Pediatrix Medical Group Inc (MD) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX Fourth Quarter 2019 Earnings Conference Call.

(Operator Instructions) As a reminder, today's call is being recorded.

I'll turn the call now over to Mr. Charles Lynch, Vice President, Strategy and Investor Relations.

Please go ahead, sir.

Thank you.

Good morning, everyone.

Welcome to our fourth quarter call.

With me today is our CEO, Roger Medel; and our CFO, Stephen Farber.

I'll quickly read our disclaimer, and then we'll move to the call.

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 annual report on Form 10-K and in the Investors section of our website located at mednax.com.

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

Thank you, Charlie.

Good morning, and thanks for joining our call.

Our operating results for the fourth quarter and full year 2019 were in line with our expectations.

2019 was a year of significant organizational change, leadership restructuring and broad-spectrum transformational activity.

We expect in 2020 to continue our full-throttle efforts to improve and have provided a preliminary financial outlook for the year.

There's a lot I'd like to cover today, but I will start by discussing the payer matter that we announced alongside our earnings this morning.

As we stated in our press release, we've been notified by UnitedHealthcare that they have unilaterally and with no prior notice, terminated all of the contracts of our affiliated practices across 4 states covering all of the services our physicians provide in those states, including anesthesia, neonatology and maternal-fetal medicine.

In doing so, United is eliminating many critical health care services from its networks in those states, which, in a number of instances, include the only physicians providing anesthesia coverage, neonatology or high-risk obstetrics in urban and rural geographic areas.

These surprise terminations were not for contracts that were under negotiations.

They were unilateral, without warning and unprecedented.

We have been told that the only avenue for negotiation will be to accept a 50% reduction in the rates our practices are paid for their services.

This is neither an approach nor an outcome, of course, that we will accept.

And I sincerely doubt that our patients or their parents think that the work that we do is worth $0.50 on the dollar.

We have also heard that we are not alone in receiving these notices and that several large anesthesia groups and other physician organizations have also recently received terminations with demands for 50% rate reduction.

In fact, the American Society of Anesthesiologists recently conducted a survey of its members and found that more than 60% of respondents have had their contracts terminated over the last 6 months.

Of those, 4 out of 5 were terminated by United.

We are concerned that this type of broad-scale reimbursement disruption may put hospital and ambulatory surgical operations at risk as well as access to care for many patients.

We are especially concerned how these actions may interfere with the ongoing discussions in Washington surrounding surprise billing.

The overarching goal of that proposed legislation is to encourage payers and providers to work together in order to make sure that patients receive coverage for their health care services from the insurance companies that they or their employers buy it from and rely upon.

As we have repeatedly discussed, our internal policy and orientation has always been to be in network.

As a result, our total out-of-network revenues have historically been very low, as you are all aware.

The steps that United has taken fly in the face of both our efforts and those of congress.

And if these terminations are made effective, we will have significant increases in out-of-network patients.

We would be left with no choice but to notify our patients who have United coverage that they will be out of network and build directly for the services our physicians provide.

This is a terrible and unfair outcome.

The last thing that a mother needs to hear when her baby is in the NICU is that her insurance company doesn't cover that care because they kicked the doctors out of network.

I have reached out directly to the CEO of UnitedHealth.

And of course, we hope to resolve this matter in a way that is acceptable to all parties.

But after that, you should be aware that against our will, our out-of-network revenue will rise this year; that our collectible revenue will decrease; that United patients, including high-risk mothers, parents of premature babies and acutely sick children will be billed directly for their care; and that our administrative cost of processing those bills and the time and stress for patients receiving and resolving these bills will increase meaningfully.

This is precisely the opposite outcome of what we, our affiliated physicians, our hospital partners and especially our patients would want or expect from their insurance companies.

It makes a mockery of the work legislators have been doing to prevent surprise billing.

The surprise here is coming from the insurance company.

Our goal this morning is to be as transparent and possible -- as possible about this matter.

So I'm going to have Steve provide some additional thoughts, after which, we'll have a more thorough discussion of our results, our outlook and our ongoing focus for the future of our medical groups.

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

Thanks, Roger.

Good morning, and thanks for joining our call.

We have a lot to cover today, so I'll keep my comments brief, beginning with the United matter.

The specific contracts that United terminated represents $70 million to $80 million of annual net revenue.

More than half of the terminated revenue relates to anesthesiology with the remainder impacting neonatology and maternal-fetal medicine services.

In terms of timing, we're scheduled to be kicked out of network in batches over the next several months, with the first occurring on March 1.

These terminations represent about 2% of our total 2019 annual revenue.

Our total annual United revenue is about $350 million to $400 million or roughly 10% to 12% of our total 2019 revenue.

Overall, about half of that total business with United is for neonatology and other women's and children's services.

These terminations, if they occur, will have differing impacts on revenue and EBITDA.

In some cases, the impact may flow through dollar-for-dollar.

In other cases, the impact may be partially offset by a range of items, including the financial dynamics and structure of individual practices.

In many cases, these terminations will reduce the compensation of highly specialized physicians who are scarce and clinicians that directly care for patients.

Let me reiterate now, as we noted in our earnings release this morning, our financial guidance for 2020 does not include any estimated impact from these terminations.

We expect impact, but right now, it cannot be estimated.

With that said, I'll turn to our fourth quarter results.

As Roger mentioned, our adjusted EBITDA and adjusted EPS for the fourth quarter were in line with our expectations.

Our top line performance was also in line with our expectations.

Same-unit growth was 2.3% with 1 point of this growth volume-driven and with the strongest growth in neonatology.

Within neonatology, NICU days grew by 1.7%, reflecting effectively flat birth on an average at the roughly 400 hospitals where we manage the NICU, and slight increases in both rate of admission and length of stay.

