Pediatrix Medical Group Inc (MD) 2015 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX 2015 third-quarter earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded.

Your hosting speaker, Charles Lynch.

Please go ahead, sir.

Thank you.

Good morning, everyone.

I want to read our forward-looking statements and then I will turn the call over to Roger and Vivian.

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 assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate.

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

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

In today's remarks by Management, we will be discussing non-GAAP financial metrics.

A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our quarterly report on Form 10-Q, or in the Investor section of our website located at mednax.com.

With that I'd like to turn the call over to our CEO, Roger Medel.

Thank you, Charlie.

Good morning, and thanks for joining our call today to discuss our results for the third quarter of 2015.

We had a strong quarter, with double-digit growth in revenue and earnings per share, despite the loss of almost $16 million in parity revenue compared to last year.

This quarter, we generated revenue growth of more than 15%, EBITDA growth of almost 13%, and adjusted EPS growth of more than 14%.

During the quarter, our pace and volumes continued to grow, with NICU days up about 1.2% and growth in anesthesia volumes, as well.

vRad also continued to perform at or ahead of our expectations in their first full quarter as a part of our Company.

I am be very pleased with their performance since we completed that acquisition in May.

We also continue to grow and diversify strategically.

During the quarter, we added two very strong anesthesia groups, one based in Tampa and the other one in New Jersey.

These marked the eighth and ninth practice acquisitions this year, and we continue to see a strong pipeline of future deals.

We also acquired Alegis, a leading third-party receivables company specializing in revenue recovery through eligibility screening and enrollment solutions for hospitals.

What is notable about this acquisition is that it's the first that we have completed through one of our portfolio companies.

MedData identified Alegis as a business that would be a valuable addition to its set of revenue-cycle management services, and we worked together to complete this deal.

Lastly, we hosted an Investor Day in September, and I want to spend some time talking about that.

This year marks our 20th anniversary as a public company.

Over that time, we have built MEDNAX from a small, single-specialty physician group to a national organization that includes a network of more than 3,200 physicians, and spans all 50 states.

But this did not happen overnight.

Our growth has been deliberate and strategic.

We've also done it at a pace where we could always assure not only that we could generate strong financial returns but, more importantly, that we could support our physicians and our hospital partners in taking great care of our patients.

Without this, nothing else works.

At our Investor Day in New York, we discussed all the pieces of the Company that we've built over the years: our clinical services, our operations support, and the additional companies we've added more recently -- vRad, MedData, and Surgical Directions.

All of these companies have joined MEDNAX just in the last year and a half, and we believe they make is very unique in terms of the capabilities we can bring to our customers.

This is particularly the case since now we can combine our clinical specialties with additional value programs as a unique, broad-based set of solutions for our hospital partners.

We also discussed how we realigned MEDNAX this year.

Today, our operating units are aligned along geographic lines, not specialty lines.

The reason for this is that, in the past, we tended to be very focused on our individual specialties, with operating leadership even down to the local level divided into Pediatric or American Anesthesiology.

Oftentimes we were not taking full advantage of all the opportunities that might have existed to provide additional services out of hospitals where we may have only one contract.

Under our newly aligned structure, we believe we are well positioned to have those conversations.

This is particularly important now that we've got such a diverse set of services, including additional areas such as teleradiology, consulting, and revenue-cycle management.

It is also important because, as our hospital partners face their own challenges under healthcare reform, we need them to see us as a true solutions partner, as one MEDNAX.

The healthcare industry is only going to get more complex and more challenging as we move forward.

We recognize this and all of the investments we have made in new technology, new services, more scale have been made to position MEDNAX to add true value to the way our physicians and our hospital partners deal with these challenges.

With our realigned operating structure now in place, I believe that we are very well positioned to continue our growth and to help our partners prepare for their own future.

Looking forward to the end of 2015 and into 2016, our outlook remains strong and I look forward to what is ahead.

With that, let me turn the call over to our CFO, Vivian Lopez-Blanco.

Thanks, Roger.

Good morning, and thanks for joining our call.

I want to give an overview of our operating results for the third quarter as well as our outlook for the fourth quarter.

