Pediatrix Medical Group, Inc. (MD) Earnings Call Transcript
May 10, 2023
Earnings Call Speaker Segments
It's my pleasure to be wrapping up day 1 of the conference with the Pediatrix Medical Group, which is the leading provider of pediatric care, a large hospital base across the country. Presenting today, we have Jim Swift, CEO; Curt Pickert, COO; and Charlie Lynch, SVP of Finance and Strategy. Today, we're just going to jump kind of right into Q&A.
Sure.
So I guess over the last, call it, 5 years or so, there's been a big transformation of the company back to the core roots of the pediatric business. We'd love to just kind of maybe level set for everybody how you guys are thinking about the core growth of the business and what the margin profile of the business should be looking like over the next several years.
Yes, I'll start. Obviously, people are aware that as the company's roots have been in neonatology and women and children services and then we diversified into both anesthesia and radiology, we moved away from those 2 specialties, divesting those really with the idea of focusing largely on women and children services. And in doing so, I know that most people still recognize the company as a hospital-based provider of pediatric services. But for many years, the company has been the large provider of high-risk maternal fetal medicine services in the United States. With that profile, we felt a diversification of more the ambulatory services, continued embracing what we're doing in the inpatient side. Foremost, we felt early on in the last 5 years that moving into the pediatric subspecialties, primarily in pediatric surgery, pediatric neurology, those specialties that service the patient population that we care for in the hospital was important with really threefold: one, for the patients; two, because it kept those patients in the hospital without having to be transferred; and three, because we had a relationship with our hospital systems to provide really those suite of services that assisted them in managing those patients. Outside of that, we also looked at women's services and diversified with an OB presence, really taking OBs and working in our MFM clinics as well as moving into the OB hospital space. Those 3, MFM, OB and OB hospitals, remain a growth priority for us on the women's side. And then finally, when we look at it, and this is going to be germane later to women's services, but on pediatric services, what we saw coming out of the pandemic was a dislocation of primary care patients that we would either have on the pediatric side that we would send out to the community to general pediatricians. And the landscape has changed on the inpatient side, where general pediatricians didn't want to come into the hospital anymore to see patients in the newborn nursery. So we had this population of patients that didn't have a medical home. So we thought it was intuitive to move into primary care, and we did that through 2 strategic acquisitions, NightLight of Houston and NightLight of Orlando, 2 separate companies in the pediatric urgent care space, with the idea that, that dislocation we saw and the patient population we saw in the urgent cares were primary care patients that could not get care during the pandemic. The philosophy we had was if we're seeing all these newborns in the hospital the pediatricians are not coming in to see, we could acquire these patients and have a medical home. Now take that for a moment and on top of that medical home from, first, an inpatient, newborn nursery or the NICU, those -- or the PICU for that matter, those patients coming out to the community, if we could create that medical home, we then could leverage our specialists, pediatric cardiology, pediatric urology, pediatric neurology, to build kind of a holistic system of care and a population health management paradigm for these children. So our focus remains in our core services on the inpatient side, and we'll continue to grow that footprint. But we also look at that on the outpatient side of creating this continuum of care for children. Same is true on the women's side. Because of our presence in OB and OB hospitalists and in MFM, there's an opportunity for us to diversify in some of the other gynecological specialties where we can provide, again, a medical home for women. So those are probably the 2 places where we're focusing, and that growth is going to be equally distributed with organic growth and standing up clinics as well as acquisitive growth. And so that's our -- what we're viewing for the future.
How do you think about the growth of those end markets? Is that -- like what's the building blocks to kind of long-term growth, volume growth, pricing growth?
Yes. So I think from the standpoint of the growth in the markets, you won't see us necessarily land in a geography where we don't exist now. So the focus we have are the existing geographies where we're providing those services and where we have the operational scale to do it. And when you look at some of those places, Texas, California, here in Nevada, primarily in Las Vegas, there is a lot of ramp to growth in those other specialties we're discussing and on the primary care side. So I think when we look at that, we look at, number one, on the inpatient side of having access to that care; but also for the payers on the outpatient side, there's a lower cost of care in some of those primary care areas or in the urgent care; and then the, really, the work that we could do on value-based care where, again, taking those patients that might end up in an ER and seeing them in the urgent care.
