Pediatrix Medical Group Q4 2023 Earnings Call Transcript

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February 20, 2024

There are 9 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 2023 4th Quarter Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time.

Operator

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Charles Lynch. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. I'll quickly read our forward looking statements and then turn the call over to Jim. 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 Pediatrics' 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 Pediatrics undertakes no duty to update or revise any such statements whether as a result of new information, future events or otherwise.

Speaker 1

Important factors that could cause actual results, developments and business decisions to differ materially from forward looking statements are described in the company's filings with the SEC, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non GAAP financial metrics. A reconciliation of these non GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our quarterly reports on Form 10 Q and our annual report on Form 10 ks and our website at www.pediatrics.com. That, I'll turn the call over to our CEO, Doctor. Jim Swift.

Speaker 2

Thank you, Charlie, and good morning, everyone. Also with me today is Mark Richards, our Chief Financial Officer. Our Q4 results were within the revised expectations we provided in November. Our overall same unit volumes reflected strength within our office based maternal field medicine services, partially offset by lower volumes in our hospital based services. Notably, these comparisons are against very strong volumes in the prior year quarter.

Speaker 2

Our underlying same unit pricing was also stable absent certain distortions from last year's Q4 that Mark will detail. Turning to 2024, we provided this morning our preliminary outlook for adjusted EBITDA of between $200,000,000 $220,000,000 This outlook reflects clear progress in 3 priorities: effectively transitioning to a strong sustainable revenue cycle management program generating continued efficiencies across our support structure and maintaining strong payer relationships in a high in network status. It assumes also stabilizing our practice level margin profile against the headwinds we face. I'll give details on each of these priorities. 1st,

Speaker 1

we have moved forward

Speaker 2

with our transition to a hybrid RCM model. We've continued the expansion of our internal team and expect that we will soon be fully staffed and we have worked closely with a new vendor under an interim transition engagement that we intend shortly to shift to a long term relationship. Thanks to this combination of robust resources, we have not encountered any significant disruptions to our RCM activities through the Q4 and to date in 2024. 2nd, while this hybrid RCM model does necessitate additional internal staffing within our G and A line, we continue to identify efficiencies within our non clinical infrastructure such that in 2024, our expected total G and A expense will remain at a comparable percent of revenue as compared to 2023. 3rd, although our in network status has typically been above 95%, we entered this year with an even higher in network position following successful negotiations with 2 payers in 3 states where we previously had been out of network.

Speaker 2

As we've discussed in the past, we believe that these renegotiations were made possible by our ability to effectively navigate the arbitration process for out of network claims under the No Surprises Act through which we've been able to demonstrate the value of the critical services our affiliated clinicians provide to their patients. We are very pleased that patients and their families now have in network access to these services and we are gratified to have a broad recognition by payers of our essential role in the market. Finally, as I noted last quarter, we are also focusing on narrowing the range of financial performance across individual practices in our organization. We have identified and initiated specific plans for a wide range of affiliated practices, and these plans themselves encompass an array of structural, tactical and strategic steps. As we have been executing on these plans, we expect that activity will accelerate through the year.

Speaker 2

As a result, we believe that the financial impact of these improvements will build cumulatively through 2024. Overall, I'm confident that our focus on the operating priorities that are critical to our success will benefit all stakeholders. And I firmly believe that this focus in no way detracts from our mission to take great care of the patient. We look forward to executing on these priorities throughout the remainder of the year. Before turning the call over to Mark, I want to emphasize that above all else, we are a clinically focused organization and we take very seriously the critical role we play in the improvement and quality of patient care for the most fragile patients.

Speaker 2

This week, pediatrics will be hosting 2 concurrent conferences, our 12th Annual Specialty Review in Neonatology and our 45th Annual NEO, the Conference for Neonatology. It is a testament to our mission that we have hosted these important events for so long with strong attendance that goes well beyond pediatrics affiliated clinicians. With that, I'll turn the call over to Mark Richards.

Speaker 3

Thank you, Jim. Good morning, everyone. I'll provide some details for the quarter. Our same unit volumes were mixed in the quarter with hospital based volumes declining somewhat offset by strong office based volumes, specifically maternal fetal medicine. Notably, these comparisons were against strong volumes in the prior year Q4.