The remainder of our same-unit growth was a net pricing increase of 1.3%.

As we've discussed, while this level is generally in line with the pricing trend we've seen over the past couple of years, it is significantly less than the growth in our clinical costs and is at risk of further dislocation by the United terminations.

Specifically in the quarter, our practice salary, wages and benefits costs grew 2.8%, roughly 1 percentage point faster than our reported unit revenue.

Please note, however, that this understates the increase.

If you recall, the 2018 fourth quarter included roughly $8 million in labor costs for physicians at the North Carolina practice we were winding down, which costs did not recur in 2019.

Adjusting for this, the comparable increase in practice salaries, wages and benefits quarter-over-quarter was roughly 4%.

I also want to highlight, as we discussed last quarter, that med-mal, legal and other insurance costs increased roughly to $13 million year-over-year during the quarter, about $11 million of which is reported within our salaries, wages and benefit line.

In terms of our nonclinical expense, our combined G&A, supply and other operating expenses declined roughly $3 million in the fourth quarter compared to 2018, with a roughly $9 million reduction in G&A, partially offset by increases in other operating expense.

On the G&A side, this reduction primarily reflected position eliminations.

The offset were related primarily to earn-out activity in both the current and prior year quarters.

Last, we recorded $44 million in transformational and restructuring expenses in the quarter.

The majority of this investment related directly to our enterprise replatforming of our core systems and process reengineering.

Roughly $8 million was severance and termination costs and another $3 million or so related to lease buyouts as we consolidate office space around the country.

Overall, we reported adjusted EBITDA of $132 million, in the upper half of our guidance range and slightly above consensus.

For those of you maintaining models on the company, keep in mind that after adjusting for the Q4 2018 North Carolina salary expense I just discussed, our Q4 2019 adjusted EBITDA declined roughly $6 million.

In terms of margins, our adjusted EBITDA margin for the fourth quarter was 14.6%.

After adjusting for the North Carolina salary expense, the decline was roughly 1 percentage point.

Moving now to full year 2019.

Our adjusted EBITDA was $501 million with a margin of 14.3%.

After adjusting the prior year for the North Carolina contract, our full year 2019 adjusted EBITDA margin declined roughly 140 basis points.

This is consistent with our comments on the third quarter call.

And in a few minutes, I'll touch on how this plays into our forecasting for 2020.

Our operating cash flow for 2019 was strong.

Adjusting for cash transformation and restructuring costs of -- adjusting for cash transformation and restructuring costs of $69 million over the year, our adjusted operating cash flow was roughly $400 million.

Two items, in particular, benefited this result.

First, our revenue cycle transformation efforts reduced DSOs by about 2 days, adding $15 million to $20 million to cash flow.

Second, our cash taxes in Q4 were reduced by about $12 million from the sale of MedData.

It is important to note that in 2020, we anticipate significant additional onetime cash tax benefits of roughly $80 million.

Our CapEx for continuing operations in 2019 was $32 million.

We expect a similar level in 2020.

These amounts are down from a historical level of roughly $50 million, driven down by the sale of MedData.

In terms of capital structure, we ended the year with 0 borrowings on our $1.2 billion revolver, no debt due until 2023, and a $112 million of cash on the balance sheet.

Our leverage at year-end was 3.3x net debt-to-adjusted EBITDA.

Given the United matter, both on its own and combined with its potential intersection with pending surprise billing legislation, you should expect us to maintain our focus on a conservative leverage posture.

If more patients move to out-of-network status, you should expect our time to collect and cost to collect to increase.

For 2020, we plan to focus our cash resources on completing our transformation program, although I'll note that our budget also includes an estimated $50 million of tuck-in acquisition spend.

We've spoken at length over the past several quarters about our transformation and restructuring plans.

At this point, the diagnostic and preparatory work is largely done.

We are in full execution and implementation mode, and we expect to end 2020 roughly 3/4 complete and plan to finish the restructuring in mid-2021.

For 2020, we expect investment in third party resources to be roughly $100 million.

The majority of this investment is for the comprehensive systems replatforming across the organization to create efficiencies and greater effectiveness in our support functions, to variabilize our nonclinical cost structure and to enhance our scalability.

We expect our 2021 investment to be roughly half of the 2020 level.

And as I've said, we expect to be done in mid-2021.

It is important to note that the majority of these expenditures are tax deductible as incurred.

So the after-tax cost of these investments is roughly $80 million to $90 million in the year.

In total, over the aggregate 2019 to 2021 period, we are investing roughly half a year of cash flow in these third party resources.

With that said, I want to turn to our guidance for the first quarter and our preliminary outlook for 2020.

For both the quarter and the year, our outlook of adjusted EBITDA brackets current consensus.

We expect Q1 adjusted EBITDA to be between $90 million and $100 million with a midpoint of $95 million.

This outlook is based on expected same-unit revenue growth of 2% to 4%, which is consistent with our same-unit results for the fourth quarter, but also contemplates the extra day we'll have in Q1 given the leap year.

On the cost side, our outlook also contemplates a continuation of the broad trends we've seen in the recent past, in particular, the challenging unit cost growth and unit revenue growth mismatch and the elevated medical malpractice, legal and insurance expense we discussed last quarter.

For full year 2020, our preliminary adjusted EBITDA outlook is $470 million at the midpoint, which we have historically bracketed in a range of plus or minus $20 million.

While we generally don't guide to a revenue range, we have been engaging in aggressive portfolio management, particularly in anesthesia.

In the last 6 weeks, we have exited 2 anesthesia practices with roughly $60 million of revenue and breakeven EBITDA.

We expect additional portfolio activity, and it will likely partially offset our normal level of revenue growth.