Overall, I am pleased with our ability to translate our 15% revenue growth into a similar growth in adjusted earnings per share, especially given last year's parity and same[-unit] volume comparisons.

I believe this demonstrates our ability to utilize our strength in both operations and capital deployment towards shareholder value.

And I'll walk through some of the details of that for the quarter.

For the third quarter, our net revenue increased by 15.3%, to $722 million.

Most of this growth came from recent acquisitions, with our acquisitions of vRad this year and MedData last year contributing more than half of that growth, anesthesiology practices contributing roughly a third, and neonatology and related and pediatric-practice acquisitions a little less than 10%.

Looking at our same-unit metrics, same-unit revenue declined by roughly 120 basis points.

Excluding the impact of parity in both 2015 and 2014 periods, same-unit revenue would have increased by 1.4%.

On the volume side, same unit increased by 1.1% against a strong 2.1% comparison last year.

Our NICU days were up 1.2%.

And we continued to see growth in other pediatric services and growth in anesthesia volumes, partially offset by a decline in pediatric cardiology volumes.

On the pricing side, we recorded roughly $1.5 million in parity revenue in the quarter, or less than $0.01 per share, compared to $17.2 million, or $0.05 per share, for the same period last year.

Excluding the impact of parity from both periods, our net same-unit growth from reimbursement-related factors was about 30 basis points.

Impacting this growth was roughly a 100-basis-point shift in mix towards government payers compared to 2014.

Our profit after expense for the third quarter was $248 million, up 18% year over year.

Profit-after-practice expense margin improved by over 80 basis points, which primarily reflects a favorable impact from the mix of businesses we've acquired in the past year, partially offset by the impact of reduced parity revenue on same-unit growth.

Our G&A expenses increased by 32% over the prior year and by 140 basis points as a percent of revenue.

This increase reflects the mix of acquisitions that we've completed in the past year, particularly our non-practice acquisitions.

Excluding those businesses, our G&A expense increased about the same pace as our revenue, even though that revenue growth was impacted by the loss of parity over last year.

Overall, our EBITDA increased by 12.5%, to $168 million, and our EBITDA margin declined slightly to 23.3% from 23.9%, with this margin decline primarily reflecting the impact of lower parity revenue, this quarter versus the last year.

Finally, our third-quarter net income grew by 5.3%, to $90.8 million.

And diluted earnings per share of $0.97 grew by 12.8% as compared to the prior-year period.

On a non-GAAP adjusted EPS basis, earnings per share of $1.10 grew by 14.6% over the prior year.

For the quarter, weighted-average diluted shares were 93.6 million, down about 6.5 million shares from the prior year, due primarily to the repurchase activity we undertook during 2014 and the first quarter of 2015.

Looking at our balance sheet, we had cash and cash equivalents of $61 million at September 30.

And accounts receivable were $407 million, an increase of approximately $55 million as compared to December 31.

Day sales outstanding were 51.8 at the end of the quarter, up about 2 days from the end of 2014.

Our total outstanding debt under our credit facility was $1.4 billion at September 30, up from $568 million at the end of 2014, mostly related to acquisitions completed during the first nine months of this year and the share repurchases we executed in the first quarter.

As we announced in June, we amended our credit facility, increasing it to $1.9 billion from $1.5 billion, and with the flexibility to increase it additionally to $2.2 billion.

Lastly, during the third quarter, we generated cash flow from operations of $172 million compared to $159 million last year.

Moving on to our outlook for the 2015 fourth quarter, as we announced in this morning's press release, we expect that our diluted earnings per share for the three months ending December 31 will be in a range of $0.97 to $1.01, and that our adjusted earnings per share will be in a range of $1.10 to $1.14.

The range for our fourth-quarter outlook assumes anticipated same-unit revenue growth will be 2% lower to unchanged year over year, including an approximately 2% unfavorable impact on pricing from the decrease in parity revenue from the 2014 fourth quarter.

Excluding parity revenue from both periods, a non-GAAP measure, our fourth-quarter outlook assumes same-unit revenue growth will be flat to 2% higher year over year.

