Pediatrix Medical Group, Inc. (NYSE:MD) Q4 2023 Earnings Call Transcript

Pediatrix Medical Group, Inc. (NYSE:MD) Q4 2023 Earnings Call Transcript February 20, 2024

Pediatrix Medical Group, Inc. reports earnings inline with expectations. Reported EPS is $0.32 EPS, expectations were $0.32. MD isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 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 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 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. 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 $200 million and $220 million.

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 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 through the fourth quarter and to date, in 2024.

Second, while this hybrid RCM model does necessitate 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 2 payers in 3 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 our 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. 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 is 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 Marc, 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, Pediatrix will be hosting 2 concurrent conferences, our 12th annual specialty review at 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 Marc Richards.

Marc Richards : 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 fourth quarter. 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 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 a 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 2.8x. 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 potential borrowings needed before we turn to expected 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, Mark. Operator, let’s now open the call for questions.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of Brian Tanquilut from Jefferies. Brian from Jefferies, your line is open. Okay. We’ll move on. We’ll go to A.J. Rice from UBS.

Unidentified Analyst: This is Anja on for A.J. 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, we expect to maintain stable pricing through this transition, i.e., a continuance of what we saw in the fourth quarter of ’23.

Unidentified Analyst: Got it. 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 : I’ll just start, 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.

Marc Richards : Yes. And our win rate has improved for 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.

Operator: Your next question comes from the line of Ryan Daniels from William Blair.

Jack Senft: This is Jack Senft for Ryan Daniels. 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 gets you to the low end of the range versus the high end of the range?

Charles Lynch : Can you clarify? I didn’t catch you right where like the first quarter or the full year?

Jack Senft: Sorry, the first quarter. I think the guide was a $20 million range versus what you’ve done in the past of about $10 million.

Jim Swift : I think for the full year, that it. 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 Marc provided of 19% of full year EBITDA. That’s a little bit narrower than $20 million.

Jack Senft: 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 capable 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 to just maybe if we can just get your expectations here for 2024 with this initiative as well. .

Marc Richards : 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 towards 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 this year. Jim, do you want to?

Jim Swift : 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 an 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.

Pito Chickering: On the revenue growth guidance are sort of $2 billion to $2.1 billion, what are the components of the revenue growth split between volume and price?

Marc Richards : Pete, we — I would take out a couple of pieces. We’re expecting stable volume throughout ’24 in our guidance. 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 or 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’s opportunity for rate improvement as we approach the end of the year.

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

Jim Swift : That’s generally — if we’re going to move from an out-of-network to an in-network position that’s generally favorable for us, Pito.

Marc Richards : And the last component — Pito, the last component of that top line revenue estimate is around organic growth and the opportunities there.