Earnings Call Transcript - MD Q3 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX Third Quarter 2020 Earnings Conference Call. At this point, all participant lines are in a listen-only mode. However, there will be an opportunity for your questions. As a reminder, today's call is being recorded. I'll turn the conference now to Mr. Charles Lynch, Vice President of Strategy and Investor Relations. Please go ahead, sir.

Charles Lynch, Vice President of Strategy and Investor Relations

Thanks and good morning, everyone. I quickly read our forward-looking statements and then turn the call over to Mark. 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 MEDNAX'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 MEDNAX 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 most recent annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, 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 annual report on Form 10-K in the Investors section of our website located at mednax.com. With that, I'll turn the call over to our CEO, Mark Ordan.

Mark Ordan, CEO

Thanks, Charlie and good morning, everyone. I'll start my remarks by telling you what an honor it is to work with my colleagues at MEDNAX. There is a real passion throughout the organization, including my fellow members of our support team in our offices, for providing the best care for our patients, for leading in research and clinical support, for being careful financial stewards, and for being the best possible partner to hospitals, practices, physicians, and all clinicians. I've already met the leaders of hospitals who attest to our commitment to quality care, and who hope to expand our relationships. And I've had the privilege of meeting many of our doctors and nurse practitioners, visiting our sites and receiving a resounding welcome to show support for a continuing commitment to reinforce our mission to take great care of the patient. Joining me on today's call are Marc Richards, our new CFO and Dr. Mack Hinson, who leads our Pediatrix and Obstetrix Medical Groups, which of course will be all of our operations after the sale of our radiology medical group closes. Mack and I work hand in hand to lead the day-to-day operations of the company, along with a dedicated and smaller senior team. Marc, as you may know, has worked with me for over 10 years and is an operations and capital allocation focused CFO. Marc and I will detail the results of the third quarter. Before I turn the call to Marc, let me make a comment about the radiology sales. I thought before I joined MEDNAX that the company should focus on its core and decide accordingly. In my first days and weeks, that opinion was reinforced to our Board members who share that conviction. So we restarted the sale process, made it certainly competitive, and concluded it in just over one month. We were in our guarantees when we agreed upon price and when the sale closes, we will be able to make our strong balance sheet much stronger, allowing us to operate our core practice areas more efficiently and to grow more certainly. I have no update today on closing timings since we are in the customary regulatory approval process. When we do close the transaction, we expect to pay down debt and fund accretive growth more easily. Be assured that we are very shareholder friendly, and if tools like buybacks or distributions ever materialize in the future, we'll work with our Board to do what's best. Marc will now speak about the third quarter.

Marc Richards, CFO

Thanks, Mark. I certainly appreciate the warm welcome. I'd like to thank Mark, our Board, and the MEDNAX team for an exciting opportunity to work here. My focus over the past two months and going forward is on operations with the goal of driving core profitability. I'm overseeing accounting, finance, tax, technology, and RCM and we'll continue to refine our organizational structure for optimal efficiency, while also ensuring that adequate resources are available to execute on our business plan and growth initiatives. Before going into our third quarter results, I know that modeling our company has been challenging, given the divestiture early this year of American Anesthesiology and the announced sale of MEDNAX Radiology Solution. So concurrent with this morning's press release, we provided on our website full quarterly financials for 2019 and year-to-date 2020 for our continuing operations. And I'll make references to those financials for both sequential and year-over-year trends. Turning to the quarter, I'll give some details on our P&L drivers to add some context to the information provided in our release. As we announced, our same unit volumes declined 4.3%, which marks a partial recovery from a roughly 9% year-over-year decline in the second quarter of this year. This recovery was greater at our office-based practice areas based on the more severe impact those services experienced during the second quarter. And on a preliminary basis, our overall volume trend in October appears to be similar to what we saw in the third quarter, with patient volumes across the organization down by mid-single digits on average compared to last year. Within our hospital-based practices, which include neonatology and related services, pediatric ICU, pediatric hospitalists, and pediatric CR, our NICU days were down 3.9% while volumes and other related services were down somewhat more. Others in the hospitals in the NICU were down 3.2%. And the rate of admission was down slightly year-over-year. I'll note that the third quarter of last year was a fairly strong comp period with births up 1.7% and NICU days up 3.4%. So it's important to keep that comparison in mind. Looking at a two-year stacked basis, for example, births declined by just under 1%, which is in line with our experience over the past several years. In our office-based practices, which primarily include Maternal Fetal Medicine and pediatric cardiology, volumes also declined by approximately 5%, a significant recovery from Q2, where volumes fell by roughly 17%. Pediatric cardiology remained among the most impacted service lines in the third quarter. But MFM volumes rebounded sharply and were down only slightly compared to last year. On the pricing side, we received just over $14 million in CARES funding during the quarter, which was a contributor to our 3.9% same unit pricing growth, along with normal managed care price increases. Offsetting this, payer mix was modestly negative during the quarter. At this point, our overall mix remains in line with the range it's been in for the past several years. And for the quarter, the negative comparison appears to be a year-over-year fluctuation within that range, with last year's quarter being modestly on a favorable side of that range. I also want to flag items on the expense side. Our practice level salary, wage, and benefit expense was up about $8.6 million in the quarter. Most of this increase was just over $6 million reflecting the flow-through of CARES response and the practice bonus expense. Our G&A expense was up about $3 million year-over-year. As we detailed in our press release, G&A includes about $10 million in expenses we incurred as part of a transition services agreement we had just completed, following the sale of American Anesthesiology. The reimbursement for those expenses is reflected in our investment and other income line item, so there is a minimal impact to our adjusted EBITDA, but they do inflate our G&A expense. As one last word for G&A, there were just under $3 million in TSA expenses within our second quarter G&A. Finally, on our G&A expenses, is the wind-down of the TSA with NAPA. This activity will wind down as we move through 2021, but in terms of financial impact on MEDNAX, there will likely be a lag time for us to bleed off these expenses currently being reimbursed for. We think of our G&A expense excluding those TSA costs as a future state of work towards and not an immediate step down in G&A. Our transformational and restructuring expenses were $34 million for the quarter, which included about $27 million of costs related to our executive and board restructuring, roughly $5 million in consultant costs and the rest related to contract termination fees and the like. We will continue to reduce our transformation activity for Q4 of 2020 and expect any ongoing consulting expenses to be minimal by early 2021. Overall, adjusted EBITDA was just under $73 million for the quarter, up from $69 million last year. We know that many analyst models for the quarter still included our radiology organization, so to help bridge results for people's models, we detailed in our press release that MEDNAX Radiology Solutions generated Q3 revenue and adjusted EBITDA of $126 million and $21 million respectively. Again, on a sequential basis, our adjusted EBITDA showed a sharp recovery, $73 million from $56 million. For one last piece of detail, the CARES funds we received in Q3 contributed $8 million of EBITDA compared with $3 million contribution in the second quarter of this year. I’ll make one final note on adjusted EBITDA: for those of you keeping models, while we aren’t providing financial guidance for the fourth quarter, I’ll point out that while we have applied for additional CARES funds based on HHS guidance, it's uncertain how much we will receive during the fourth quarter. So the more appropriate comparison to use for your models would be our third quarter adjusted EBITDA excluding the CARES contribution to that EBITDA. As we have done for the past two quarters, we’ll provide specific details of any CARES funding we received during the fourth quarter, when we report early next year. Turning to our balance sheet and cash flow. There are a number of moving parts on what's flowing through continued operations and discontinued operations, particularly given the collection retained from the anesthesia transaction flows through discontinued operations. The better way to look at cash flows, then, is our total increase in cash for the quarter to $295 million from $132 million at the end of June. Roughly $40 million of this increase reflects anesthesia AR collections. Another $28 million reflects the receipt of income tax related refunds and the remainder reflects operating cash flow from our core operations with engineering ops, and from radiology within discontinued ops. With that, I will turn the call back over to Mark.