For those of you maintaining models of the company, we would suggest contemplating revenue in the range of $3.5 billion to $3.6 billion.

As I noted, our overall adjusted EBITDA margin in 2019 was down roughly 140 basis points year-over-year on an apples-to-apples basis.

As we discussed on our last earnings call for 2020, we do anticipate less margin compression than in 2019.

Looking forward, our goal is to stabilize our margins in 2021 as our transformation becomes complete, and from there, return to growth.

Before I turn it back to Roger, one last comment.

Please remember that this financial outlook does not include any potential impact from the United matter.

With that, I'll turn it back to Roger.

Thanks, Stephen.

We have talked for several quarters now about the transformational activity that we have underway.

But today, I'd like to spend some time to pull all of this in context, particularly related to the organizational changes that we have also undertaken.

Over the last 40 years, we've had tremendous success in our growth, attracted more physicians to join us and created a true national medical group that is committed to our original mission, which is to take great care of our patients.

Throughout this company's history, we've taken it upon ourselves to invest continually in the pursuit of that mission.

As one of the leading medical groups in the country, it's become our responsibility to help set the standards of care for our patients.

Through the support of physicians across all of our medical groups, our organization has distinguished itself as a leading innovator.

Innovations such as our 100,000 Babies campaign for neonatology, leadership in the development of treatment for babies born with neonatal abstinence syndrome, quality and safety programs in the operating room, simulation programs, enhanced recovery after surgery, subspecialty training for advanced radiological interpretations, big data and artificial intelligence in radiology.

MEDNAX is a leading innovator in all of these efforts, and I am tremendously proud of the success we've had in caring for our patients.

In recent quarters, we've taken decisive action to address the challenges and headwinds in our business and position our company for success.

Although changes in our patient population in reimbursement and in the cost of providing care remain challenging, we are better equipped to face them today.

I want to emphasize that as we enter 2020, we are now organized very differently than we were just a couple of years ago.

In 2018, we took a deep look at the strategic opportunities available to our company in order to decide what businesses we should be in and even whether we should remain a public company.

Indeed, we did explore whether we might go private, and we talked to a large number of potential partners.

None of our discussions during that process resulted in a proposed transaction.

But the process itself was educational.

Most importantly, we learned what we needed to do to improve our company and much of the actions you have seen from us since are the result.

Following our decision to divest MedData, we are now an organization wholly dedicated to physician services and patient care.

The organizational and leadership changes we have made reflect that focus.

We no longer have a Corporate President or Chief Operating Officer.

Instead, our medical groups stand on their own, with dedicated presidents who report to me.

While radiology has largely operated as its own group since we formed it, the separation of American anesthesiology and pediatrics and obstetrics was a significant undertaking, spearheaded by our new group presidents, Dr. Kathy Grichnik and Dr. Mack Hinson.

Throughout the second half of 2019, Dr. Grichnik and Hinson built dedicated operating support, national, regional and local, for their organizations.

And along with Matt Devine, our President of MEDNAX Radiology, they entered this year in full motion with their operating plans.

Just as importantly, each medical group fully utilizes a dyad structure with physician and business leaders working together to execute on our operating plans up and down our organizational infrastructure.

We have a Chief Financial Officer with extensive experience and relationships to drive transformational and restructuring change, which Stephen has already outlined, and which is well underway.

We have new leadership within our managed care functions, and we are in the process of identifying a new Chief Information Officer.

We also have a new Chief Growth and Strategy Officer charged with investing in the growth of our medical groups.

And we have world-class consulting partners working alongside us to transform our organization and position us for adaptability, scalability, growth and future success.

We are entering 2020 with a clear vision and the eminent capability to succeed in each of our medical groups and to succeed as MEDNAX.

I also believe that based on our plans and operational forecast, we have a pathway to stabilizing our EBITDA over the coming year and to setting the stage for growth beyond that.

Looking specifically at our 3 medical groups, we continue to be very excited about radiology.

In 2019, our radiology organization generated roughly $0.5 billion in revenue, up 9% from the prior year with almost half of that growth coming organically.

Following the acquisition of Boca Radiology Group, our organization comprises over 800 radiologists who interpret more than 12 million studies annually, both on-site and remotely through teleradiology.

With our on the ground practices providing services in 15 states combined with vRad's customer base, we provide radiology coverage across the country.

We have also invested in some powerful innovations via both our practices in vRad.

It has always been our belief that combining industry-leading clinical practices and industry-leading technology would provide great opportunities for our radiology organization, and we're now seeing this come to reality.

During 2019, we invested in the installation of a common imaging platform for one of our foundational practices.

This means that the physicians at this practice, rather than reading from multiple pack systems and different facilities, can now interpret their entire volume of studies via a single workstation and a single queue, all linked directly to the hospitals that are submitting those studies to our radiologists for interpretation.

This was a key initiative for this practice.

And we believe we are in a unique position to move forward based on the underlying IT and systems capabilities we bring to the table via vRad.

We're excited about the growth opportunities for MEDNAX radiology as we scale investments like these across the organization.

Turning to American anesthesiology.

As we have discussed in the past, financial results in this medical group have been negatively impacted by a combination of constraints to revenue growth and historically high clinical labor cost inflation.

Unit labor cost inflation is a significant challenge across our organization, but it is particularly outsized in anesthesiology.

The simple fact is, there are not enough anesthesiologists and nurse anesthetists to meet that demand, yet reimbursement rates are insufficient to address this mismatch.

This is by no means unique to MEDNAX, and our focus remains on aligning our top line and cost trends.

To that end, we've taken steps around compensation structure changes, data and analytics improvements, changes in our operations support and augmentation of that support through our consulting partners.

As we undertake practice contract renewals, we remain focused on shifting our practices to a revenue-share model, similar to what we have in radiology.

