Welcome to the Mednax 2018 fourth quarter earnings conference call. All participants are in listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you require operator assistance, please press star then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Charles Lynch. Please go ahead.
Thanks, operator. Good morning, everyone. I'm going to quickly read our forward-looking statements. I'll turn the call over to Roger Medel. 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 and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors. In today's remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning's earnings press release, our annual report on Form 10-K, and in the Investors section of our website located at mednax.com. With that, I'll turn the call over to Roger Medel, our CEO.
Thank you, Charlie. Good morning. Thanks for joining our call. I'm happy to report that our EBITDA and EPS results were within the ranges that we provided previously. As well, same unit revenue growth improved compared to the third quarter, with volume increases across all of our service lines, except for neonatology. Finally, we also met the 2018 targets that we established for our corporate and operating initiatives. During the fourth quarter, we also completed a $250 million share repurchase program. Looking across our service lines, our women and children services were affected by continuing softness in birth volumes, with total deliveries at the hospitals where we cover the neonatal ICU declining modestly for the quarter. Our other specialties within this service line, including maternal fetal medicine and pediatric cardiology, saw modest volume growth while newborn nursery growth was strong.
This has been a focus area for us, as I have discussed in the past. We will continue to pursue growth opportunities in this area. Our payer mix was also favorable compared to the prior year, which is similar to what we saw during the third quarter. In anesthesia, our results were largely in line with our own expectations. Volume growth was modestly positive, and while payer mix remained unfavorable, the practice-level operational initiatives that we have developed have been effective to date in helping to offset this headwind. Operating results in anesthesiology remained distorted during the quarter due to the non-renewal of a contract that we have discussed in the past. As of January of this year, a significant part of that impact is now behind us. Finally, our radiology service line finished a strong 2018 in terms of both organic revenue growth and our strategic expansion.
In 2018, we added five groups through acquisitions, representing both tuck-in additions to our existing practices and geographic expansion. Our radiology organization now totals more than 785 physicians, either affiliated with our on-the-ground practices or reading for vRad and reads nearly 12 million studies annually. I am excited about the opportunities ahead for us, both in the growth of the organization and the clinical innovations which we are pursuing. This morning, we also announced our preliminary expectations of 2019 adjusted EBITDA. Given the many moving parts in our 2018 results, we believe this can give you a better picture of how we're looking at the year ahead. I would like to take some time this morning to discuss our thoughts behind those expectations and the priorities which we have established.
In terms of market trends at a high level, we're operating with the expectation that the headwinds that we experienced in 2018 will persist. These include clinical compensation growth, a payer mix migration towards Medicare in our anesthesiology services, and soft birth trends at the hospitals where we cover the neonatal ICU. To varying degrees, these have been the key external drivers of volatility in our results over the past couple of years. Our strategic plans revolve around addressing these factors through all the aspects of our businesses that we can control. For that reason, we anticipate that 2019 will be a year of intense internal focus for us as we continue to execute on our operational and corporate initiatives.
Above all, the priorities that we have established within these initiatives have the common goals of stability of our business, consistency in our operating results, and visibility of the trends that we see in the marketplace and across our organization. From a financial standpoint, our goal remains unchanged to realize $120 million in annualized improvements by the end of 2019. Based on what we achieved in 2018, we remain on track to achieve the target. The steps we will take need to become more transformative in comparison to the more tactical steps we took in the early stages of these initiatives. We have identified areas where we intend to invest further, utilizing resources outside of our organization in order to either accelerate our plans or to expand them.
We expect that these steps will be focused both on our practices and on our infrastructure support of the practices through the management services we provide. The first of the steps that we are taking is focused within anesthesiology. This is an area where a lot of our activity through 2018 was very practice-centered and focused on specific areas where we could make improvements for individual groups. As we moved through the year, our plans increasingly engaged not just operations teams, but also our clinical leadership, our consulting organization, Surgical Directions, and our information technology resources. Through this involvement, we have been able to identify opportunities that aren't just practice specific, but that can be targeted across our complete anesthesia organization. In terms of incremental investments, we have initially committed to the rollout of additional IT capabilities to improve our practices' clinical scheduling systems and process efficiency.
This should yield a better experience for our clinicians by reducing the amount of their time spent on non-clinically oriented tasks. In addition, this will allow our clinical leaders and operators to better measure, benchmark, and manage their clinical teams, which we expect will ultimately result in enhanced productivity and reduced premium and agency labor costs. Finally, using a common platform and metrics will enable the sharing of best practices among all groups. I think this first investment we're making is a good example of the transformative steps we're taking through our operational initiatives. To the extent that we're managing against the expectation that certain headwinds will persist in our business, we also need to establish pathways for continuous improvement in processes, in efficiencies, and in the productive use of our clinicians' time.