And so I guess over the last couple of years, there's been a concern from a pricing perspective around the No Surprises Act and how that might impact your ability to get the commercial pricing that you increase -- that you'd expect or need to see. So can you tell us what's going on? Like how you've been experiencing that?
Yes, I'll start and then Charlie can add in as well. So the biggest issue on the No Surprises Act is really the feeling that the payers are going to use that as a tool or a weapon in order to take providers out of network and then ask for rate reductions. We certainly have heard the stories of payers asking for 70% reductions in overall rates for in-network providers. As that came up, obviously, we all know very well the court cases that have been leveled against the No Surprises Act and in the implementation. We -- first of all, we agree with No Surprises Act. There is no reason that any patient should have a surprise bill that comes to them after being in an inpatient setting, especially if it's an emergency setting. Then secondarily, what we would hold is that the implementation of the No Surprises Act should take a fair consideration the specialty that is the patient is being cared by as well as the training and the implementation of those services at a reasonable level. Now the payers have really relied on the implementation to look at the QPA, the qualified payment amount, and look at that in relationship to what the median in-network rate is, but to also draw down on the fact that they're utilizing what we call ghost contracting, where they're taking all providers outside the specialty, including pediatricians, and taking those prevailing rates, which is lowering the QPA to, really, to 100% of Medicare or in some cases lower. So we have pushed back on that. We also obviously have unfortunately been out of network in a few cases. And we have ramped up for this what's called the independent dispute resolution, the IDR process. We've gone to arbitration. And CMS just came out with a report on Q4, largely what all the providers are getting somewhere between 72% and 75% of wins on the cases going to arbitration. We're seeing much higher that 80 -- over 80%, in some cases, 90% in other. And that's really coming in with a really, the value proposition of what we're providing in the neonatal unit and in some of our other inpatient specialties. So the story is not over there. What we feel is that without having really a position to illustrate the absurdity of some of this implementation, we're able to win and demonstrate to the payers that this is going to be a tool that we use as well to have an honest discussion about getting back in-network. And we think that those wins will draw them back into the conversation so that we can do it on a fair basis. Charlie, do you want to add anything to that?
Not much. I just think that it's important to note and probably emphasize for pediatrics, the concept of going to arbitration, the concept of out-of-network exposure is fairly peripheral for us. Whereas, Kevin, as you know, we're 95% in-network across our revenue, and even arbitration volume is a small subset of that 5% out-of-network. But -- so as a result, the direct impact from the No Surprises Act has been relatively immaterial for us. It has not been a factor behind delays in AR or anything like that. The dollars just haven't added up. That said, we view the arbitration process and how we go about it, the preparation we go through to ensure that we're presenting a very balanced view of what we think is an appropriate prevailing rate for our services as a critical defense of that in-network position in an instance where you could have payers effectively probing defenses and seeing if there's an opportunity for them to go further. So that's where we see it is as critically important, even though on the face of it, it's not a material factor for us in our results.
Just to clarify something because I think the industry win rate was like 71%, 72%. I think at Q4, we're talking about 80% win rates. I thought this most recent quarter, you talked about somewhere like 75% and 80%. So like what's your win rate, I guess...
It's 80%, over 80%. And so that was just -- I was bringing up that point on the call with regard to the CMS Q4 survey.
Okay. So that's 80%, even winning versus 71%, 72%, but you've been consistent...
Correct. Yes.
And in instances where we've gained some more experience and looked at the cases that we brought and where we might not have prevailed, we've also had a good learning experience and, in a time sequence, been able to increase that win rate.
And so that 5% that's out-of-network, that's been relatively consistent over time? So there hasn't been a big change in that number?
Yes. Correct.
And so I guess the concern that people would have is that, to your point, they're kind of probing this and kind of saying, well, all right, if I win some arbitrations, then I could go out-of-network and threaten a lower rate update. Like are you getting the rate updates as you've historically gotten on your in-network renewals during this time? Or has that changed at all or slowed at all?
No, no, no, we have. And I think that's a story that's often missed is that for the cases where we discuss it being out of network, the normal negotiations we've had with some of the payers have been really with the normal escalators that we would have. So in order to keep -- listen, I think the broader -- this is probably for the broader industry that participating in the IDR process, as unfortunate it is from a cost standpoint, administrative standpoint, it really does push the payers to understand that they can continue to battle this way. But why not have an honest conversation about where rates have been, in some cases, for us between 5 and 10 years with the same payer, why not have an honest conversation about let's renegotiate, let's stay in network and, again, at a fair rate that we've really had in the market for some time.
