Pediatrix Medical Group Inc (MD) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX 2017 Fourth Quarter Earnings Conference Call. (Operator Instructions) And as a reminder, your conference is being recorded. I would now like to turn the conference over to your host, Mr. Charles Lynch. Please go ahead.

Thank you, and good morning, everyone. I'm going to read our forward-looking statement, then I'll 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' 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 section 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 annual report on Form 10-K or in the Investors section of our website located at mednax.com.

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

Thank you, Charlie. Good morning, and thanks for joining our call to discuss the results for our fourth quarter of 2017. Our results for the quarter were above the high end of our forecasted range. At a high level, I'm encouraged by these results as they reflect an improvement in macro trends of volume and payer mix.

I am also encouraged by the progress that we've made in the corporate initiatives we began implementing during the third quarter and discussed on our last earnings conference call. While these initiatives didn't yet have a significant impact on our fourth quarter results, I expect that impact to build in 2018, and we have incorporated that expectation into our guidance for the first quarter of this year.

Looking at our operating results, same-unit revenue growth exceeded our forecast. Patient volumes increased across all of our service lines. Anesthesia volumes were particularly strong. And the payer mix headwind we faced earlier in 2017 continued to moderate during the fourth quarter.

Our neonatology volumes were strong and reflected improved underlying trends with a favorable payer mix more than offsetting the slightly unfavorable mix in anesthesia. Our neonatology volume growth also reflected expansions of existing contracts and contract wins at existing practices as far as our organic growth initiatives. We will continue to pursue opportunities like these, especially in cases where they can complement our existing services and enhance our hospital partnerships.

The fourth quarter also wrapped up an active acquisition year for us. We completed 6 practice acquisitions throughout 2017 within neonatology and our other pediatric subspecialties. So far in 2018, we've continued this growth with the acquisition of a neonatology practice in California.

In radiology, during the fourth quarter, we completed the acquisition of Synergy Radiology Associates in Houston, our fourth on-the-ground radiology group acquisition for the year. Synergy is one of the largest independent radiology practices in the country with more than 90 physicians providing diagnostic and interventional services at more than 150 sites. The practice has grown significantly over the past 5 years and now has a presence not only in the Houston market, but also throughout Texas and in Arizona and Colorado. I'm excited to have the Synergy physicians as part of our national radiology group, and I'm also excited at the opportunities for continued growth.

Throughout 2017, vRad proved to be a significant asset in our strategy of building a national radiology group. Each of the groups that joined MEDNAX last year: in Texas, in Connecticut, in South Florida and in Tennessee, have told us that the opportunity to collaborate with vRad played a key role in their decision-making, and they continue to explore opportunities to collaborate and grow together. At the same time, we've been pleased with the early performance of these groups. We completed our first practice acquisition, Radiology Alliance, in Nashville, Tennessee roughly a year ago. And thus far, the group's performance has been well in line with our expectations.

We continue to have very positive conversations with large, highly-respected radiology groups, and we will continue to pursue the types of cornerstone practice additions that we were able to complete in 2017. We have also identified a number of follow-on opportunities across our newly-established geographic footprint in radiology. These include tuck-in acquisitions as well as organic growth initiatives. I can report today that we currently have 2 tuck-ins under LOI for radiology plus 1 additional LOI for a new market out west.

As you can see in our EBITDA results for the fourth quarter, our cost trends remained elevated. I spoke at length last quarter about the initiatives that we developed to address the challenges we faced in 2017, and I want to provide an update on where we stand.

On the corporate side, we developed plans that target best-in-class cost and service excellence, with the goal of reducing our G&A expense by $25 million in 2018 and by 10% over the longer term. While the actions we've taken thus far didn't materially impact our fourth quarter results, we remain on track to meet those targets. And our guidance was -- for the first quarter of 2018 includes the improvements that we have realized so far.

At the practice level, we developed action plans for a meaningful number of physician groups. These plans include a wide range of specific actions that can impact both revenue growth and cost effectiveness, and they are meant to engage people across our organization, including our clinical and operating leadership, surgical directions and our managed care and government affairs teams. They also include a formal process for execution and measurement that, so far, has been very effective in focusing our efforts and ensuring accountability.

Based on the progress we have made so far on these plans, we continue to improve more practices, not just those that have faced internal or external challenges, but also those operating at a high level. The improvements we're targeting have varying time frames, so it remains difficult to establish an overall goal of improvement to EBITDA, but we believe the opportunities in front of us are significant.

Overall, I believe we have made progress in the initiatives we developed last year, and I also believe that continuing execution of those initiatives -- cost excellence, practice support and strategic growth -- will position us well to adapt to the challenges we face in 2017 and optimize our ability to grow as an organization.