As we move forward, there will most likely be additional areas where we focus and consider investments, and we will continue to discuss these initiatives throughout the year as we progress. I hope walking through this specific rollout can give you a sense of how we will identify similar projects and what we are looking to achieve. While our operational initiatives will be a key priority for us in 2019, the deployment of our capital will also be a focus area. A hallmark of our organization has been our cash flow generation, which we believe provides us the opportunity to generate value to our stakeholders, even in an environment as we anticipate for 2019 that may present headwinds to EBITDA growth. During 2018, we devoted more than $420 million towards a combination of acquisitions and share repurchases, a significant portion of which was funded by our free cash flow.
In the year ahead, our intent is to commit capital towards both repurchases and practice acquisitions. On the acquisition side, our pipeline has a similar profile to what we achieved in 2018, including attractive small to mid-size potential acquisitions across radiology and women's and children's services. While we haven't included any larger, more strategic acquisitions in our outlook for the year, we will certainly pursue any such opportunity if we see it as having a significant benefit to our organization, both competitively and financially. With that in mind, we do expect to be buyers of our own shares during 2019, utilizing our own free cash flow and, to the extent our ongoing process to identify a capital partner for MedData results in a successful transaction, some portions of the proceeds of that sale.
In the near term, we do intend to repurchase our stock through open market transactions during the first quarter of this year. Lastly, I want to give a brief update on our ongoing search for candidates for our board of directors. That search has progressed well since we announced it last quarter, and as of today, we've developed a shortlist of candidates that our nominating committee is in the process of reviewing. Based on this progress, we expect that we will make decisions over the next couple of months. To reiterate what I said earlier, above all else, our priorities for the coming year have the common goals of maintaining stability and consistency in our operating results.
The initiatives we have been undertaking, and will continue to undertake, follow those priorities and are designed to enhance the effectiveness of the support we provide to our physicians as well as the differentiation of the services we provide to our patients and our hospital partners as a true national medical group. We believe the plans we have in place for 2019 represent a strong and balanced approach to address both the headwinds and opportunities across our business. We also believe they reflect that the continued transformation of our organization, enhancing our adaptability, our value as a health solutions provider, and similarly, our ability to add value to our stakeholders. With that, I'll turn the call over to our Chief Financial Officer, Stephen Farber. Stephen?
Thanks, Roger, and good morning, and thank you for joining our call. I'd like to touch on a couple items within our fourth quarter results, and then I'll walk through our first quarter guidance and preliminary outlook for the year, including our sources and uses of capital. Finally, I'll add to Roger's comments on our focus areas in 2019. Looking first at the fourth quarter, our results were in line with our expectations, in some places slightly ahead, but there are a few moving parts to call out. On the positive side, same unit revenue growth was modestly higher than our 0%-2% forecast, primarily on the pricing side. Our managed care rate growth was relatively good during the quarter, and we also did not experience any negative impact from payer mix, with an unfavorable comparison in anesthesiology offset by a favorable comparison in women's and children's services.
Related to the non-renewal of the Southeast anesthesiology contract, our salary expense for the physicians affected by that non-renewal was $8 million, or roughly $1 million less than we had forecast, since there were a number of physicians who took positions elsewhere and thus were not on our payroll. As a result, the overall impact to our EBITDA compared to 2017 was roughly $14 million in the quarter, consisting of this salary expense and the lack of EBITDA contribution from that contract. Separately, MedData's EBITDA results were modestly below our expectations. This was primarily due to a combination of revenue and expense items during the fourth quarter. Finally, as Roger indicated, we did hit our targets for operational and G&A improvements for the year, which totaled $35 million and $25 million, respectively.
Below the EBITDA line, we completed our $250 million accelerated share repurchase late in the fourth quarter with the final settlement of shares we received occurring earlier than we had forecast, benefiting EPS by roughly half a penny. A slightly lower than expected tax rate also benefited our EPS by roughly a penny. Partially offsetting these items, we issued $500 million of 6.25% senior notes during the quarter, and the higher cost of these notes as compared to the revolver borrowings we repaid, impacted EPS negatively by roughly $0.01. Turning to cash flow, we generated $128 million in operating cash flow in the fourth quarter, bringing our operating cash flow for full year 2018 to $290 million.
This full year amount understates our true underlying cash flow generation since it includes $62 million of cash tax payments we made in the first quarter of 2018 that were deferred from the second half of 2017. I think adding that amount back gives a better reflection of our operating cash flow and a good reference point for your own expectations for 2019. I'll touch on this in a few moments when I talk more about the year ahead. Finally, turning to our balance sheet, we ended the quarter with total borrowings of $2 billion, consisting of our revolver borrowings and senior notes. This represents leverage at year-end of roughly 3.5x debt to EBITDA. Now I'd like to turn to our guidance for the first quarter and our preliminary outlook for the year.
I'm going to start with our view of the year as a whole in order to put our Q1 guide in context. As we reported this morning, we expect our adjusted EBITDA for 2019 to be in the range of $550 million-$580 million. That range encompasses a number of different scenarios in terms of volume, pricing, mix, and operating costs, as well as our own operational and shared service initiatives. It also takes into account our experience through 2018 in terms of our end markets, in particular, payer mix in anesthesia and birth trends across the country. As a side note, our guide does include MedData for the full year. We will adjust for that when and if we complete the transaction.