We believe this structure encourages the practice leadership to focus on both clinician productivity and growth of the practice.

We have been encouraged by the performance of some of our first practices to renew under this structure.

In particular, we have seen measurable improvements in clinician productivity and a greater level of engagement by practice leadership, including with the hospitals where they are providing services.

As of the end of 2019, we have successfully completed contract renewals for practices that make up roughly 1/3 of our anesthesia revenue, and we have a goal of moving that percentage to 1/2 by the end of 2020.

We believe that this alignment of incentives within our practices is the right way to go and a vital component of our operating plans.

We have also undertaken and will continue to contemplate an aggressive approach to portfolio management.

From a peak of 47 anesthesia groups, our organization now comprises 41, affording us additional operational bandwidth that we can redeploy to support our remaining sustainable markets and practices.

All that said, the business environment in this specialty remains one with persistent case volume growth, but with scarce clinical resources and a difficult environment to increase prices.

As a result, we do anticipate additional compression of EBITDA in 2020.

However, we believe that we have a demonstrable path toward a stabilized EBITDA profile for our anesthesia organization as we exit this year and look to 2021.

Moreover, we've had outreach from several of our hospital partners asking us if our existing practices might consider covering more of their facilities in instances where the hospital is dissatisfied with their current anesthesia group.

I believe that the investments that we have made have put us in an advantageous position to pursue some of these organic growth opportunities.

Finally, we are looking at pediatrics and obstetrics with fresh eyes.

As you know, this is a large, highly diversified organization comprising well over 3,000 clinicians across more than 15 specialties and providing critical health services across the country.

Each year, we touch the lives of 1/4 of all of the babies born in the United States and many thousands more pregnant women and children with complex health care needs.

This is also a very resilient organization.

Operating results within pediatrics and obstetrics have remained very stable, despite the challenges presented by soft birth trends and in some areas, the same elevated clinical wage inflation trends that we have seen elsewhere.

Following our organizational realignment in 2019, we entered 2020 with the leadership and support structure wholly dedicated to pediatrics and obstetrics.

We've developed distinct plans to address any cost challenges we may face to continue to expand our footprint and to execute on innovative strategies for each of our service lines.

With all of our national, regional and local operating structures finalized, we're seeing a wealth of new ideas to put into place, more refined data capabilities and dashboards, more specific people resources for certain markets or specialties and shared services functions increasingly tailored to the specialties they support.

We're expanding the dyad structure that I mentioned earlier into each of our individual service lines.

Under this structure, we can identify specific business steps to take as well as specific growth plans for each specialty.

Across pediatrics and obstetrics, the most common theme that we're seeing is the opportunity for growth.

Indeed, we're seeing an increasing number of opportunities to win new business.

Beyond our normal and expected acquisition activity, we're getting more calls from hospitals who want to talk to us about the contract to provide neonatology services.

And we're doing just that on a number of new NICUs just in the first couple of months of this year.

As a result of our investments to expand our coordinated sales and marketing efforts using data-driven methods, we have positioned ourselves to be the provider of choice for these hospitals.

And as a result, our new sales pipeline has increased measurably.

Our pediatrics and obstetrics business will always be impacted by the broader trends in birth in the United States.

But with dedicated leadership and operations support, the opportunities for generationally-driven acquisitions and the expansion of our sales organization, I believe, we can become less reliant on these broader trends and generate accelerated growth.

Finally, as has always been the case across all of our medical groups in pediatrics and obstetrics, our highest priority remains to take great care of our patients.

We take care of more sick and premature babies than any other organization in the world.

This morning, we have over 5,000 sick and premature newborns under our care.

Babies who were born last night, mothers went into early labor unexpectedly, and we're taking care of them.

And just this week, we are hosting the country's largest neonatology conference as well as our own board review for neonatologists, which includes more than 700 combined physician attendees.

Over the decades, we have spent tens, if not hundreds of millions of dollars, investing in clinical research, education, quality and patient safety, developing the tools and protocols to improve care across a collaborative network of thousands of physicians.

We developed our own electronic medical record for neonatology in the '90s.

We have the world's largest neonatology clinical base, with over 27 million patient days and still growing.

We publish more articles in neonatology in peer review journals than anyone else.

Our 100,000 Babies campaign, which began almost 20 years ago, actually ended up including more than 400,000 babies, and we have put that investment into action in teamwork with our hospital partners, their nursing staff and our peer clinicians.

With that in mind, it was a tremendous honor to have our clinicians who manage the neonatal intensive care unit at St.

Luke's Hospital in Kansas City, recognized in the State of the Union Address a couple of weeks ago, for caring for a 21-week premature baby who was in the audience with her mother.

I want to do the same today and recognize Dr. Barbara Carr, the medical director of that practice and her team, for the incredible work they did to make that story come true.

As a neonatologist, I know personally, what kind of team it takes for this type of success.

What we saw at the State of the Union and in the news is truly just the tip of the iceberg.

It's not just the neonatologist, it's the team of nurse practitioners, it's the nursing staff at the hospital, the obstetrician, the hospital administration, it's the investment in equipment and capabilities in the NICU, and it's decades of investments in clinical research, education and quality done at MEDNAX.

We will continue to invest to benefit our patients, our physicians, our partners and our shareholders for decades to come.

I am confident that we have the plans in place across our medical groups as well as for our shared services functions to address the challenges in our business and deliver value to our shareholders and our stakeholders.

We've covered a lot of ground in our discussion today.

So before we go to questions, I want to leave you with 5 key points to take away from our call.

First, the challenges we have faced and continue to face in our business are not unique to MEDNAX, but we do believe we are in a unique position to manage against them and to succeed.

Second, we have made significant progress in addressing what we can control.