Mark Ordan, CEO

Thanks Marc. I'll now pick up and provide you with a look at what we're up to and what it means. While we look at our share price and read analyst comments about our company, I see a misunderstanding. We are not an organization that is sitting around waiting to see what share we will get based on our country's birth rate. At this point, we don't see any signs of a major drop in birth rates, like we've heard about anecdotally. Instead, we are very actively managing every aspect of what we do to maximize efficiency without ever putting our patients anywhere but as our number one priority. We have been reducing our overhead and in particular slashing outside consultants spending, which for the year-to-date was almost $50 million in total and almost $30 million related to our continuing operations. While we're not just providing earnings guidance, I will reaffirm our view that we can achieve a steady state EBITDA run rate of $270 million in 2021. This assumes no major continuing effects from COVID. Our confidence in this is bolstered by the combination of our control of our business and spending, along with the direct and constant push for sustainable, organic and new growth. If you're having trouble getting from our current quarterly EBITDA levels to where we think we can go, I would point to a few things that I love. First, the $14 million in CARES dollars we received in the third quarter and the EBITDA associated with only dollars did not fully make up for the lost revenue we experienced due to the pandemic. This is clear when you see that even including these dollars, our same-store revenue remains down slightly this quarter. Second, we continue to make overhead spending reductions, which likely won't be fully evident until after the end of this year. We've also made significant changes to our leadership team and reporting structure, which also are not reflected in our third quarter results. Third, the changes in sales and gross which are reporting directly to me and our veteran Chief Development Officer Dr. Jim Swift, and operations reporting to me, Mack and Marc are new and will materially affect the way we run the company. I want to expand on this way of planning. Mack and I are visiting our practices and hospitals and our key markets and we now for the first time have practiced data analytics to allow much more effective monitoring and financial control of our operations. This sole focus on increasing efficiency and first-hand understanding of our practices and partner hospitals has begun last fall by Mack and our team. This now has the full support and attention of our entire organization. To underscore the importance of this focus, sales, business development, and strategy now report directly to me and to Dr. Swift. We see many ways to grow organically and with a combination of new practices and new and expanded hospital relationships. And we are very confident that we can grow without straying from women's and children's health. I can attest to the strong relationships we have firsthand with hospital systems, who are eager to find ways to expand our partnerships. And we will be all over this. In fact, just this week, we were very pleased that subject to customary Board approval, the Memorial Healthcare System here in South Florida announced their decision to choose MEDNAX to lead their neonatology services across three hospitals, including Joe DiMaggio Children's Hospital. This achievement was only possible because of our reputation, our dedicated and rededicated focus on women's and children's care, and relationships that were built and nurtured long before I got here. Our founder Dr. Roger Medel, and our senior leadership with Mack made this a reality. I can promise you that our passion for excellence and smart growth is alive and well at MEDNAX. Dr. Mack Hinson will now share how our team is combining this passion for both clinical excellence and operational excellence. Mack?

