complement this growth while adding greater value to our hospital partners. First of all, we will be far more responsive and proactive in looking to broaden our existing hospital relationships. For example, as most of you are aware over the past several years we've significantly expanded the scope of neonatal and pediatric services we provide to the TriStar system in Nashville, which has provided a great growth avenue for us, and at the same time enabled TriStar to enhance its service offerings in the Nashville community.

This quarter Arizona Pediatric Cardiology Consultants, our pediatric cardiology practice in Phoenix, and Phoenix Children's Hospital Heart Center, formed a joint venture that will provide comprehensive community based care, as well as pediatric cardiovascular surgery and other subspecialties at Phoenix Children's Hospital. Our practice has been providing care at Phoenix Children's for more than 25 years, and this venture further formalizes that and expands our relationship with that. This is a strategy that broadens our service offering when are within the Phoenix metropolitan area, offers new growth potential for us and recognizes the close relationship we've had with Phoenix Children's for years. While this is a formal joint venture, I think that either through JVs or in partnerships likes with Tristar, we will continue to pursue these type of opportunities across our divisions. There are great chances to create more integrated care models alongside of our local health systems, not only related to our footprint within Pediatrix Medical Group, but also related to our broader footprint across the Company. And as we look at that footprint we see a number of areas of opportunities that we will pursue.

The second strategic step we're taking is as we look at our operating infrastructure, and the services and support we provide to our physicians, in the past we've always done this with an internal focus. Building our own solutions to support our own physicians. Looking forward we will continue to make those investments, but over and above that commitment we're increasingly interested in adding tools to our infrastructure that might be available to us through acquisitions or partnerships, rather than just by building them ourselves.

So also during the second quarter we acquired a company called Surgical Directions. Surgical Directions is a collaborative team of anesthesiologists, operating room nurse executive, and parity operative business strategists, that develop and provide solutions to streamline patients throughput, enhance anesthesia service levels, increase surgeon and patient satisfaction, decrease cost, and implement strategic parity operative growth plans to hospitals and health systems. We see this business as a positive component of our organic growth potential, both immediately and in the future. In addition, a number of our own anesthesiologists have worked with the company, and found their input to be extremely valuable, which led us to consider and then act on the idea of acquiring them.

We think more of our practices can benefit from Surgical Directions services, and the Company had company has free rein to market itself on essentially an intra-company basis. To the extent that we can provide our anesthesiologists with an additional tool to improve their practices, we think there is a great potential value there. We also think the workflow solutions they focus on could be relevant to our pediatrics division and Surgical Directions will have conversations with those medical directors in that division as well. And just as importantly I think there is potentially a great value we can unlock by taking a look at the tools we bring to bear today to support our own physicians, and thinking about beginning to export those tools, potentially through the provision to outside division groups and hospitals systems of the varied services we already provide to our own national group practice.

We're obviously in the early stages of addressing this opportunity, but I anticipate that we will continue down this path as well, and that opens up to consider businesses like Surgical Directions, that can help us develop a platform for new revenue growth. So overall I think initiatives like this will be complementary, and hopefully meaningfully so to our future growth, and I don't think they would be possible without our existing footprint, infrastructure, and relationships. I have talked about in the past, I believe our position as a large national group practice is more relevant and valuable than ever as the healthcare industry evolves over the coming years. A broadening of our scope to include deeper system relationships, and new avenues of revenue growth can complement our established strategy of adding new practices.

This will be particularly be the case as health systems seek to expand their service offerings, and as the broader healthcare market seeks new solutions to prepare for Healthcare reform, and to operate more efficiently and with a greater focus on quality and outcome improvement. And just as importantly, they leverage the strength that we already bring to the table for our divisions, and for our hospital partners, the clinical, technological, and operational capabilities that enable them to take great care of their patients. And with that, I want to turn the call over to our Chief Financial Officer, Vivian Lopez-Blanco.

Thanks. Good morning Roger. Good morning and thanks for joining our call. I want to add some details to Roger's comments on our second quarter results. At the top line our net patient service revenue for the three months ended June 30th increased by 12.5% to $596 million. 9.2% of this growth came from recently acquired practices, with American Anesthesiology Practices contributing 79% and Pediatrix Medical Group acquisitions the remaining 21%. Same unit revenue improved by 3.3%, with revenue attributable to net reimbursement related factors growing by 2.6%, and volume increasing by 0.7%.