Speaker 3

On the pricing side, there are 2 key items to call out for you to make an appropriate year to year comparison. First, in the Q4 of 2022, we recorded revenue from our prior RCM vendor for financial support related to aged receivables, which did not recur in the 2023 Q4. This reduced our same unit pricing growth by roughly 2% in Q4 of 2023. Additionally, we recorded a modest amount of CARES dollars in Q4 of 20 22, which also did not recur, reducing our same unit pricing growth in Q4 of 2023 by an additional 40 basis points. These items clouded what we view as a stable and positive pricing comparison, which included favorable payer mix and a growth in contract and administrative fees.

Speaker 3

On the cost side, our practice level expenses declined slightly year over year, largely reflecting lower incentive compensation and malpractice expense, partially offset by increases in salaries and group insurance expenses. As Jim noted, underlying pricing level salary growth remained elevated in the mid single digits. Lastly, G and A increased slightly year over year, partially reflecting staffing increases as we continue to build our internal RCM team. We generated $73,000,000 in operating cash flow for the 4th quarter, resulting in full year operating cash flow of $146,000,000 As Jim noted, we're pleased that our RCM transition did not cause any material disruptions in billing and collections in the 4th quarter. And our DSOs were basically flat at year end compared to the end of Q3.

Speaker 3

We ended the year with total borrowings of $628,000,000 and cash of $73,000,000 for net leverage at year end of just under 2.8 times. As a reminder, we are a user of cash in the Q1 of each year as we pay out incentive compensation and other benefits. And this cash balance will reduce any potentially borrowings needed before we turn to expected free cash flow generation in Q2 and beyond. I'll add some details to our 2024 outlook. We expect net revenue of $2,000,000,000 to $2,100,000,000 or modest growth over 2023.

Speaker 3

And as Jim touched on, we anticipate that our G and A expense as a percentage of revenue will be comparable in 2024 versus 2023, with additions to our RCM team offset by continued efficiencies across our corporate infrastructure. Finally, in terms of quarterly earnings progression, we anticipate that our 1st quarter adjusted EBITDA will represent 17% to 19% of full year adjusted EBITDA, largely reflecting the normal seasonality of our financial results. With that, I'll turn the call back over to Jim.

Speaker 2

Thank you, Mark. Operator, let's now open the call for questions.

Operator

Your first question comes from the line of Brian Tanquilut from Jefferies. Please go ahead. Brian from Jefferies, your line is open. Please check your mute button. Okay, we'll move on.

Operator

We'll go to A. J. Rice from UBS. Please go ahead.

Speaker 4

Hi, this is Anja on for A. J. The company previously sized around a $50,000,000 RCM headwind in the first half of twenty twenty three. Would that be a tailwind in 2024 for pricing in the first half?

Speaker 3

No, I don't think so. We are in the midst of a transition from an end to end vendor to a hybrid solution. I would say as we progress through this transition, which is staged in various components throughout 2024, we expect to maintain stable pricing through this transition, I. E. At continuance of what we saw in the Q4 of 2023.

Speaker 4

Got it. Thanks. And then a quick question on arbitration. CMS reopened the arbitration portal in December. The company had previously talked about having around a 75% success rate in arbitration cases versus industry average of 71%.

Speaker 4

Are there any updates on this win rate? And are we seeing more cases go through arbitration than previously? Thanks.

Speaker 2

Well, since I'll just start. Since we're back in network now with a number of the payers that we were having

Speaker 5

I would say

Speaker 6

that the process and our internal process for this,

Speaker 2

I would say that the process and our internal process for this, we've continued to refine by having much of that capability in house. Yes.

Speaker 1

And Anja, our win rate has improved through the course of the last several months. We're approaching at least on our most recent data, we're approaching almost 90% win rate when we are going to arbitration.

Speaker 4

Great. Thanks. Thanks a lot.

Operator

Your next question comes from the line of Ryan Daniels from William Blair. Please go ahead.

Speaker 7

Hey, good morning guys. This is Jack Semp on for Ryan Daniels. Thanks for taking my question. First, the adjusted EBITDA guide was admittedly wider for the first quarter was admittedly wider than what you've guided to in the past. Can you just talk about the rationale for this and maybe the puts and takes that get you to the low end of the range versus the high end of the range?