Mack Hinson, Chief Medical Officer

Thank you, Mark and good morning everyone. As Mark said, starting the course with Roger Medel, we have insisted on building our relationships, and our reputation as a leader in women's and children's health. When we met with the leaders of Memorial Healthcare, this was the focus and the commitment we brought out to them. So, we're very excited to begin providing services during 2021 and to bring our decades of dedication, investments in data and clinical research and our mission to take great care of the patient to several additional outstanding hospitals here in South Florida. Across the three Memorial Healthcare hospitals where we'll be providing the neonatal care, there are roughly 13,000 annual deliveries and 120 new beds. This is about 1.5% addition to the 2019 annual volume across the pediatrics organization. This is now a very flat organization with a complete absence of silos. We'll work together in teams to make sound decisions for all of our operations teams and our medical groups. I agree with Mark that we are misunderstood as a company. We're not just a group of neonatology practices but a diversified National Medical Group across more than a dozen pediatric medical and surgical subspecialties, plus maternal fetal medicine and the only hospitalist services providing the most vulnerable patient population in the country to care for these patients, to the expecting mothers, their newborns and children. It's our incumbent on us to ensure that physicians across our organization are fully supported, so that they can care for their patients as best as possible. Physicians spend years of their lives learning and training in the science of medicine, in order to bring their knowledge and skill to the best side of the patient. It's an art, honed through repeated patient interactions that allow every clinician to translate science into compassionate care of our patients. But healthcare is also a business; it’s our business. It requires us to work every day to put tools in the hands of our clinicians so they can deliver high quality care to our patients in the most cost-efficient and effective way possible, and to do so in a way that positions us for growth as an organization. In order to do that, last fall, we focused our efforts around a market-based approach. In each geographic area, we considered how we can strengthen and support our practices, and how we can be better partners with our hospitals. So we can expand existing relationships and form new ones. What sort of tools are we supplying? We're introducing several tech-enabled solutions that will improve the efficiency of the work our clinicians do each day. These include a significantly more streamlined charge capture system, a cloud-based image access and storage solution, the continued development of our cloud-based neonatology-specific notes and data system, and upgrades to our ambulatory EHR that are better for clinicians, and improve the patient-facing portal for our patients and their families. Since August, we're supplying real-time data to practices so they can see and more importantly manage patient volumes. Our operations team and clinical leaders are highly focused on improving access to patients and on more actively managing our market relationships. These data enable comparison of our productivity data across the practices, and will allow more direct dissemination of best practices. This also enables a more active management of staffing and expense allocation. One of the greatest predictors of success in our partnerships at the hospital and health system level is a high degree of strategic alignment between our clinical leadership and our partners. This requires of our clinicians the skill set beyond just the practice of medicine. To this end, we're re-launching our pandemic delayed clinical leadership development program. Physicians and nurse practitioners from across the organization will be starting this new program at the first of the year, so we can actively develop and support future clinician leaders in MEDNAX. The steps we're now taking will help us better allocate resources, improve the efficiency of our clinical staff, enable improved patient access and market relationship management, and foster stronger health system relationships. These actions will maintain our current relationships with the business, improve our presence in our markets, and retain and attract talent, clinicians, and new practices to grow MEDNAX. With that, I'll turn the call back over to Mark.

Mark Ordan, CEO

Thanks Mack. Operator, now let's open up the call for questions. And Mack, Marc, and our SVP, Charlie Lynch are available to answer questions.

Operator, Operator

Certainly. And first from the line of A.J. Rice with Credit Suisse. Please go ahead.

A.J. Rice, Analyst

Thanks everybody. Congratulations to the team, as they go forward from here. First of all, I know I appreciate the comments about not being too focused on short-term volatility of birth rates. But I know there was a comment in the press release about what you're seeing in terms of maternal fetal patient volume being slightly down. Does that give you any indication of what the next couple of quarters might look like in terms of volumes, or does that suggest similar to your long-term trend volume likelihood?

Mack Hinson, Chief Medical Officer

Yeah, this is Mack. It certainly suggests that we're seeing a similar type of volume that we've seen in the past. The fact that we're returning to a baseline and beyond that, I think it's hard to predict for beyond that information.

A.J. Rice, Analyst

Okay, and maybe a little housekeeping question. Obviously, when you finished the sale of the radiology business, we're calculating you'll be just north of two times debt-to-EBITDA. So, presumably you have a decent amount of flexibility on your capital deployment. Can you talk a little bit about how you're thinking about capital deployment in terms of share repurchases, tuck-in deals, larger deals, and other uses of your cash flow going forward as you complete the radiology sale?

Mark Ordan, CEO

Sure, I touched on that briefly in my comment. This is Mark. First, we think there are a lot of growth opportunities in our core area and around our core area. We're working very hard on that. So we want to make sure that we have the capital to deploy to make that happen, and so we have a very strong balance sheet process. I think we have a very sophisticated board, and we're very careful about capital allocation, and as I said, we're very shareholder friendly. In the future, it makes sense to consider a buyback or some kind of distribution, of course we'll do that. The great thing is for this company to have a strong core business, and also to have the financial flexibility to make the right moves. So, we have no plans to announce today, but our eyes are wide open.