I have tremendous confidence in our team and in our plans, and I do believe we will continue to build on this progress through 2020 and beyond.

Third, we are at the most active period of our transformation, and we expect to get it largely done and behind us by mid-2021.

The United matter is of meaningful concern to us and to our patients, as we have discussed.

We would prefer a sensible solution, but we'll have to wait and see how things play out.

And fifth, we have been and will always be, first and foremost, a physician organization.

Our physician-centric leadership structure, our investments in advancing clinical care and our commitment to taking great care of our patients remain our first priority.

Alongside all these takeaways, I commit to you that you should expect a lot from us over the coming couple of years.

We certainly do.

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

And first we go to the line of Ralph Giacobbe with Citi.

I guess, what, if anything, can you infer or did United tell you about sort of the 4 states specifically?

Can you give us what those 4 states are?

And then, any other indication that this is just sort of phase 1 with more coming or anything along those lines?

Ralph, it's Stephen.

We've sort of said what we have to say on the United matter.

So we aren't going to go beyond our prepared remarks.

Do you mind telling me again the second part of your question?

Well, I was hoping you can give us the states?

And then any indication if it's just sort of phase 1 or if there's sort of more coming?

Okay.

I've already answered that, I guess.

Okay.

Can you give us a sense of when you received the notification from them?

And whether or not negotiations are still ongoing at this point?

Or is there sort of no negotiation at this point?

Ralph, I'd love to be able to answer your questions, but you got to ask me ones that I can actually answer.

We aren't going to make any more comments on the United matter really beyond what we've already said.

Okay.

And maybe you can discuss negotiations with other payers, I guess, at this point.

Is it getting more difficult to come to agreements on rate and/or are the balance billing headlines sort of being used against you in those discussions and greater threat, if you will, of more payers sort of willing to go out of network?

Look, we've had fairly good relationships across our payer universe over the course of time.

Many of the services that we provide are highly specialized, which I think does and, in many cases, for physicians where there are true supply problems, so there are meaningful imbalances between the availability of physicians in care and patient demand.

So I think we, over the course of time, have perhaps been in a slightly different position than some of the more commoditized elements of medicine.

But we've always sought to have good relationships.

And I think that is evidenced by the fact that we have well less than 5% of all of our contracts across hundreds, probably thousands of contracts that are in network, right?

We have -- we historically have had very, very small amounts and usually only transitory amounts of out-of-network patients.

That is our goal as a company, and I think that does sort of reflect the state of our relationships with our payer universe.

Okay.

All right.

And then just one last one, if I can.

Can you talk about recourse you have, whether it's with United or anybody else?

In the past, perhaps there was some willingness to balance bill and Roger, based on your commentary, it sounds like you may now have no alternative but to do that.

But there's obviously greater sensitivities around that with all the headlines.

So if you did have to go out of network and a payer decides to sort of pay you less, not more, can you just help us -- I mean, what is the current process you employ?

And just give us a sense of whether or not this could bubble and sort of cause DSOs to rise in cash flow implications?

Yes, Ralph.

So this, of course, as I said earlier, was unexpected and unique.

And so we're gathering what our solutions -- potential solutions are.

I think the base problem here is, it's just a big mockery to what the government is trying to do.

I mean, you have the House and the Senate trying to take away the surprise bills from the patients, and all of a sudden, these guys are kicking us out of our network and terminating the contracts.

I mean, again, these are not contracts that we were negotiating or anything else.

In fact, a lot of the contracts they've terminated has been in place for almost 20 years.

And so -- and they say that in their communication.

So I think the first thing we're going to do, of course, is try to publicize what's going on and go talk to the legislators and make sure that if they do put a bill in place that is one that, hopefully, takes this situation into account.

One thing, as we said in the press release, is that these terminations are not immediate.

In fact, none of them have taken place yet and will continue throughout the end of the year.

So there's a slow accumulation of these.

So -- and I think we have a lot of opportunity.

I've written, as I said, the CEO of United, a letter.

I want to make sure that he understands what's going on here.

And so we await that response.

And those are the things for right now.

I know that there are other physician companies that have taken more legal actions against them and that kind of stuff.

But we haven't done any of that as of now.

(Operator Instructions) And next, we go to A.J. Rice with Crédit Suisse.

Well, I just wanted to ask maybe about what's happening with the transformational and cost restructuring program.

So you ran $44.3 million in Q4.

I know that includes beyond just the third-party vendor.

It sounds like that's sort of the peak level, but is it going to be stable at that level of spending as you progress through the rest of this year?

And then, I guess, as part of all of this, too, you're exiting these couple of practices where you were breakeven.

Is that -- can you give us a sense of how many more of those types of situations exist in the portfolio where you might walk away from business as part of your repositioning?

A.J., it's Stephen.

Thanks for the question.

Sure, in terms of transformation, we are probably at our peak spend levels right now.

We have a massive, as you know, systems replatforming effort under way with installing Oracle and cloud, ERP, wall-to-wall across the organization.

With redoing our entire revenue cycle platform, which, as I'm pretty sure, we've discussed before, we have an 1,100-person revenue cycle platform that carries itself more than $100 million of annual cost.

So there's a tremendous amount of systems work going on, and that's all underway.

So I would think the heaviest part of that spend really is over the next sort of 3 quarters as the bulk of that -- of those efforts get in place.

And then it should start to scale down.

But I wouldn't really think of it as that $40 million to $44 million number quite as much.

It's probably something more like in the $25 million, $28 million per quarter type range for those third-party investments because some of those other dollars, as I noted, were for severance or for lease buyouts or we have a lot of ancillary efforts underway.

And from a portfolio perspective, I think the best way that I can answer that question, Roger noted in his comments that over the last series of quarters, we've gone from 47 to 41 anesthesia contracts -- or from 47 to 41 practices in anesthesia.

