Earnings Call Transcript - MD Q1 2023

Operator, Operator

Thank you all for joining us. Welcome to the First Quarter 2023 Earnings Conference Call. This call is being recorded. I will now hand it over to your host, Mr. Charles Lynch. Please proceed.

Charles Lynch, Host

Thank you, Greg, and good morning, everyone. I'll quickly read our forward-looking statements, and then we'll 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 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 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 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, CEO

Thank you, Charlie, and good morning, everyone. Also with me today is Marc Richards, our Chief Financial Officer. Our first quarter results were largely in line with our expectations, with some variances that Marc and I will discuss this morning. And as you'll see in our release this morning, we're maintaining our full year outlook for adjusted EBITDA of between $235 million and $245 million. In terms of business trends, patient volumes were stable to positive against relatively strong year-ago comparables. This was particularly the case for our office-based services, where same-unit volume grew 4% against a nearly 5% prior year comp. Within our hospital-based services, same-unit births and NICU days declined year-over-year, but this was also against a difficult year-ago comp. And both metrics were up on a two-year compounded basis. As you'll see in our release this morning, same-unit pricing was also strong, keeping in mind that in last year's first quarter, we recorded roughly $10 million in CARES funds. This pricing growth partially reflects modest improvements in our revenue cycle management activities, which I'll detail in just a minute. On the cost side, our practice-level expense growth continued to hover above historical trends, similar to what we've discussed in the last few quarters. But we expect this expense growth to normalize through the course of 2023. Lastly, our G&A expense declined year-over-year and continues to reflect efficiencies we have created, primarily in the area of net staffing. And we will continue to seek further efficiencies in our corporate services. Turning to revenue cycle, I'll classify the progress we've made as encouraging, but by no means complete. Throughout the beginning of this year, our internal focus has been on highly targeted staffing additions, both to address the gaps we had identified in front-end activities experienced to date, and to bring in the necessary subject matter expertise that matches the nature of our clinical services, particularly in the hospital-based care. Our internal team has worked very closely with our vendor to ensure that we are tracking the right metrics, quickly identifying any variances to benchmarks, and ensuring that the improvements that we have had to make to date can be built upon as we go forward. Overall, we're pleased with the steps that we have implemented to bridge the front-end gaps that we identified and have spoken about in the past. We also believe that supplementing the extensive services we receive from our vendor with an internally staffed function is not only proving effective, but will also be necessary on an ongoing basis. What we found is that, in our business, a hybrid solution is the most effective at or near the point of care. And while I emphasize that it's still early, we nonetheless believe that this hybrid, a higher-touch front end working in tandem with our vendor, has enabled us to reduce our unbilled AR; get claims moving through the process; and as Marc will detail, generate improvements in our DSOs, our accounts receivable and ultimately our revenue. With that, I'll turn the call over to Marc Richards.

Marc Richards, CFO

Thanks, Jim. Good morning, everyone. I'll start with details of how our RCM activities flowed through our financial results. As you'll see in our earnings release and our 10-Q filed this morning, both gross and net AR have declined since the end of last year. Overall, our DSOs were 51 days as of March 31, down two days from year-end and down eight days from a year ago, but still above the high 40s range that we would consider to be historically normal. On the P&L side, our net same-unit pricing increased by 40 basis points year-over-year despite a 2.2% headwind based on the CARES funds we recorded in Q1 of '22. In the first quarter of '22, we highlighted that our same-unit pricing was burdened not only by core RCM activities, but also by a temporary issue surrounding our private pay collections, the latter of which represented roughly half of the pricing headwind we discussed on last year's first quarter call. Accordingly, despite a notable improvement in same-store pricing, core RCM activities continue to burden our P&L. And similar to our discussion last year of our full year outlook for adjusted EBITDA, additional and sustained improvements are a component of that outlook. Turning finally to our balance sheet. We were a net borrower during the quarter, as we typically are in Q1, based on the timing of incentive compensation payments and employee benefit plans matching. We ended the quarter with net debt, just over $750 million, and net leverage of 3x. With that, I'll turn the call back over to Jim.

Jim Swift, CEO

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

Operator, Operator

Your first question comes from Kevin Fischbeck from Bank of America. Please go ahead.

Kevin Fischbeck, Analyst

Thank you. To begin with the cost aspect, you mentioned that you anticipate a moderation in cost growth as the year progresses. Can you elaborate on the factors driving this change? When should we expect to see improvements year-over-year, considering it's primarily a comparison issue? Additionally, how do you view cost growth once we return to normalized conditions?

Marc Richards, CFO

Kevin, Marc Richards here. Why don't I jump in, and then I'll flip it over to Jim. You are correct. Looking at both the discrete comp item in the P&L and same-store comp, sequentially and quarter-over-quarter, we did see an outsized growth in clinical compensation. That is consistent with our projection for the quarter. And we also expect that to revert back to a more normalized increase as the year progresses, I think that's important to note. So we saw that coming in the first quarter. We expect it to slowly revert to normal as the year continues. Jim, I don't know if you want to -

Jim Swift, CEO

Yes. And Kevin, we talked about this last quarter, some of this with our organic growth activity as practices have come on, and this de novo growth does add some cost in as we ramp up. And generally, we see a lot of growth that occurs in the last quarter and then into the first quarter, and that will smooth out over the years. So we think, again, this will return to normal.