Our views on payer mix dynamics and anesthesia are relatively unchanged. We do anticipate a continued migration towards Medicare based on demographic trends across our footprints of practices. To put this in some context, for the full year 2018, our anesthesia payer mix by volume shifted roughly 85 basis points towards government. All else being equal, that payer migration impacted our EBITDA in 2018 by roughly $15 million. Should last year's trends continue, we would anticipate a similar headwind in 2019. That is incorporated into our guidance. On the neonatology side, while our own NICU volumes have varied quarter to quarter, that's been against a persistently difficult backdrop. At the roughly 400 hospitals where we manage the NICU, total delivery volumes have been down roughly 1%-2% in eight of the last 10 quarters .
Unless and until we see some inflection point in that key driver of our volumes, we're incorporating a continuation of that trend into our outlook. Again, to put this in context, every 1% change in our same-unit NICU volumes equates to a roughly $5 million impact in annual EBITDA. Our outlook also contemplates our trend in labor cost inflation. As you can see in our P&L, our annual labor expense is more than $2.5 billion, and the vast majority of this expense is clinical. Moreover, this is far from a homogeneous labor pool. It encompasses highly skilled, and in many cases, highly specialized clinicians across multiple specialties and varied geographies. As a provider of the services we focus on, it is our highest priority to ensure we can recruit and retain physicians and clinicians to care for patients in critical situations.
Against a backdrop of relatively full employment across the country, we are not immune to inflation. This is not a new phenomenon for us, nor should you view it as a new phenomenon. I do think it's important to put our clinical compensation costs in the right context. The very diverse nature of our clinical workforce doesn't create broad levers that lend themselves towards universal efficiency measures. At more than $2.5 billion a year, it does not take a significant amount of inflation to create pressures for us, particularly if it's coupled, as it has been in the past few years, with additional headwinds to revenue growth in the form of volumes, payer mix, and a challenging reimbursement environment. It also makes sense for us to anticipate that there will be pockets of more significant pressure, such as we've experienced in the past.
I want to emphasize that we have identified a number of areas where we can deploy resources to bend this curve, and we're in motion to do just that. I'll touch on some of these specific areas in a moment. Related to our 2019 outlook, I want to highlight some of the key pressure points we've been focusing on, particularly against the existing financial goals we have for operational and shared services initiatives. Lastly, our outlook contemplates a moderate level of acquisition spend in the range of roughly $100 million. This is similar to our acquisition activity in 2018, and at this point, we would expect the profile of our pipeline activity to be similar, with a focus on smaller to mid-size deals within radiology and within women's and children's care.
While there is always the potential for some larger, more strategic deals, we're not incorporating any such deals into our outlook. Those are the big drivers of our outlook for 2019, and obviously, we'll revisit each quarter based on our experience as the year unfolds. I'll also make a couple comments related to our first quarter guidance, the details of which we provided in our earnings release this morning. I know that modeling the progression of our EBITDA from the fourth quarter to the first quarter can be challenging to begin with, and likely even more so this year, given all the moving parts within our results over 2018. To that end, we provided additional detail in our press release this morning about the seasonal factors that typically impact our Q1 results.
The greatest of these is the disproportionate share of our annual Social Security payroll taxes and 401 match that we incur in the first quarter. Historically, we've taken about 40% of these expenses in Q1, which impacts adjusted EBITDA by about $25 million, all else being equal, compared to if they were distributed evenly throughout the year. We expect that impact to be similar in the first quarter of 2019. The first quarter of this year has one fewer weekday than last year, which equates to roughly $4 million in reduced EBITDA. This adds to the expected seasonality of our earnings this year in terms of the expected contribution from Q1 to our forecast full-year results.
As you'll be able to see, our Q1 guidance range equates to roughly 20% of our full-year outlook, which is at the low end of the range of that contribution over the past number of years. This day count also impacts the comparison of our expected first quarter results to last year. In addition, as we've disclosed in the past, the EBITDA contribution from the Southeast contract was roughly $11 million in the first half of 2018, and more specifically, about $5 million in the first quarter of 2018. Turning to our focus areas for 2019, Roger provided a broad perspective on the operating plans that we have in place. I want to add some detail to those plans in order to give you some color on what kind of activities we're targeting. Since joining Mednax, I've been heavily focused on our costs.
I've also spent a considerable amount of time with our operating leadership to get a better understanding of the dynamics behind these cost trends, as well as our ongoing operational and shared services initiatives. These have been very effective so far, we've also discussed over the past couple quarters that as we move forward, our initiatives begin to move away from tactical steps and towards more transformational ones. The primary reason for this is that while our clinical cost structure does not lend itself to uniform measures to offset inflation, there are, in fact, a number of areas where we believe we can drive more consistency and more efficiency. From my own perspective, I believe there are significant opportunities to harness data, analytics, and technology to drive performance across the enterprise.