We continue to work on that portfolio.

And I think it's really hard to give an outlook other than that we do expect some additional activities within that portfolio.

I mean it -- in some cases, we have practices that are marginally profitable or at breakeven, and we've been putting a lot of effort over the past several quarters in determining whether those -- the performance of those practices can be improved or not.

Once we reach a conclusion that the answer is not, then we're going to do something about it.

So we made that more as a directional comment and to sort of frame revenue because otherwise, the revenue guidance that we laid out for 2020 would seem a bit soft.

It's soft because we're eliminating revenue that carries no margin.

Next, we'll go to Chad Vanacore with Stifel.

This is Seth Canetto on for Chad.

I just had a question on the 2020 outlook.

You guys have mentioned that the adjusted EBITDA was down 140 basis points on an apples-to-apples basis and for 2020, we're forecasting a less margin compression than in 2019.

But how should we think about that compression?

Will it be, like, closer to 70, closer to that midpoint or just can you give us any more thoughts about how you guys are thinking about that?

Yes, Seth, it's Charlie.

Stephen gave you a couple of parameters to think about for 2020 at the top line, and we did that fairly purposefully to think about how you look at your model.

So something that's comparable to slightly higher at the top line in 2020 to what we reported in '19 of $3.5 billion.

And if you look at the midpoint of our adjusted EBITDA guidance range, I think you'd see something that is moderating from the 140 bps that we referenced for 2019 and the margin compression we saw there and moving towards the 100 bps range or something like that.

But I think you can work out the math on that looking at our EBITDA guidance range versus that top line.

Okay.

And then just a question on G&A spend.

In the fourth quarter, you guys have talked about how it's a little bit better-than-expected from the trip of the North Carolina business.

But just given the cost initiatives there, what should we expect for that going forward throughout 2020 in terms of dollar amount?

Yes.

We don't generally comment too much prospectively about G&A as a line item, to some extent, because a lot of expenses through the restructuring are getting remapped, so we are pushing more out the practices.

So in some cases, some things that may have previously been G&A will migrate into COGS.

In other cases, we have things moving in the other direction.

We're also doing a lot of installation technology, which will have some substitutive effect on some labor costs, and we are working, in general, on many efforts for labor efficiency.

So I guess, it's not a terribly satisfying answer to say we expect it to move around a bit, but we expect it to move around a bit as we work through all these transformation efforts.

Next, we'll go on the line of Rishi Parekh with Barclays.

I guess, 2 questions.

One, I appreciate that you're not giving us any information on the UNH contract, but in general, can you provide us what your average commercial over Medicare spread is for anesthesiology, radiology and neonatology?

And then in terms of the UNH contract, is that a regional contract or a national contract?

The first part of your question, I can't answer because I think I'd break much laws if I did.

The second part of your question is, we have many, many contracts with United as we do with most of our payers.

We generally don't have national contracts.

Okay.

And then on the out-of-network payments, can you just maybe give us an idea how you get paid on those out-of-network payments?

Is it less than or more than your in-network as you see today?

And then what is your Blues exposure?

Yes, I think we're going to keep our comments around that, too, to what we discussed, related to United and particularly related to out-of-network payments, as there is just simply too much diversity of how those are administered, collected, et cetera, to give a blanket comment.

Yes.

I would add 2 facts towards that.

One would be that, as we said before, we typically have had well under 5% of our total revenue in out-of-network because we -- it is not good for our patients or anybody else to be out of network.

So we are fully supportive and wish to have all of our patients being in network.

But when you go out of network, while I can't speak to any individual contract, I will say in general, going from in-network to out-of-network imposes a lot of inefficiency and a lot of extra costs and longer time periods to collect and that's on top of what's most important thing, which is a lot of stress and burden on our patients.

Think about it this way.

Typically, when we are in-network with most of our payers, we can electronically adjudicate the majority of our claims.

Out-of-network claims, particularly because we have so few of them, require a high degree, if not complete, manual handling.

In many cases, payers, and we have had some experience with this and we have heard from others as well, that if you get kicked out of network that some payers, including United, will cut off our access to their systems and will require our people to literally pick up telephone and call them to status an account or to find out what copays are required.

I don't want to go too into the weed, but it is essentially an effort to encourage us to stay and anyone to stay in-network.

They impose lots and lots of speed bumps that make adjudicating plans significantly more expensive, significantly slower and a significant burden upon the provider and, in particular, the patient.

So I just want to give you a little bit of color that, consistent with the comments that I made before, getting kicked out of network creates a ton of hardship for everybody.

Next, we'll go to the line of Kevin Fischbeck with Bank of America Merrill Lynch.

I wanted to focus on the comments on kind of returning to growth in 2021.

How much of that is kind of a view on the top line reaccelerating versus a view that you're going to get a more balanced cost growth versus rate growth dynamic?

And to the extent that it's the latter, what gives you confidence that the cost growth is going to no longer be the margin pressure once we get past 2020?

Yes, Kevin, it's Charles.

Let me frame that a little bit because it's a multitude of factors that we're looking at.

I would say that part of it within our medical groups reflects something that Roger talked about pretty emphatically surrounding anesthesiology, that we do believe we have a demonstrable path as we move through 2020 to go into an exit from this year with a stabilized EBITDA profile for that medical group.

We also believe that there is a meaningful amount of growth opportunity still remaining in radiology, and the trends have been very favorable for us in that business.

And in pediatrics, with the investments that we've made, with the dedicated leadership, we do believe that there's an opportunity for an acceleration of growth.

So part of our views looking at 2020 as a whole reflects some of those inflections in trajectory.