And so what kind of rate updates are you getting in commercial today?
They're modest. I would say that the concept of payers being difficult to negotiate with is not a new one. And as a result, and we've discussed this a lot on earnings calls and other conversations in the past few years, the combination of the normal escalators we might have in our managed care contracts, renewals we might have counterbalanced by our reliance on Medicaid revenue as well has typically yielded for us a price trend in the kind of 1% to 2% range. Nothing outlandish, and we still see that as the case.
Okay. And so then can you talk a little bit about costs? It seems like labor has been an issue for most providers. So like what's your wage growth and kind of general cost pressure relative to that 1% to 2%?
Yes. We talked about this a bit on the call and also with regard to the fourth quarter. We have seen some specialties, primarily in OB hospitals, and we've talked about this, that we've rolled out some programs and did that in rapid succession in response to some of our hospital partners. And so as you do that, there's more of a reliance on contract labor that you have to bring in. That cost is a bit higher, and it's unique to only some specialties. I call out OB hospitals because that is one that has become very popular of an ask from the health systems as well as then many of the providers in that space who are OB-GYNs that have moved from the clinic into an environment where they want to be an OB hospitalist, have been able to push some of those rates from the locums companies. And if you're rapidly moving into these programs, there is a cost to bear. What we've done with our hospital systems is just have an honest conversation about how these programs need to ramp and to do that more methodically. So when we do have to use the locums and the contract labor, it smooths out that, and we're able to then bring in our employed providers. So we believe we'll see some of that effect through the remainder of the year that returns to normal.
Okay. And so I guess when you think about your general cost growth or expense growth, can you keep that in that 1% to 2% range?
Yes, from a labor standpoint, number one, we have great retention. Number two, our specialties, we've not seen acceleration, and so that kind of 1% or so is something that we look at.
And as you know, we have a pretty measurable variable component to our overall clinical SW&B. So that benefits us in both directions and gives us a buffer against just pure -- any kind of pure salary trend, which has been pretty modest.
Okay. And then can you talk a little bit about M&A because it seems like you guys have been buying some stuff? And so urgent care seems to be one of the areas of focus. Is there anything else that...
Yes. So we're still looking within our pipeline. Obviously, our core services in neonatology will remain a focus of what we're doing here in the second half of '23. Also, as I mentioned, the subspecialists in the medical and surgical subspecialties in pediatrics are important to us. So we have a number of those in the pipeline. Again, building out that continuum in the community where we have the density and where we have the inpatient services. And then finally, we really have focused on an organic growth element to the primary urgent care, but we're going to be opportunistic as it relates to either acquiring general pediatric practices. It's a lower number of pediatric urgent care practices out there that may not be in the markets where we're focused on. So we think that there's a way to acquire some of the pediatric practices and then really change that platform to both primary and urgent care.
And how do you think about multiples in that?
Yes, so I think as we've talked about today with some folks, we think these are low single-digit multiples. There is going to be maybe some platform deals in markets where we don't -- we haven't really operationally looked at that may be pushing on some large general pediatric platform, but that's not what we're going to attack. We're going to look at those tuck-ins that are the practices with 4 or 5 pediatricians, maybe 1 or 2 locations, again, in a density of a market where we have -- already have a presence.
And so then is that the full use of cash flow? Or do you think you'll have excess cash flow beyond kind of what you'll be able to...
Yes, I think we will have excess cash flow. We'll pay down the revolver. I think that's really what we'll do with the capital structure. And then we'll talk with -- speak with the Board in terms of other things to do. But I think right now, we're focused on -- we're going to -- we've executed well on the organic side. I think we've talked about this that the No Surprises Act gave us a bit of pause in '22 to look at what we're going to do to acquire if rates would change. We feel more comfortable with that now. And so we think we can execute on a number of acquisitions here in the second half of the year.
Yes, keep in mind, the unit size and the outlay for the kind of acquisitions were -- that Jim is talking about is not great. So in most instances that we could envision, this would be well inside our free cash flow and fund it internally with additional cash flow, which, fortunately, given our cap structure right now, gives us some flexibility because we have a significant amount of prepayable debt.
