Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX First Quarter 2022 Earnings Conference Call. At this time, all lines are in a listen only mode. Later, we'll conduct a question and answer session. Instructions will be given to you at that time. If you need assistance during the call, press star and then zero and an operator will assist you offline. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Charles Lynch. Please go ahead.
Thank you, Cynthia. Good morning, everyone, and welcome to our call. I will quickly read our forward-looking statements and 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 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 quarterly reports on Form 10-Q, and our annual report on Form 10-K, and on our website at www.mednax.com. With that, I'll turn the call over to our CEO, Mark Ordan.
Thanks, Charles, and good morning, everybody. Also joining me on today's call are Marc Richards, our CFO, and Dr. James Swift, our Chief Development Officer. We are pleased with the results for the quarter. Our bottom line results were in line with our expectations and demonstrate resilience in a challenging healthcare environment and operating challenges we anticipated and addressed. Volumes continue to rise. Total births at the hospitals where we provide NICU services were up just under 4% on a same-unit basis, and our aggregate patient volumes were up just over 3%, with office-based growth a bit higher than hospital-based growth.
We also recorded $10 million in revenue related to related funds from the CARES Act during the first quarter that favorably impacted adjusted EBITDA by about $6 million, which relates to applications we submitted for the periods in 2020 when our operations were disrupted during the COVID pandemic. As we've done in the past, we provided details of their contribution to revenue and adjusted EBITDA in order for you to make a proper comparison to your models. Within our financial results for the quarter, I'll point out that revenue was modestly below our internal expectations. This was primarily related to our transition of our revenue cycle functions, although it appears in pricing as we detailed in our release. Mark will discuss this in more detail, but this was largely anticipated and we believe relates primarily to timing.
Offsetting this modest variance in revenue, we had good cost performance during the quarter, yielding adjusted EBITDA in line with our expectations before contemplating the addition of CARES funds. I'm also pleased that despite headwinds across the healthcare industry, particularly labor cost pressures, and for physician groups like ours, the uncertainty surrounding surprise billing rulings, we remain comfortable with our outlook of at least $270 million of adjusted EBITDA for 2022. On the labor front, I'll share shortly how we'll be focused on ensuring that Pediatrix continues to be the organization that people really wanna be part of. We all know the challenging labor environment, and this has only deepened our commitment to our amazing clinical team and to our equally amazing support team.
On payer relationships, we continue to have constructive discussions around the country, including in many states where we've successfully renewed contracts in a fair manner and on schedule. Let me update you on our organizational priorities. I'll start with our people. As a non-physician leader, I'm constantly in awe of the dedication of all of our clinicians to this company's mission, and I'm likewise confident that our dedication to physician leadership will always keep our organization focused on our highest priority, which is providing great patient care. To that end, we are establishing a Physician Executive Council represented by many of our specialties to enable our affiliated physicians to advance their skill and knowledge for the sake of patients. This group will meet directly with me to ensure my firsthand understanding of issues and opportunities on the minds of our affiliated clinicians.
This is also an opportunity for them to have a far better understanding of our decision processes. Dr. Curtis Pickert, our Executive Vice President of Clinical Services, is chair of this council, and Dr. Roger Hinson will serve as an advisor to the group. On that note, Roger will be transitioning away from his role as president of our women's and children's organization on June first, and I wanna personally thank him on behalf of the entire organization for all that he has done for the company. Roger has been an invaluable physician leader since he joined Pediatrix in 2003, and given his experience and judgment, I'm pleased that in addition to advising our Physician Executive Council, he will continue to remain as a senior advisor to me and the rest of the team here.
