Q4 2023 Pediatrix Medical Group Inc Earnings Call

Participants

Charles Lynch; Senior VP, Finance and Strategy; Pediatrix Medical Group, Inc.

Jim Swift; CEO; Pediatrix Medical Group, Inc.

Marc Richards; CFO; Pediatrix Medical Group, Inc.

A.J. Rice; Analyst; UBS

Ryan Daniels; Analyst; William Blair & Co.

Pito Chickering; Analyst; Deutsche Bank

Brian Tanquilut; Analyst; Jefferies

Kevin Fischbeck; Analyst; Bank of America

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the 2023 fourth quarter earnings conference call. (Operator Instructions) 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.

Charles Lynch

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 Pediatrix'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 Pediatrix 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 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 K and on our website at www.Pediatrix.com. With that, I'll turn the call over to our CEO, Dr. Jim Swift.

Jim Swift

Thank you, Charlie, and good morning everyone. Also with me today is Marc Richards, our Chief Financial Officer. Our fourth quarter results were within the revised expectations we provided in November. Our overall same unit volumes reflected strength within our office-based maternal-fetal 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. Our underlying same unit pricing was also stable, absent certain distortions from last year's fourth quarter that Marc will detail.
Turning to 2024, we provided this morning our preliminary outlook for adjusted EBITDA of between 202 hundred and $20 million. This outlook reflects clear progress in three priorities, effectively transitioning to a strong sustainable revenue cycle management program, generating continued efficiencies across our support structure and maintaining strong payer relationships and 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. First, we have moved forward 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 for the fourth quarter and to date in 2024.
Second, while this hybrid RCM model does this state additional internal staffing within our G&A line, we continue to identify efficiencies within our nonclinical infrastructure, such that in 2024, our expected total G&A expense will remain at a comparable percent of revenue as compared to 2023.
Third, 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 two payers in three states where we previously had been out of network. 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. And as we have been executing on these plans, we expect that activity will accelerate through the year. 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 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, and 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 this week. Pediatrics will be hosting two concurrent conferences, our 12th Annual specialty review and neonatology at our 45th. And you will know the conference for neonatology 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 Marc Richards.

Marc Richards

Thank you, Jim, and 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 fourth quarter.
On the pricing side, there are two key items to call out for you to make an appropriate year-over-year comparison.
First, in the fourth quarter of 22, we recorded revenue from our prior RCM vendor for financial support related to aged receivables, which did not recur in the 2023 fourth quarter. This reduced our same-unit pricing growth by roughly 2% in Q4 of 23. Additionally, we recorded a modest amount of CARES dollars in Q4 of 22, which also did not recur reducing our same-unit pricing growth in Q4 of 23 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 growth in contract and administrative fees.
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&A increased slightly year over year, partially reflecting staffing increases as we continue to build our internal RCM team. We generated $73 million in operating cash flow for the fourth quarter, resulting in full year operating cash flow of $146 million. As Jim noted, we're pleased that our RCM transition did not cause any material disruptions in billing and collections in the fourth quarter and our DSOs were basically flat at year end compared to the end of Q3. We ended the year with total borrowings of $628 million and cash of $73 million for net leverage at year end of just under 2.8 times. As a reminder, we are a user of cash in the first quarter 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 ExpressJet free cash flow generation in Q2 and beyond.
I'll add some details to our '24 outlook. We expect net revenue of $2 billion to $2.1 billion or modest growth over '23. And as Jim touched on, we anticipate that our G&A expense as a percentage of revenue will be comparable in '24 versus '23, 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 first 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.

Jim Swift

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

Question and Answer Session

Operator

(Operator Instructions) Brian Tanquilut, Jefferies.
Okay. We'll move on.
A.J. Rice, UBS.

A.J. Rice

Hi, this is Andrew on for A.J. On the company previously sized around a 50 million RCM headwind in the first half of 23. Would that be a tailwind in 24 for pricing in the first half?

Marc Richards

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 24 weeks back to maintain stable pricing through this transition. I be a continuance of what we saw the fourth quarter of '23.

A.J. Rice

Got it. Thanks. And then a quick question on arbitration. Cms reopened the arbitration portal in December. The Company previously talked about having around a 75% success rate in arbitration cases versus the industry average of 71%. Are there any updates on this win rate? And are you seeing more cases go through arbitration than previously?