More importantly, as I have emphasized in the past, the overriding goal of our initiatives is to become a truly differentiated provider of health solutions for our patients and for our partners. That can't happen without the thousands of dedicated people at MEDNAX on both the clinical and operating side.

While 2017 proved to be a very challenging year for us, it also created opportunities for associates to take on new roles and challenges and contribute toward our goals. So I want to thank all of our associates for the work they've done so far, which I believe has taken us a long way towards adapting to a changing health care environment while ensuring that we stay true to our philosophy of taking great care of our patients.

With that, I'll turn the call over to Vivian.

Thanks, Roger. Good morning, and thanks for joining our call. I'll provide an overview of our fourth quarter and some additional details in a couple of areas.

First of all, I want to point out that our GAAP EPS of $1.46 includes a $70 million tax benefit or $0.75 per share related to the revaluation of our net deferred tax liability resulting from the reduction in corporate tax rate under the Tax Reform Act. Our adjusted EPS of $0.87 excludes this impact.

Moving on to our operating results. Consolidated revenue in the quarter grew nearly 10%. Same-unit revenue increased by 3.9% and acquisition-related growth contributed 5.7%, largely due to our recent radiology practice acquisitions. Our same-unit revenue growth was better than what we had forecasted with volume growth of 2.4% and pricing growth of 1.5%.

On the volume side, we saw growth across all of our service lines. The greatest contributors to this growth were anesthesia, where volumes increased by just over 3%; and neonatology, where NICU days increased by roughly 2.6%. Our volume trends reflected an improvement in macro trends across our service line as well as contributions from organic growth initiatives, which included both expansion of services and contract wins at our existing practices. Most of this activity was within neonatology and other pediatric services, although we had some additions in anesthesia as well.

On the pricing side, same-unit pricing growth of 1.5% was largely driven by modest improvements in managed care contracting and increases in administrative fees received from our hospital partners. Overall payer mix for the fourth quarter was favorable by roughly 50 basis points compared to the fourth quarter of 2016.

In anesthesia, our mix was slightly unfavorable, but marked a continued improvement from the trends we saw earlier in 2017, and it was more than offset by a favorable mix in neonatology.

On the cost side, practice salary and benefits expense was $617 million or 67.8% of revenue as compared to $533 million or 64.2% of revenue last year. Growth in clinical compensation expense remained higher than in past years, reflecting a combination of compensation increases, premium pay, agency labor and staffing additions at our existing practices. Practice salary and benefits expense also reflects somewhat higher professional liability expense in the fourth quarter related to an increase in reserves based on unfavorable claims experienced.

Our G&A expense was 12% of revenue. Related to the initiatives we've discussed, these did not have a material impact on our fourth quarter G&A. However, based on the improvements that we've achieved to date, we remain on track towards our target of $25 million reduction in 2018.

EBITDA for the quarter was $155 million compared to $170 million in the fourth quarter of 2016. This equates to a decline of 8.9% or slightly better than the range we provided in our forecast. EBITDA margin was 17% versus 20.4% last year. For the fourth quarter of 2017, we adjusted our calculation of EBITDA.

Historically, we had included investment and other income and equity earnings of unconsolidated affiliates as a component of a net interest expense adjustment within EBITDA. Beginning in the fourth quarter, we have excluded these items. A historical reconciliation to GAAP measures is available on the Investor tab of our website.

Turning on to our balance sheet. Days sales outstanding was 51 at the end of December, down 4 days as compared to both the third quarter and December of 2016. The sequential decrease is related to the timing of our radiology acquisition and the storm impact in the third quarter.

We generated $196 million of operating cash flow during the fourth quarter compared to $131 million in the fourth quarter of 2016. A portion of this decrease reflects a deferral of tax payments based on the extension granted by IRS to companies impacted by the hurricanes in the third quarter. We'll make those payments during the first quarter of 2018.

Finally, we ended 2017 with total borrowings of $1.9 billion, consisting mostly of our revolver borrowings and senior notes. At year-end, we had additional borrowing capacity under our revolving credit facility of roughly $890 million.

Turning on to our outlook for the first quarter of 2018. As we announced in this morning's press release, we expect that our earnings per share for the quarter will be in a range of $0.63 to $0.68, and our adjusted EPS will be in a range of $0.84 to $0.89. The range for our first quarter outlook assumes anticipated same-unit revenue growth will be between 2% and 4% year-over-year.

For the first quarter, we expect that our EBITDA will be within a range of down 4% to up 1% compared to EBITDA for the first quarter of 2017 of $133 million. Within our outlook for the first quarter, we have included expected improvement in our EBITDA of roughly $5 million related to the corporate initiatives we developed during 2017, primarily related to our G&A expense.