A.J. Rice, Analyst

Okay. And maybe just a final question then. I know over the course of the summer there have been discussions about as you refocus on the women's health business and pediatrics legacy business, there was the potential to reaccelerate a bit the growth rate. I know putting the deferred volatility quarter to quarter aside and maybe get back to certainly low to mid-single digit type of top-line growth. I wonder if you have any views on that. I know that wasn't really your assessment that you offered; it was the previous group, but I wanted to hear how you feel about that?

Mark Ordan, CEO

Well, I won't put a number to it yet because the processes that I described in my comments have really just recently started. I do think that we have a lot of avenues for growth starting now and going forward. So, I am confident that we can achieve a solid level of both organic and new growth. But again, in our areas, we're not looking to do anything outside of our core areas. And we're very fortunate that our core areas have a lot of opportunity. I'd go back to the comments that Mack made that by looking at our company stand, and if you look at it market-by-market, think about how we can be better and bigger partners with hospitals and have more practices join us in and around our core, I think it gives us a very incredible way to grow without stretching. I'd say as we talk about the new award that we got from Memorial Hospital here in South Florida, there are opportunities like that throughout the country. We have a great team of operators who are really working on how to take advantage of those opportunities. This may seem unimportant to me; it's all important. This is all we do. We talk about this day and night. We are working together as a team. We have no other distractions. So that gives me a lot of confidence in our ability to grow.

A.J. Rice, Analyst

Okay. Thanks a lot.

Mark Ordan, CEO

Thank you.

Operator, Operator

Our next question is from Brian Tanquilut with Jefferies. Please go ahead.

Brian Tanquilut, Analyst

Hey, good morning, guys. Mark, just a question on the comment that you made during the prepared remarks about just not seeing growth rate compression. Obviously, you put up a 5% NICU volume growth, and same-store 4.3% number for the quarter decline. How should we put those two comments together? I mean, what's the link between those two?

Mark Ordan, CEO

Well, the reason for my comment is obviously we hear plenty of anecdotes, and articles, and we're pretty passionate about this to look to see if there are some cliffs that we're approaching or something, because we hear these dire predictions. We're not in the business of making long-term forecasts on birth rates, we'll leave that to others. But we don't see anything within our four walls that would indicate a precipitous decline. So what I was saying is that I see those growing and we expect that they'll be plus or minus with some changes in the birth rate, but we just don't see anything that would tell us that we're walking into a clear sustained decline.

Brian Tanquilut, Analyst

No, I appreciate that, very helpful. So, and I appreciate you addressing the sell-side concern. So I guess just along those same lines, if you don't mind just describing to us what the comp structure is now that we are down to the legacy core business without anesthesiology and radiology. Just think about the flow-through of payer mix changes and volume changes over time, what's the variability in the comp? And how should we be modeling that again with the risk on the horizon of whether it’s payer shifts or volumes compressing?

Mark Ordan, CEO

Well, I would say that detailed information will be provided later. I'm not avoiding the question; we are currently making a lot of changes and continue to focus on both our core business and radiology. We are restructuring our operations, which will impact our overhead and business management. As we grow in the areas I believe we will, I think it will allow us to maintain our financial leverage while operating as a more efficient company than in the past. We’ll share those details in the upcoming quarters as we implement our changes.

Brian Tanquilut, Analyst

Appreciate it. And then last question for me, Mark, you're known as a turnaround guy. Coming into MEDNAX with a fresh set of eyes. Obviously, there are cost opportunities here. And I guess you guys alluded to in your prepared remarks. But if you can just give us more detail on what are the areas you're seeing right off the bat where you could see non-compensation expense opportunities? Thanks.

Mark Ordan, CEO

We highlighted the company for several reasons and have invested significantly in general consultants over the past few years. While it’s not typical for me to do this, I’m not questioning past decisions, but we will not continue this moving forward. Marc Richards touched on this as well. My perspective is that when you focus on a company, it's crucial to examine every dollar spent and to look for different ways to manage expenses. There are many opportunities to reduce costs going forward. Like any organization, we’ve learned from the pandemic about necessary versus unnecessary travel, as well as ways to enhance office efficiency. We've already streamlined our office expenses, which have decreased, and I expect them to decrease further. I believe we will take significant measures to tighten our spending. Furthermore, I am equally, if not more, excited about the exceptional team that was already in place when I arrived. I think they haven’t had the chance in recent years to focus exclusively on this, due to many external distractions and the demands of a larger company, which required more attention to areas like anesthesiology and radiology. I cannot emphasize enough my confidence in the team, and I look forward to collaborating with them closely to enable their focus.

Brian Tanquilut, Analyst

I appreciate that. Thanks again.

Operator, Operator

Our next question comes from Gary Taylor with JP Morgan. Please go ahead.

Gary Taylor, Analyst

Hi, good morning. I had a couple questions. First, as we're just thinking about valuing the company and calculating enterprise value. Are there any adjustments we need to make to the balance sheet outside of the $885 million of Radiology proceeds? Are there any unearned CARES Act received or any accelerated payments on the balance sheet we need to reverse out?

Charles Lynch, Vice President of Strategy and Investor Relations

Hey, Gary, it's Charlie. No, those are what you would look at. I think, as we mentioned, related to the RAD transaction, we don't anticipate any tax implications related to those proceeds. So, that's a good proxy minus fees and expenses for what you would expect us to receive. On the CARES side, the only funds we have applied for or received are what we talked about, which is that roughly $14 million we got in this quarter, and something less than that in Q2. We didn't take any accelerated payments or anything like that.