Jim Swift

Thanks.
Wasn't it was not just started since we're back in network.
Now with a number of the payers that we were having to contemplate arbitration, we haven't seen an increase related to our creation cases.
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 and you are on our win rate has improved over the course of the last several months, we're approaching at least on our most recent data. We're approaching it almost 90% win rate when we are going to arbitration.

A.J. Rice

Thanks a lot.

Operator

Ryan Daniels, William Blair.

Ryan Daniels

Hey, good morning, guys. This is Jack Sam on for Ryan Daniels. Think 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 things. Can you clarify?

Marc Richards

I didn't catch it right. It relates to the first quarter or the full year.

Ryan Daniels

Sorry, the first quarter, I guess because I think the guide was a $20 million range versus what you've done in the past of about $10 million.\

Marc Richards

I think I did it for the full year. That's a we've provided a $20 million range, which is give or take a 10% range around the midpoint of where we're at for the first quarter. 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 million.

Ryan Daniels

Sorry, I definitely misspoke. I meant before your sorry about that. And then as a quick follow-up here on last quarter, too, I know you mentioned that you're planning to tackle the labor cost challenges and growth in clinician comp. 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 just maybe if we can just get your expectations here for 2024 with this initiative as well.
Thanks.

Marc Richards

I can I can start off and let Jim add some color on that within our expectations for the full year, EBITDA is similarly an expectation of some moderation in underlying practice level 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. It doesn't 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?
Jim, you want to?

Jim Swift

Yes. 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 and 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 expanding pool of clinicians where we are not going to have been really the contract labor is a headwind.

Operator

Pito Chickering, Deutsche Bank.

Pito Chickering

I just want guys on on the revenue growth guidance are $2 billion to $2.1 billion. What are the components of the revenue growth split between volume and price?

Marc Richards

Hey, Peter, good morning. We I wouldn't I would take out a couple of pieces. We're expecting stable volume throughout 2014. Our guidance on volume, of course, is a contributing factor to our top line range that we provided. I would say also, as we indicated, we expect through our RCM transition rate to remain somewhat stable through '24. 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.

Pito Chickering

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

Marc Richards

And that's that's generally we're going to move from an ad network to in network position that is generally favorable for us.
Peter starts, I'll send a lag component of Pete over the last component of that of a top line revenue estimate is around organic growth and the opportunities there.

Pito Chickering

Okay, which which actually is a great segue you know, looking at your sort of guidance ranges with with contracting for pricing basically set and contracting with your doctor has basically said is the only variable between the high and the low end simply with the volumes and out or where the components are there between the high end are still low in the guidance.

Marc Richards

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

Pito Chickering

Okay, sir, I have two more quick ones here. With your contracting with your physician, is there any change to sort of turnover has as contracts come up for renewal? There been any change to the turnover of those docs on those contracts, or is it pretty stable?

Jim Swift

No, it's been pretty stable. Our turnover is very, very low, as we've commented before. And with most of these contracts. Again, some of them are renewed over three 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.

Pito Chickering

It makes sense. And then last quick one year free cash flow conversion for 24 should be pretty similar for you as it was at 23 now that now that RCM is pretty stable. Thanks a lot.

Charles Lynch

I would think so, Pito, if you look at 23, it was a little over 70% from adjusted EBITDA to operating cash flow from our general rule of thumb, rule of thumb has been in the range of maybe two quarters of adjusted EBITDA into operating cash flow. So that's a kind of a good baseline for you to think about.

Pito Chickering

Great.
Thanks so much.

Operator

Brian Tanquilut, Jefferies.

Brian Tanquilut

Hey, good morning, guys, and sorry about the technical difficulties earlier. Jim, I guess my first question would in your prepared remarks, you talked about structural tactical and the strategic changes that you're making to the business.

Jim Swift

Maybe if you can share with us what falls into each of those three buckets that you alluded to 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 clinics, physicians versus other clinicians such as nurse practitioners or PAs. That's one piece to 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. So we feel that there's going to be a benefit as we get more of our marketing and execution around the patient volumes from a collective ambulatory standpoint.

Brian Tanquilut

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.

Charles Lynch

Have you kind of hinders the ability to drive growth? Is it your hospitals losing market share or is it just the birth rate altogether Just curious how you're thinking about volumes.

Jim Swift

Yes. I think that part of the volume issue is, you know, take the Nik, you out for a moment. We did not see the large amount of volume this year as last year that we saw in 22 related to the other inpatient services such as pediatric hospitalists, pediatric ER and pediatric ICU. I think from the standpoint of our inpatient acute services, people talk a little bit about, you know, a higher degree of severe prematurity and increasing length of stays. And we've certainly seen that the some of the bread and butter around emissions into the mix. You 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.