And can you just remind me how much free cash flow are you guys forecasting this [ year ]?
We generally have a view that we'll pull through in the range of 60% to 60% plus of our adjusted EBITDA and operating cash flow. Our -- or CapEx requirements, even including development activity related to primary urgent care clinics is probably in the $30 million to $40 million range per year. So -- and do the simple math on that, and it gives us quite a bit of flexibility before even contemplating dipping into the revolver.
Okay. And then the other kind of issue that's come up has been the transition on the rev cycle management. So just talk a little bit about where we are today and how much opportunity there is for things to normalize from here?
Yes. So we talked about the modest improvement. I'll let Curt speak to it. Curt Pickert, who's our Executive Vice President and COO, really took this as a major initiative for the company and to really have eyes wide open on it. So Curt, I'll let you speak to this.
Just a couple of comments. I think that on both sides, there were assumptions made that were maybe aggressive. And it took us a while to get to know each other and figure those things out. But now the tone of the conversation has changed to one of being very collaborative. We've spoken to the fact that we're looking at a hybrid model now that we've brought back part of our front end. We're looking at bringing back some other functions within RCM, a relatively small group of people. But I'm closely in contact with executive leadership of R1, and they align that there are opportunities there. It may not be permanent, it may be short term, and yet bringing back that expertise that was lost in the initial transition is a key component of solving this problem. But we are very optimistic going forward. It's a collaborative conversation, so...
Yes. So I guess like originally, you're outsourcing it, you're saving some money by outsourcing it. But then -- so then you're talking about bringing back resources. Like does that change in any way the ultimate opportunity from a cost saving perspective?
Well, the conversation right now is what's the mutual opportunity there because as it flows through, both sides benefit, so literally in the midst of conversations the last couple of days in that regard. So no, I don't think the big picture does.
Yes. And if you look at the scale, I mean we had 800 employees in rev cycle at the height of what we're doing on an in-source side. We transitioned a large segment of those employees over to R1. And so they were, at its height, about 350 employees and then scaled a little bit down from there. We have no -- we're not going to bring on 300 people. We're talking in the dozens of people that can help us on the front end of the back end. But I think the fair consideration is just -- it's intuitive, right? We're bringing people on that are improving the front end and the back end, and that's resulting in higher revenue and thus for the fees for R1. I think there's a recognition that we're paying for something that R1 understands they have some culpability in as well.
And we're seeing significant improvement in some of the metrics, for example, the registration metrics where it's a process that didn't start correctly, it doesn't flow through correctly. So there's progress.
So it wasn't 100% clear to me on the quarter because when you have the buildup in AR that happened during the transition that you collect -- you're collecting on prior AR that was reserved, was there a benefit to EBITDA in the quarter from prior kind of collection that was now maybe written off and now collected? Or was that...
I think it's more that you see in the quarter compared to 12/31, our DSOs are down. Our gross AR is down. So there's -- but there's been progress there. And going back to the front end of the challenges we face, that extension of AR from a normal reserving standpoint as the AR ages into different buckets, you're reserving it more conservatively just based on past collection experience. So as we hopefully continue to move in the other direction and accelerate the AR cycle with some obvious time lag in between, that will start to be recognized in our financial reporting as we move away from some of the older age buckets and everything moves through a lot more quickly.
Are you saying -- so -- but is that like a one-time kind of collection thing? Or are you saying from a year-over-year perspective, the bad debt kind of goes down because you don't have buckets reaching the write-off stage?
Yes, we're getting less. It's aging out further. And keep in mind, not all of this will ever move in a perfect linear direction. And we'll have some catch-up here, we'll have some slowdown there. But by and large, as we've come through the past several quarters, it's some more in the correct direction.
Okay. And then I guess as far as the Q1 number goes, I guess the Q1 number was a little bit below, I think, where the Street was, but you guys reaffirmed guidance for the year. I mean, is there -- sometimes the Street and you guys don't always have the same assumptions. But like how did you think Q1 kind of played out versus your expectations? And what, if anything, is going to apply for the rest of the year?