Our outlook also assumes an effective tax rate for the first quarter of approximately 27.5%. This expectation is based on our calculations of the impact of the Tax Act on our effective federal tax rate as well as on various components of our effective state tax rate. We expect that our effective tax rate for the full year will be in a range of 26% to 27%.

As a reminder, our results for the first quarter of every year are also impacted by some timing issues that affect our results on a sequential basis. For the first quarter of 2018, these factors include a 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 as well as impacts on net revenue because there are fewer calendar days in the fourth quarter. These recurring items impact our EBITDA, net income and earnings per share and are included in our financial outlook for the 2018 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 credit facility to pay bonuses and 401(k) plan matching contributions that have accrued throughout the prior year. Our 2018 first quarter cash flow will also be unfavorably impacted by tax payments from 2017 that were deferred by the IRS as a result of the hurricanes in the third quarter.

With that, I'll turn the call back over to Roger.

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

(Operator Instructions) Our first question comes from the line of Ryan Daniels.

Roger, let me start with one for you. It seems like you're broadening some of the site-level initiatives, not only to the underperforming or lower-performing locations, but also some of the higher performing operations. So can you share a little bit more about, one, why that's the case? And then number two, what the response has been from the physicians themselves or practitioners regarding these strategic initiatives?

Yes. I mean, look, there's always room for improvement. We start to look at some of the ways that we're doing things, some of the ways that the processes as we go through, the practices are being carried out, some of the staffing, some of the vacation time, some of the additional time that we're paying for with locums coming in and providing some coverage, some -- I mean, this is a combination of some practices that are covering services that are not at the nucleus of what the practice is. But maybe they're going off to a dentist's office or something like that and then providing some coverage there, and that's not exactly being as efficient as we'd like for it to be. So it's a combination of all things. And of course, we looked first at the practices that were underperforming. And then we found some things. And we said, "Well, we could also apply some of these things to some of these other practices." And although they are successful and they are profitable, could benefit from some of these initiatives as well.

Okay, that's helpful color. And then as my follow-up, you had talked last quarter about likely not accelerating the M&A pace on a go-forward basis. And I'm curious with the tax law changes and improvement that will drive in your free cash flow going forward, if there's any changes to that thought. Or what the thoughts might be around additional capital deployment towards repurchases or debt pay down given that change?

Yes. Well, we believe that the opportunity here is to acquire some large radiology practices and then bring in some tuck-ins under that -- those practices. In fact, I didn't talk about it in my remarks, but that's already happened once here in Florida with the Miami practice that we acquired. There is already one additional smaller hospital that's a tuck-in and that is functioning under the direction of that large Florida practice that we acquired. As I said in my remarks, there are a couple of other practices, one in Tennessee and one in Florida I believe, where we have the same opportunity to continue to grow. So for us, that's an important part of the growth because it helps us to -- just dilute some of the expenses and take advantage of the revenue opportunities that come with those. We do want to continue to acquire some of the large practices, and we have an LOI, as I said, in place out west. And we continue -- we believe we will get more of these practices. We're not giving up on neonatology. We -- in fact, we have a couple of -- I didn't talk about that either. We have a couple of small LOIs for neonatology across the country already in place for this year. And we believe we'll get those done as well. So to answer your question, our preference is always to put our money to work by using our cash to acquire practices. When we acquire practices, as we have said in the past, they come not only with earnings, but they also come with a lot of cash flow. And so for us, as long as the opportunity is the right one, that's what we prefer to do. It does not mean that we will not look at acquiring, buying, doing a share repurchase. If we get, as we always do towards the end of the year and we haven't spent the amount of dollars that we would like to spend, our board always looks at that. And as you know, over time, before -- a while back, we had bought a significant amount of money in our shares. So it's not something that we're opposed to doing. You just kind of have to go through your priorities. And for us, right now, given the opportunities that we see and the results that we see and the -- how well the vRad combination with the on-the-ground practices, how well that has been received, we see an opportunity to continue to grow in radiology and in our other structural pieces as well.

Our next question comes from the line of John Ransom, Raymond James.

Roger, I was just wondering, since we heard from you last, have you had any new thoughts or any progress to report on the process of recontracting some of your anesthesiology compensation contracts?

I would say we're in the midst of that. I wouldn't -- there's nothing specific I want to report on that. It is one of the initiatives that we have going across the country at this point in time. And as you might imagine, it's not an easy conversation to have, but we're having those conversations. And I expect that we'll make some progress there within the next couple of quarters.

So practically speaking, is this something you have to wait until the original deal expires? Or can you reopen existing contracts?

No, we can do both. Our contracts with them give us the right to do both. And so particularly in those practices where there's been a meaningful decline in the profitability of the practice, we have the right by contract to renegotiate their reimbursement.