Across our entire organization, ensuring that Pediatrix is the place of choice for people to practice and to work is absolutely a priority for us in today's market. That's true within our affiliated practices, and it's equally true across all of our non-clinical support teams. A key reason our affiliated practices can be fully devoted to our patients is the work of an amazing group of support professionals in all areas of our operations. On our February earnings call, I talked about a number of steps we've taken, including our commitment to our ESG goals and ensuring that we are truly an equitable organization. Here again, I believe that my deep personal involvement and commitment will ensure that our efforts do not let up on behalf of our teams and that diversity and inclusion are truly in our core and just not a couple of two buzzwords.
I also talked about the importance of a strong brand, and in March, we formally introduced our new Pediatrix logo, which you'll now find throughout our website and which is being rolled out across our affiliated practices. Further to that, you'll recall that in 2020 we asked our shareholders for approval to rename the company as Pediatrix Medical Group, signifying a return to our core focus and in caring for women and babies and children. This year, thanks to the great strides of our amazing marketing team, we are now in position to formally return to the Pediatrix name for our corporate entity as well.
I'm excited to complete this full return to Pediatrix, which is a well-known and highly respected name nationwide, and will signify our commitment to be the employer of choice, a trusted partner to hospitals and clinicians across the country, and a public company that can meet the high standards of you, our shareholders. The Pediatrix name and brand is also integral to our growth. Following our acquisition earlier this year of a second urgent care clinical platform, NightLite Pediatrics , bringing us to 21 urgent care centers, we've begun the process of de novo development of Pediatrix-branded primary and urgent care clinics in several of our key markets, with a goal of opening new clinics before the end of this year.
As I've said in the past, we'll also contemplate additional opportunistic acquisitions, but I believe that these de novo development opportunities give us the chance to tailor the location, size, and layout of clinics exactly to our existing market footprint. Since this is still a new business area for Pediatrix and has real estate as a key component to it, we've also added to our senior team a head of real estate who will play a key leadership role in our clinic development and report directly to Dr. Jim Swift, whose role within the company is also expanding. Building a presence of primary and urgent care clinics in our key markets also gives us opportunities to reinforce our brand, since these locations will carry the Pediatrix name.
Before I turn the call to Mark, I want to thank our people, the clinicians caring for their patients, the operators, and the myriad support teams that make Pediatrix the special organization that we are. We continue to operate in a changing and challenging environment, but despite that, the dedication I see every day to our highest priority, our patients, has never wavered. It's that dedication that motivates me and that gives me confidence that we can continue to succeed, grow, and serve all of our stakeholders well. Now I'll turn the call to Mark for additional financial details.
Thanks, Mark. Good morning, everyone. I'll provide some details on our quarterly results as they relate to our revenue cycle management transition process, and then add to Mark's comments on our outlook and financial position. Related to revenue cycle, there are two factors within that transition process that modestly impacted our first quarter revenue and financial results, which I would classify as primarily timing related. As you'll see in our balance sheet, our accounts receivable increased sequentially by roughly $16 million, which brought our DSOs to 59 days at March 31st versus 55 at December 31st. This reflects an increase in unbilled AR related to the transition to R1. We were not surprised directly by this extension since there was an expectation there would be some delay as R1 automated various functions that had previously been manual in nature.
It was modestly beyond our expectations as of quarter end. Based on our normal reserving practices for the aging of receivables, our Q1 revenue was slightly affected by this. However, we view this AR aging predominantly as a timing matter. We expect our DSOs to return to historically normal levels over the course of this year, and correspondingly, we also expect a historically normal collection of these amounts. Separately, but also related to our RCM transition activity, we also saw a slight uptick in our self-pay receivables, which are not managed by R1, but by other third-party vendors. For context, I'll point out that self-pay, which for us is true self-pay, typically represents only 1%-2% of our total revenue. It's a fairly nominal amount.
