MEDNAX Inc
NYSE:MD
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MEDNAX Inc
Earnings Call Analysis
Q4-2023 Analysis
MEDNAX Inc
The company reported that their fourth quarter results aligned with the revised forecasts from November. During this period, there was a solid performance in office-based maternal field medicine services, though hospital-based services witnessed lower volumes compared to the remarkably strong volumes in the prior year's quarter. This resulted in stable underlying same-unit pricing, excluding certain distortions from the previous year's fourth quarter. Looking ahead to 2024, the company has provided preliminary guidance for adjusted EBITDA, expecting it to be in the range of $200 million to $220 million.
The company is transitioning to a hybrid Revenue Cycle Management (RCM) model which involves expanding their internal team and transitioning to a long-term relationship with a new vendor. This shift has not led to significant disruptions in RCM activities so far. Additionally, there were successful negotiations which resulted in an increase in their in-network status, expected to reduce out-of-network challenges and potentially improve patient volume consistency. They are also working on standardizing the financial performance across individual practices within the organization, which is anticipated to cumulatively improve financial outcomes in 2024.
On the pricing front, a non-recurring revenue item and the absence of cares dollars from the previous quarter impacted same-unit pricing growth negatively by approximately 2% and 40 basis points, respectively, in Q4 of '23. However, the company managed to achieve favorable payer mix and growth in contract and administrative fees. Looking ahead, the company anticipates maintaining the stable pricing seen at the end of '23, potentially influenced by the arbitration process under the No Surprises Act, where they've improved their win rate to almost 90%.
The company concluded the year with $628 million in total borrowings and cash holdings of $73 million, leading to a net leverage of just under 2.8x. It is important for investors to note that the first quarter typically sees the company using cash for compensation and benefits payments, with an expectation to transition to free cash flow generation in the second quarter onwards.
For the upcoming year, the company projects modest growth in net revenue, amounting to between $2 billion and $2.1 billion. General and Administrative (G&A) expenses relative to revenue are expected to remain consistent with the previous year, despite the expansion of the internal RCM team. It is also anticipated that the first quarter's adjusted EBITDA will represent 17% to 19% of the full year's adjusted EBITDA, guiding investors on the distribution of earnings across the year.
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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.
Thank you, operator, and good morning, everyone. I'll quickly read our forward-looking statements and then turn the call over to Jim.
Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrix' 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.
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 Pediatrix affiliated clinicians.
With that, I'll turn the call over to 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.
Thank you, Marc. Operator, let's now open the call for questions.
[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.
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?
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.
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?
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.
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.
Your next question comes from the line of Ryan Daniels from William Blair.
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?
Can you clarify? I didn't catch you right, related to the first quarter or the full year?
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.
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.
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.
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?
Yes. 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.
Your next question comes from the line of Pito Chickering from Deutsche Bank.
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?
Pito, 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.
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?
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.
And the last component -- Pito, the last component of that top line revenue estimate is around organic growth and the opportunities there.
Okay, which actually is a great segue. Looking at your sort of guidance ranges with contracting for pricing base we set and contracting with your doctors basically set, is the only variable between the high and the low end simply where the volumes end out? Or what are the components are there between high end versus low end guidance?
I mean, Pito, I would say that, that is certainly a component of that range. I want to be clear that we have a lot of activity on the operational side, be it in the RCM transition in our practice level plans and in our corporate plans. So there is an execution component in each of those that we wanted to take into account within that guidance range.
Okay. Fair enough. Two more quick ones here. With your contracting with your physicians, has there been any change to sort of turnover as these contracts come up for renewal? Is there any change to turnover of those docs on those contracts? Or is it pretty stable?
It's been pretty stable. Our turnover is very, very low as we've commented before. And with most of these contracts, again, some of them are renewed over a 3-year period. And in the specialties we're in, we really are the medical home for a lot of these specialties. So I think that really breeds confidence within the clinician pool to remain a part of the organization.