And while we do envision some continued compression of EBITDA and margin this year, we do believe we have a high visibility of where that can go.

And exiting 2020, we do think that trajectory can continue to change with better cost alignment to our top line, in particular, and the acceleration of top line growth in medical groups where we're making concerted investments.

So I think we kind of frame it as a view that we believe we're on a visible path towards exiting this year with a stable dollar EBITDA profile.

That is our goal.

And with the early-stage investments and ongoing investments and growth of our medical groups, those can take greater and greater hold as we move out of 2020 and 2021.

I hope that's helpful.

I guess the question is, you -- I kind of just -- you guys maybe are resetting kind of the EBITDA base here, but it's not a bit like in the prepared remarks, as you guys were talking about kind of structural supply pressures that there's shortages of doctors and certain specialties, which is making it hard, and that's putting up a pressure on labor, even if you're able to reset this, how do you have confidence that, that's just not going to say, okay, but now we're going to see pressure again the following year off of these rebased numbers?

Great.

Kevin, it's Stephen.

Part of it, to add to Charlie's comments and to go direct to your follow-up, we are investing a tremendous amount of technology effort to better manage all of our labor.

The vast majority of our P&L is physician and clinician labor, and we want to have those physicians and clinicians utilize their time as efficiently as they possibly can.

So we are investing in a lot of things to help with that, which should help close that gap in terms of labor costs.

We also are making a ton of investments in trying to make our G&A and shared services more efficient and automate as many tasks as we can.

That should also help somewhat to close that gap.

But the bottom line is, we also have to get paid for the services that we provide.

And it is very difficult going on some period of time now with the sort of 1%, 1.5% type of unit reimbursement growth in the face of the real world of providing highly specialized physicians and clinicians that take -- it takes a decade and a half to make a neonatologist.

So the -- and demand at this point does outstrip supply.

So that is, at the end of the day, the fundamental question, and I think we're taking a very broad and hard effort against it.

And our hope is that we managed to find a way to get closer to balance and that we manage to drive both organic- and M&A-driven growth that tip the balance towards upside as we get through the transformation and back into ordinary way operation.

Next question is from Whit Mayo with UBS.

Just one question for me.

I think, Roger, in your prepared remarks, you discussed prior conversations you've had with private equity sponsors, none of which seem to manifest into additional conversations or a bit.

I'm just kind of curious what the time frame is you're referencing?

Just any other thoughts you care to share would be helpful.

Whit, it's Charlie.

That was in 2018 that Roger was referencing.

And next we'll go to Gary Taylor with JPMorgan.

I guess maybe following on Whit's question.

I want to ask about Starboard, and I certainly appreciate there's probably a lot of what we'd like to know that you can't answer, but maybe any help.

I mean, I think last week, they announced they increased their stake by 1/3.

They made their alternative slate of Directors public.

So maybe the few other questions I have is, is the annual meeting set for May?

Is -- do you have an ability to delay that if you wanted to?

Does Starboard have any confidentiality agreements?

Do they have any access to nonpublic info that we don't have?

And there also were headlines last week about possibly line of business sales being considered.

So I know investors have a lot of questions about all of that.

So anything you could help us with there would be great.

Well, as you've already figured out, there just isn't much along those lines we're going to be able to talk about.

Your questions sort of fall under a different type of questions, and we're just not prepared to answer any of that stuff right now.

What about just the annual meeting?

Is that yet set?

And do you have the ability...

No.

That hasn't been set.

Yes.

No, that has not been set.

And is there an outside date on how far you could push that out if you chose to?

Gary, Roger, has, I think, already answered what we're able to now.

Okay.

Last one, if I could just do one more, sorry.

Just on United, and I know, I know we're trying to limit what we've said there.

I know some states, over the last few years have implemented laws and regulations that have really defined what you have to get paid or what you're allowed to get paid on out-of-network, and then there's other states, as Steve, as you mentioned, are there's an array, there's a lot of diversity, it's more nebulous.

Is there anything in these states that United has chosen to terminate that, I guess, are these -- would potentially be the more nebulous states, so it puts you a little more at risk?

Or -- I wanted to ask and take a shot at it.

Look, Gary, we are generally happy with most of the laws that each state has passed as far as being out of network.

Now most of that stands because you'll remember, last time we had this conversation, I said I wasn't losing much sleep over the out-of-network stuff because we weren't out of network.

But in those states where, for whatever reason, we may be out of network for a few days or whatever, we're not unhappy with the bills that have been passed, we find them to be mostly reasonable.

I think the problem most physicians are having is with the federal legislation that's being proposed.

And as you know, there's more than 1 bill that is being proposed at this point in time.

And there's probably some time to go before anything really becomes more official.

But the lack of -- being able to negotiate, et cetera, is what most people are unhappy with.

I wouldn't say there's anything -- just to answer your question, I wouldn't say there's anything special about any of these states.

For those in the audience, we have gotten over our normal hour.

But to be respectful, we still have a few questions in the queue and with your patience, we're happy to take those and try to move through them pretty quickly.

And next, we'll go to Jason Plagman with Jefferies.

Just a question on the comment on variabilizing the clinician compensation model.

I think you mentioned a target of 50% of the anesthesia practices making the switch by the end of 2020.

Can you just add any color on the timing of contract renewals beyond -- in 2021 and beyond?

And the trajectory to get that eventually to 80% or 90% of anesthesia practices on a more variable compensation model?

Yes, Jason, it's Charlie.

Roger was correct that, that's what we have in our sights related to the coming year.

And moving beyond 2020, I think the best way for you to look at it is, we would probably have some ratable amounts over the next couple to 3 years beyond 2020 that we would also be interested in moving.