On the reimbursement side, the majority of our same unit growth was related to parity revenue. The remainder of our same unit growth from net reimbursement related factors was due to continued modest improvement in reimbursements received from third party commercial payors, and a positive shift in our payer mix, with the percentage of patients covered by commercial programs increasing by 30 basis points compared to last year.

On the volume side we saw good growth in anesthesia, and continued growth in neonatology services with NICU days up 0.7%, and solid growth in other pediatric services. While volumes were down in maternal fetal medicine and pediatric cardiology.

Turning to parity, in Q2 we recorded roughly $16 million in parity revenue, or about $0.05 per share after the impacts from incentive compensation and income taxes. This is the first quarter in which we lapped parity revenue in the year ago period. In last year's second quarter, we recorded about $2.5 million. Our profit after practice expense for the 2014 second quarter was $201 million, up 12.9% year-over-year. Profit after practice expense margins increased slightly by 12 basis points. Our general and administrative expenses grew by 11.4% over the prior year, slower than revenue, and G&A as a percent of revenue declined by 10 basis points versus last year to 10.2%. Overall our operating income grew by 14.4% to $130 million, and our operating income margin of 21.8% increased by 35 basis points versus the prior year period. Finally, our second quarter net income grew by 14%, and dilutive earnings per share grew by 16% as compared to the prior year period.

For the quarter weighted average diluted shares were 99.9 million, down about 1.2 million shares from the prior year. This is due to the repurchase activity that we undertook early in the year. We sent roughly $127 million this year to buy back shares under our previously announced share repurchase program.

Looking at our balance sheet we had cash and cash equivalents of $17.7 million at June 30th, Accounts Receivable at June 30th were $327 million, an increase of approximately $42 million as compared to December 31. Days sales outstanding at the end of the second quarter were 50, down slightly from the end of the first quarter. The total amount outstanding on our $800 million revolving credit facility was $179 million at June 30th, down from $248 million at the end of the first quarter. Lastly during the second quarter, we generated cash flow from operations of $134 million compared to $127 million last year.

Moving onto our outlook for the 2014 third quarter, as we announced in this morning's press release, we expect that our earnings per share for the three months ending September 30th will be in the range of $0.82 to $0.86, the range for our third quarter outlook assumes anticipated same unit revenue growth of 2% to 4% 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 0.5% to 1.5% for the quarter as compared to the 2013 third quarter. Included in our third quarter estimate is approximately $0.05 Medicaid parity net of the impact from incentive compensation and income taxes. Now I will turn the call back over to Roger.

Thank you, Vivian. Let's go ahead and open up the call for questions, please.

Certainly. (Operator Instructions). And first go to Ryan Daniels with William Blair. Please go ahead.

Yes. Good morning. That was for taking the questions. Roger, I wanted to start a little bit about with your commentary about providing services to outside physician groups. Maybe talk a little bit more about who the team is that's looking at that, and then any more color you might have on how you would market that? I assume you can leverage your business development pipeline to market to groups, and number two, are you thinking things like electronic health records or HT IT or more revenue cycle management? Just any dollar there would be great.

Yes. Thanks. Good morning, Ryan. You know we are looking at revenue cycle management as a place to start. We think that there are some opportunities there for us, as we go across the country and spend time with other medical groups, so we're looking both at an internal group and a potential acquisition of a company that's involved in revenue cycle management already.

Okay. That's helpful. Then maybe a quick one for Vivian. I assume the Phoenix JV is what appeared this quarter in the earnings in unconsolidated? Number one. Number two maybe just any more color on what you are seeing in the market if you any by offering that JV opportunity it will open up longer-term more lease partner shift opportunities for the Company? Thanks.

Yes. So obviously, Ryan, yes. The JV that's in the financial statements and there will be more color once we file the Q in the notes, but yes, I mean I think as you guys have seen in other markets, we have seen where basically this does create a partnership that we think is beneficial to searching those patients in that area, and so potentially there will be more of these.

Okay. Great. Thanks. I will hop back in the queue.

Next go to Kevin Fischbeck with Bank of America Merrill Lynch. Please go ahead.