Gary Taylor, Analyst

Thanks. And then my other question, Marc, I just want to make sure I understand what you're saying about the $270 million run rate. I think you're saying you won't necessarily guide for that in '21, but you're expecting as you exit the year to be at that run rate, excluding transformational expenses, adjusting for seasonality, etcetera. Is that correct?

Mark Ordan, CEO

Well, if you say, at the end of the year, I think my only hedge is, like every other company on the planet, I don't know. But it's unlikely that on January 1st, the pandemic switch will be switched off. So, I'm saying that if the pandemic wasn't affecting our business, and we described how it has, then I think we should be able to achieve that $270 million run rate. I have seen our forecasts that are a good amount lower, and I scratch my head, and I don't see any sign of that. And I think that combined with, if you look at what we were able to do in the third quarter, and project that out along with the changes that we're making. We’re making the changes now, like seven months from now, we see no reason not to have that number unless we get clobbered from the outside. And as I said, obviously, we don't forecast a steep decline in birth rates. If that were to happen, that would definitely make a difference. As I said in the last call, I will tell you that we are in the business of also growing at a time when things are choppy, and people are concerned about birth rates, and they're not sure where they are. I do think that provides a buying opportunity for an organization that has a smart and careful long-term approach to our business. So, I think that we don't hope for a lower birth rate. But there are opportunities that come in a choppier time, and we're here to take advantage of that.

Gary Taylor, Analyst

Appreciate that. Just a quick follow-up on the restructuring and transformational expenses, which have been pretty material the last couple of years, certainly were this quarter as well. Are you yet in a place to sort of talk about how and when those ramp down, so we can start thinking about true EBITDA performance without the noise of excluding a material amount of expenses?

Marc Richards, CFO

Hey Gary, it's Marc Richards. Yeah, we are in the process of arranging that down. I would expect very early on in 2021, that that effort and the related costs will be moving to zero. Is that January or February, probably in that range, and maybe some residual that'll flow through in the early part of 2021, but not to carry on certainly, nothing at the level that you saw here in the third quarter.

Gary Taylor, Analyst

Okay, thank you very much.

Marc Richards, CFO

Sure.

Operator, Operator

Next, we'll go to Whit Mayo with UBS. Please go ahead.

Whit Mayo, Analyst

Hey, thanks for the question. If I look at the EBITDA reported in the quarter and take out the $8 million for CARES Act, it gets me to 65. Historically, MEDNAX has earned about 27% of the full year EBITDA in this quarter, which would imply kind of a $240 million. So I'm just trying to come up with a starting point to think about how we build up to the 270. And if there's any headwinds or tailwinds that we should consider in terms of a normalized environment where you would be versus the pandemic, where your budget was and where you are now, costs, anything that may help us sort of bridge the gap would be helpful? Thanks.

Charles Lynch, Vice President of Strategy and Investor Relations

Yeah, hey Whit, this is Charlie. I can give you a couple things, and Mark alluded to this in his prepared remarks. When you look at that 65, that doesn't include the CARES, that effectively gives you a fairly broad depiction of our operations right now, as impacted by the volume trends we've seen this year related to the pandemic. And over and above that, when you look at the contribution from the CARES dollars we’ve received this quarter, you can see that even including those at the top line, I think the flow-through EBITDA is comparable to what you would have seen if we had sufficient volume to get there. Our same unit revenue is still down slightly year-over-year, which is somewhat less than our trend in revenue for the past several years. So that's the most important thing that while we're pleased with how much we've seen volumes come back and force the return to normal, they are not back to normal. And that has an impact on the flow-through into EBITDA as Mark mentioned. Now, the 270 is predicated on a view of normalized performance. The last thing I would bring up is just a different reference point is, when you look through the pro forma financials we provided for 2019, it’s on our website, you'll see that for the full year 2019 for continuing operations with adjusted EBITDA about $260 million $261 million. So that too is a relatively appropriate baseline to think about for last year, which was not impacted by the pandemic.

Mark Ordan, CEO

And Whit, this is Mark. The other thing I would say is, over the last several months with the reorganization of the company and everything that went on, the sales process that I described as now ongoing, so the process was somewhat interrupted. So in the third quarter, we still have significant expenses as Marc Richards said will be mostly gone by the beginning of ’21. And as the overhead changes that I described, will be in place in ’21. So there was a lot of spending in the third quarter that we don't expect to see in ’21, coupled with effective sales which you didn't see in the third quarter of this year. Because again, I would say the mass preceding in the third quarter, that pace was not as robust as we expect it to be.

Marc Richards, CFO

And I think, Mark, maybe more specifically meaning our normal sales and marketing and business growth process, not the radiology sale process.

Whit Mayo, Analyst

Okay, that's all. Just to be clear, Charlie, I think you were suggesting that if we look at the CARES contribution, that's a decent representation of how performance may have been in the absence of the pandemic. Is that a fair characterization?

Charles Lynch, Vice President of Strategy and Investor Relations

I think structurally, that's what I meant with. But my other point is relevant to this: I don't think we would have anticipated a negative same unit revenue growth in a normalized environment. And by that, I mean, the funding we received through the CARES Act did not fully replace what we experienced in lost revenue related to volumes.