Kevin Fischbeck, Analyst

Okay. Great. And then just on the pricing side, obviously, no surprises that, that's still, I guess, a concern for some. Just want to hear the latest and greatest from what you guys are seeing, how that process is working and whether the backlogs that are happening have any kind of input on DSOs or skewing any of the metrics. Thanks.

Jim Swift, CEO

I will begin. We haven't observed any significant activity from the payers that would cause us concern. Recently, there has been some information from CMS regarding the IDR process and its backlog. We have successfully pushed many claims through the IDR process and have been winning around 72% to 75% of them. For some payers, our success rate is as high as 80%. Additionally, the recent CMS report for Q4 indicated that providers, on average, were winning about 71%. We believe that the infrastructure we have established to manage the IDR process is effective and sends a clear message to the payers about our desire for fairness and balance. We are hopeful that this will encourage out-of-network payers to engage with us, and we have had meaningful discussions with several of them.

Kevin Fischbeck, Analyst

Great. Thanks.

Operator, Operator

Your next question comes from the line of Brian Tanquilut from Jefferies. Please go ahead.

Taji Phillips, Analyst

Hi, good morning. This is Taji for Brian. Thank you for my question. I’d like to revisit your comments on same-store pricing growth. Given the ongoing RCM pressures and the negative comparison from 2022, how should we approach the expected trends for this year?

Marc Richards, CFO

Hi, good morning. Marc Richards here. I think that's a great question. And there are a lot of pieces in the first quarter relative to pricing as we've seen marginal improvement relative to our RCM efforts. Same unit pricing for the quarter up about 40 basis points. That was burdened by about 220 basis points of CARES in the first quarter of last year. So with taking that into account, there's 260 basis points of same-store accretion there, which is partially offset by issues we saw in the private pay side in the first quarter of last year, which accounts for 100 or so basis points of that. So picking through the first quarter, looking at pricing in the 150 basis point area, it is probably consistent with expectations going forward. I would note also that in that pricing analysis, there's probably some component, a smaller component, some catch-up from prior year activity. So to the extent that we still are creeping in that 150 basis point range as the year progresses, I'd say that's consistent with our expectation. I know that's a lot.

Taji Phillips, Analyst

No, I appreciate the color. And then as I shift to the balance sheet, I see you ended Q1 with $6 million of cash on hand. Just curious about your outlook on improving your cash balance on hand.

Marc Richards, CFO

That's a good question. In the first quarter of the year, we were a net borrower. Our compensation arrangements with our practices require annual incentive payments in March. Therefore, we used our revolving credit and funded that. However, we anticipate that as the quarter and the year progress, our position will improve, cash will continue to accumulate, and our net borrowings will decrease in the next quarter or two.

Taji Phillips, Analyst

Thank you.

Operator, Operator

Your next question comes from the line of Ryan Daniels from William Blair. Please go ahead.

Jack Senft, Analyst

Hi, good morning. This is Jack on for Ryan. Looks like you guys added some nice office-based patient service growth year-over-year with maternal and fetal medicine being a strong area this quarter. Any comment on the growth or contribution from some of the other service areas, such as pediatric primary and urgent care? Any additional color here would be great.

Charles Lynch, Host

Sure. It's Charlie Lynch. I will give you a couple of pieces, I'll work backwards on primary and urgent care. We've continued to see fairly strong growth in patient volumes in that service line. The caveat is that, in aggregate, it remains a relatively small piece of our total volume and net revenue. So in terms of impact to our overall same-store volume growth, doesn't move too much. Within the office-based service lines, looking at the first quarter, the strength we saw was primarily in some of our peds subspecialties. But also within cardiology and maternal and fetal medicine, which are our largest office-based service lines, we saw growth that was just under the 4% that we quoted for total office-based services.

Jack Senft, Analyst

Okay. That's all. Thank you.

Operator, Operator

Your next question comes from the line of A.J. Rice from Credit Suisse. Please go ahead.

A.J. Rice, Analyst

Hi, everybody. Maybe first on the comments around the revenue cycle management. So you're at 51 days and hoping to ultimately, maybe to get back to the high 40s. Any time frame on that? And then also with respect to this issue, you've added staff to support everything that's going on there and making sure you're getting it right. Is this a sort of a run rate, that you think, of expenses associated with the revenue cycle management side that will go forward? Or as you get things on track, you see an opportunity to reduce some costs you're incurring there, beyond just getting the DSOs in a more normalized fashion.

Jim Swift, CEO

Thank you for the question, A.J. This is Jim. I'll begin, and Marc can also provide input. We've discovered that there is a significant amount of hands-on engagement required at the point of care, particularly on the hospital side, where gathering information can sometimes be challenging through automated processes. Therefore, we have assigned some team members, who previously held different roles within the organization, to engage directly at the bedside to collect this information. Although this team is small, their presence has improved the front-end operations of our revenue cycle management. We plan to retain these individuals for now as part of our solution to address the existing challenges. We are also collaborating with our vendor on various aspects beyond the front end, including the back end. Looking ahead, we intend to keep these team members in place, and their associated costs are not significant for the value we provide. Marc, do you have anything to add?