Lastly, included in our fourth quarter is approximately $0.01 per share from Medicaid parity net of the impact from incentive compensation expense and income taxes compared to $0.05 in last year's fourth quarter.

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

Thank you, Vivian.

Before going to questions, let me just say this.

Look, you know who we are.

This October marked our 20th anniversary as a publicly traded company.

Always doing the same thing -- taking care of patients.

We have articulated the same strategy from day one -- build a national group practice in our specialties.

Because we do not like to surprise our shareholders, when we saw that the neonatology deals were going to slow down, we were the first ones to tell you so -- eight years ago.

When we decided to look for a new specialty, we laid out that analysis for you -- seven years ago.

And when multiples in anesthesia started going up, we told you so -- two years ago.

In spite of all that, we have continued to grow.

We just posted double-digit growth in revenue, EBITDA, and earnings per share.

The last 20 years have seen a constant instability in the business of healthcare.

I remember when HMOs were going to change healthcare services.

Then it was managed care.

And then, it was capitation.

The threat of Hillarycare was around way before Obamacare -- and may yet come back again.

We've not only survived, but we have thrived during that time -- because we have stuck to our strategy.

We understand what business we are in.

And we understand our specialties -- very well.

I believe there will be opportunities in the future, like there are always are with change and instability.

And I believe we are well staffed, well experienced, and well capitalized to take advantage of those opportunities.

With that, let's open up the call for questions.

(Operator Instructions)

Our first question is from the line of Ryan Daniels, William Blair.

Good morning, everyone.

Thanks for taking the questions.

Let me start with one just on pediatric cardiology.

I know it is not a huge piece of your sales but it is a segment that apparently continued to see negative volume, where the others are up.

So, I'm curious if there's anything you would point to there that is pushing sustained volume declines, even as the US birth rate has stabilized over the last year or so.

There is nothing specific I would point to.

I would tell you that a couple of years ago there was a decrease in reimbursements for cardiac ultrasounds, and that had a significant impact back then.

Other than that, there's nothing specific I could point to.

That was for both adult and pediatric.

Right.

Okay.

And it is not significant dollars, Ryan.

It is concentrated in a couple of areas but it is just not big dollars.

Okay, so it is not impacting the overall growth?

No.

Okay.

As a follow-up, just on mix, I know you had a 100 basis point decline year over year.

And clearly that's something that is completely out of your control.

It's just based on who's coming in and what insurance they have.

But have you looked into anymore insights on what is going on there just in regards to certain geographies?

Are you surprised maybe mix has not improved with the employment picture and exchanges putting a little more people on the commercial front?

Any thoughts you may have there as we think about going forward?

Thanks.

Yes.

We've spent a lot of time looking at it in the individual regions where we're at.

We do have some specific examples.

We know what is happening with some of the payers related to, for example, in one state where we had to hold some applications because we were waiting to get all of the credentialing in.

So, we have seen pockets of that so that is really the bigger driver of that.

There is nothing macro about it.

We have seen in some states where there has been some increases in enrollment on Medicaid, but that is really not a big factor in it.

We do have some specific payer situations in some of our states.

Okay.

That is helpful.

Thank you.

I will hop back in the queue.

The next question is from Kevin Ellich of Piper Jaffray.

Please go ahead.

Thanks and good morning.

Thank you for taking the questions.

Just following up on the mix shift, Vivian, what is really pushing that?

Is it Medicaid expansion?

And even excluding the impact of parity, I think pricing was up about 30 basis points.

Just wondering is that the rate of pricing growth we should assume in 2016 once you lap parity?

As I just mentioned to Ryan, when we look at P mix, there are some specific drivers in certain states with some of our applications.

And other than that, we did see that there is some slight increase in enrollment, not really significant, as well as then on the pricing side, as I've mentioned to you guys before, that is somewhat seasonal because it just depends on execution of the work plan.

So, in any given quarter, you will see some really fluctuation based on the number of contracts that we have gotten renegotiated and when they pop up.

When you say applications, are you talking about applications for the exchanges, Vivian?

No.

I am saying applications for us to turn in our billing for government programs.