Whit Mayo, Analyst

Okay, now that’s helpful. Maybe one other question, I'm just scanning the queue, it does look like you've got all disclosures around payer mix, and it looked like subsidies looked like they were up $10 million year-over-year. I know that's the normal course of business. But I guess maybe just remind us how this works with your hospital partners, how much visibility you have into sustaining those types of increases and maybe what the trigger points are for you?

Charles Lynch, Vice President of Strategy and Investor Relations

Yeah, I saw you mentioned in your note, Whit, and just as a quick clarification there, that contract and administrative fee revenue was up about $10 million year-over-year. The majority of that increase is related to new business and contracts signed, and that includes some level of admin fees. Only about $3 million represents the same unit comparison year-over-year. So that's really where you saw that increase, and those are all negotiated contractual structures. So, that's just part and parcel of how we're providing services to all those contracts.

Mark Ordan, CEO

And Whit, it’s Mark Ordan. I also go back to what I refer to and Mack described in more detail. This company, for its existence, did not have, in my opinion, anything like good data analytics to be able to look at the factors that contributed to the results in its ambulatory practices and other places in the organization. Several months ago, and long before I got here, there was a strong effort to create that data analytics, so that we could really look at all the financial movements in our practices, to think about the comparison with what best practices are versus what was employed elsewhere. I don't know how you can move results without those analytics. Those analytics didn't exist before. They were first rolled out, starting about a month ago. I'm just trying to give you and everybody an understanding that, that we are running the company, we could lead it. It's very hard to drive your car with no dashboard and no windshield. I actually would say, I admire what people were able to do without that. But with that, we can look at scheduling and we can look at a host of things and be able to move the needle where in the past, all you could do is go in and wish people well. I can't put numbers to it now. I look forward in the coming quarters to putting numbers to it. But from my experience elsewhere, that's what gives me confidence that it’s going to be different here.

Whit Mayo, Analyst

That's helpful. Sounds like there's a number of cumulative positive forces there, so I appreciate it. Thanks, guys.

Mark Ordan, CEO

Sure, thank you.

Operator, Operator

And our next question is from Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck, Analyst

Great thanks. I was wondering if you could provide a little bit of color on the payer mix in the quarter. It sounds like you're saying that there really wasn't a major change in there. But any difference in payer mix between the core NICU business and the other services that you provide in the hospital, any changes there potentially impacting payer mix?

Charles Lynch, Vice President of Strategy and Investor Relations

Hey Kevin, this is Charlie. No, we haven't seen anything like that. Marc Richards mentioned that looking at the next quarter, it looks like fluctuations are at a pretty steady mean over the last several years. And that's indeed what it looked like. So, we didn't see anything in there that looks like a change in trends. The trends for the past, probably four or so years, as in our payer mix and keep in mind, for pediatrics and obstetrics, we're really looking at a largely binary mix between Medicaid and non-government. It's been a slightly favorable trend, generally flat but slightly favorable. For this quarter, over last quarter, it just looks a little bit unstable. But there are fluctuations around that norm. So we're not in a place here, where we can see a change in trend. We'll see how things develop, but it really looks like a normal fluctuation.

Kevin Fischbeck, Analyst

Okay, I guess any update exactly on the payer rating, sounds like that was normally for updates and anything to think about as far as Medicaid rate updates in the current environment?

Charles Lynch, Vice President of Strategy and Investor Relations

No, nothing to call out.

Kevin Fischbeck, Analyst

Okay, and then I guess maybe finally, when you think about the cost cuts that you guys are talking about kind of ramping in the future quarters. How much more is kind of that to be realized versus where the Q3 amount realized this?

Charles Lynch, Vice President of Strategy and Investor Relations

We have successfully managed a significant portion of our expenses, particularly in non-payroll areas, allowing us to make reductions without negatively impacting the organization. We've already implemented many cuts, but I believe there are still numerous opportunities for savings outside of consulting. Most of our organizational changes are now complete, and I anticipate that the benefits will become apparent starting in the fourth quarter and continuing beyond.

Kevin Fischbeck, Analyst

Okay, great. Thanks.

Operator, Operator

And our next question is from Ryan Daniels with William Blair. Please go ahead.

Nick Spiekhout, Analyst

Hey guys, Nick Spiekhout on for Ryan. Thanks for taking the question. I guess so you kind of touched upon this to start the call, but historically point to kind of like historically 3% growth maybe a goal getting that kind of 6% area. I know, you said that's from prior management, but I was assuming like, what would be like kind of moving parts to kind of get to that mid-single-digit level that is mostly targeting organic? Is that going to be a little bit more through acquisition? And then I guess, what kind of birth rate assumptions would be in that general area to get to that area?

Mark Ordan, CEO

I can't provide a specific answer, but I'll do my best to assist. It's Mark. We anticipate fluctuations in the birth rate, expecting it to neither rise significantly nor fall. Considering that and the potential impact of COVID, you can infer the situation. So, aside from those factors, we're very focused and organized. We have regional leaders and presidents reporting to two excellent operating executives who answer directly to Mack and me. As Mack mentioned, we maintain a flat organization, allowing us to collaborate with our practices and hospitals to identify new organic growth opportunities within the system. We have a fantastic team for that. But I mean, the heads of our mid-Atlantic group or our group down in Texas, they not only have a great understanding of operations, they have a terrific relationship with our hospital leaders. And again, I'm not only bragging about them, not about me, I brag on them. So I would say that gives us a huge opportunity in organic growth. In terms of tuck-ins, same thing, we have a terrific sales and business development team that's out there; they've established long relationships with practices. It's not completely under our control, because somebody has to decide if they want to sell. But I think that the more they see that we are totally focused on is business and it's all of us, the better it is. So we know recently, the team has been working on an opportunity and a major opportunity in MFM. And, it was all hands on deck to make sure that the practice was comfortable, that we think about the future of the practice, figure out what we can do to make the doctors and other clinicians as happy as possible. And that involves just about everybody working together to make it happen. I got to get involved when it was already 99% done, so I could look like a hero.