Great. Thanks. I wanted to have you expand a little bit on the conversation about deepening relationships with the customers. I wasn't clear. Is this about doing what you kind alluded to in the past around getting the key contract, and adding more pediatric services, or were you actually talking about kind of cross-selling anesthesia into existing contracts, or even adding additional service lines outside of those two core?

Well, we are talking about everything. Everything is on the table right now. We're evaluating our strategy and our partnerships with our hospitals, and at this point in time we've got the capital to be able to invest in the things that are attractive to us. The world of healthcare right now appears to be changing, and so what we're doing is as always taking some small steps and evaluating what the opportunities are for us. We have had requests from some of our hospital partners to provide other services, and we're looking not only at hospital-based services but at other potential specialties as well.

Yes. I guess that was going to be my follow-up question is, you have had some of your competitors in the industry talk about kind of cross-selling and deepening relationships for years now. I mean what's kind of spurred this new focus from the Company? Is it that you're getting more in bound questions around this, or is there something else driving that discussion?

Yes. W have had a request or two, not that many, and a conversation or two with some of our hospital partners, but frankly we just haven't seen any horse trading going on, with the bulk of what we do, which is neonatology and anesthesia. I think there is some of that going on with emergency room and hospital services, and those kind of things, but we really have not seen anything in our world. We have been approached, again, and have had a couple of conversations with hospitals about providing additional services, but in our fields, in our specialties we're not seeing those kind of requests.

Okay. Do you have any numbers around historically how much these types of expanding services has added to growth over time? Do you get 1% or 2% of revenue growth each year from doing that, or is it not that much, and you want to move it to some sort of sustainable consistent addition to revenue?

So good morning, Kevin. It's Vivian. So I think we have talked a little bit about these programs in the past, because we have talked about expanding these services to pediatric hospital lists, as well as OB/GYN hospital programs, but really they are opportunistic, and so it's not something that we have set a target to say this is going to be X percent of the organic growth because honestly some of these will just be coming depending on what the opportunities are in the market, and so that's not really the scope of it. It's more to be able to enhance the services we provide to our hospital partners, and continue to be relevant in the services that we provide. So that's more how we look at it.

Okay. And then maybe just last question. On parity. What's your expectation for next year? I think we found six states and plus DC I guess, that have on their own looked to extend the Medicaid parity rates. Is that consistent with what you have seen so far, or do you know of more, and then what's the thought process on whether we will see more of those happen by year-end?

Okay. So we have seen the parity extended beyond 2014 in Maryland, Colorado, New Mexico, Michigan, and additionally Florida has legislated about a 10% increase over the pre-parity levels prior to 2012. As we, and it is our number one focus for our legislative agenda. We've got people across the country working on this. It also has been, there have been other groups that have joined us. The Florida Medical Association now has joined, recommending that parity be kept up, and we have got the American Academy of Pediatrics and others, and six months before the end of the year, so we're hopeful that we will be able to see other states join in. As we calculate the amount of revenue that we have recovered, or that we will recover from the states that have already legislated going forward, we think it's about a 20% makeup of the parity. So those states for us represent about 20% already moving forward into beyond 2014 of the parity revenue.

Okay. Great. That's very helpful. Thank you.

Our next question is from Darren Lehrich with Deutsche Bank. Please go ahead.

Hi. Good morning everybody. I wanted to just first get an update on the narrative, Roger, that you have talked about in the past regarding deal complexity, and some of the added due diligence steps that you feel like you needed to take with hospitals for some of the deals in the pipeline, and just get a sense for really where we are in that process?

Okay. Well, as you see the deals are happening. It is taking longer to get through the process, but we continue to get these deals done. We have done six already so far this year and we believe that given the fullness of our pipeline and where we are in the negotiations processes, we believe that we will continue along the same path for the remainder of the year. So the deals are getting done, it is just taking longer to do them, but we do believe that we will continue to get these deals done for the rest of the year.

Okay. And then just as it relates to the equity component, I know you've talked in the past that we might start seeing some of the deals have some equity component for perhaps just some of the physicians. I'm just wondering if any of the deals this year had that structure, and if we should be expecting any in sort of the near-term pipeline to have that structure?