Well, listen, I think we did, we reaffirmed and we thought the quarter was within our expectations. And so from that vantage point, I think we hold to what the full year outlook is. Now listen, we've also said that what we would see in the improvement on rev cycle would come in the second half of the year. I think R1 reported on their fourth quarter earnings call that it would be primarily in the first half. We don't think that's the case. Obviously, what we're hopeful for is we'll see an acceleration in the rev cycle improvement in Q3 and Q4 and be hopefully back to normal as much as could be expected at the end of Q4 and going into 2024.
Okay. And so that -- and that's what basically you're kind of saying. So that ramp, as the year goes on, that's what you're assuming is that the improvements continue as it accelerate.
Correct, correct.
Okay. And then I guess one of the things that we've seen broadly speaking is the focus on the redeterminations. My guess is it doesn't really have much of an impact for you, but I can almost assume a scenario where that's actually a positive. In fact, people are being kicked off of Medicaid and now getting coverage on the exchanges or commercial. That's a positive mix shift potentially for you. I don't know if you've thought about or seen redetermination have an impact on payer mix or...
Yes, I think -- and Charlie, you can address this because I think there is some pieces around the poverty level on that as well.
Yes, we're not watching it that closely because for the lion's share of our patient population, the eligibility threshold for coverage by Medicaid is high. And that was established a decade -- 2 decades ago across all 50 states. So as a result, we're under a favorable umbrella related to those patients, the admissions into the NICU and the like and the expecting mothers to be covered. So in our view, it would probably be fairly peripheral. And it might be that patient or family that previously was Medicaid eligible still would be and yet might move into a HIX or something like that. So net-net, the bias sounds like it could be slightly favorable, but it's certainly not something that we've got baked into our outlook.
Yes, I guess you're not putting it into the outlook. I guess, why wouldn't it -- because I guess -- like I'm trying to think. The commercial rate versus the Medicaid rate is like 3x, 4x. I'm trying to think about this. Like that would be pretty meaningful if you could move any part of the population from Medicaid into commercial, right? So the default rate is they're not going to lose coverage because every baby born in the country is covered at least by Medicaid, right? So there's no downside from redetermination. There's only upside potential of moving into commercial. So if -- I don't know, if United or Elevance is saying, somebody is going to show up on employer coverage, somebody is going to show up on exchange, why -- is it just too hard to forecast and leave it as upside? Or is there a reason that it wouldn't for your population necessarily follow?
I think that's one piece of it. But the other is just past experience when there have been changes around Medicaid eligibility going all the way back to the Medicaid expansions across 35-or-so states a decade ago and then also including all the extensions that were provided during the pandemic. We did not see anything we could really measure related to our own payer mix. So we take that and transfer it forward to something like redeterminations, that's where we're not really anticipating any change. But admittedly, the bias seems to be that it would be more likely favorable than unfavorable.
Yes, I agree with that. It seems like it could be.
And especially if you look at the ambulatory setting, right, on the subspecialties within primary care setting.
Yes. I guess maybe just to go back to the M&A question, what is the right leverage for you guys? When you guys think about ability to lever up for something or paying down debt versus acquisitions, what's the target leverage for you?
Yes, listen, I think we're comfortable. We thought it was surprising that as we announced our leverage on the call, that people saw -- thought that unreasonable. We think where we are, somewhere between 2.5x, 3x, makes perfect sense. And we still have the excess cash flow to do some of those deals as well as pay down the revolver, which we will do over time, right, through the remainder of the year. So where we sat just prior to the end of the year is perfect. And if we have to go to 3x because we have the onetime payments to make to both 401(k) and to the bonus plan for the physicians, we feel very comfortable there.
Okay. And I guess one of the questions that we've been asking all the companies is just the recession. So like when you think about your business and your growth heading into a recession, what does that mean for you? I mean there's always that push and pull between volumes, between payer mix, between costs. So like does the business grow the same, faster, slower, in a recession?
Well, historically, Charlie can speak to this, but I think that we're -- the jury is out on just exactly what level the recession will be. Obviously, we had more impact coming out of 2007, 2008. We can't opine, and there's a lot of questions today talking about birth trends, we can't necessarily opine on that, but we've had recession activity where we had normal birth trends that we had seen the year before. So I think that right now, we think the business we're in, both on the ambulatory side, on the specialty side and on the core inpatient side, should be fine.
Great. I think that's all we have time for. Thank you very much.
Thank you.
Thanks, Kevin.
Thank you.
I appreciate it.
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