Okay.

And then, Roger, just big picture, as you expand further into anesthesia and other specialties, radiology, do you expect the mix to continue to shift more to government pay just naturally?

Is that just something we should model in?

I cannot predict that.

We're certainly not predicting that.

The Medicaid shift on the neonatology side is what it is.

We do not predict much more of a move in that direction.

On the anesthesia side, there may be some movement in that direction.

But as the economy improves and jobs get better, we would, like everybody else, expect the tide to turn in the opposite direction.

Okay, great.

And then, lastly, can you give us some color and update on the M&A environment, your thoughts on doing some bigger deals?

Obviously you have done a number of acquisitions and deployed a lot of capital already this year.

Will you be able to repeat this next year?

And do you see the pipeline in that type of shape?

The pipeline is, as I said earlier, very full and we are very happy with where our pipeline is today.

We have completed a number of significant deals, two of them in this quarter that were larger deals.

So, we are very happy with that.

Yes -- I look at my pipeline and there are a number of opportunities there where, if things fall the right way, we could have a big year again next year.

Okay.

Great.

Thank you.

Our next question is from Brooks O'Neil, Dougherty & Company.

Good morning, Roger and Vivian.

I was hoping, you mentioned vRad was off to a great start.

Maybe you could just give us a few more details there and what your outlook for that business is and how it fits with the rest of the mix.

Yes.

vRad is performing as we told you guys when we acquired that it was.

They're really doing on the volume side high single digits, so, we are happy with the result.

As I said also in my commentary, Brooks, on the gross profit side, on the EBITDA side, they are up also helping with that given their margin profile, as we also said when we acquired them.

Really, right now, we are happy with the performance.

That is great.

And then I just wanted to ask you, I know I asked you about the ER business at the investor day, but subsequent to that we have seen these announcements of AmSurg trying to buy TeamHealth, and some issues in the hospital business, issues with Envision.

Could you just comment?

Obviously with your realigned structure you're focusing more on trying to serve your hospital patients.

How do you view the environment out there today?

Any comments would be just much appreciated.

I am not sure what you just asked me.

(laughter) We have said from the beginning that there is enough people already taking care of the emergency room that we do not believe there is a need for us to jump into that business.

We would enter the business only as a defensive measure if we were to see or feel the threat that some of our contracts would be taken away if we were not able to provide those services to any of our clients.

We have not seen one single instance of that.

We have not had one single hospital or client come to us and say -- you must do this.

We like to study our specialties and we like to dig deep into them and we like to become experts in our specialties.

So what we are continuing to do is continue to work down the path to become those kinds of experts in anesthesia, and starting to go down the path in radiology.

We have no plans in the foreseeable future unless something changes and some hospital comes to us and there is the threat of one of our contracts disappearing.

We have no plans to go into the emergency room business.

As far as the global picture is concerned, I think it was interesting what happened a couple of weeks ago.

I do not have any inside knowledge of any of that and I don't really have any comments on it.

I just think that that was an interesting development.

It is interesting.

20 years is a tremendous accomplishment and I am pretty sure there's going to be 20 more.

I am looking forward to it.

There you go.

Next question is from the line of Brian Tanquilut of Jefferies.

Please go ahead.

Good morning, guys.

Vivian, just to follow up on your comments on the payer mix and pricing, outside of parity and outside of the payer mix shift, as you renew your contracts are we still getting the typical between, put it, 3% to 5% rate increases on a same-contract basis?

Yes.

It fluctuates but, yes, it's still in that range.

Okay, got it.

Then G&A ramp for the quarter was pretty -- I don't want to say steep but it was a good chunk.

And then Alegis obviously kicks in in Q4.

So, what were the drivers for the G&A uptick in Q3?

And then how should we think about all of that with Alegis in Q4?

Again, it is the first full quarter for vRad.

As I mentioned to you guys before, Brian, on the portfolio companies, they do have a higher G&A percentage than overall MEDNAX.

So, that is really the effect you are seeing.

I do not really think that Alegis per se is going to move that more because they are smaller.

I think in this range is where you're going to see it, give or take a few basis points here and there.