Yes. We had a couple of deals in the pipeline that have that structure, but that isn't any, hasn't been any kind of a deciding factor. I mean it's nice to have, and a couple of groups have elected that given the choice that some of the people in that group would take that, but I don't think that is keeping us from getting deals done.

Okay. That's helpful. And then just last thing if I could here, I wanted to go back, Vivian, to the joint venture and it sounds like we'll get a little more detail in the 10-Q, but can you just maybe help us think about what is the structure that this joint venture is, and is this sort of a standard joint venture model that we ought to be thinking about, to the extent you are doing some more joint venturing?

Yes. So it is a standard model, and so for the purposes of the accounting rules, you have to consolidate it because it has a management services agreement and it's considered a variable interest entity, and so that's kind of why it's consolidated, but I would tell you that I think it's you know the typical type of joint venture.

And the services insides of the venture just so we understand you talked about who the partner is, but what services are insides of it?

Well, I mean it would be the management services that we provide on an ongoing basis, which is the billing the collecting and all of that, as well as then you have the physician services component.

Okay. Very good. Alright. Thanks a lot.

Our next question is from Brooks O'Neill with Dougherty and Company. Please go ahead.

Good morning. I just wanted to follow up first on Kevin's questions on parity. If I was listening correctly, Roger, you said the states that have already extended it would represent about 20%, maybe either you or Vivian could help us to think about just to pull it out, how much benefit parity you expect for 2014, and if they didn't extend it across-the-board, how much of an impact would that 80% be for 2015?

Right. So basically we had another $15 million or so that we reported in this quarter, and we've said it for the next quarter again, remember this year is a little bit of a, I am glad that you asked the question, Brooks, because I don't want to overstate the 20%, because this year we are catching up from money that we wouldn't have gotten last year, because the money started to come in so late, and so basically it's roughly $10 million of roughly about in the $50 million range or so.

Then just help us think about this, I'm getting older all of the time like everybody I guess, but the benefit, I mean the sharing with the physicians and then the taxes. What kind of and EPS impact would that be having do you think this year?

Well, I mean, again, we've had about roughly about $0.05 per quarter.

Yes.

This year. So again, we're recording it as we can accrue it, and so that's, I don't know what else I can tell you about that.

No. That's helpful. And then do you hear anything about extending it at the federal level as opposed to the states right now?

Yes.

The budget that the President has presented does have the extension at the federal level, but I don't think anybody expects that budget is going to pass.

Yes. Okay. And then I was just curious if you know, clearly our friends at Amsurg have stepped into the fray with their acquisition of Sheridan. I'm curious if you see any impact of that in the marketplace at all at this point, or if you expect any?

I think it's too early. They just closed the thing a couple of weeks ago so I don't, I haven't seen or heard anything that I want to talk about.

Sure. And then anything changing in sort of the core trends, the percent of babies admitted to the NICU, or birth trends that you see that are worth talking about?

No. NICU days were up and that's kind of very exciting for me, because it's the third quarter in a row where we see that so that's kind of exciting. The admit rate during the second quarter was up slightly from the prior year, and the length of stay was down slightly from the prior year, all within historical ranges so I don't think we're seeing any changes there at all.

Sure. And then just one on sort of the strategic thing you talked about. Obviously, if I'm hearing you correctly you're pretty excited about what I would call the traditional pipeline. So I guess I'm assuming you're looking for a little incremental pop on the growth from some of these strategic initiatives, or how are you thinking about that?

Well, the pipeline is very full and I am encouraged by the fact that we continue to get these deals done. I think we have found some languages, et cetera, that help our hospital partners feel better, and continue down the path of getting these acquisitions closed, and so I think that we've got 5.5, five months left of the year, and I think that we will get more of those deals done.

Now, in addition to that we talked about Surgical Directions, and we think that is a very exciting acquisition for us, because they have a long track record of helping hospitals in the operating room, run their ORs more efficiently and save a lot of money in their timing, and their turning over of the operating rooms, et cetera. And so they have a good reputation, and we think that we can offer that to our hospital partners, as well as another service that we can bring to them that will create more value, if you will, for the relationship between American Anesthesiology and the hospitals. We're looking at enhancing our revenue cycle management offerings, so that we won't just be focused internally, but we've got I think an opportunity to provide those services, and we've got great expertise, and the whole revenue cycle management managed our contracting, coding, billing, collections, and we think we can offer that to some external parties, as well as some of our hospital clients that might be able to benefit from that.