Nick Spiekhout, Analyst

Thanks for the insights. I wanted to ask about the investments you've been making in improving analytics. Will these improvements allow you to share more specific data with us regarding volumes, NICU patient days, and similar metrics?

Mark Ordan, CEO

I believe Marc and I have always aimed to be as transparent as possible. If we share our initiatives with you and they start to yield results, we have a responsibility to update you on their impact. We're very confident about the progress we're making towards closing this. Some of the expenditures Mack mentioned should lead to financial improvements, but it's crucial to understand that many of these actions are necessary for us, as leading clinicians, to stay at the forefront of our field. Practices prefer to collaborate with top-tier companies, and hospitals seek partnerships with equally reputable organizations. Our contract with the Memorial Health system was secured due to our reputation and commitment to quality. When I discussed areas for potential spending cuts, I deliberately excluded research, as I believe it's essential for us to lead in that domain.

Nick Spiekhout, Analyst

Awesome, thanks for taking the question.

Mark Ordan, CEO

Sure. Good question. Thank you.

Operator, Operator

And next, we'll go to Pito Chickering with Deutsche Bank. Please go ahead.

Pito Chickering, Analyst

Good morning. Thanks for taking my questions, following up on the $250 million EBITDA for 2021, just understand excluding the COVID impact, is that a possible model, maybe I missed it? Can you break out what is the split between organic revenue versus M&A if this is the number?

Charles Lynch, Vice President of Strategy and Investor Relations

Yeah, I think Mark made a comment earlier that when we think about the ways to get there, and it's all the above. So now look, where there's a reason why we don't have specific financial guidance, just like every other company. We're going into the fourth quarter and doing our budgeting process. And we'll be a lot more granular as we move into 2021. But I think, going all the way back to a bit earlier this year, when we started to discuss that financial profile, it was based off of multiple factors between the opportunities for organic growth, the opportunities for acquisitions, the opportunities for cost improvements, without any specific line or contribution from each of them. So, I think we're still thinking about it the same way in a holistic fashion, without a specific contribution from X, Y, or Z.

Mark Ordan, CEO

And let me add, one of the reasons I said that and I was so declarative about it is I was reacting to things that that I read, and I understand the reason for the things I've read, but I think that there is a thesis out there, which I totally understand. If the birth rate is going down, and you're not really growing, and you just want to sit there, how are you going to get to 270? I totally get that. So my point was, Hey, I don't think we're not growing. I know that wasn't around a business that wasn't we have, because of the focus that we're in that that's been enabled.

Pito Chickering, Analyst

Okay, so, one question on birth trends. Have you seen any differences with the ages of pregnant mothers or senior practices? We've seen that teenage pregnancies are down quite a bit due to COVID, was curious to what you've seen particularly within new pregnancies?

Mark Ordan, CEO

So, if I understood the question correctly, are we seeing different types of mothers in the practice? And I would say no, I think we're seeing the same sort of mix of maternal patients that we've historically seen. We've been a very data-driven company that looks at quality and looks at trends in businesses and led by somebody who's very passionate about this. So we've tried to see if there's something that we're missing. So we haven't detected any significant changes. The anecdotes that are out there, we're managing them closely.

Pito Chickering, Analyst

Okay, and then last one, looking on free cash flows what's on the horizon? Just having these sort of what are these free cash flow generation for the core business at this point? You're looking at cash flow from ops that has definitely been pressured for charges. If you think about sort of the cash flow, whether it's coming from ops or CapEx, going forward how should we think about the conversion from EBITDA to cash flow? Thanks so much.

Charles Lynch, Vice President of Strategy and Investor Relations

Yeah, Pito, I think we're just talking about what percent of EBITDA we can pull through into GAAP operating cash flow and free cash flow. We've generally looked at that in a broad sense in the past, and I think the parameters we think we've thought about in the past still apply, for pediatrics, which is that a fair rule of thumb is to think about us pulling through somewhere in the range of 60 to two-thirds of our EBITDA into GAAP operating cash flow. Beyond that, our CapEx requirements are fairly minimal for continuing operations, so it should be comfortably under $20 million a year. So those are the parameters you should think about. And, I don't think they changed dramatically post the sales of anesthesia or radiology.

Pito Chickering, Analyst

Great. Thanks so much, guys.

Operator, Operator

And our next question is from Ralph Giacobbe with Citi. Please go ahead.

Ralph Giacobbe, Analyst

Yeah, sorry about that. Can you talk about maybe discussions with physicians and staff at this point, any turnover? If you can give us a sense of churn or if that's stable if you're looking to add? And then previously, there was a push more into service lines connected to NICU and women's services. Is that still a focus, or is it more focused on sort of the core entity at this point?