But I don't think Alegis itself will be able to move the needle.

But the other portfolio companies -- and, again, vRad being in the full quarter, that's it.

That is why I wanted to specifically address that if we take those out, MEDNAX per se, really, our G&A grew at the same rate slightly below revenue.

Got it, all right.

And then was there any uptick from ICD-10 or any issues related to ICD-10 in the quarter?

We are happy to report we had a very successful rollout of that.

And right now, as you would expect, we keep very close tabs on that.

We have a committee here, as I've mentioned before, that is responsible for it and is really meeting daily to look at the progress of that.

And right now I am happy to say that we have not reported any issues with that.

So, we will see as the cash comes in.

Right?

(Laughter).

We're more worried about how prepared the payers are.

(Laughter).

Yes, exactly.

Last question for me, everyone is talking about cost inflation or wage inflation.

And I know you don't employ that many nurses relative to doctors, but what are you seeing in terms of just wage growth going forward?

And then I will hop off the call.

Thank you.

We are not seeing anything significant down that road.

Our doctors have a bonus plan in place and we utilize that plan to address the issue of pay raises and those kinds of things.

So, we're not expecting anything on that front.

All right.

Thank you, guys.

Our next question is from Ralph Giacobbe, Citi.

Go ahead.

Thanks, good morning.

In the recent past there was a thought and hope of economic improvement and higher birth rates maybe turning the corner and driving better volume.

Volume has obviously softened a little bit in total and then we've got the mix shift to Medicaid.

The question is, do you still have the comfort or conviction that better volume will show through?

And then specific for this quarter, can you give us a sense at all of commercial volume, if that was up, down or flat?

When we look at the statistics, we still see that there was an increased number of births going back from 1975 to 1990.

And that number has stayed at the 4 million babies per year level since 1990 for the past 25 years.

Because half the babies born are boys and half are girls, we expect that there are an additional 0.5 million women of childbearing age that are coming into our service area.

So, we continue to believe that, because of that statistic, we continue to believe that we will see birth rates going up.

But, also, honestly, the volumes were good considering last year.

If you guys remember, we basically had very high volumes, as well.

We are happy with it.

Okay.

And then the commercial volumes in the quarter?

Yes.

Again, overall, we saw a mix shift toward government.

But, again, in some places the commercial was actually offsetting that.

Yes, we are still seeing commercial growth.

Okay.

And then ex parity, the guide for Q same-store revenue zero to 2% -- can you give us a breakdown on how you see that between price and volume?

Again, we had pretty some good volumes last year in the fourth quarter.

Third and fourth quarter were very good last year.

We do have something baked in there for pay payer mix, again just because I don't know where that's going to end up.

Some in for payer mix and then the rest volume.

Okay.

Thank you very much.

The next question is from the line of Kevin Fishbeck, Bank of America Merrill Lynch.

Please go ahead.

Hello, this is actually Joanna Gajuk filling in for Kevin.

I want to go back briefly to the comments around G&A.

When you said that the increase was reflective of the business mix, the fact that you now have more nonpractice business, so the idea there is that the labor cost actually is reported in that line rather than SWB because in fact SWB line was down year over year.

So, that's the way to think about that, the cost structure is changing because of the way of the reporting of labor costs between the two different types of businesses you are in?

Yes.

Again, it is labor costs but of course vRad does have some labor cost in their gross profit.

The point is, these companies are smaller and they have a higher percentage of G&A.

Okay.

So, it's not just labor.

You're just talking about the G&A, right?

That makes sense.

Yes.

Second of all, going back to the commentary about acquisitions, can you give us a flavor for the multiples?

I know the merger, you told us in the past when you saw the anesthesia multiples going up, or starting to creep up.

Has it accelerated?

Are you seeing any change?

Or would you expect change there?

If, in fact, there is a large merger that was also discussed on this call, would you view it as a benefit to you in a sense that it would remove competitors for anesthesia deals?

Any color on that or any view you might have.

Thank you.

As I've said before, multiples have gone up way beyond where we would have liked to have seen them.

There are a number of practices that are in the market.