Okay. And did you see -- in the fourth quarter in anesthesia, did you see a similar kind of mix shift that you had been seeing all year? Or will the co-pay -- does seasonality help offset a little bit of that in 4Q?

It's Vivian. So in Q4, there's usually some seasonality in anesthesia, as you would expect, but we did -- so we saw the same that we've seen in prior Q4s. But certainly, the trend is much better than we had seen throughout the year. But yes, there's some seasonality in Q4 always.

So we should -- again, so we should expect to see the reverse of that in 1Q then, I would think, and it just gets a little worse every year with high co-pay plans?

Yes. I don't know that it's getting worse. I do think it's a trend throughout, but we definitely see seasonality and payer mix. So we usually do see it slightly higher in Q1. I agree with you on that, yes.

Okay. And just last one for me. We're hearing reports of the radiology multiples really heating up in the private equity market. Are you having to compete with higher valuations or you're able to hold the line?

Well, for us, we're not playing that game. We have something to offer these practices, which is a strategic advantage to them. And now that we've got practices that we can point to, it makes it even easier. We do hear the same as you have heard. There are a number of private equity firms that, I guess, are either in or trying to get in the radiology world. We heard of practices going for, I don't know, whatever, 15x. I don't know whether that's true or not true, but we're not playing that game.

Okay. And in your first quarter guidance, is vRad year-over-year positive for EBITDA in your 1Q guidance? Has it gotten to that point yet?

Yes.

Yes.

Your next question comes from the line of Ralph Giacobbe with Citi.

You showed nice acceleration in organic growth. I would have expected maybe a little bit better margin as we've seen margin pressure largely on sort of the slower top line and mix pressure that seemed to reverse this quarter. So just wanted to flesh it out a little bit first and maybe talk about again where you see margin opportunity here, if you don't really view the story as one of much sort of margin expansion and much more sort of top line driven.

This is Vivian. So yes, we did continue to see some pressures on the clinical compensation side. Some of that is related to the organic growth, and so some of that's positive. We want that to occur, but there's still pressures on the clinical compensation line. As Roger mentioned earlier to John, we're working on those plans. And then we did see a slight increase in our professional liability this quarter. And so we do expect that to normalize certainly in Q1, and that's reflected in our guidance.

And just on the professional liability expense, can you just give us a sense of magnitude? And I think you mentioned just higher claims expense. Was that sort of a -- I mean, do you view it as a onetime? Or is that sort of a sustainably more elevated level?

No. So that was related to unfavorable claims development. And so we do believe that, that will normalize itself. But yes, it was roughly a little bit less than 1/3 of the -- of impact to that line.

We do think of it as a onetime.

Okay, all right. That's helpful. And then last one, just can you talk about the decision that could change the EBITDA calc and include the investment income? Maybe what exactly is that, if you can get into the details there? And then why it seemed to pop a bit in the fourth quarter?

Yes. So there was a business reason for that. We actually deemed that to be immaterial in the past, and so that's why it was netted in there. We do think that as we move forward in radiology and we get some of these opportunities that Roger talked about, that -- that the JV experience is going to continue and therefore, we think it's best to really unbundle that because we want to reflect the operating results of those joint ventures. And so we felt that now it's a good time to do as some of these radiology opportunities are going to take off.

Okay. And then that run rate number, are you going to still sort of disclose it as a separate line item? Or is it going to get wrapped into another expense? So in other words, the -- I think it netted out to be somewhere around $2.5 million. Is that sort of a run rate kind of we should think about going forward?

Yes. So it should grow because -- but it will be a separate line item because like I said, we expect to have more joint venture income, and so that will be separately reported.

Okay. And the run rate?

The run rate of 2.5% should grow because again, we're expecting to have joint venture income there, [those few] quarters separately, yes.

Our next question comes from the line of Kevin Fischbeck with Bank of America.

Great. Wanted to talk a little bit more about the G&A reduction that you've been outlining. Sounded to me like the movement to expand it to practices that are doing well was somewhat new or incremental. Did that change at all your view about what the long-term savings opportunity was? I think you talked about 10% of G&A savings. Is that the way to think about it? Or is that maybe now a bigger number, if you're expanding this?

So a lot of the initiatives that Roger talked about on the clinical side would be included in cost of service. But G&A, we're -- we'll continue to work on that, but we don't want to increase the target at this point. But certainly, we feel pretty comfortable about getting to that $25 million number, Kevin, because that's why I put roughly $5 million in Q1 estimate. But we'll see how those goes. But a lot of these other initiatives that we talked about are related to cost of service because they're in the practice action plan.