Marc Richards, CFO

Yes. A.J., just real quick on your DSO question. I would note that our guidance expectation for '23 does anticipate continued improvement in the DSO. So we would expect to be in that high 40s as we approach year-end this year.

A.J. Rice, Analyst

Okay. All right.

Marc Richards, CFO

We'll need to triangulate with our continued efforts surrounding improvements relative to RCM.

A.J. Rice, Analyst

Okay. Regarding business development, what opportunities are you encountering for expanding the management of NICU and related women's health services? Can you provide some insight into the pipeline and potential growth in that area?

Jim Swift, CEO

Yes, A.J., thank you. Listen, I think from an organic standpoint, we still have a very robust pipeline of organic growth. It probably breaks evenly across the ambulatory specialties and the inpatient specialties. Some of those may be tilted more towards the newborn service lines and pediatric critical care, but we do have some NICU opportunities in there. On the nonorganic side, we feel we have a pretty good pipeline that we're actively working at this time that is inclusive of some opportunities in Level 3 NICU. So more to come on that, but we feel it's a pretty balanced approach, both on organic and inorganic.

A.J. Rice, Analyst

When I hear hospitals reporting, they mention increasing fees related to hospital-based services, mostly in the emergency room and a bit in anesthesia. Is there any change happening in your year-to-year fees that hospitals would need to pay you?

Jim Swift, CEO

I think our approach has been quite stable. There are certain services that need fees to be supported, particularly in lower volume situations. For instance, in the OB hospice sector, there's a requirement for some contractual stipends with hospitals. However, we haven't experienced any significant changes in our approach. As you know, our practices typically do not operate with stipends. Therefore, we haven't been actively involved in that ongoing discussion.

A.J. Rice, Analyst

Okay. Thanks a lot.

Operator, Operator

Your next question comes from the line of Pito Chickering from Deutsche Bank. Please go ahead.

Kieran Ryan, Analyst

Hi, there. You've got Kieran Ryan on for Pito. Thanks for taking the question. I saw that commercial and nongovernment mix was down about 70 bps year-over-year. So not a huge move, but I was wondering if you could just talk about any impact on pricing that had there. And just given the broader puts and takes within pricing, do you still see that up in the 1% to 2% range this year?

Charles Lynch, Host

Kieran, it's Charlie Lynch. I think Marc gave a good reference around that. Essentially a core trend in that mid-1s range when you picture the pieces for this quarter. So I think you're relatively on point there. On the payer mix side, yes, we did see a 70 bps increase by volume year-over-year on the government side. It had a modest impact on our net pricing for the quarter, a little bit of a headwind for this quarter. I would back up though and say that, on a gross basis, looking at our mix, we're still looking at a multiyear trend line here that is stable to very slightly improving. So given that there are some variances quarter-to-quarter, we like to call those out. But smoothing that out a little bit, we've got a meaningful amount of stability in our overall payer mix. And in fact, it has a very slightly favorable trajectory.

Kieran Ryan, Analyst

Got it. Thank you. And then if I can just get a quick follow-up. Obviously, the improvement on the RCM front. I just wanted to check in to see, are you still sizing that impact at about $15 million this year, weighted towards the first half? Just wanted to see that...

Marc Richards, CFO

That's right. That's still consistent with our expectations this year. That is correct.

Kieran Ryan, Analyst

Thanks so much.

Operator, Operator

Your next question comes from the line of Whit Mayo from SVB Securities. Please go ahead.

Whit Mayo, Analyst

Thanks. Good morning. Just a few clarification questions here. Marc, did you guys recover any AR in the first quarter that you had fully reserved in prior quarters?

Marc Richards, CFO

Certainly, the analysis of the rates is influenced by recovery, although it is not a significant factor. What I meant to convey is that while the first quarter rates seem positive at first glance, they might also include adjustments from previous efforts last year. That summarizes my point.

Whit Mayo, Analyst

Okay. I think you guys also referenced in your prepared comments some efficiencies that you expect to see in corporate this year. Can you maybe just elaborate a little bit more on some of those efforts?

Marc Richards, CFO

In terms of our overhead, I would say that compared to what we have done over the past year or two, there have been significant changes. We continue to seek efficiencies, but right now, we don't have a major program in place or the expectation of significant cuts for the rest of the year. That's our overall take on that, Whit.

Whit Mayo, Analyst

Okay. No, that's helpful. And I may be overreading this since it's in the press release, but I wasn't sure if there was anything, Marc or Charlie, that you'd care to call out or share just as it relates to sort of your internal expectations.

Marc Richards, CFO

I would say that, to the extent that in the quarter ahead, we noticed anything in consensus expectations that we would want to address. We did not notice that related to Q2.

Whit Mayo, Analyst

Perfect. Thank you, guys.

Operator, Operator

And at this time, there are no further questions.

Jim Swift, CEO

Thank you, operator. We'll end the call now.

Operator, Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Teleconferencing. You may now disconnect.