Ladies and gentlemen, thank you for standing by. Welcome to the 2023 fourth quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star, then zero. 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'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 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-fetal 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 three 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 two payers in three 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 their 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 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 two concurrent conferences, our twelfth annual Specialty Review in Neonatology, and our forty-fifth 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 two key items to call out for you to make an appropriate year-to-year comparison. First, in the fourth quarter of 2022, 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 2023. Additionally, we recorded a modest amount of CARES dollars in Q4 of 2022, which also did not recur, reducing our same-unit pricing growth in Q4 of 2023 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 2.8 times. 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 2024 outlook. We expect net revenue of $2-$2.1 billion, or modest growth over 2023.
As Jim touched on, we anticipate that our G&A expense as a percentage of revenue will be comparable in 2024 versus 2023, 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%-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.
Okay, ladies and gentlemen, if you'd like to ask a question, please press one, then zero on your telephone keypad. You may withdraw your question at any time by repeating the one-zero command. If you're using a speakerphone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press one, then zero at this time. One moment, please, for your first question. Your first question comes from the line of Brian Tanquilut from Jefferies. Please go ahead. Brian from Jefferies, your line is open. Please check your mute button. Okay, we'll move on. We'll go to A.J. Rice from UBS. Please go ahead.
Hi, this is Anja on for A.J. The company previously sized around a $50 million RCM headwind in the first half of 2023. Would that be a tailwind in 2024 for pricing in the first half?
You know, 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 2024, we expect to maintain stable pricing through this transition, i.e., a continuance of what we saw in the fourth quarter of 2023.
Got it. Thanks. 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 we seeing more cases go through arbitration than previously? Thanks.
Well, I'll just start. Since we're back in network now with a number of the payers that we were having to contemplate arbitration, you know, we haven't seen an increase related to arbitration 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.
Our win rate has improved through the course of the last several months, where we're approaching, at least on our most recent data, we're approaching almost 90% win rate when we are going to arbitration.
Great. Thanks. Thanks a lot.
Your next question comes from the line of Ryan Daniels from William Blair. Please go ahead.
Hey, good morning, guys. This is Jack Senft for Ryan Daniels. Thanks for taking my question. 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, the high end of the range? Thanks.
Can you clarify? I didn't catch it right. Related to the first quarter or the full year?
Sorry, the first quarter. I think because 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's 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 17%-19% of full year EBITDA, that's a little bit narrower than $20 million.
Sorry. Yeah, I definitely misspoke. I meant the full year. Sorry about that. And then-
Yeah.
Just a quick follow-up here. Last quarter, too, I know you mentioned that you're planning to tackle the 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, two, just maybe if we can just get your expectations here for 2024 with this initiative as well. Thanks.
You want to start him off? I can start off and let Jim add some color. You know, within our expectations for the full year, EBITDA is similarly an expectation of some moderation in underlying practice level expense growth. And as we discussed in the previous quarter and Jim referenced this morning, we have, you know, 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 toward 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 year. Jim, do you want to give some thoughts?
Yeah, and we're looking at really what we're doing on the variable and fixed comp side to have more stability around that. Additionally, I think, you know, what we've seen along the way in starting up new practices is that 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 gonna have really the contract labor as a headwind.
Your next question comes from the line of Pito Chickering from Deutsche Bank. Please go ahead.
Hey, good morning, guys. On the revenue growth guidance of $2 billion-$2.1 billion, what are the components of the revenue growth split between volume and price?
Hey, Pito, good morning. We, you know, I would, I would take out a couple of pieces. You know, we're expecting stable volume throughout 2024 in our guidance. You know, 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, for rate to remain somewhat stable through 2024. 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 you know, basically stable volumes and stable rates. I mean, as you brought on those out-of-network contracts into in-network, was that a rate tailwind or a rate headwind?
That's generally. If we're gonna move from an out-of-network to an in-network position, that's generally favorable for us, Pito.
Right.
The last component of, 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, you know, looking at your sort of, you know, guidance ranges, you know, with contracting for pricing basically 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, you know, what are the components are there between getting the high end versus the low end of guidance?
... I mean, Pito, I would say that that is certainly a component of that range. I wanna be clear, though, 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, you know, as those contracts come up for renewal? Has there been any change to turnover of those docs on those contracts, or has it been pretty stable?
It's been pretty stable. Our turnover is very low, as we've commented before. With most of these contracts, again, some of them are, you know, renewed over a three-year period. In the specialties we're in, you know, 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 2024 should be pretty similar for, you know, as it was in 2023, now that, now that RCM is pretty stable? Thanks so much.
I, I would think so, Pito. If you look at 2023, it was a little over 70%, from Adjusted EBITDA to operating cash flow. Our general rule of thumb, rule of thumb has been in the range of, you know, maybe two-thirds-
Two-thirds
of Adjusted EBITDA into operating cash flow. So that's a kind of a good baseline for you to think about.
Great. Thanks so much.
Your next question comes from the line of Brian Tanquilit from Jefferies. Please go ahead.
Hey, good morning, guys, and sorry about the technical difficulties earlier. Jim, I guess my first question, you know, within 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, you know, what falls into each of those three buckets that you alluded to?