I also believe this will require meaningful IT and operational investments in areas like technology-enabled process change, shared service expansion and improvement, and also meaningful deployment of administrative tools and technology directly into our practices. To that end, we've been contemplating different areas where we intend to supplement our own internal resources with external resources in order to accelerate the rollout of new technology and tools, along with support for the implementation of these tools, as well as analytics. The first commitment we've made is to support the rollout of a robust scheduling and clinical resource management tool across our anesthesia organization, which Roger referenced in his prepared remarks. We anticipate that the cost we will incur for this rollout will be roughly $15 million-$20 million, and we intend to complete it over the coming four to six quarters.
That's a significant acceleration from what we might achieve across more than 40 different practices without outside resources. There is a distinct time and benefit right there. To put the dollar cost in a different perspective, our total clinical compensation expense in anesthesia alone is north of three-quarters of a billion dollars. It doesn't take a significant percentage change in the trajectory of that cost trend to pay back our $15 million to $20 million investment in very short order. That's how we're thinking about initiatives like these, compressing the time to value from implementation to completion and accelerating the timeline on ROI. As we indicated in our release this morning, we will be breaking out the cost of transformational investments like this one as we move forward.
I think this will help clarify which investments we're making proactively and our decision-making process behind this is heavily dependent on the returns we expect to achieve. I think it's a little bit premature to place a hard dollar figure on what we'll commit to in 2019, a good way for you to think about it is that we expect to move forward on two or three additional similar investments through the course of 2019 and quite likely several more in 2020. We're committed to providing you with details on our areas of focus, we'll have and the rationale for our decisions. Lastly, I want to touch on our cash flow and our plans for uses of capital in 2019. Since I joined Pediatrix Medical Group, one aspect of this organization that has continually impressed me is our cash flow profile.
Adjusting for various timing issues, such as the tax payments we deferred from 2017 into 2018, we generally convert between 60% and two-thirds of our EBITDA into operating cash flow. In 2019, we would expect a similar conversion of EBITDA to cash flow. Against that, our CapEx requirements are fairly minimal. 2018 capital spending was only roughly $50 million. That included roughly $20 million from MedData. Our current outlook for acquisition activity this year is fairly modest given our internal focus, such that our expected capital deployment for deals as part of our 2019 forecast would utilize only about a third of our free cash flow, with the remainder available for share repurchase activity we intend to undertake and other uses. Overall, we believe that we can fund both a modest acquisition pipeline and a meaningful return of capital to our shareholders through internally generated capital.
As we indicated in our release this morning, we intend to utilize some portion of our share repurchase authorization via open market purchases during the first quarter of this year. Finally, in addition to our free cash flow, we do intend to utilize any proceeds from our previously announced plan to sell MedData towards a combination of debt repayment, share repurchases, and acquisitions. We remain relatively early in that process, so far I'm pleased with the level of interest we've seen in MedData, which I believe validates our views that it would represent an attractive platform for the right capital partner. From a modeling perspective, we expect that MedData would move to discontinued operations when we reach an agreement for sale. For modeling purposes, MedData's EBITDA for 2018 was $42 million, and we have budgeted $45 million for 2019.
I'll also point out that a significant portion of our historic CapEx has been related to MedData, so the potential sale of that business would have a fairly nominal impact on our ongoing free cash flow. Overall then, we believe our cash flow profile, supplemented by the potential proceeds from a MedData sale that would be available for a combination of debt repayment, share repurchases, and acquisitions, will enable us to pursue significant value-additive activities through 2019 and moving forward. With that, I'll turn it back to Roger.
Thank you, Stephen. With that, operator, let's open up the call for questions.
Ladies and gentlemen, if you wish to ask a question, please press star then one on your telephone keypad. If using a speakerphone, please pick up your handset before pressing the numbers. Once again, if you have a question, please press star one at this time. Our first question comes from the line of Ralph Giacobbe with Citigroup. Please go ahead.
Thanks. Good morning. Details were helpful, hoping you could help bridge a little bit more in terms of embedded core growth expectations in the guidance, both in terms of revenue and EBITDA.
Sure, Ralph. Good morning. Other than the key assumptions that we've outlined, I'm not exactly sure what it is that you are looking for. When you put all of the different pieces together, essentially, if you look at the midpoint of our guidance, it's essentially fairly consistent with the results that we reported for 2018. Charlie, do you have anything you'd like to add to that?
No, that's helpful. I guess there's obviously a lot of moving parts with some of the contracts coming off and some of the pressures you saw, and I understand the continuation of pressure, but some of those pressures also continued in the fourth quarter. The results were better than seemingly the guidance looking ahead. That's what I was trying to bridge in terms of just core growth when you look at the business and say, when we strip out some of the "one-time items," what's the baseline growing or not growing for that matter?
Sure. Yeah. We did add a lot of detail in our disclosure, in our written comments, and in our release this morning. I guess really the only thing additive that I would say, Ralph, is when you look at the various buckets of headwinds and you look at all of our activities that we have underway and additional activities that we are working on, I think the goal for the year is to try and have them largely offset each other, and to focus on a year of stable and consistent results.