Now, in addition to that as I said everything is on the table, we are looking at other specialties, both hospital-based and not hospital-based, and we will continue to go down the path to see what other investments in the healthcare, if you will, in the physician spot makes sense for us. We like the business that we are in. We think we're in the right business. We understand that in this industry nothing happens without the physicians. You've heard me say before, there aren't any prescriptions that get written, there aren't any admissions that get made to the hospital, there aren't any lab tests that get ordered, there are no X-rays. Nothing happens until the physician makes the decision, and that's why I like the business that I am in, because we're in this gigantic industry, we're right in the middle of it.

That's great. I appreciate all that color, and congratulations on continued success.

Thank you.

Our next question is from Gary Taylor with Citi. Please go ahead.

Hi. Good morning.

Hey Gary.

Morning, Gary.

Hi. A couple of questions. On the Surgical Directions acquisition I just wondered if you could give us maybe just a little more on size and scale of that whether that's, number of, or revenue employees, number of clients, just some sense for how large that is? And is the business model really kind of one-off consulting engagements, or is there a continuing revenue stream associated with the service they provide?

So on the size of it it's really not significant as it relates to moving our needle here, because it is small as it relates to MEDNAX in general. So I figured somebody was going to ask that. I think more of the contracts have been a one-time, but I do know that they have sometimes follow-up on them, because they are improving metrics within an OR, and sometimes they do have some shared savings approaches, and all of that. But it's kind of early for us to tell again, as Roger mentioned in his prepared comments, Gary, we have and continue to use them in some of our practices, but they also have a business outside of American Anesthesiology that they want to continue to pursue, and we're encouraging that as well as potentially expanding some of their services within the pediatrics arm as well. So it's kind of early to tell, but it is relatively small as it relates to MD consolidated.

Okay. Second question, given the conversation in the market around bundling of services, and your flexibility and willingness to consider other specialties down the road, Roger, you had made the comment about not seeing a lot of horse trading in your key specialties, which jives with what we're seeing in the market. Do you have maybe the kind of to address that even more, do you have contracts or clients retention in NICU versus anesthesia? In the last 12 months, has there been any turnover at all in your practices?

No.

Neither side of the business, right?

Neither side.

Great. And then last question, I just wanted to see if there was a little more color. When we look at that same unit pricing of 2.6%, the press release says it's principally due to the parity growth, and the math suggests that that's accurate. I understand there's a lot of mix things happening there. There's mix of anesthesia versus the core pediatrics business, there's mix shift between government and commercial, there's mix shift within anesthesia, between hospital-based and ASC and contained management. And so really it's impossible to look at the 2.6% and really have an understanding about any changes in terms of pricing, or just collections. So when you look at the pediatric side and the American Anesthesia side, how do you kind of look at sort of core pricing growth in those businesses?

Sure. So, Gary, we do look at those separately, and we do have as far as the managed care work plan we'll have one for both of those divisions, so I can give you some color our on that. But both of them are still getting very respectable increases, as it relates to what they had for their work plans. Obviously, the dialogue with payors continues to be very challenging but nonetheless they both have positive growth in that area. As it relates to the P mix, again we're pretty encouraged with that. Both sides of the house really have had some favorability in that, and so we represent it consolidated but we do look at it separately, and they're both moving in the right direction.

So would it be fair to say if you took, let's say there was no Medicaid parity this quarter and that same-unit pricing looked roughly flat year-over-year, would the biggest driver of that just be the shift or the faster relative growth in anesthesia versus the pediatrics specialties that would be the primary mix driver to that lower number?

No. I mean I think we have good pricing in anesthesia as well as PDX.

I just meant the relative revenue per unit, I guess that your measuring.

Yes.

Okay. That's it. Thank you.

Thanks, Gary.

Our next question is from Brian Tanquilut with Jefferies. Please go ahead.

Hey. Good morning, guys.

Hey Brian.

Good morning. First question for you and just to piggyback on Brooks' question earlier from Sheridan. Have you seen any change in multiple expectations on anesthesia now that Sheridan is owned by Amsurg?