All right. Makes complete sense. And then last quick one here. Free cash flow conversion for '24 should it be pretty similar for as it was in '23, now RCM's pretty stable.
I would think so, Pito. If you look at '23, it was a little over 70% from adjusted EBITDA to operating cash flow. Our general rule of thumb has been in the range of maybe 2/3 of adjusted EBITDA into operating cash flow. So that's kind of a good baseline for you to think about.
Your next question comes from the line of Brian Tanquilut from Jefferies.
Sorry about the technical distances earlier. Jim, I guess my first question, in your prepared remarks, you talked about structural, tactical and strategic changes that you're making to the business. Maybe if you can share with us what falls into each of those 3 buckets that you alluded to?
I suppose when we look at it face value, one is, and we've talked about volume in the past, we're looking at staffing associated with the practices to make sure that we have the right staffing mix in terms of personnel. And within that, is really are we using physicians versus other clinicians such as nurse practitioners or PAs. That's 1 piece.
Two, we know that we have contract revenue in our relationship with some of our hospital partners. And certainly, that becomes an element in terms of rightsizing the support for those practices and making sure that we really are executing with our hospital partners in that regard, and we've had some favorable results thus far.
And I think as well as the issue that we've seen about being back in network in the case of our ambulatory practices that have been adversely affected because as opposed to the inpatient services where the patients do make it to the service largely in those other areas, we are really -- those patients are directed elsewhere. So we feel that there's going to be a benefit as we get more of our marketing and execution around patient volumes from an elective ambulatory standpoint.
Got it. Okay. And then maybe since you talked about inpatient, is there anything you're seeing in the hospital other than a tough comp from last year that kind of like hinders the ability to drive growth? Is it your hospital losing market share? Or is it just the birth rate altogether? Just curious how you're thinking about volumes.
I think that part of the volume issue is take the NICU out for a moment, we did not see the large amount of volume this year, this last year that we saw in '22 related to the other inpatient services such as pediatric [ cost ], pediatric DR and pediatric ICU.
I think from the standpoint of our inpatient NICU services people talk a little bit about a higher degree of severe prematurity and increasing length of stays, and we've certainly seen that. Some of the bread and butter around admissions into the NICU have been variable across the country. So -- but again, we anticipate volumes will remain kind of where we are for the time being. But we don't see any indication of volumes decelerating going forward.
Yes. And Brian, just as a quick note on that. We did highlight that the fourth quarter had some pretty strong comps that we went against. And we look at our NICU days over 2 years stack, they were actually slightly positive versus 2 years ago.
So in our view, looking across as many states and practices where we are providing neonatology services. we usually view it as more appropriate to look at a longer-term time frame to get a better sense of where things are going. And as a result, as we look into '24, we're not anticipating within our outlook for the year, any meaningful movement in patient volumes.
That makes a lot of sense. And then maybe last question for me. Since you guys talked about in-network, how much out-of-network is going to be left in the business, let's just say, as we exit the year?
It's a good question because you're asking things that we don't know about how this year will unfold. But where we stand right now, we're -- our historical experiences are less than 5% out-of-network position and we're lower than that as we enter this year, thanks to some of the re-contracting we've done.
[Operator Instructions] And you have a question from the line of Kevin Fischbeck from Bank of America.
Great. I guess a couple of follow-up questions. When you said that the going in-network is usually a positive for the company, were you talking about positive on the rate perspective? Are we talking about this dynamic with the outpatient volumes usually getting a boost once you go in-network?
I was referencing the rate our experience over the last several years is that when we are in an out-of-network position. The reimbursement we're receiving from payers tends to be quite low, hence, the arbitration processes that we enter. So we're generally unfavorably positioned when we are out-of-network from a rate standpoint. Jim, you want...