Okay. All right, fair enough. Then if I could, you talked a lot about the strong cash flow that the company generates. Any thoughts or updates on how you approach or think about a dividend? We talked a lot about repo and M&A and maybe debt pay down, given the stability of that cash flow and sort of where you are in the maturity cycle, is there any increased thoughts or discussion around a dividend?
Hey, Ralph. Good morning. We haven't really spent a lot discussing the possibility of a dividend. I think that we've made it pretty clear that we intend to be buyers of our own stock going into the year and into the quarter. We've got a board meeting coming up, and I'm sure that's a topic that will come up again. As of this point, I don't really have anything else to say about a dividend.
Okay. Just real quick, I just want to clarify, the non-renewal of certain contracts that you mentioned in the press release, there's nothing incremental. That's just related to the SAC contract. Is that correct?
That's right.
Okay. All right. Thank you.
Next, we'll go to the line of Brian Tanquilut with Jefferies. Please go ahead.
Hey, it's Jason Plagman. A question on the G&A spend in Q4, it stepped up a little bit more than people were expecting. Given the cost initiatives there, should we expect that to trend down throughout 2019? Or where do you think we'll end 2019 from a G&A dollar perspective?
Yeah. Jason, good morning. We haven't really fleshed out at that level of detail in terms of our guide. Our primary goal was to extend from a one quarter forward guide to a full year guide so you could have a sense of what we're working towards. Also really, there was a lot of moving parts over 2018, we were just trying to make it easier for you to get an overall sense of 2019. Hopefully that was helpful and constructive. In terms of G&A, more qualitatively, I would say you should expect that number to bounce around a little bit because there are so many different parts in that. I'll give you a couple examples. Our revenue cycle operation is in that, our IT is in that, our rent expense is in that.
There is just a significant number of items that comprise it, and to try and delve into that is fairly complicated, and I'm not sure how useful it would be in terms of understanding our overall outlook.
Okay. Yeah. That's fair. Just thinking about from the margin perspective, if I back out the Charlotte salaries from the Q4 results, I get an EBITDA margin of 15 and a half approximately. Should we expect that to be where you end next year for Q4 2019 as well? What's given the cost savings that you're driving, is that the way you're thinking about it with the savings offsetting the headwinds that you've mentioned?
Yeah. The way that I would think about it probably is that we are not as margin-focused as we are EBITDA-focused. We've provided our guide for 2019 on adjusted EBITDA, because that is precisely what we are looking at from a financial perspective as our primary objective. There's a bunch of parts that move around that, which impact margins up and down. If you think of 2019 as a largely stable, consistent year in terms of our expectations relative to our reported performance for 2018, I'm not sure that focusing too hard on all the different puts and takes is really going to get you to a better place, because all of those elements have been baked into the $550-$580 guide that we've provided.
Okay. Thanks for the question.
Next, we'll go to A.J. Rice with Credit Suisse. Please go ahead.
Thanks. Hi, everybody. A couple questions, if I could. First, I appreciate the comments on the Q1 outlook. I was wondering, you had comparable growth of 2.8% in the fourth quarter, but you're guiding for 0%-2% in the first quarter. I know you got the one less day, and it looks like it was probably a tough comp a year ago that you're dealing with. Is there any other change relative to what you saw in the fourth quarter and trends that you're incorporating in your first quarter outlook within the business lines, or is it pretty much accounted for with those two things?
Those are basically it, AJ. Good morning.
Hey. Okay. Now, Steve, that you had a little time to get your legs under you there. The 3.5% debt to EBITDA that you guys are at now, what's your thought about comfort with that, or would you like to see that move in one direction? Do you guys have an updated target you're looking at?
Yeah. AJ, look, I am fine at three and a half, and I think we've historically described our comfort in the sort of three and a half sort of range, moving up and down. I think clearly for a little while, we're probably going to be at the higher end or a little above even what we view as our longer-term range. I think over the next couple of years, you should see us as we get incremental traction on all of these initiatives that we have in flight and all the new ones that we expect to launch. I think our expectation is some combination of debt reduction and EBITDA growth over time will bring that ratio back to a more normalized level within that sort of lower half of three to three and a half type range.
Okay. In the press release this time, and I think last quarter as well, it referenced that the payer mix, the language was slightly different, but basically the payer mix was steady year to year in some form or fashion as it was described. I know you've made the comments about the overall impact on 2018 of payer mix pressures and anesthesia. Has it more steadied out in the last two quarters that that's less of an issue as you move into 2019? Do you think that's still a bit of a headwind for you?
Yeah. A.J., we did speak a lot about payer mix in our prepared remarks sort of on purpose. I guess I'd think about it this way. In Q4, we did pretty much have a wash, right? Some beneficial payer mix in Women's and Children's basically offset the anesthesia mix. Frankly, our anesthesia mix in Q4 was a little less than we had seen in other quarters, and Women's and Children's a little better than we had seen. Our view on anesthesia mix is that it's probably, we view that as a persistent headwind, and that's one of the reasons why we talk about it separately. It's simply demographic driven. We view that as likely more persistent. The Women's and Children's, we've had some good impact, and we've had some good benefits, but it's really based on a number of other factors.