Well, I think the Sheridan acquisition did create some unrealistic expectations, we have walked away from a deal that just didn't make sense for us on a multiple basis, but in the meantime we have gotten four other LOIs with other groups that we were able to come to terms with on not crazy multiple basis. So I do think that needle was moved at least following that announcement, and some expectations were I think moved a little bit higher. Yes.

Okay. Thanks for that, Roger. And then in your press release you talked about operating efficiencies as one area that you're focused on. Do you mind just sharing with us what you're working on in that regard, so that we can kind of think about margin trajectory going forward?

Yes. Well, good morning. It's Vivian. I do think that it is partly related to the growth on the acquisition line, and certainly parity so as we said before, that helps as it relates to the G&A line so that's more specifically what we're talking about. As Roger mentioned on the operating efficiency, one of the things we're looking at is, and namely why we thought that Surgical Directions was a good way to look at the some of the parity operative processes, and scheduling, and things like that, but in our business as you know for the cost of service line, it's hard to move the needle on that, because of the quality of care as it relates to physicians.

We're always looking at it on anesthesia as it relates to scheduling. Obviously NICU side a lot more related to the volume increases, and then obviously on the revenue cycle management, that's where we've talked about in the past that we continue to consider that one of our core competencies, and do consider that be improvements, as we kind of run practices through our own processes. So it's kind of all of the above. I don't think there's any change there other than some of these other strategic initiatives that potentially will help us with that going forward.

Again, Vivian since you mentioned Surgical in the consulting business, as you think about buying non-anesthesiology or non-pediatric practices, how do you guys think of, how is the decision process like, as you guys figure out where you want to go, whether it's an ROIC or an MPV analysis, or from a strategic perspective? How do you guys decide that we'll go with the revenue cycle, l or we'll buy and ED or hospitalist. What are the parameters that you work around?

Well, okay the ED and hospitalist would be a little bit different, because those would be more based on like how we look at our own deals, right? But it is certainly slightly a different margin profile as you guys would expect. For the other business lines it's similar to looking at another type of business what you're going to look at is based on a multiple of the earnings of that business. Kind of like you would do for any other type of business. Again, part of what we look at is not only financial, but is it complementary to the service offerings that we're trying to expand, and can that be also somewhat synergistic in the future. So some of that to be candid with you, we don't have all of that nailed down at the moment, because I think some of that as Roger talked about, is kind of evolving.

Okay. And then last question for me. You highlighted how maternal fetal was negative during the quarter. Is that a leading indicator for NICU volumes down the road?

No. I really don't, I mean I don't know if you want to talk a little bit.

Yes. There were times when we thought that would be the case but over time that has not proven to be the case, because what's happening is that the obstetricians, as the general obstetricians don't really want to take care of high risk patients, except when they don't have any patients to take care of, and then they stop referring patients to the maternal fetal medicine guys, and so it's more a function of obstetricians not referring as many patients to the maternal fetal medicine specialists, than there being fewer patients to be sent over.

Okay. Got. It. Thank you.

Okay.

Our next question is from Kevin Ellich with Piper Jaffray. Please go ahead.

Good morning. I jumped on the call late, so if any of this has been answered I apologize, but Roger, good to see same units NICU volumes up 70 basis points. It sound like some of the hospitals have been reporting stronger volume trends. I think HGA on their call said neonatal admissions were up 9%. Just wondering if you could help us bridge the gap in terms of birth trends at your host hospitals, and what's going on, on the volume front?

Well, when compared to the prior-year period, births at our hospitals were up 27 basis points so I don't -- I'm not sure where that 9% number, that's a huge number for HDA. I'm not sure where that is coming from.

Right. Has anything changed in the competitive landscape, or have you seen any changes in the dynamics on that front?

Can you expand a little more what you mean by the competitive landscape?

Any of the smaller neonatal practices coming into your markets or host hospitals and getting any share do you think?

No.

Okay. That's helpful. And then on the acquisition front you talked a little bit about a third specialty. I guess what's the timing? Do you have any sense.

You should see the looks I'm getting. Well, we are interested in moving forward. I can't tell you that it's going to be a month or three or six. We are going to evaluate, as we have done in the past like I said before, everything is on the table so we're looking not only at hospital based specialties but also office based ones. We are going to enter a business that makes sense more than anything else financially, and that we see growth opportunities in, and that helps us with other hospital relationships, and those kinds of things. The last time I said I was going to enter the anesthesia business, we sort of led an onslaught of others who decided me too, so I'm not doing that any more.