And as I have said before, if it is just about how much money can I get for my practice, and the practice will go to the highest bidder, we're likely not to be the winner of those deals.

We continue to do deals, as you have seen throughout this year, because there are others who are not just interested in how much they are going to make, but what is also important is who is going to be my partner, am I going to get slipped to somebody else three or four years from now.

I don't know who I'm going to be working for.

Is my hospital happy with who my new partner is going to be

So, there are a number of other considerations that sometimes -- and I will say often -- influence where the practice is going.

It is not just about the money.

But multiples have gone there's, there's no doubt about it.

So, any color of the two competitors who are deals merging, whether that removed them from the market?

I don't know.

I guess if a couple of those came together that would remove one competitor.

But I don't have any insight or any comment on any of that.

We are not involved in any of that stuff.

And just lastly, real quickly, just coming back to the discussion around payer mix, is there a way to think about it?

You don't see any major change in underlying trends.

You're just saying there is fluctuation.

You did make it sound like the business mix is changing and that's impacting payer mix.

So, is that the way to think about it, that there is not really major change in underlying trends, it is normal fluctuation?

Or was there something that happened this quarter?

Like I said, Joanna, there are several factors of it.

Some are ours related to payers and applications for government and all of that.

Some of it, we have seen a slight increase in the enrollees in Medicaid programs.

But, again, I would not call any of this a trend at this point because the numbers are not significant enough to say that.

Again, there has been accumulation of them for what made up the quarter but nothing that I would say that this is going to be a continuous trend going forward.

We are always very cautious on P mix because we don't really have the underlying factors of it, other than what we can gleam out from our own information.

Great, thank you so much.

Our next question is from the line of Chris Rigg, Susquehanna.

Good morning.

I just wanted to follow up on an earlier question with regard to labor.

What percentage of your direct costs are related to nurses?

I do not look at that like that, honestly, because we look at the clinician line in total.

There is physician cost and there's CRNAs and NNPs in it totally.

So, I do not really have that.

Okay.

And then just on the NICU volumes, and Roger's big picture comments on population growth, when you think about the changes in demographics, should that be impacting births now or are we still a year or two away or several years away from when you think this extra 0.5 million or so people really begin to impact the volume side?

It's been 25 years so we would expect that that should happen probably at any point, I suppose.

I can't predict when that's going to happen but it has been 25 years, so we expect that would start at some point.

Okay.

And then just lastly, obviously you have done several deals recently and you had the decent-sized buyback earlier in the year.

Just capital priorities at this point -- are you in a deleveraging mode or just you feel comfortable with the leverages and you use capital as priorities present themselves?

Or just any color there would be helpful.

Thanks a lot.

We are comfortable with where we are.

We believe that there will be more opportunities.

And, of course, we would rather put our many to work by acquiring practices and generating not only income but significant amount of cash flow that comes with these practices.

We will evaluate where we are at the end of the year and make whatever decisions, if we're going to make any, after the end of the year.

Thank you.

Your next question is from the line of Chad Vanacore of Stifel.

Please go ahead.

I just wanted to follow up on Joanna's question because I'm not sure I got that all.

Expense controls in the quarter were good, in particular, SWB was been better than expected.

Have you been doing something that helped you avoid some of the same pitfalls that other staffing companies have had during the quarter?

I do not know what those pitfalls are but, as we said, our physicians typically have contracts.

We're are not renewing their contracts all the time, so we have not really seen.

When I look at the same-unit numbers, honestly, it is not an unusual increase there at all.

We are not seeing those increased costs, like some other companies are reporting.

Okay.

Then just on the acquisition front, would you expect the acquisition pricing to moderate next year, seeing as the other staffing companies seem to be pressured?

We would hope so.

Obviously, it is hard to predict.

We do think there is a possibility that prices or multiples will moderate given the recent activity in the sector.

All right.

Have you seen any enhanced opportunities cross-selling opportunities since you've had vRad under your belt?

Yes.

I do not have any specific wins to point to, but we are having significant conversations with some of our hospital partners about helping them, particularly on the pediatric side with pediatric services, whether it's pediatric emergency room or pediatric hospital services, et cetera.