I think if you probability weight it, while we've enjoyed it of late, if you probability weight it's likely to move around a bit more than the anesthesia mix is. We've incorporated an outlook sort of along those lines as part of our 2019 guide.
Okay. All right. Thanks a lot.
Next, we'll go to the line of Kevin Fischbeck with Bank of America. Please go ahead.
I guess when we think about the guidance, is it right to kind of think about $60 million of cost saves this year because you got $60 million last year? Wasn't sure if there's any nuance there about run rate of $120 versus actual realized synergies this year.
Yeah. Look, I think, Kevin, our goal is to get to the $120 by the end of the year. We do have that baked into our guide, but it is not $120 run rate during the course of the year. There is a ramping in over the course of time.
Okay, it's going to be something less than $60 realized in the year? Is that the right way to think about it?
Yes.
When I look at the guidance, it looks like you're talking about up 2% to down 3%. That's kind of the number. If you assume, I don't know, half of the $60 million is realized this year, that kind of says that the core business is down 3% to 9% on an organic EBITDA basis, even though you're doing, I guess, some deals in there too. Is that the right way to think about it? It sounds to me a little bit like what you're doing on the cost side kind of says that you're always thinking you're going to have to save $30 million-$60 million every year, going forward.
Just want to understand what you think the core business is doing and whether you're setting yourselves up to be able to announce and deliver another round of cost savings next year to kind of keep a similar growth profile 2019 into the future years.
Kevin, let me sort of try and address that in a couple different pieces. I think, pretty much every healthcare provider has a similar dynamic to Mednax. I don't really think we're all that unique, where everybody's got some reimbursement pressure, everybody has cost inflation, particularly on the labor side. I think in some areas, we have a little less cost inflation than, say, a hospital company might because we don't have a bunch of pharmaceutical spend, for example. The flip side is 70% of revenue is labor for us, and most of that labor is relatively high-cost, specialized clinicians. We probably have a bit more labor cost pressure than others might have, but we have other cost pressures that may sort of offset that a little bit.
I do think it is fair to say, as it would be for just about any healthcare company, that it's really just part of the business that every year you are always looking for ways to be more efficient. Now, I guess I would add to that, there are some unique benefits to the fact that we have this remarkably heterogeneous and geographically distributed $2.5 billion workforce, in that there are a significant number of opportunities to, every year, create incremental efficiencies, whether it's through technology or analytics or all the other stuff that we've talked about. It would be very different if it was some monolithic cost and we were trading barrels of oil, which we of course are not doing. I think from a general mindset, that is the case.
In terms of specifically quantifying how much the drag is that we need to offset, I think there will be varying views on that. From a general dynamic, that's just the life of a healthcare provider.
Okay. No, that definitely makes sense. I guess when you think about the issue that you kind of outlined, these are the headwinds in 2018, we think they're largely going to persist through 2019. The payer mix headwind of $15 million, I guess that's happening during a period of a generally strong economy. That feels like, I guess about as good as it's going to be. The birth one, in theory, should be reversing. I think we all kind of expect at some point births will improve. To your point, not seeing it yet, better to be cautious there. Labor costs, I guess, love to hear your thought about, do you think payer mix pressure and anesthesia stay this way? Is this the right way to think about it long term, or does it get better or worse?
Births, do they get better or worse? Labor pressure, does it get better or worse over time? I appreciate that maybe you can't provide 2020 guidance, just kind of thinking over the long period of time, how do these things kind of bear out?
Yeah. Look, Kevin, far be it for me to try and project more than one year in the future, in a general sense, I would say, you definitely called it right, Kevin, in that each of these areas is kind of in extremis, right? Take labor. We've got full employment across the country, right? We've got a three-point whatever % unemployment rate. Healthcare, you have a decent amount, depending on what study you read and who's saying what, it seems like the sort of national estimates for labor inflation are somewhere from the mid twos to the low threes, that's before you talk about the subset, which is healthcare, which is usually more challenged. There's another subset within that, which is the fact that we have some highly specialized people, where scarcity of those people is an incremental factor.
You look at some of the states that we do business in, where they're even more competitive in terms of certain specialized healthcare providers. It does seem to be in extremis. If you believe that there's a full employment environment until the end of time, that's one view. I don't think we really share that view. I think these factors are all, look, I would hesitate to call it a perfect storm, but I guess I would say, I think we feel all of these pieces are somewhat in extremis, and that the likelihood of everything staying like this on a persistent basis seems to us to be pretty low. At some point, there has to be reversion to the mean, which would be a benefit for us in terms of our earnings.
Let me just add that the payer mix shift that we're seeing in anesthesia is probably, in my opinion, this is just my opinion, it's probably as bad as it's going to get, simply because that is being driven by the elderly population. Most of what we're seeing there is really based on semi-elective procedures, right? If you need a coronary artery bypass and you're 63 years old, you're not going to wait to have it done. On the other hand, if you need a hip replaced or a knee replaced, you might walk around with a cane for a couple of years until you reach that age. I think that I believe, and I think we believe, that is most of what we're seeing.