Speaker 1

Thanks. Can you clarify, I didn't catch it right, related to the Q1 or the full year?

Speaker 7

Sorry, the Q1. I think the guide was $20,000,000 range versus what you've done in the past of about $10,000,000

Speaker 1

I think for the full year that's we provided a $20,000,000 range, which is a give or take a 10% range around the midpoint of where we're at. For the Q1, if you do the math on what Mark provided of 17% to 19% of full year EBITDA, that's a little bit narrower than $20,000,000

Speaker 7

Sorry, yes, I definitely misspoke. I meant the full year. Sorry about that. And then just a quick follow-up here. Last quarter too, I know you mentioned that you're planning to tackle the labor cost challenges and growth in clinician comp.

Speaker 7

Curious if you can just give any additional color here and kind of what you've done or at least plan to do heading into 2024? And then 2, just maybe if we can just get your expectations here for 2024 with this initiative as well? Thanks.

Speaker 1

I can start off and let Jim add some color. Within our expectations for the full year, EBITDA is similarly an expectation of some moderation in underlying practice level of expense growth. And as we discussed in the previous quarter and Jim referenced this morning, we have fairly specific plans across a pretty broad spectrum of practices that have any number of different focal points to them. And a lot of that is geared toward a stabilization of gross margin across our practice spectrum. And within that and obviously within our guidance for this year is some moderation in overall practice level expense growth versus what we experienced over the past year.

Speaker 1

Jim, do you want to Yes.

Speaker 2

And we're looking at really what we're doing on the variable and fixed comp side to have more stability around that. Additionally, I think what we've seen along the way in starting up new practices is that the in some of the specialties, the harder challenge to recruit in and pay those physicians. I think we'll still see some of that, but I think in some of the specialties where we've largely had to use locums, we think that there's a expanding pool of clinicians where we are not going to have the really the contract labor as a headwind.

Operator

Your next question comes from the line of Pito Chickering from Deutsche Bank. Please go ahead.

Speaker 8

Hey, good morning guys. On the revenue growth guidance of $2,000,000,000 to $2,100,000,000 what are the components of the revenue growth split between volume and price?

Speaker 3

Hey, Pito. Good morning. We I would take out a couple of pieces. We're expecting stable volume throughout 2024 in our guidance. Volume, of course, is a contributing factor to our top line range that we provided.

Speaker 3

I would say also as we indicated, we expect through our RCM transition for rate to remain somewhat stable through 2024 certainly as we complete the various stages of the transition and we move over to our complete hybrid solution, there is opportunity for rate improvement as we approach the end of the year.

Speaker 8

Okay. So basically stable volumes and stable rates. So I mean as you brought on those out of network contracts into in network, was that a rate tailwind or a rate headwind?

Speaker 1

That's generally we're going to move from an out of network to an in network position that's generally favorable for us, Peter.

Speaker 7

All right.

Speaker 3

And the last component of PETA, the last component of that top line revenue estimate is around organic growth and the opportunities there.

Speaker 8

Okay. Which actually is a great segue. Looking at your sort of guidance ranges with contracting for pricing basically set and contracting with your doctors basically set, Is the only variable between the high and the low end simply where the volumes end out or what are the components are there between given the high end versus the low end of guidance?

Speaker 1

I mean, Pito, I would say that, that is certainly a component of that range. I want to be clear though, we have a lot of activity on the operational side, be it in the RCM transition, in our practice level plans and in our corporate plans. So there is an execution component in each of those that we wanted to take into account within that guidance range.

Speaker 8

Okay, fair enough. 2 more quick ones here. With your contracting with your physicians, is there any change to sort of turnover as those contracts come up for renewal? Has there been any change to turnover of those docs on those contracts or is it pretty stable?

Speaker 2

It's been pretty stable. Our turnover is very low as we've commented before. And with most of these contracts, again, some of them are renewed over a 3 year period. And in the specialties we're in, we really are the medical home for a lot of these specialties. So I think that really breeds confidence within the clinician pool to remain a part of the organization.

Speaker 6

Right. Makes a quick sense.

Speaker 8

And then last quick one here. Free cash flow conversion for 2024 should be pretty similar for as it was in 23 now that RCM is pretty stable? Thanks so much.