Okay. And then, I guess, just going back to the question on organic growth. I mean, you're obviously looking for Q1 numbers to be down 4% to up 1% [in EBITDA growth line] with 4% is from cost-cutting and some contribution from [deals]. So I mean, I guess, when we think about organic growth in Q1 year-over-year, are you still looking for something like down high-single digits? Is that the right way to think about it? And what is going on in 2018? How do we think about what's driving that fundamentally in '18 and whether that should change in 2019 and beyond?

Yes. I mean, we're still thinking 2% to 4%. So I don't know if I understand your question because that is pretty much a continuation of the trends we saw in fourth quarter. We do have an improvement in the decline of the margin because we do have some of this favorability baked in, like I said, $5 million roughly on G&A. And that -- and hopefully, on the clinical side again, we'll see some of that as the year goes on, those are required to arrive at -- in one quarter. Is that what you were trying to get at? I don't know...

Well, I guess, I mean, the 2% to 4% is the revenue -- the organic revenue number. And I guess, I was trying to think about that number is one of the best numbers we've seen in the last 3 years, and yet you're still talking about EBITDA on a consolidated basis being down 4% to up 1%. And if you're saving 5% on a cost-cutting initiative, add 4% to EBITDA. So really, you're talking about down 8% to down 3% on a consolidated basis, and that includes [deals]. So I mean, are we talking about something organically EBITDA-wise down in the high-single digits? And if so, what exactly -- despite the fact that your same-store revenue growth is some of the best growth you've seen in the last 3 years, so just trying to understand like is there something else going on right now that's transitory that says the core business is actually doing better than that? Or is that not the right way to think about what organic EBITDA growth is?

So organic -- one of the things I need to correct on what you said, it's not 5% reduction of G&A. It's -- it's roughly $5 million of...

That's 4%, right?

Yes. So yes, it's a little bit, yes, less than that but, yes. So yes, we're still continuing to see some of the compensation pressure. But again, we're thinking that, that's going to get better throughout the year. But it's not -- if you look at the implied margin reduction, it is much better than what it has been throughout '17, and so there is continued improvement in that.

Okay. And I guess, maybe just the last question then on that compensation point. What gives you the confidence that you're going to be able to go back and renegotiate some of that contract structure? And I guess, I understand the concept that you -- that the pressures you're seeing are going to be seen by everybody, right? So in theory, everyone is doing the same thing. And so in theory, everyone should realize that the rate that you're paying may not be the appropriate rate for that market going forward. But I guess, from what I've heard from talking to some other companies in the space, they feel like there's still a shortage of physicians. So it's -- we're still kind of in that, I don't know, position where someone has to blink first and actually kind of move on this. So how long does it take to actually kind of get the market to reset to that lower rate given that there is still a little bit of supply issues?

Yes. Like I said earlier, it's not an easy conversation to have, and it's not something that is going to be done quickly. It's a lot easier to have when the contracts expire and they're renegotiating their contracts. You always want to look towards some opportunities for growth or some opportunities for covering additional services, et cetera, et cetera. At the end of the day, we have to tell these guys that if they don't agree to taking whatever cut or making whatever reduction, we have to be prepared to take whatever action we think we need to take at that point in time. Now remember, these are people who practice in these communities and live in these communities and their kids go to school and their homes and their in-laws and whatever. And so it's not anything that either one of us wants to see happen. And so it's just a conversation that needs to be had. And at the end of the day, for them to move to a different city -- they can't really stay there -- to open up their own practice. They're not going to -- they're not likely to get the same kind of managed care contract, the same kind of reimbursement to have the same kind of savings with benefits, the malpractice, this, that and the other. And so when you run the numbers, there are a number of reasons why we -- it might make sense for them to stay. We also again offer them the opportunity for if things turn around, if we can pick up 6 months from now, a year from now, it's not a -- this is all you're going to get for the next 5 years. It's a let's work on how to get this back on track. So like I said, it's just -- it's a long conversation, and it's not anything that anybody wants to go through.

But the other thing to expand on here is that these initiatives at the practice level, they're not only related to renegotiating the physician contract. They're also related to looking at workflow opportunities, with really collaborating with surgical direction on the flow at these practices and the combination of CRNAs to physicians and all this. So it is a multifactorial action plan that, yes, one of the levers is renegotiate the physician contract, but there's other things that we're looking at as well.

Well, and the first question you always ask is, "What would you do if you weren't part of MEDNAX?" Here's your reality. And I know what they do, they get the younger guys who were just hired last year, they get let go and you work harder, and that's how you avoid having to take a pay cut. And so I've ran enough practices that I know how that works. So there's just a lot of different tools that you have.

And our next question is from the line of Gary Taylor from JPMorgan.