I suppose, you know, when we look at it at face value, one is, and we've talked about volume in the past, you know, 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 clinical physicians versus other clinicians, such as nurse practitioners or PAs? I think that's one 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 right-sizing the support for those practices and making sure that we, you know, really, are executing with our hospital partners in that regard, and we've had some favorable results thus far.
And I think as well, is 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, you know, more of our marketing and execution around, you know, 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, you know, kinda like, it hinders the ability to drive growth? Is it, is it your hospitals losing market share, or is it just the birth rate altogether? Just curious how you're thinking about volumes.
You know, I think that part of the volume issue is, you know, take the NICU out for a moment. You know, we did not see the large amount of volume this year as last year that we saw in 2022 related to the other inpatient services, such as pediatric hospitalists, pediatric ER, and pediatric ICU. I think from the standpoint of our inpatient NICU services, you know, people talk a little bit about, you know, 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, you know, going forward.
Yeah, and, and Brian, just as a, as a quick note on that, you know, we did highlight that, you know, the fourth quarter had some pretty strong comps that we went against. When we look at our NICU days over a two-year stack, they were actually slightly positive versus, versus two 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, timeframe to get a better sense of, of where things are going. And as a result, as we look into 2024, you know, we're not anticipating, within our, within our outlook for the year, any meaningful movement in inpatient volumes.
That makes a lot of sense. Then maybe last question for me, since you guys talked about in-network. How much out-of-network is gonna be left in the business, you know, let's just say, as we exit the year?
That's a good question because you're asking things that we don't know about how this year will unfold. But, you know, where we stand right now, you know, our historical experience is, you know, 5 or less than 5% out-of-network position, and we're lower than that as we enter this year, thanks to some of the recontracting we've done.
Got it. Okay. Thank you.
If there are any additional questions, please press one then zero.... And you have a question from the line of Kevin Fischbeck from Bank of America. Please go ahead.
Great, thanks. I guess a couple of follow-up questions. When you said that the going-in network was usually a positive for the company, were you talking about positive at, on the rate perspective, or were you talking about this dynamic with the outpatient volumes usually getting a boost once you go in-network?
I was referencing the rate. You know, our experience over the last several years is that when we are in an out-of-network position, you know, 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-
Yeah, and Kevin, it is volume too, right? It is volume on the ambulatory services, particularly, and although we had, you know, strong numbers on our maternal-fetal medicine practices. But if you think about it, when that is impacted in that outpatient setting, that doesn't impact, that does impact some of the inpatient, if that is a mother who's directed away from one of our practices that might not deliver, you know, at one of our facilities. So again, that captures that volume back, which we're very pleased with.
Okay. And then if I just wanna make sure I got the numbers right. I think, I think the reported same-store pricing in the quarter was -50 basis points, and you're saying add back 2% and then another 40 basis points. You kind of look at overall pricing in the quarter as like a, a positive 1.9 on a normalized basis. Is that the right way to think about it?
That's right.
That's right.
That's right.
Okay, and so-
If you walk-
So-
Walk through the pieces, you know, same unit revenue quarter over quarter is down about 1.5%. The, 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 stable as in, like, still about 2% pricing?
No, when I say stable, I mean effectively flat, continuing off of the end of 2023. So effectively, the rate, the exit rate in 2023 is what we anticipate driving 2024.
Okay. Is there a reason why you're not getting rate updates, that you're in-network? You know, I would think that you should be getting at least some sort of cost of living. Is there something else around 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, you know, despite the fact that we're anticipating a stable rate through 2024 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, you know, 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, you know, we still are looking at... I think there was, we had a certain amount of caution, you know, while 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 of practices. 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.
All right, great. Thank you.
Next, we'll go back to the line of Pito Chickering from Deutsche Bank. Please go ahead.
Hey, guys. Thanks for letting me come back in. Just a quick modeling question. So we're looking at the guidance, you know, if we're modeling salaries and benefits as a 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. I just, you know, looking at your guidance, you know, from revenue, you're saying that G&A is gonna be flat. I mean, just, you know, I guess, let me ask it differently: like, how do you view salaries and benefits as a % of revenue in 2024 versus 2023?
Yeah, I think you can, you can partially solve for that, and I think, I think you have within the range we provided on, on revenue and Adjusted EBITDA. At a high level, our view and our goal is that 2024 represents a stabilization of our margin profile, as compared to 2023, following some of the headwinds we faced over the last year or two. So that's by and large, how we have formulated that outlook, if that's, if that's helpful to you.
Yeah, and then which, you know, as I think about for 25 and beyond, you know, what... You know, I understand your G&A levers, you guys have done a good job with that and, you know, excellent job for dealing with the RCM issues you've, you know, that have occurred. But as I think about sort of two, three years down the road, is there an ability to stabilize S&B from turning from a headwind into a tailwind, or is this like a sort of a permanent sort of headwind that needs to be offset with G&A leverage? Thank you so much.
No, I, I think that our goal and what we see is, the second half of the year is where we would look, hopefully, that we start to see improvement. And then looking into 2025, really it'll, 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, you know, to the organization. And on top of that is obviously what we're doing structurally with our, our overhead at a corporate level.
All right, great. Thanks so much.
Thanks, Pito.
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.