That said, we saw a modest increase in these true self-pay balances, which as you might imagine, carry a lower collection rate. This also had a modest impact on our revenue for the first quarter. MEDNAX utilizes several third-party vendors to manage these accounts separate from R1, and we are working closely with these vendors to first determine whether this is a temporary or ongoing shift, and second, to ensure that we optimize the collectibility of these accounts. Net-net, the combination of these two items are the primary pieces within the modest decline in our same unit pricing in Q1, which again, we believe is primarily related to the timing of our RCM transition to R1. Offsetting these revenue items, our cost trends in G&A were favorable in Q1, primarily reflecting lower professional fees and the net savings in RCM expenses following our transition to R1.
At the practice level, underlying salary trends remained at historically normal levels at our existing practices. All told, these modest variances from our internal expectations yielded adjusted EBITDA largely in line with our expectations prior to the contribution from the CARES funds we received. As our first quarter results relate to our outlook of adjusted EBITDA for the year, as Mark noted, we're maintaining our underlying expectations for 2022 of revenue in the range of $2 billion and adjusted EBITDA of at least $270 million. Within that outlook, we expect our adjusted EBITDA for the second quarter to be roughly comparable to or slightly higher than the prior year's $66 million, with growth in adjusted EBITDA re-accelerating in the second half of the year. I'll close with a quick overview of our financial position.
On March 31st, balance sheet reflects the refinancing of our capital structure that we completed during the quarter, with total borrowings of $799 million and only a modest amount of cash for both gross and net leverage of approximately 3x trailing adjusted EBITDA. Our debt structure is fairly evenly split between fixed and floating rate debt, and all of our borrowings under our revolving credit facility and term loan are prepayable. This refinancing significantly reduced our ongoing debt service costs. Based on our March 31 borrowings, we expect our quarterly interest expense to be approximately $8 million, compared to $12 million in the first quarter of this year and $17 million in the fourth quarter of 2021. We also believe our current debt structure provides us with an efficient capital structure that offers optimal flexibility and liquidity for the foreseeable future.
With that, I'll turn the call back over to Mark.
Thanks, Mark. We're ready for any questions.
MP, if you can open up the line for questions, we'd appreciate it.
Certainly. Ladies and gentlemen, if you wish to ask a question, please press one and then zero. You will hear an acknowledgement tone. You may remove yourself from queue by pressing the same one-zero command. Once again, for any questions or comments, press one and then zero. One moment, please. We will go to the line of Tao Qiu with Stifel, and your line is open.
Thank you. Hi, good morning. You have taken the opportunity to refinance the debt before rates move much higher. I'm wondering if you have seen any changes in the acquisition market or your pipeline now that the cost of capital have increased. Also maybe give us an update on, you know, kind of how your year-to-date acquisition with de novo activities track relative to your expectations.
Well, we've seen some change in pricing in the acquisition pipeline. Given the uncertainties that are still out there on pricing and relative to the surprise billing legislation, we've been a little bit more cautious to take a stab because we wanna see how things level out a little bit. We do think that all of this dislocation will provide opportunities for us, and our team is working on those now. I don't know, Jim, if there's anything you wanna add to that.
No, I just think there continues to be interest among the different subspecialties and primary care specialties in the acquisition market.
What about transaction volume? Has that been affected by the cost of capital?
Only slightly. As we said on our last call, our focus has been on the primary urgent care side. That's where we've seen growth, and it's been very helpful, and we wanna digest that properly. We foresee a continuing flow of transactions. I'd also point to the areas which are also of key interest to us, which is working with our major hospital systems to look at areas where we can fill in and be better and even fuller partners to them. That's a very big thrust of what we're doing right now.
Got you. On the labor front, I know that you mentioned that labor costs remain at kind of historical levels, but that kind of stands in contrast with what we've seen, you know, on the hospital side, where they're seeing, you know, accelerating labor cost increases. I'm wondering what's your outlook on the physician salary, you know, and benefits growth for the rest of the year. You know, do you expect that to, you know, accelerate from here, or do you see that to be relatively stable?