Glad to see that stronger revenue growth. I know you're pleased with that as well. I just had a couple of questions. I guess, one, just to follow-on to just Kevin's last question. I do understand the leverage that you have. I think maybe the market thought you don't have any leverage in having these difficult conversations with physicians, and I do fundamentally understand that. But what sounds a little different to me is just this concept of the contractual rights, and I just want to make sure I'm understanding that correctly. So if you've got a physician that you've given a 3-year or 4-year or 5-year compensation guarantee to, are you saying in all cases or majority of cases, there is some provision in there that allows you to renegotiate that at any point? Or it's only in the event of a material adverse change? I just want to understand that flexibility better.

Yes, it's that. It's in the case of a material decline that we have the right given specific numbers and specific percentages, we have the right to renegotiate the contract. And it's not something everybody wants to do. Again, it's just not a pleasant conversation to have. And I think throughout our lifetime, I'll venture to say maybe we used it one time throughout our 30-year career. But it is there, and it's something that you can at least point to -- to help you in the negotiations.

I wouldn't imagine in your businesses, the flu has had much impact, even on NICU. But have you given a thought to some of the better anesthesia volume being perhaps partially just deferred procedures that were deferred from the hurricane disruptions in the third quarter? Any thoughts around if that could be a material part of what you're seeing on that side of the business?

We just don't have that much anesthesia business in Florida. So I would say it's just probably not material.

Okay. Last question, and just going back to the med mal reserves. I presume we'll see that number in the Q. I don't know if the Q is out yet. But Vivian, you had said something about 1/3 of one line. And I guess, I just missed, did you quantify the dollar amount of what that increase in med mal was this quarter?

Yes, I said it was roughly 1/3 of the total, yes.

1/3 of the total what?

Yes, of the total margin decline that we saw in the fourth quarter.

Okay, I'll do some math on that. I could figure it out then, okay.

And our next question is from Brian Tanquilut from Jefferies.

Viv, just a housekeeping question first. As I think about subsidy, you called it out as a driver of the rate growth for the quarter on same store. Do you mind just giving us your views on sustainability of that? And also as we look at the rate growth, what percentage of that was driven by subsidy and what percentage was rate, like even rough numbers?

So basically, on the subsidy side, it is part of our initiatives with the hospitals as it relates to some of these collection guarantees and things like this. So I do think it's part of the action plans, and I do think it's sustainable. And we've had pretty good run rate on that. As it relates to how much it was of the total, I can't remember here. Let me see if I can look at that. Yes, maybe around 1/3 of that total pricing impact was that, yes.

Okay, got you. And then Roger, you mentioned something in passing in your prepared remarks about the board and the buyback. So where do you sit today? I mean, what's the board's view on -- given the business outlook and what -- obviously, the stock's up today. But just how does the board think about capital redeployment toward share buyback or just other areas as you pull back on M&A from historical levels?

Well, I said we think we have an opportunity for growth in radiology. We have been pretty successful with our radiology strategy. And we always prefer to put our money to work by acquiring these practices that come with earnings and cash flow. And so for now, no decision has been made either to do a repurchase or not to do one. It's just this is the path that we're going down. We're executing down our path. And I like I said, when we get further down the year, if we haven't been able to put to work the amount of money that we think we should be able to put to work, then we'll continue. But this is a conversation that comes up at our board meeting. Every single board meeting, the conversation comes up. It's not a onetime decision that says this year, we're going to only do this or that. It's an evolving process, and that's where the decision is at right now.

And last question for me. As I think about hospital -- your in-hospital imaging volumes, are you seeing any headwinds or any impact yet from payer rules changes on the hospital's ability to do imaging scans on outpatients inside the hospital? Anthem put through that rule late last year.

Yes. No, I would say we have not seen that. We do, and I think Vivian touched on the joint ventures, and these are joint ventures in radiology that we see our hospital partners wanting to open up some freestanding image centers outside the hospital. And we have one joint venture already in place with one of our clients or one of our partners. And we, given conversations that we're having with other hospital clients, we see that there is a tendency towards that. So we expect that, that will continue. It's -- but to answer your question directly, we have not seen any impact from that of any significance.

And our next question is from the line of Chad Vanacore from Stifel.

All right. So at this point, I've got a few questions and clarification. Looking at the fact that salary expense in the quarter was a bit lower than we modeled, did that include any physician comp structure or benchmark changes? And then the other part of that question is have wage pressures on the nurse and the administrative side, have they abated?

So on your first question there, yes, I mean, that line would include anything that we would have in changes to physician compensation. But as Roger mentioned, there hasn't been much of that so far, but it would be included in there. And then on CRNA compensation, we do think that obviously we've gone through '17 and negotiated a lot of that. So there was still some of that in Q4, but we do expect some of that to be normalizing in '18.

All right. Vivian, you also alluded to maybe some extra temporary labor. Is that right?