So moving from, if we're successful, roughly half of our revenue base converted to a revenue share model and then moving into a solid majority and then most or a predominant amount of that over the coming -- over the couple of years beyond that or subject to some of the calendar renewal schedules and alike.

Yes.

It's mostly a function of when their current contracts expire.

So as their current contracts expire, they get renegotiated, and we're just following the calendar of when those contracts expire.

Great.

That's helpful.

And then last one from me.

It looked like my math would say, admin -- hospital admin fees in Q4 were up about $10 million from the prior quarter.

Can you just comment on the negotiations or discussions you're having with your hospital partners on admin fees and subsidies?

Yes, Jason, that's -- this has come up in the past because that line item has moved up.

I think in general, the components you were thinking that are, some of it is purely business growth, where we have certain different service lines that have a greater admin fee associated with them and that are more funded by the hospitals, and we've often brought up the example of OB hospitalist program.

So some of it has been business growth within our service line that has a greater admin fee component.

Some of it has also been different negotiations and contract updates with hospitals themselves.

But it's been a mix of those factors that's moved that line, particularly over the past couple of years.

Next question is from Pito Chickering with Deutsche Bank.

I'll take another shot at this one, I apologize.

But last quarter, I asked about, so what percent of managed contracts locked in for 2020?

With the changes to the United contract, investors are obviously skittish about this topic due to private competitors bonds trading $0.50 on the dollar.

Is any chance you can share with us what percent of your contracts you have visibility to be on for 2020?

And how it compares versus this time last year?

That's really not something that we've ever really commented on, Pito.

We have a tremendous diversification of our managed care contracts within payers, within states, across service lines.

So we've generally not looked at it in that fashion.

And secondary to that, if you go back to some of Roger's comments, these terminations were unilateral, and in instances that Roger brought up, related to contracts that have been in place for 10 to 20 years or longer.

So our focus here is on the process by which this was undertaken and not at any kind of renewal schedule or anything like that.

All right.

And then let me ask a different question.

Capital deployment, you're guiding the shares higher to be for 2020 versus fourth quarter.

You bought back a sort of truckload of stock in 2019.

Should we read this as any signs to your capital deployment strategies?

Can you sort of talk about capital deployment in 2020 versus 2019, any changes we should read into or not?

Sure, Peter.

It's Stephen.

The only comment that we made in our prepared remarks was that, especially in the face of this United matter with an unknown outcome and unknown impact or scale, you should expect over the near-term for us to have a pretty conservative posture from a leverage perspective.

We obviously need to finish the transformation work that we have begun.

We do want to continue with M&A, particularly, in the pediatrics and women's and children's business, and we put out there the big numbers we contemplated in our model, which was about $50 million.

If you look at 2019, what you'll see is our total M&A spend was roughly around $110 million, $120 million, but about half of that was related to radiology and the rest was women and children.

So kind of a consistent type of women and children spend over 2020 is at least the underlying assumption in the model.

In terms of other historical share repurchase activities, I think there were certain circumstances at those times around those repurchases, and I'm really not in a position to make any comments about any sort of forward-looking activity on that front.

And next, we'll go to Matt Borsch with BMO Capital Markets.

So my question is not about UNH specifically, but just to understand the contracting more broadly to the extent that's in focus.

Generally speaking, is it more the case that your physician contracts are based on regional or statewide fee schedules?

Or would you say, are the majority of them, at least to what you want to look at by revenue volume, whatever, based on practice-specific negotiation?

I would say there that B is the right answer.

They are practice specific, depending on geography as well as specialty types and number of physicians required to cover.

We do have -- just in our pediatric group, we do have pediatric cardiologist, pediatric intensivist, neonatologist, hearing screen.

I mean, it's just a number of different services that we're able to provide.

So it's going to be dependent on all of that.

And does that...

sorry.

I would just...

sorry, go ahead.

No, I was just going to ask if the customization, I would think, would be correlated with the market or pricing power that you have, but maybe I'm wrong about that.

Look, I would just go back to a comment that I made earlier is that, look, we, for the most part, provide really sensitive and important services to a very vulnerable patient population that are either vulnerable because they're premature babies, they're vulnerable because they're high-risk pregnancies, they're vulnerable because more than half the patients that we serve are Medicaid babies in our pediatrics business.

I mean, we take care of really sick little kids and that the dynamics of our payers' discussions, for the most part and over the course of time, have been cordial.

And nothing that you would find extraordinary.

We have not been, in any meaningful way, subject to heavy-handed or abusive approaches to figuring out how to make sure that these folks are -- have access to these services.

So this is a significant departure and that is -- and it's a very significant -- it has a potential to be a very significant matter, and that's why we are highlighting it the way that we are because it deserves to be highlighted.

And I want to stress one point that we keep making over and over again, which is that it's never been our strategy to be out of network.

And I think, it's really important to know that there are a number of times when we acquire a group of physicians who are out of network, and we automatically and immediately bring them into network, and our negotiations take into consideration what the new revenue from the group is going to be once they get into network.

So we have been adamant from the beginning, when you're taking care of these very sick newborns, you're developing relationship with the patients and the parents.

You're there with them at night time.

You're -- when the times are bad, you sit there and you hold their hands.

These people are going to be -- have patients in the hospital for 2, 3 weeks, a month, more than that.

There's a special relationship that is built between the parents and the physicians who are there from the delivery until the time the baby gets discharged.

And the good -- the news are not always good news.

There are times when you unfortunately have to deliver some bad news.

And so there's a very special relationship.

And now to go tell the parent, "Listen, your insurance company is not going to pay the bill.

I'm going to have to send you a bill," is not something we want to do.

And with no further questions in queue, I'll turn it back to the company if you have any closing comments.

No.

Thank you, John.

Appreciate your help.

And thanks, everyone, for listening this morning.

Great.

Thank you.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.