We're not forecasting any material difference. I would say we're working harder than ever to recruit and retain people. I think it wasn't. I certainly didn't mean it as just fluff, some of the comments that I made. I think that this is a time when our recruiting team and our whole organization just has to double down. We as executives have to double down our own efforts personally to attract people to the organization. I mentioned the Physician Executive Council and the work that Dr. Pickert does of making sure that there's such a close alignment between the organization and our key clinicians so that people really feel this is the home for them, and they want others to join us here.
I think that's something that we're really doing quite well. In our human resources department, we have a terrific recruiting team. As we saw the wind shifting, we added to that team since that's you know really part of the heart of what we do. We're not forecasting anything materially different, except that we're working materially harder to make sure that we keep things on track.
Okay. Appreciate it, Carter. Thank you for taking my questions.
Thank you.
Thanks, Tom.
Thank you. Next, we will go to the line of A.J. Rice with Credit Suisse. Your line is open.
Hi. Thanks, everyone. First, maybe just to ask about your discussions with managed care, any changes. Obviously, people are focused on whether there'll be any impact from surprise billing. Any updated thoughts on pricing, terms of arrangements, that you're seeing versus, and also any move to going out-of-network on the part of payers?
Well, one of the reasons that we feel good about our $270 number, A.J., is that we haven't seen a material shift. We have had, as I mentioned, very good dialogue with all of our major payers. We've had renewals on schedule and in line with our expectations. There's been a cross-current of things, but certainly not a wave in a negative direction that people had feared. I can speculate that after the Texas Medical Association ruling and the reaction from the government to say that they'll get back and think about where they're gonna be, we had hoped that there would be clarity by April of this year.
I think that was what many people expected, and the latest they've said is there'll be clarity by early summer. I would say until there's clarity, everybody out there is in a little bit of limbo. Having said that, during this time, I would think, you know, I've read everything I can read. I think people realize that the government is being very thoughtful about what they've done and what would be the right way to do things. I think we feel, you know, at least modestly more comfortable, but we'll have to wait and see. Until we learn further, things seem to be moving along okay.
Okay. Maybe a follow-up question. You mentioned that you're making a push toward health systems to try to you know see what you can do there. I know it's been a while since you announced the Memorial deal. That was a big deal. Do you think the pandemic has sort of slowed hospitals being willing to discuss potential making changes of significance like NICU management or whatever? Now that the pandemic seems to be subsiding a bit, are those discussions picking up? Is that part of what your push is about, or is it pretty much status quo?
Hey, A.J., this is Jim. You know, actually, we're seeing more activity with the health systems and what they perceive as their needs, and I think that's what we're trying to fill. You know, what we see is both on the inpatient side, you know, it's not accelerating from the standpoint of them looking at different opportunities. I think what they're really looking at is how do we support them on the ambulatory side with some of these subspecialties that really, you know, lead to being able to manage patients on the inpatient arena.
Our engagement at a national level has been very good with the large health systems, and on a local level, I would characterize it, you know, as a strong relationship that we're trying to build on, to look at all the services, both inpatient and ambulatory.
Okay, great. Thanks a lot.
Thanks, A.J.
Thank you.
Thank you. Next, we will go to the line of Ryan Daniels with William Blair, and your line is open. Ryan, please check your mute button.
Can you hear me now?
Yes, we can. Please go ahead.
Okay, sorry about that. Hi. Nick Nocito for Ryan. Thanks for taking the question. I guess just to start on the inflationary front, just wondering if there's any other areas where that is, you know, kind of likely, those pressures are likely to show up, I guess, outside of the typical kind of wage inflation.
Hey, Nick. It's Charlie. As I think about that throughout our P&L, I think you can imagine the answer is going to be that, you know, there's always the possibility that that can show itself virtually anywhere just based on what you and we all have seen. On the labor front, supply chain front, whatever the case may be, you know, in real time, our experience, as you can see in the first quarter, has been pretty favorable. As Marc Richards mentioned at the practice level as we look at underlying salary trends, and I'll add, you know, to date so far this year, looking at underlying turnover trends, we're seeing historically normal activity.