The increase in volume, which is good, being driven by the elderly population needing more procedures, but at the same time, with a payer mix that reimburses you less for those procedures. My own personal opinion is I don't see where that's going to get any worse. I think that is where it is for the time being as we cycle through this elderly population.
All right. Great. That's very helpful. Thanks.
Next, we'll go to Anna Guth with SVB Leerink. Please go ahead.
Okay, thanks. Good morning. Following up on the cost efficiencies, which as you say, are more, it looks like backloaded. What type of assumptions are you building into that for the recontracting that you're doing with anesthesia practices, risk sharing on revenue and cost metrics, like maybe a 5-year period rather than 7, you talked about. Then what is kind of the progress that is being made on changing those contracts for additional groups?
Sure. Good morning, Anna. I think probably the simplest answer is that our forecast is based on a detailed budget process, which goes down to the practice level, and it does include our assumptions for each of the recontracting situations that are scheduled for this year. I would say those are baked in. Charlie, I'm not sure if you have anything you'd like to add to that.
Hi, Anna. I would just add that when we're looking at that kind of a transition in comp structure for our practices, I would just keep in mind that the underlying goal we have in that kind of a transition is to reengage the physicians and the practice to have them retain some autonomy over what they're doing, and engagement in their own productivity, performance, and growth. It's not designed to reduce their compensation. In fact, as we go into those discussions without getting into too much detail, we're still looking to solve for the appropriate level of compensation that they deserve. On a go-forward basis, the goal is to have an equitable sharing, up and downside, between the corporate entity and the practices of the success of that practice. That's what we've achieved so far in the early stages of some of this recontracting.
We have other discussions that are ongoing, and we'll update as we go through the year. That's the real goal, is to have that engagement of the practices, to have them share in a first-dollar benefit when they identify ways to grow, ways to enhance their own productivity.
Okay, thanks for that color. Yeah, I would love to hear more updates as you move through other practices. Another piece on the guidance, I think. You had some tailwinds on the managed care, small tailwinds on the managed care contracting in the second half of last year. Is that in there? Is there any incremental to go? Is there any upside, or is that at the higher end of your guidance, there may be some upside, I guess?
Anna, I think, again, probably the easiest way to answer it is we've made assumptions in our forecast that are specific to most of the contracts that are significant enough to move the needle within our overall results. The guidance would effectively bake in our aggregated expectations.
Okay, thank you. A final one on the NICU and the birthrates. You've talked about cross-selling other services to hospitals and the well-baby care with the pediatricians that are kind of more hospital-based, bringing them on board. At what point would you feel that your own efforts to offset some of the secular pressures would get you to a point where you don't have to bake in this 1%? For every 1% NICU, you have this potential $5 million headwind, it becomes flatter, at least even flatter, even better, maybe.
Hi, Anna. Good morning. I think that it's fair to say that we're making some good progress there. I think that it is an area of focus for us that is producing some good results. If you look at our press release, every area within Women and Children's Services grew during this quarter, with the exception of neonatal intensive care. That's really a reflection of the effort that we're making. When you think about the services that are tied in or built around neonatology, you have maternal-fetal medicine, which is a very hard-to-come-by group of specialists. There are maybe a couple of thousand of them across the country, and these are high-risk obstetricians, which everybody wants because they drive business into the hospital. They're hard to get.
We're talking about well babies, which is an area again, that we have placed specific emphasis on and which is growing for us because that's an obvious area of growth for us. We're talking about OB hospitalists, which is our fastest-growing area right now, where we're providing the hospital with obstetricians to be in the hospital around the clock, ready to handle any emergencies that might come up. We're talking about pediatric cardiology. We're the largest group of pediatric cardiologists in the country. We're talking about pediatric intensive care. There's a host of these services, which is why we can focus on that and tell you that if you look at neonatology, that's more than 50% of our revenue, and the impact on births has had, obviously, a material impact on our results. We've been able to overcome that, and that is the goal.
This is a year of stabilization for us. This is a year where we want to make sure that we're providing the stability in our performance that our stakeholders want. That is one main area of focus for us. It's not just the cost savings on the side of anesthesia and its growth on the maternal-fetal side, and its growth on the radiology side, which is also growing as well, and we haven't talked very much about that. That's what we're focused on.
That's kind of right now in the midpoint of your EBITDA guidance for the full year?
Oh, I'd say it's less than that.
Less than, okay.
I think we have a lot of room to grow, and if I understood your question correctly, I think we have a lot of room to grow, particularly, again, in well babies and OB hospitalists. Yeah.
Okay. Good to hear. Yes, thanks. Thanks, Roger.
Thank you.
Operator, I understand that we have a number of questioners still lined up in the queue, in the interest of time, I think we'll take two more questions.
Okay. We'll next go to Gary Taylor with J.P. Morgan. Please go ahead.