Yes, yes. And so that's just agency labor when they have shortages, so locums and all this. So obviously, again, part of the action plans that operations is working on is trying to minimize that, and so that's why we do mention that because that would obviously hit that line as well.

But that also is related to growth. And I think it's important to note that if you get a contract and they want you to start covering 2 weeks from now, you may be able to bring one of your own physicians. But you can't bring -- there's no way you can come up with 3 or 4 or 5 additional physicians to cover. And then specifically, I said that we had a practice in Florida, a radiology group and that part of that is involved in those -- some of those expenses with that growth, so just to clarify.

Yes.

All right. And do you expect that in your outlook for 1Q to normalize?

Well, some of it will. But we're also hoping in the Q1 guidance that we continue this organic growth and...

And I hope not.

Some of that is related to that, as Roger said. So hopefully, you'll get the benefit on the top line, and you will have to incur some additional salary expense there. But yes, for the ones that are settled in, then of course, you do replace the agency labor with permanent and that will normalize. So there is some -- I guess the point is, there is some start-up type of expenses when you get an organic growth opportunity; that certainly starts normalizing.

All right. And just sticking with the 1Q outlook. How much synergies are expected in that quarter? And then how should we expect them to progress through the year? You outlined around $25 million synergies for '18.

Yes. So we have -- I think I've mentioned earlier, we have roughly around $5 million of expected synergies primarily on the G&A line that's related to getting to our $25 million or so. So some of that will accelerate, and we do expect more to come as we deal with this action plan on the clinical side. So some of that will flow through cost of service line.

All right. So you start at $5 million as a G&A in 1Q '18 and then progress from there?

Yes. I'm not going to -- we give out one quarter at a time, but that's basically what we're comfortable with on first quarter.

All right. And then just one more. You mentioned in the prepared remarks that anesthesia mix had been a little bit weaker. So how volume's trended? And then -- or in other words, was the weakness in anesthesia side purely mix shift? Or is there a volume or rate in there as well?

Yes. So let me clarify. So anesthesia volumes were great. They were basically over 3%. The mix, when we say it shifted, it basically was up, less unfavorable than it had been in the past. And so it's moving in the right direction. Now some of that is seasonal. We see some of that in the fourth quarter. But again, we're pretty encouraged with what we saw with the mix trends, both on neonatology and anesthesia for the fourth quarter because it ended up being favorable overall by 50 basis points or so.

Our next question is from Dana Hambly from Stephens.

I'm curious on the anesthesia business. Is the larger opportunity to improve margin really just on renegotiating compensation packages? Or is the larger opportunity on surgical direction initiatives and improving workflow and initiatives like that?

I would say it's a combination of both. I think there are some specific practices where the hospital and the -- can benefit from surgical directions. There are practices where the benefit will come from renegotiating their contracts or from expanding -- just to some tuck-ins in their communities. I mean, I think we're looking at all of those opportunities across all of our practices.

Okay. And then on the radiology acquisition, I know vRad in the past has been sort of viewed as predatory in nature. It sounds like that's becoming less of a sticking point. I wonder in the negotiations, are there common sticking points? And is vRad still a big issue for potential targets?

VRad for us is a home run. When it comes to making these acquisitions, the fact that we take our practices up to vRad, we show them what vRad does, what vRad is. And the systems that are proprietary to vRad, it makes all of those negatives that you mentioned earlier go away because vRad now becomes your partner. They're not your competitor. And I can tell you that in every single one of the 4 large practices that we acquired last year, they are using vRad to their advantage. And it's been beneficial from the standpoint that now, the people that you had covering at night that you were paying extra money for them to cover at night, those reads are now being done by vRad. And so it becomes a financially-attractive opportunity for these practices because they utilize those physicians to either grow or to do something else. They're -- stop paying extra money for weekends, nights, et cetera, et cetera. It becomes a real win-win, which is what we saw originally, when we looked at vRad, the combination of the underground practices with our teleradiology business. And again, vRad just becomes your partner. It is 3:00 in the afternoon and all of a sudden, you get a spike in CT scans because there was a car accident or something, vRad can pick up half of the scans. And it's a completely different conversation.

Okay, that's helpful. And then last one for Vivian, the first quarter EBITDA contribution to the full year has been fairly consistent over the last few years. I wonder if there's anything that if we look for the full year, as you look in the first quarter, anything unusual in the first quarter this year that would have us deviate from that pattern?

No.

Our next question is from the line of John Ransom from Raymond James.

I was just following up on Kevin's conversation about 1Q. Vivian, can you give some -- we made a stab at it this morning. I just want to make sure we're in the ballpark. But do you have an idea of what 1Q implied EBITDA growth would be, absent M&A?

No.