Charles Lynch

And Brian, just a quick note on that. We did highlight the fourth quarter had some pretty strong comps that we went against. We look at our Nike days over a two year stack. They were actually slightly positive versus the first two years ago. So in our view, looking across as many states and practices from 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 24 on, we're not anticipating within our within our outlook for the year, any meaningful movement in patient volumes, some of them at the rate.

Brian Tanquilut

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

Charles Lynch

Yes, it's a 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, where our historical experiences five or less than 5% out-of-network position and were lower that as we entered, were lower than that as we entered this year, thanks to some of the recontracting we've done.

Brian Tanquilut

Got it. Thank you.

Operator

Kevin Fischbeck, Bank of America.

Kevin Fischbeck

Great, thanks. I guess a couple of follow up questions on when you said that the that going in network is usually a positive for the Company. We're talking about positive on the rate perspective. Are we talking about this dynamic with the with the outpatient volumes usually getting a boost once you go in network.

Charles Lynch

I was referencing the rate our experience over the last several years is that we're in and when we are in and out of network position, some of the reimbursement we're receiving from payers tends to be quite low, hence the arbitration processes that we that we enter them. So we're generally fund favorably positioned when we are out of network from a from a rate standpoint, Jim?

Jim Swift

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

Kevin Fischbeck

Okay.
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 back 2% and then another 40 basis points you kind of look at overall pricing in the quarter is like a positive 1.9 and a normalized basis. Is that the right way to think about it that's right.

Jim Swift

That's right.

Charles Lynch

That's right. Okay.

Marc Richards

So if you walk and walk through the pieces of same unit revenue quarter over quarter is down about 1.5%. There's 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. And then, of course, you referenced the other component related to the guarantee last year.

Kevin Fischbeck

Okay.
So so when you said that your revenue guidance assumes stable volumes and stable pricing. And when you say stable, you mean flat year over year or you mean stable as in like still about 2% crisis?

Marc Richards

No. But when I say stable, I mean effectively flat continuing off of the end of 23. So effectively the the rate the exit rate in 23 is what we anticipate driving 24%.

Kevin Fischbeck

Is there a reason why you're not getting rate update that you're in network, I would think that you should be getting some sort of cost of revenues or something else about payer mix assumptions or anything else that you're assuming?

Marc Richards

No, I mean, we assume our payer mix has been relatively flat year over year. If you look back in the 10 K, 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 24 going to flat volume, there is a little bit of growth in the top line. The timing of that I'd say is counterbalanced with both, you know, our CFO transition and the like.

Kevin Fischbeck

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?

Jim Swift

Well, we still we still are looking at and I think there was a 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 of those practices that would make sense for us to acquire. So yes, we still have an attitude of deploying capital in that regard.

Charles Lynch

Thank you.

Operator

Pito Chickering, Deutsche Bank.

Pito Chickering

Yes, hey, guys. Thanks. Let me come back in.
Just a quick modeling question. As we're looking at the guidance for modeling salaries and benefits as a 30 basis point sort of headwind, is that generally how we should be thinking about 2024, where are you referencing that 30 basis points?

Charles Lynch

Peter? Sorry. Sorry.

Pito Chickering

Just looking at looking at your guidance from revenue, you saying that G&A is going to be flat on I mean, just you know, I guess let me ask it differently, like how do you view so it was embedded as a percent of revenue in 24 versus 23?

Charles Lynch

Yes, I think you can partially solve for that. And I think 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 two. So that's by and large how we have formulated that outlook, if that's if that's helpful to you.

Pito Chickering

Yes. And then which you is at the most 25 and beyond what I understand your your G&A leverage, 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 two, three years down the road, is there an ability to stabilize S&B from turning from a headwind into a tailwind? Or is this sort of a permanent headwind that that could be offset with G&A leverage? Thank you, sir.

Jim Swift

No, I think that our goal and what we see is even though the second half of the year is where we would look that hopefully, we start to see improvement. And then looking into 25, really it will be a different story. We think in terms of the overall cost structure, both at the practice level on labor. But also again, I think what we referenced and 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, we with our overhead at the corporate level.

Pito Chickering

All right, great. Thanks so much.

Operator

And at this time, there are no further questions.

Jim Swift

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&T Executive Teleconference. You may now disconnect.