Speaker 1

I would think so, Pito, if you look at 2023, it was a little over 70% from adjusted EBITDA to operating cash flow. Our general rule of thumb has been in the range of maybe 2 thirds of adjusted EBITDA into operating cash flow. So that's a kind of a good baseline for you to think about.

Speaker 6

Great. Thanks so much.

Operator

Your next question comes from the line of Brian Tanquilut from Jefferies. Please go ahead.

Speaker 5

Hey, good morning guys and sorry about the technical difficulties earlier. Jim, I guess my first question, in your prepared remarks you talked about structural, tactical and strategic changes that you're making to the business. Maybe if you can share with us what falls into each of those 3 buckets that you alluded to?

Speaker 2

I suppose when we look at it at face value, one is and we've talked about volume in the past, we're looking at staffing associated with the practices to make sure that we have the right staffing mix in terms of personnel. And within that is really are we using clinicians versus other clinicians such as nurse practitioners or PAs. I think that's one piece. 2, we know that we have contract revenue in our relationship with some of our hospital partners and certainly that becomes an element in terms of rightsizing the support for those practices and making sure that we really are executing with our hospital partners in that regard and we've had some favorable results thus far. And I think as well as the issue that we've seen about being back in network in the case of our ambulatory practices that have been adversely affected because as opposed to the inpatient services where the patients do make it to the service largely, in those other areas, we are really those patients are directed elsewhere.

Speaker 2

So we feel that there's going to be a benefit as we get more of our marketing and execution around patient volumes from an elective ambulatory standpoint.

Speaker 5

Got it. Okay. And then maybe since you talked about inpatient, is there anything you're seeing in the hospital other than a tough comp from last year that kind of like hinders the ability to drive growth? Is it your hospital losing market share or is it just a birth rate altogether? Just curious how you're thinking about volumes.

Speaker 2

I think that part of the volume issue is take the NICU out for a moment. We did not see the large amount of volume this year this last year that we saw in 2022 related to the other inpatient services such as pediatric hospitalist, pediatric ER and pediatric ICU. I think from the standpoint of our inpatient NICU services, people talk

Speaker 5

a little bit

Speaker 2

about a higher degree of severe prematurity and increasing length of stays and we've certainly seen that. Some of the bread and butter around admissions into the NICU have been variable across the country. So but again, we anticipate volumes will remain kind of where we are for the time being, but we don't see any indication of volumes decelerating going forward.

Speaker 1

Yes. And Brian, just as a quick note on that, we did highlight that that the Q4 had some pretty strong comps that we went against. We look at our NICU days over 2 year stack, they were actually slightly positive versus 2 years ago. So in our view, looking across as many states and practices, where we are providing neonatology services, we usually view it as more appropriate to look at a longer term timeframe to get a better sense of where things are going. And as a result, as we look into 2024, we're not anticipating within our outlook for the year, any meaningful movement in patient volumes.

Speaker 1

So that makes sense.

Speaker 5

And then maybe last question for me. Since you guys talked about the in network, how much out of network is going to be left in the business, let's just say, as we exit the year?

Speaker 1

It's a good question because you're asking things that we don't know about how this year will unfold. But where we stand right now, our historical experience is 5% or less than 5% out of network position and we're lower than that as we enter this year, thanks to some of the re contracting we've done.

Speaker 5

Got it. Okay. Thank you.

Operator

And you have a question from the line of Kevin Fischbeck from Bank of America. Please go ahead.

Speaker 6

Great, thanks. I guess a couple of follow-up questions. When you said that going in network was usually a positive for the company, were you talking about positive on the rate perspective? Or are you talking about this dynamic with the outpatient volumes usually getting a boost once you go in network?

Speaker 1

I was referencing the rate. Our experience over the last several years is that we're in an when we are in an out of network position, the reimbursement we're receiving from payers tends to be quite low. Hence the arbitration processes that we enter. So we're generally unfavorably positioned when we are out of network from a rate standpoint. Jim, you've Yes.

Speaker 2

And Kevin, it is volume too, right? It is volume on the ambulatory services particularly. And although we had strong numbers on our maternal fetal medicine practices. But if you think about it, when that is impacted in that outpatient setting, that doesn't impact some of the inpatient if that is a mother who's directed away from one of our practices that might not deliver at one of our facilities. So again, that captures that volume back, which we're very pleased with.

Speaker 2

Okay.