Mark Ordan, CEO

Let me start taking the first one because, and then Mack can add to it. I had the opportunity to meet with a lot of our physicians and nurse practitioners around our system, and there is a great level of enthusiasm and also a real interest in helping. I call a name, John Lloyd, who is one of our anesthesiologists in Texas, who has been enormously helpful to me as I think through what we should be doing to better support our practices. This is kind of unique, and it's fantastic that people who are part of our organization want us to succeed, and they want to be as helpful as they can be to enable our success. Obviously, if we're listening, it's going to help us and it's going to help them.

Mack Hinson, Chief Medical Officer

Yeah, I would agree, Mark. I think the people are enthusiastic about the focus on women's and children's services. I think that's a very uniform response that we're getting as we're talking with multiple practices across the country. With regard to service lines within pediatrics, we do a couple things: one is we certainly want to pay attention, because there is specialty-specific focus. It's important. The specialists want to talk to other specialists, and neonatologists want to know what their partners are doing across the country as do pediatric surgeons that we had a discussion with some pediatric surgery leaders yesterday about exactly this thing. But it's also important to think about the whole. So we're not thinking that we want specific pieces of pediatric or maternal care, but we did want to continue to help facilitate discussions within our specialists. But thinking about the specialties cross-talking as a whole is really important to our success going forward, and we're devoting time and energy to make sure those things happen.

Ralph Giacobbe, Analyst

Okay, that's helpful. And then I was hoping, in your prepared remarks, I think you talked about normal managed care pricing. Maybe just remind us what that typical rate is, and is there any opportunity there, or are you seeing maybe incremental pressure there? Thanks.

Mark Ordan, CEO

I can't point to any specific changes in our focus. We prioritize our relationships with payers, and there’s no trend I can identify. Our team is dedicated to managed care relationships, and its leader has a background in the payer industry, which helps us communicate effectively and understand their perspectives. There’s no significant change to highlight, but as with any partnership, there are two sides involved. We are committed to maintaining our focus on these relationships and collaborating with our payers.

Operator, Operator

And we have a question from Gary Taylor with JPMorgan. Please go ahead.

Gary Taylor, Analyst

Thanks for the follow-up. I just wanted to go back to the 4Q just for a second. I know you're not giving guidance, but I think Charlie had said sort of think about at least sort of the starting point coming out of 3Q as a $73 million minus the CARES Act funding. When we look at the restated financials for 2019, there was pretty sharp step up in EBITDA from 3Q to 4Q. And it's just been obviously a number of years since we've been able to see this business on a standalone basis. So is that level of seasonal pickup, is that normal? Or was there something, or C&A was down a lot? I see. But there's something else in the fourth quarter of 2019 that just made that a steeper ramp. Should we be thinking about that sort of ramp, obviously, subject to how the pandemic might impact 4Q?

Charles Lynch, Vice President of Strategy and Investor Relations

Yeah, hey Gary, it's Charlie. That is a specific unknown as we go into the fourth quarter from the third, any kind of sequential changes related to the pandemic. And obviously, that's why we don't have financial guidance for the quarter. What I would say is that historically, in a normal seasonal pattern based on the nature of our business, the fourth quarter from a top-line perspective, and therefore into EBITDA would generally have a slight downtrend from the third quarter. And that's over multiple years, as we look at it and for us internally we can see when there are different distortions that might move that separately. The second point is that because you're looking at this call last year, there are also different items, either on the cost or revenue side that kind of represents adjustments and alike as you go into the end of the year. And they tend to sort that trend off and on as deal flow.

Gary Taylor, Analyst

That's helpful. And if I could just one follow up for Mark to just try to get back to some of the disconnect between your outlook and the Street models. Maybe you could speak to this. So if we look at 2019, the EBITDA and continuing ops is the $264.5 million. But the presumption is, I think, for most is that just looking at continuing ops that would have been down from 2018. We don't know that number, and that would have been down including acquisitions. And I know, obviously, you guys' goal is to turn the company around, but I think the disconnect is trying to bridge. What that organic decline looked like or what we're guessing that looks like without perfect transparency and trying to measure that gap to where your go-forward is? So I don't know if there's anything else you could provide on kind of thinking about how the organic growth or decline in this core business has played out? That would help us.

Mark Ordan, CEO

I think Charles should discuss the past more. Charlie, would you like to elaborate on that a bit? Then I can share my thoughts, which are similar but more refined. The nature of a turnaround doesn't adhere to a strict timeline, but it does involve building trust. I see potential here that allows us to adjust our approach quickly. There are immediate opportunities we can act on. Rather than pointing to a specific number, I'm suggesting that I believe we have the capacity to achieve our goals and we are taking the necessary steps to do so. I'm not primarily focused on what happened in 2018 or 2019; instead, I'm looking at 2020 and the factors affecting us then, along with our current team. I have a clear understanding of the events in 2020, which gives me confidence about our prospects for 2021. If I establish a steady state, I’ll connect the dots and provide guidance. Ultimately, I am very confident that we can reach our targets, and my confidence stems from the strong team that Dr. Medel and others have assembled; this effort is more than just a simple turnaround.

Gary Taylor, Analyst

Understood. I appreciate that. Thanks.

Operator, Operator

And with no further questions, I'll turn it back to the company for any closing comments.

Mark Ordan, CEO

We appreciate all the questions. We appreciate all the interest. I hope that we're not frustrating you by not being able to be more precise. I hope that we are the opposite of frustrating you by showing you how we think, how we're running a business and where we think we're heading, and we look forward to hosting you on our progress going forward. Have a great weekend.

Operator, Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.