So, we are seeing some movement in that direction.

All right.

And the last question for me, I think on the prior call you had expected payer mix to actually improve in the third quarter from what was maybe a lull in the second quarter.

It doesn't seem to have happened.

Could that be a function of the mix of new practice acquisitions?

It is really on a same-unit basis.

So, when we go back we put it in.

So, not really.

Like I said, we have done a lot of work on the P mix shifts, and we believe it's specific payer in certain of our states that we have had either the application on the government side, a payer issue, and/or we have seen some slight enrollment increases overall in the state.

But that is really as much commentary as I can give you on that based on what we have been able to pull together.

Thank you.

That's it for me.

The next question is from the line of Gary Taylor of JPMorgan.

Please go ahead.

Good morning.

A couple of questions.

One, I just wanted to make sure I am very precise about the change in government payer mix.

I had a note in my model, at one time, when you talk about 100 basis point change year over year, is that on net or gross same-store Medicaid billings?

That is on gross.

Okay.

And that percentage change in mix that you called out over the last couple of years, that has always excluded parity impact?

Not really because it would be all in there.

Yes.

So, it has been included.

Yes.

I know I asked the same question last quarter but just on payer mix, that pick up in Medicaid versus commercial, are you generally seeing that across all service lines and geographies?

There's nothing really to call out there?

Yes, not really.

Some states have a lot more improvement in commercial.

So, yes, not really.

Not all across the board.

When I do my back of the envelope on what I have seen, maybe 100 basis point shift in mix year over year, I come up with that's maybe a 5%, 6% earnings headwind year over year.

Would you be willing to endorse that being in the ballpark or not?

I will tell you why not.

Because it just depends on where you are getting that.

It depends where in that state what the difference is between government and commercial.

So, that could have a significant impact.

For example, this quarter that 100 basis point really is slightly less than what we would do it if we did it all across the board because some states that are pretty favorable had a more commercial mix.

So, it is not a straightforward calculation.

On the payment differential.

Yes, exactly, Gary.

Last question -- Roger, maybe this one is for you.

I know you don't give forward year guidance or even long-term guidance, but I have had a lot of questions from investors about, really, what does organic growth look like at MEDNAX over the next few years.

You have had obviously the benefit of parity and now really difficult comps going up against that.

I think almost everyone would argue the reported numbers are probably understated versus what the real go-forward looks like.

But if you look the last five years or so before parity, volumes ran 1% to 2% same store, price ran 2%, it was a 3% to 4% same-store revenue growth story.

Is that still a number that makes sense?

And then the new specialties cross-selling contract potentially adds to that on a non-same-store but organic basis?

Is that a reasonable way to think about this?

Yes.

I think 3% to 4% makes sense.

I think that is an appropriate number to be thinking about.

Obviously we are putting in a lot of initiatives to improve that, to increase it.

We think that with the addition of vRad and their focus on organic growth and some other things that we are putting in place, we would like to see that increase.

I think going forward that same 3% to 4% is a reasonable assumption, and our expectation is to try and prove that.

Last question, if I could, when vRad or even the anesthesiology segment with some of your sales restructuring, presumably there is some cross-selling there and you'll be able to add some specialties in hospitals where you have existing contracts already.

Will you report that out as same-store or will that be same-store plus organic and carved out separately?

Or would you just imagine rolling it all into that same-store revenue that you report?

It depends on how it falls out, Gary.

If it is significant enough we could consider doing non-purchased versus purchased growth.

But, quite candidly, it has not made an impact.

Typically if it is in the same-unit you will see it in there.

Okay.

Thank you.

Our next question is from the line of Whit Mayo of RW Baird.

Please go ahead.

Thanks.

Just a few questions.

Roger, a few quarters ago you offered up what I would call maybe a commitment or belief that you felt like you could grow your earnings double digit.

I'm curious, do you still share that view?

Charlie might throw a pencil at you but just curious what you think about your growth rate.

We did it this quarter and we believe we're going to continue to go down that path.

We said it during our conversation in New York last month and we are saying it again.

We expect continued double-digit growth.

