Pediatrix Medical Group, Inc. (NYSE:MD) Q3 2023 Earnings Call Transcript

Pediatrix Medical Group, Inc. (NYSE:MD) Q3 2023 Earnings Call Transcript November 5, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrix Medical Group, Inc. Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. later we will conduct a question-and-answer session, and instructions will be given at that time. [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, and good morning, everyone. I will quickly read our forward-looking statements and then we will get into 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 Security Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrix 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 measures. 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 will turn the call over to our CEO, Dr. Jim Swift.

Dr. Jim Swift: Thank you, Charlie. Good morning, everyone. Also with me today is Marc Richards, our Chief Financial Officer. Our disappointing results reflected relatively soft patient volumes and persistent practice level cost inflation. We plan to take meaningful steps to address this shortfall since we firmly believe that our current operating results do not reflect the full earnings potential of this great company. To go a step further, we believe that Pediatrix is a unique organization. We represent both the largest singular service provider for newborns in the U.S., as well as the largest group of maternal field medicine clinicians in the women’s health sector. Our network of affiliated practices provides critical services to women, babies and children, often in their times of greatest need.

We have been successful in maintaining a predominantly in-network relationship structure, a key differentiator, as we have navigated the challenging implementation of the No Surprises Act. And against a rising interest rate environment, our debt structure has allowed for prepayment of floating rate borrowings, and more important, our cash flow profile has enabled us to do just that. With all of this in mind, we intend to take significant steps designed to support and bolster our core business to generate a stable gross margin profile, as we continue to address cost trends and make any necessary changes to our service line footprint. Let me list our areas of focus. First, we intend to make structural changes a priority in our ambulatory practices to enhance the earnings potential of the broader organization.

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Q&A Session

There are wide variances in the financial performance across individual practices within our organization, whether viewed by geography, specialty or subspecialty, or any number of other perspectives. We have always taken a proactive but careful approach to portfolio management to ensure that we are dedicating the right resources to the right places to narrow these variances. We will expand these efforts, identify further actions we can take in the near-term to improve practice performance where possible and take these steps as quickly as we can. Second, we intend to confront the labor cost challenge we are facing head-on to mitigate costs while also remaining competitive in the clinician environment. We will continue to work with our affiliated practices to review overall staffing needs in order to ensure optimal models that first and foremost support the highest quality patient care, but also are aligned to the current needs of each practice.

Third, given our financial strength and liquidity we will focus our capital allocation priorities to build on our core as we have communicated previously. Given the dislocation that has occurred across the physician service industry over the past several years, we believe that we are favorably positioned as the organization of choice for high quality practices in need of a national platform in which to collaborate with peer clinicians. Lastly, as we disclosed this morning, we have made the decision to transition to a new vendor for revenue cycle management services. We did not make this decision lightly, given the importance of this function to our practices and to our overall operating performance. However, our experience over the past year underscores our conviction that a true hybrid model incorporating an internal team focused on front-end functions is the appropriate structure to generate optimal performance for Pediatrix.

Our decision to make this change reflects our need to migrate more quickly and completely to our hybrid model than we believe can be accomplished with our existing vendor. Additionally, we observed a regression in RCM performance during Q3 to past challenges that we have seen in AR, DSOs and other metrics. We are focused on turning to a chapter, where we rely on our own team where it makes sense and on an outside RCM partner for the areas where we simply cannot match their efficiencies and we expect to begin this transition prior to the end of 2023. As we have discussed at length this year, we have been building our internal team, which we believe will help minimize any potential disruptions while we transition to a new third-party vendor. Our current vendor will continue to provide services through a transition period as we make the switch to a new vendor.

While this transition period will likely result in some duplicative costs, we believe this too will help mitigate potential transition risks. We will be as transparent as possible in terms of what expenses are temporary as compared to underlying and ongoing costs and performance of or go-forward revenue cycle management activities. All told, we believe these steps can meaningfully enhance our operating effectiveness, put us on a path to sustainable, improved gross margins, while ensuring the Pediatrix can continue to provide best-in-class support services to our affiliated practices. With that, I will turn the call over to Marc Richards.

Marc Richards: Thank you, Jim, and good morning, everyone. I will provide some additional details for the quarter. Our adjusted EBITDA for the quarter was roughly $15 million below our internal forecast, primarily driven by practice level operating expenses and also impacted by soft patient volumes. Within our topline results, our same-unit pricing growth primarily reflected year-over-year recovery in both revenue collection rates and payor mix against a very challenging quarter in 2022. At the practice level, our year-over-year expense growth was evenly divided between salaries on the one hand and incentive compensation and benefits on the other. This underlying salary growth accelerated by roughly 100 basis points, as compared to the second quarter of this year, when we saw some deceleration.