Speaker 6

And then if I just want to make sure I got the numbers right. I think the reported same store pricing in the quarter was minus 50 basis points and you're saying add back 2% and then another 40 basis points. You kind of look at overall pricing in the quarter as like a positive 1.9% on a normalized basis. Is that the right way to think about it?

Speaker 3

That's right.

Speaker 6

That's right.

Speaker 3

That's right. Okay. If you walk through the pieces, same unit revenue quarter over quarter is down about 1.5%. About 1% of that is attributed to volume, which brings same unit rate down to about a 50 basis point decline. We've got some carriers in there.

Speaker 3

And then of course, you referenced the other component related to the guarantee last year.

Speaker 6

Okay. So when you understood that your revenue guidance assumes stable volumes and stable pricing, when you say stable, you mean flat year over year? Or do you mean stable as in like still about 2% pricing?

Speaker 3

No. When I say stable, I mean effectively flat continuing off at the end of 2023. So effectively, the rate the exit rate in 2023 is what we anticipate driving 20 24.

Speaker 6

Okay. Is there a reason why you're not getting rate updates that you're in network? I would think that you should be getting at least some sort of cost of living. Is there something else about payer mix assumptions or anything else that you're assuming in there?

Speaker 3

No. I mean, we assume our payer mix has been relatively flat year over year. If you look back in the 10 ks, we're assuming that as well. There are, of course, puts and takes in rate. Of course, despite the fact that we're anticipating a stable rate through 2024 and a flat volume, There is a little bit of growth in the top line.

Speaker 3

The timing of that, I'd say, is counterbalanced with both our RCM transition and the like.

Speaker 6

Okay. And then I guess as far as the guidance, it doesn't sound like it's assuming anything from a capital deployment perspective or do you expect to be active on that front?

Speaker 2

Well, we still are looking at and I think there was we had a certain amount of caution while we were out of network. But now being back at network largely in our bigger markets, we do have the opportunity to deploy capital in terms of acquisitions of practices. And we're certainly identifying in the core those practices that would make sense for us to acquire. So yes, we still have an attitude of deploying capital in that regard.

Speaker 6

All right, great. Thank you.

Operator

Next, we'll go back to the line of Pito Chickering from Deutsche Bank. Please go ahead.

Speaker 8

Hey guys, thanks for letting me come back in. Just a quick modeling question. So looking at the guidance, if we're modeling salaries and benefits as a 30 basis point sort of headwind, is that generally how we should be thinking about 2024?

Speaker 1

Where are you referencing the 30 basis points, Peter, sorry?

Speaker 8

Sorry. Just looking at your guidance from revenue, you're saying that G and A is going to be flat. I mean, just I guess, let me ask you differently. Like how do you view dollars and benefits as a percent of revenue in 2024 versus 2023?

Speaker 1

Yes. I think you can partially solve for that and I think you have within the range we provided on revenue and adjusted EBITDA. At a high level, our view and our goal is that 24 represents a stabilization of our margin profile as compared to 2023 following some of the headwinds we faced over the last year or 2. So that's by and large how we have formulated that outlook if that's helpful to you.

Speaker 8

Yes. And then which as I think last year 'twenty five and beyond, what I understand your G and A levers, you guys have done a good job with that and excellent jobs are dealing with the RCM issues that have occurred. But as I think about sort of 2, 3 years down the road, is there an ability to stabilize S and B from turning from a headwind into a tailwind? Or is this like a sort of a permanent sort of headwind that needs to be offset with G and A leverage? Thank you so

Speaker 2

much. No. I think that our goal and what we see is the second half of the year is where we would look hopefully that we start to see improvement. And then looking into 2025, really it'd be a different story we think in terms

Operator

of the overall cost

Speaker 3

structure both at the

Speaker 2

practice level on labor, but also again I think what we've referenced is that we're looking at all the practice in terms of the efficiencies in those practices that will be benefit to the organization. And on top of that is obviously what we're doing structurally with our overhead at the corporate level.

Speaker 6

All right, great. Thanks so much.

Operator

And at this time, there are no further questions.

Speaker 2

Thank you, operator, and thank you everyone for joining our call today.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT and T Executive Teleconference. You may now disconnect.

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Earnings Conference Call
Pediatrix Medical Group Q4 2023
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