I remember. That makes a lot of sense. And then going back to the Brian's questions on morale feel medicine how much of that was down, and for what do you think is going on in terms of why maternal fetal and pediatric cardiology is down?

Well, some of that his to do with just reimbursement for echocardiograms that haven't gone down. So particularly on the cardiology side, they tried to cut the reimbursements for the echos for the adult population, and while doing that they also took our pediatric population down, which they theoretically didn't intend to do, but now it's being harder to correct. So I think A, when births went down, fewer patients were being referred from the general obstetricians to the MFMs, and B, the whole ultrasound reimbursement package has gone down.

Okay. That's helpful. And then I found it interesting that you moved into Joliet. That's a nice sized anesthesia acquisition. Hope you didn't take any offense to the reference to Notre Dame football. So thanks.

Yes. Thanks.

Our next question is from Ralph Giacobbe with Credit Suisse. Please go ahead.

Thanks. Good morning. I just wanted to go back to the pricing side. Ex parity you were sort of flattish this quarter despite some kind of payer mix benefit. When I look at guidance for next quarter, the parity benefit starts to close to fully comp in so sort of your comfort level on that acceleration and pricing as we think about 3Q?

Yes. I mean I think that, again, yes, parity is lapping and we will have a little bit more I think last year's third quarter was about $10 million or so that we recorded, but again, some of the things with the pricing are related to timing of them, and so we do continue to expect not only that managed care pricing, but again, we're encouraged there, Ralph, with the P mix and hopefully that certainly was a factor for in that guidance discussion related to pricing.

And when you say timing of things, is that like sort of one-time adjustments or incremental revenue that you typically get sort of to think about that gives you sort of comfort in the third quarter? Just trying to understand the timing?

Yes. No. The timing means that maybe a contract that I would have negotiated in the first quarter gets delayed and moves to the third quarter, so we do look at what's on the table as it relates to what I was mentioning earlier on the work plans that we have, and what's yet left to be negotiated.

Okay. Alright. Fair enough. And then what are the average rate increases you're getting on the managed care book?

So basically we have said before and I'm going to stick to that at the moment that we're getting mid-single-digits there, and again, we try to have those contracts be multi-year contracts that have escalators in them that are of course the escalators are south of that.

Okay. And then anything to call out in terms of reform in the quarter? I guess maybe specifically on the anesthesiologist side and then the general mix improvement that you talked about, was that specifically in NICU, or was it in both NICU and anesthesiology?

No it was in both NICU and anesthesiology.

And on the reform side anything?

Yes. I haven't, I mean on the reform side I really don't have any new news to report there other than I think the headline news that everybody is seeing. Again for us, we continue to work on the parity initiatives both at the state and Federal level, so that's basically more on that end. As far as I don't know if you mean reform as it relates to, are we seeing any changes because of people signing up to exchanges is that more what you mean or--?

Yes just in I guess specifically more on the anesthesiology side, just in terms of whether you think that aided the quarter. I know it's probably a tough questions for you guys in your seat, but if there he's any way to measure that will that, or if you thought that was helpful at all in the quarter?

I really haven't seen that and as we talk to our folks they really have not mentioned that to us, and I haven't really seen much of that. On the pediatric side the products that we have seen on the exchange products really have had similar pricing to what we have seen for the same products that were not on the exchange. So that's basically what I have seen so far.

Okay, that is helpful. My last one, it sounds like there are some new ventures for you all, some of them sound more I guess fee-based, is that fair, like fee-based revenue that we should think about coming in, and as it relates to disclosure going forward, granted, that there are still small pieces and growing pieces, but will that be separated out for us, or is that just going to be tossed into the overall revenue?

So to the extent that it would be material, we would have to disclose it separately right? But again, you are right, it would be more fee-based, but at the moment these items are not material, but if they were we would certainly do it that way.

Okay. Alright. Thank you very much.

Thanks.

And next to go Chris Rigg with Susquehanna Financial Group, please go ahead.

Hi, this is Josh on for Chris, I just have one quick question. It looks like the interest expense was almost $2.2 million in the quarter, is that a good run rate to model for the back half of the year? Or do you expect that to kind of to go down as you delever? Thank you.