Yes, Kevin, it is volume too, right? It is volume on the ambulatory services, particularly, and although we had strong numbers on our maternal field medicine practices. But if you think about it, when that is impacted in that outpatient setting, that does an impact -- that does impact some of the inpatient if that is a mother who's directed away from 1 of our practices that might not deliver at 1 of our facilities. So again, that captures that volume back, which we're very pleased with.
Okay. And then if I -- just want to make sure I got the numbers right. I think the reported same-store pricing in the quarter was minus 50 basis points, and you're saying add back, 2% and then another 40 basis points. Do you kind of look at overall pricing in the quarter is like a positive 1.9% on a normalized basis? Is that the right way to think about it?
That's right. That's right. So if you walk through the pieces, same unit revenue quarter-over-quarter is down about 1.5%, at about 1% of that is attributed to volume, which brings same unit rate down to about a 50 basis point decline. We've got some cares in there. And then, of course, you referenced the other component related to the guarantee last year.
Okay. So when you said that your revenue guidance assumes stable volumes and stable pricing, when you say stable, you mean flat year-over-year? Or do you mean stabilize in like still about 2% pricing?
No. When I say stable, I mean, effectively flat, continuing off of the end of '23. So effectively, the rate -- the exit rate in '23 is what we anticipate driving '24.
Okay. Is there a reason why you're not getting rate update that you're in-network, I would think that you should be getting at least some sort of cost of living, is there something else about payer mix assumptions or anything else that you're assuming in there?
No. I mean we assume our payer mix has been relatively flat year-over-year. If you look back in the 10-K, we're assuming that as well. There are, of course, puts and takes in rate. Of course, despite the fact that we're anticipating a stable rate through '24 and a flat volume, there is a little bit of growth in the top line. The timing of that, I'd say, is counterbalanced with both our RCM transition and the like.
Okay. And then I guess as far as the guidance, it doesn't sound like it's assuming anything from a capital deployment perspective? Or do you expect to be active on that front?
Well, we still are looking at and I think there was -- we had a certain amount of caution why we were out-of-network, but now being back in-network largely in our bigger markets, we do have the opportunity to deploy capital in terms of acquisitions and practices.
And we're certainly identifying in the core, those practices that would make sense for us to acquire. So yes, we still have an attitude of deploying capital in that regard.
Next, we'll go back to the line of Pito Chickering from Deutsche Bank.
Just a quick modeling question. Sort of looking at the guidance, if we're modeling SARs and benefits to the 30 basis point sort of headwind. Is that generally how we should be thinking about 2024?
Where are you referencing the 30 basis points, Pito, sorry?
Sorry, just looking at your guidance from revenue you're saying that G&A is going to be flat. I mean just -- I guess let me ask you differently, like how do you view sales and benefits as a percent of revenue in '24 versus '23?
Yes, I think you can partially solve for that. And I think you have within the range we provided on revenue and adjusted EBITDA at a high level, our view on our goal is that the '24 represents safe stabilization of our margin profile as compared to 2023 following some of the headwinds we faced over the last year or 2. So that's by and large, how we have formulated that outlook, if that's helpful to you.
Yes. And then which -- I think for '25 and beyond, what -- I understand your G&A levers and you guys have done a good job with that and excellent jobs for dealing with the RCM issues that have occurred. But as I think about sort of 2, 3 years down the road, is there an ability to stabilize SMB from turning from a headwind into a tailwind? Or is this like a sort of a permanent sort of headwind that be offset with G&A leverage?
No, I think that our goal and what we see is to the second half of the year is where we would look at hopefully that we start to see improvement. And then looking into '25 really, it'd be a different story, we think, in terms of the overall cost structure, both at the practice level on labor. But also, again, I think what we've referenced is that we're looking at all the practice in terms of the efficiencies in those practices that will be benefit to the organization. And on top of that is obviously what we're doing structurally with our overhead at the corporate level.
And at this time, there are no further questions.
Thank you, operator, and thank you, everyone, for joining our call today.
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.