In our G&A, our corporate and non-clinical functions, we also have at least in a timely fashion the benefit of all the changes that we've made over the past year, which have afforded us, you know, some good opportunity for savings, regardless of that inflationary environment. I think that's helped us insulate us from a lot of those outside forces. It doesn't mean that they're not there. We've just had some pretty good opportunities to work against them.
Got you. Thanks. Kind of on that, savings front, I think last quarter you mentioned that the last component of the R1 RCM transition was on the ambulatory front-end functions. I think you targeted, you know, mid- to late 2022 for to kind of see, you know, the benefits of that. Is that still, you know, the target, and how are we on that front?
Hey, Nick, it's Marc Richards. I can speak to that for you. Yeah, the ambulatory piece is still slated towards the tail end of this year, and that's still within our project plan.
Got you. Thanks. I guess just one last quick one. The Brave integration, I think last quarter, you mentioned, you know, it should take a couple more months. Is that pretty much, you know , fully completed by now?
Well, the Brave integration, you know, that's a technology company that we have a relationship with through an investment we made, and we're working with them now on their EHR and technical platform for our digital front door. We feel good about where we are and the status of that. Obviously, we're working with them in concert with some of the ambulatory pediatric primary urgent care rollout that we're doing, so that relationship is working well.
Yeah.
Got you.
Just to clarify on that, Nick, you know, the relationship with Brave is an investment that we have, you know, in that organization, so it was not an outright acquisition. So for us, you know, the opportunities it brings us are just what Jim brought up. It's the access and availability of the investments that they have made in a, you know, pretty advanced IT and operating platform to support primary urgent care clinics, and that's where our focus is.
I would also add.
Got you. Yeah
You know, for us, that they have a terrific team and culture, and there's a real partnership that I don't think you'd find in most investment relationships, which has been very beneficial for us.
Great. Yeah. Just kind of on the, like, the efficiencies front that you're gaining from that kind of partnership. Are you kind of mostly experiencing, you know, the majority of those efficiencies you kind of expect with that?
No, I think that's still increasing as we speak.
Okay.
As we both transition clinics to new locations and open new clinics, I think that's when we'll feel the full effect of it.
Okay, great. Thanks, guys.
Thanks, Nick.
Thank you. Our next question comes from the line of Whit Mayo with SVB Securities, and your line is open.
Hey, can you hear me? I just heard something funny.
We do. Hey, Whit.
Oh, okay, cool. Hey, on the reserving methodology, I didn't really think you guys added higher reserves until they age out more than, you know, 90 days, maybe 180 days. I'm just trying to wonder which receivable category this was. Was this related to receivables in this quarter, or was this something that's more, you know, 90 days, 100 days, even further out? Just maybe help me understand, you know, the timing of the age out.
Hey, Whit, it's Marc Richards. How you doing? You know, it's a little bit of both. You see the age out in the DSO. Certainly, I don't wanna get into the intricacies of our accounting policies, but every day matters from that perspective. It is more or less a cumulative view as those receivables age and go through the pipeline.
Just to be clear, so is the reserving policy, like if we go from 30- 90 days, 60- 90 days, whatever it is, every time you go into that next bucket, automatically 100% of the time you apply a higher reserve against that receivable? I would think that there would be some exceptions here given that it seems like there's timing and, you know, this manual automation. I guess I'm trying to make sure I understand the methodology. I know you said you didn't wanna talk about it, but it might be helpful.
Well, no, I mean, that's a fair point. Yes, we use our history and our reserving methodology is built off of that history. You know, absent absolutely compelling information to the contrary, we wouldn't change that methodology, you know, despite the fact that we are seeing kind of a one-time event here at MEDNAX transitioning our RCM function. I would say we need to prove out the efficacy of all this in the coming months.