Good morning. Yes. So that yes, the biggest chuck of that will be outstanding, so it just depends on the timing of the acquisitions, to where we would see that going up or down. As you know we generated a lot of cash flow, so it is just the timing of the deals. I don't know if it will go down, because honestly we do have a lot of deals as Roger said that are imminent, so we will see what the timing of the close is on those.

Okay. Thank you.

We will go to Gary Lieberman with Wells Fargo, please go ahead.

Thanks. Good morning, this is Ryan Halsted on for Gary. Just wanted to go back to volumes, so you saw a decent sequential increase in same store volume growth, as well as now guiding to a sequential increase. Any comments there just in terms of what kind of volume pickups you guys are seeing?

Well I mean as it relates, I don't know if I understand your question, we continue to see volume increases. In the first quarter we did talk about that we did feel especially on the anesthesia side of the house, as well as on the office based side, that we did have some challenges because of weather. So I do think for anesthesia certainly that has come back, and so on NICU, we have been seeing positive trends as Roger said earlier on the call in the recent quarters, and continue to just see favorability in that. So really other than that, I am not sure if you are trying to get something else out of that answer?

Yes I was. A lot of other healthcare companies have been talking about maybe some improvement in local economies maybe driving elective surgeries, and I am just curious if you guys are seeing any signs of that?

I have Karl here so I will have him talk about that, because I haven't really seen much of that.

Yes. From our volume standpoint you would see a lot more of that in the outpatient surgeries, we have not seen a dramatic growth in that as compared to the inpatient, we are seeing pretty steady growth across all of it, so there is not a clear uptick in those outpatient procedures, that we would correlate with them being more elective procedures right now.

Okay. That is helpful, maybe last question, any updated thoughts on physicians, are you seeing a decent pipeline of new hires, any kind of commentary around mix of anesthetists versus anesthesiologists, just curious to see how the physician community and obvious concerns around shortages, if you guys are seeing any signs?

On the anesthesia side, we are not seeing any issues with the recruiting for anesthesiologists, clearly it is a market by market basis as well, but we have still been able to recruit physicians as well as CRNAs to all of our practices, so we haven't seen any change in dynamics that have been going on for the last several years.

Yes, we have no problem recruiting, hiring, or maintaining.

Would you say that your pipeline of new hires has improved, or--?

I guess in general I would say that we haven't had an issue before, and I think this continues to not be an issue, so it is not like we are having to search on candidates. We have got a pretty steady pipeline of candidates coming through and filling in the practices that we are in. And we have our own physician recruiting department, so there is always sourcing, recruiting, the negotiations, that is all done in house.

Alright. Great. Thank you.

And we have a question from Dana Hambley with Stephens.

Hey good morning, thank you. Vivian, I am sorry I missed it earlier, on the payment parity of the $15 million or so that you are getting per quarter, how much of that was catch up?

I don't have that, but I mean most of that, most payers now have started to pay, and so I would tell you that a lot of it is now current, but I don't really have that break out, because now they have started to pay us on a more regular basis.

Okay. I was just trying to, I think that you said earlier the 20% that you are getting we should probably discount that a little bit on what you are currently collecting?

Yes. Because there still is, and certainly throughout the first part of the year, and last year we had a lot of catch up right?

Yes.

So you will see hopefully less of that as I said before, and by the time that we get to the fourth quarter, hopefully most of it will be there, but there is certainly a piece of that is still retro.

Okay, okay. Are all states paying right now?

Yes.

They are, okay. And I guess last from me, I just got a breaking news alert, I am not sure that it is breaking news, but talking about interest surging on Medicare bundled payment initiatives, and I think that you have answered this in the past, but just an update, are you getting into any bundled payment pilots, or any changes to any kind of payment structures?

No. We have seen some initiatives that are really more related again to quality initiatives that have some payment attachments to that, we have talked about those in the past, but as far as bundles, no, we really haven't seen that yet.

Okay. Thanks.

Return to the presenters, no further questions in queue.

Thank you. If there are no further questions, then I will just thank you for participating this morning and look forward to speaking with you next quarter.

Ladies and gentleman that does conclude your conference for today. Thank you for your participation. You may now disconnect.