You don't want to talk about it? Okay. That's the most succinct answer I've ever gotten in 20 years. So I hope it gets...

I can give you a couple of those.

Yes. No, I mean, we're -- we don't want to break that out obviously, yes.

Okay. Well, we'll take your acquisition spend and then assume you paid at 27x EBITDA. How about that, Roger? Roger would like that.

Well, that is -- well, yes, okay, good.

Our next question is a follow-up from Kevin Fischbeck from Bank of America.

Great. Wanted to follow back on the organic growth rate because it's just kind of the first time that I remember you guys talking about new contracts adding to the kind of the NICU same-store growth. How do we think about that contribution to the number? And is that always been there? Or is this really kind of more of a new initiative that you're starting to really pursue new contract growth more aggressively?

You're talking about just expansion of services and new contracts, Kevin?

Yes, exactly. How much does that contribute?

Yes. So it's really accelerated because again, I keep going back to the same thing, but it's -- operations has an emphasis of going out to these initiatives, as Roger said. I think in the third quarter, we talked a lot about these corporate initiatives. One of them is growth effectiveness. And basically, we have folks focused on that. So yes, it certainly ramped up in the fourth quarter, and we're expecting that to continue in '18 because it's a big operational initiative that we have all hands on deck on.

And how long does it take those contracts to get them to profitability targets?

To get to profitability targets, I mean, they are profitable coming out of the gate for the most part. I mean, it's just that there is some ramp-up on inefficiencies on using, like we said, temp labor versus permanent. But typically, they are positive. There could be some that had some start-up labor before. But for the most part, they are positive. As it relates to ramping up, I don't know. I think it's roughly, what, about 3 months to 6 months or something like that? I guess, it depends on the opportunity and how many physicians. You can't standardize that because it just depends in what -- is it a specialty that it's hard to recruit physicians, so...

(inaudible) It depends on the contract. You may have to finance your receivables for 90 days. It just depends.

Okay. But since you're ramping this up, it sounds like we might expect a little bit better organic growth over the next year as these sets of contracts are rolling in. EBITDA margin -- margin dilutive but EBITDA positive in 2018. Is that the way to think about it?

Yes, it is, Kevin. Yes.

Okay, okay. And then the increase in administrative fees, as you guys mentioned, is part of the benefit of pricing. Is that a function of going back to the hospital and getting subsidies? Or is it a matter of like adding more services and just having the hospital pay for the extra services directly?

Well, it's a combination of both. So when we talk about administrative services, for the most part, it usually is subsidies. But certainly, on the expansion of services, it's both.

Our next question is from the line of Matt Borsch from BMO Capital.

Just a question, if I could, at sort of a high level. Want to make sure I understand what you're assuming about volume trends for this year. I mean, to what extent do you look at the fourth quarter improvement as something that you can then stretch forward into the outlook for 2018 versus the fourth quarter improvement was sequential seasonal acceleration that, to some extent, is picked up every year? Is that a fair question?

Yes. So first of all, we don't give out guidance for the whole 2018, so that would be the first comment. On Q1, certainly we do think that, as I just spoke about, some of these organic growth initiatives are going to continue. And so that's related to some of the efforts we have going on. As it relates to some of the macro trends, I mean we do believe that there's some reversal of what we saw in '17, certainly in [any] birth rates, as we're pretty encouraged with that, getting much better. And anesthesia volumes are somewhat seasonal. But nonetheless, we do believe that there's -- given some of the demographics of the population and all that, there's going to be continued utilization of that. And so we're comfortable with the range for the first quarter.

The millennials are finally having children.

Yes, Roger's point there.

Yes. Just the last question on tax reform and the percentage going to the bottom line. Do we think about that as something on the order of a 600 basis point reduction in tax rates? And I gather you're not -- well, you did actually -- I'm sorry, you did say, I think, 26% to 27% for full year 2018.

That's right. Yes, I want to get it modeled correctly. So there is some seasonality in our rate, but we do expect it to be 26% to 27% for the rest of -- for the year '18.

And again, can you just remind me, I'm sorry if I missed it, but why is the percentage that you're getting to the bottom -- flowing to the bottom line not higher than the statutory 1,400 basis point reduction?

Well, first of all, there's state rates to that. So it's not from 21% to 35%. We had 39% because that was a blended and effective tax rate blended with the state stuff. And then there's some items, and I'm sure other companies will have a similar thing that are nondeductible under the new tax law, and so we have an estimate of that. I can tell you that, that's why we're giving ourselves a range because some of that is still -- our tax department is working through that. But there's been some changes in what you can deduct.

And at this time, there are no further questions in queue.

Okay. Well, if there aren't any further questions, let me just thank everyone for participating on the call, and I look forward to speaking with you next quarter. Thank you, operator.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.