Okay. I mean, if I look at the balance sheet allowance, it was 79% I think. It used to be 78%. I mean, just simplistically, that 1% would imply a $15 million impact against the gross AR level. Is that the right way to think of the revenue impact, Mark? Should we think of this reversing itself?
That's directionally right. I'd say that number's probably a little high, but directionally that's certainly a good way to think about it.
If there was like, let's say, a - $10 million, just to make a number up for the sake of this argument, in the first quarter, if all things play out, do you get that $10 million back as a good guy in the next few quarters?
Yeah. I mean, that's the timing premise here, that despite the fact that receivables have aged beyond our normal kinda aging policy, those are fully reserved. As those receivables are collected in the future, there's the efficacy of the process. Yes, that's the timing component.
Okay, maybe one last one here just on this topic. Can you just go into a little bit more detail about this manual versus automated issue? I'm just trying to visualize and understand exactly what it is. Also, if payers are turning back on any additional claim edits? I mean, we're hearing, you know, some things. I'm just trying to, you know, understand exactly the root cause of this. I mean, I think that the numbers are fairly small, I guess, in the grand scheme of things, but I appreciate it.
Yeah. I mean, they are. Of course, you know, part of the reason we went with R1 was due to their technology and the investments they've made into automated business intelligence that of course we didn't have. It's kind of that simple.
This is not about a change in payer behavior.
Right.
Okay. Well, I'll just hop back in the queue. Thanks, guys.
Thanks, Whit Mayo.
Thank you. Next, we will go to the line of Kevin Fischbeck with Bank of America. Your line is open.
Great. Thanks. Maybe just to follow up on that. Can you give your sense of what core pricing was ex the CARES money and ex the RCM issues?
Yeah, Kevin, we didn't see any meaningful variances in there from what we've typically experienced over the past several years. To repeat some comments that I've made in the past around that, you know, our normal experience on just underlying pricing without the distortions of payer mix items like this has generally been in this you know kind of 1%-2% range, driven by normal managed care rate change, meaning escalators and the like, typically offset somewhat by Medicaid pricing. Those are the core drivers in there.
As you know, another component within our calculation of same-unit pricing is contract and admin fees, which again, for this quarter were, you know, up somewhat, but not in a very meaningful way on a same-unit basis. Those are the pieces I'd say that, you know, this quarter, absent some of these distortions and variances, was historically normal.
Okay. Then when we think about the RCM issue, you mentioned the two. You know, how should we think about the magnitude of the two? It sounds like R1 is the bigger of the two. Is it 2/3, 1/3? How should we think about that?
I'd probably think of it more of a half and half.
Okay. It sounds like on the self-pay side, you believe that it's a temporary issue, but it also sounded like you're still kinda working with your vendors to understand what drove it. I guess what at this point makes you think that it's temporary if you're still doing that work?
Well, it was really just a phenomenon in the first quarter in a blip, you know, with our R1 transition that leads us to pause and dig deeper on that.
Okay. Just maybe last question. As far as the surprise bill, I think last quarter, you kinda said that your discussions with managed care were a little bit mixed, that you had some contracts going, normally higher rates, some waiting to see how things had played out. It sounds like this quarter, it sounds like you're saying things are happening on time. Is that a change? Or are companies looking to, you know, just kinda move forward, or are there still kind of some taking that wait-and-see approach and maybe more than normal will renew in the back half?
Overwhelmingly, we're seeing companies wanting to renew and not putting things off. We have enjoyed being in network and our providers clearly continue to want to be in the network. We are more comfortable today than we feared we might be.
All right. Great. Thank you.
Thank you. A final reminder, if you have any questions or comments, press one and then zero. Again, one and then zero for any questions or comments. One moment, please. Allow in a few moments. I'm showing no questions in queue. Please continue.
If there are no further questions, then we are set for this morning. Thank you all for your understanding and support. Reach out to us if we can be of further assistance, and have a great and optimistic day.
Thank you very much. Ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.