And, by the way, the fourth-quarter forecast also contemplates that.

Right.

Back to just the question on parity, what did you say the headwind in the fourth quarter will be, or what you expect to record for parity?

It will be roughly around $0.01, basically similar to what we did in the third quarter.

Okay.

And just remind me the margin on -- I am just trying to make sure I size up what the EBITDA headwind is for the full year.

On the top-line basis, roughly you are talking about $52 million difference.

We will have roughly about $12 million to $13 million of top line recorded parity runoff for states that have continued that this year versus roughly around $65 million top line last year.

But not all of that $52 million drops to the bottom.

No.

You take half of it for bonus that we typically have.

Again, our practice is, as you know, we share in the profits of that, and then you tax effect that and then you get the difference.

Okay, 50%.

Last question I had was just around Alegis.

I just don't have any numbers in my notes around the size of that.

Is there any way to potentially size up the revenue with Alegis?

We did not really specifically point that out.

Again, it is a complementary business to the MedData suite of offerings there.

But we did not really specifically talk about the numbers.

In the MEDNAX world, it is just complementary to their service lines.

Okay, worth a shot.

Thanks.

Our next question is from the line of Dana Hambly of Stephens.

Thanks for the question.

And, Roger, I appreciate the comments at the beginning with the long-term big picture outlook.

With that, I'm going to ask a question that is very short-term focused.

On the acquisition front, with the change in the trading multiples of the public equity guys, I assume at some point that trickles over into the private deals.

Does this create a period of inertia in the deal activity?

And if so, is that a couple of weeks, couple of months, couple of quarters?

Any idea there?

Obviously, first of all, my crystal ball doesn't work that well.

I have to agree that I think along the same lines as you're thinking along.

If multiples have gone down and the private equity deals, of course, are based on paying a multiple now, that will be increased down the path.

I think that it is reasonable to think that there will be some that will be sitting on the sidelines waiting to see what happens to multiples between now and the end of the year.

Is that true of the larger deals, and maybe not so much with the smaller deals?

I could see that, really, across all deal sizes.

Okay.

Thanks.

Our next question is from the line of Nicholas Jansen, Raymond James.

Please go ahead.

I just wanted to focus maybe a little bit on utilization management by payers.

If I go back to look at the birth data from 2003 to 2007 when you were growing, NICU volume growth at 3% to 5% when the birth rate, the number of births was growing 1% to 2%.

Now the birth rate is growing at 1% to 2% and your NICU volume growth is growing the same as the birth rate.

So, I was just wondering if there's anything different today that payers are doing maybe in managed Medicaid that is resulting in that recovery in NICU volume growth never going to potentially happen.

Thanks.

That is not how we think about it.

I don't think there's anything special going on today.

I think that NICU volumes tend to fluctuate admissions based on the patient population that the hospital is serving, et cetera.

But, no, I do not think there's anything different in NICU admissions today than there was seven or eight years ago.

I'll keep it at one.

Thanks, guys.

Next question is from the line of Brian Tanquilut, Jefferies.

Vivian, one quick follow-up.

We have been getting a lot of emails as the call progressed.

People trying to figure out the comment about the application delays for Medicaid.

How exactly does that impact the payer mix if you're submitting the billings to Medicaid?

If you don't mind just giving us more color to clarify that comment.

Thank you.

It is really based on one state, but how that impacts that is because the payer mix is based on bills.

I had those unbilled, so now I am billing them and they were government bills, so that is why it impacts the numbers of that.

But it was specifically in one state.

It was an isolated situation.

To follow up, when you file a bill in, let's just say, state of Tennessee, it is still Medicaid, though, right?

In your accounting.

Maybe I am not getting it but I don't get how it changes the payer mix because in your book that should be Medicaid from the get-go.

It was unbilled.

Oh, unbilled -- got it.

So then when I bill it, it included as billed, yes.

Okay, got it.

That makes sense.

Thank you so much.

At this time we have no questions in queue.

Okay, thank you.

If there are no more questions let me thank you for your attendance this morning.

I look forward to speaking with you again next quarter.

Thanks.

Thank you.

Thank you.

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