Hi, good morning. Does that mean I get to ask 10 questions, or?
Hey, Gary.
I just have three quick ones. The first one, I just want to go to Steve and make sure I understood what you were saying about some of the transformational expenses. You said $15 million-$20 million over four to six quarters related to the IT scheduling and clinical management. You said two to three other similar initiatives and maybe several more in 2020. Similar in terms of size of spend, or we're saying it could be two to three times the $15 million-$20 million? I just wanted to get a sense of what you think that total amount is for 2019, and it sounds like 2020 is going to be an investment year as well.
Gary, the way that we are thinking about it is that these projects are all likely to have some scale to them. We are not really intending to separately break out or separately report ordinary run-of-the-mill, $1 million, $2 million, $3 million type of projects. We are intending to break out larger ones that we expect to have larger impacts. I don't think they will all be $15 million-$20 million. You could have some that are $5 or $10 or $12 or $8. I think it's unlikely that we'll have any of them that are really over $20 individually. We have a whole lot of things that we're looking at. The one specifically that we talked about today is the one that's pretty fully baked. It's in flight. We've got people working on it.
We've engaged consulting firms that are working with our people to make them happen. We were able to quantify it. We've got a bunch of others where you should think of it almost like we'll make a number of little seed investments, right? Spend a few hundred thousand dollars scoping the opportunities, prioritizing the opportunities, and some of them we'll move forward with, some of them we won't. I am not suggesting that in 2019, you will see us do three or four projects that are $15 million-$20 million of spend, all of which occurs in the year. I think you will see staggered starts of projects in the, call it the $5 million-$20 million range of several over this year, several over next year.
Honestly, with the sorts of ROIs that we are finding with some of the things that we're looking at, these are exactly the sorts of ways we would imagine you and our investors would want us to be spending our money because they are quite meaningful.
Got you. Two more quick ones. I'm not sure this was exactly covered, just thinking about conceptually, your fourth quarter same-store revenue and volume against the comparisons you had was surprisingly strong. Yet the EBITDA performance, I think third quarter EBITDA was down $11 million, fourth quarter was down $18, even though you beat the high end of your same-store revenue guidance and beat what we were expecting. As we're all sort of attempting to model the sensitivity of the same-store revenue and some of the inflationary factors you called out, is there a single one or two items that impacted the fourth quarter EBITDA performance versus 3Q?
Hi, Gary. It's Charles. I don't think there's anything I would call out specifically. As we go, you look over more than just one quarter over the previous or even one quarter over the last two previous, there's always moving parts. Related to that, we always have a lot of changes, at least historically, whether it is deal contribution in any given quarter or not. As we look at the fourth quarter, in particular, of 2018, one thing that's notable is that in the prior year, we did have the addition of a couple of fairly sizable radiology practices at the end of the year, all annualizing out as we move through 2018.
I think that's one reason among many others that we're trying to provide a pretty robust view in total of our 2019 outlook because there will be instances like that where looking at one quarter in itself may not be the best gauge of all those pieces you're talking about.
Last one, maybe just 30 seconds from Roger Medel. I did want to talk about radiology a little bit, and you had alluded to the fact we hadn't talked about it much. As you look at, still for you, a relatively restrained acquisition spending target for 2019 and then what you laid out for us on goals in terms of building out radiology, does that suggest radiology is a larger percentage of that 2019 expected acquisition spend? Is there anything else to update us on in terms of the build-out?
Well, I can tell you that Good morning, Gary Taylor. I can tell you that we have been pretty successful in obtaining growth within radiology from our local on-the-ground practices growing into, with the assistance from vRad, growing into local hospitals. A lot of that is working exactly how I would have predicted. I do expect that there'll be more growth coming from our Houston practice. I think there's opportunities for growth there as well. We just can't overpay for these practices. The way the acquisition market for these larger radiology practices is right now, the multiples that are being paid for those practices are higher than we would like to pay. I don't think you will see any significant investments from us in radiology.
There are a couple of larger practices that we are interested in and that would be very nice and important for us to have. It's going to be a matter of negotiations and whether they would like to come with us or not. Having said everything that we've said, I wouldn't be surprised if you saw that at some point during the year, there was a larger radiology practice that we invest in.
Our final question comes from the line of John Ransom with Raymond James. Please go ahead.
Hi. Just on the subject of radiology, if you look at 2019 over 2018 at a practice level EBITDA basis, is it up, down, or sideways?
I don't know that we want to tell you that answer. We've got a lot of competition in radiology. Charlie, have we addressed it?
We haven't broken it out specifically, no.
Okay. Well, at a more high level, is the business trending? It's tricky blending that with vRad. Is it trending like you thought generally?
Yes. Just to answer your question, it's up. Okay? Just to answer, it's up.
Okay.
Yes, it's trending. It's actually doing very well.
Got you. Okay. That's all I had. Thank you.
Thanks, John.
Did you want to take another question?
Sure.
Oh, okay.
Sure.
We'll go to Pito Chickering with Deutsche Bank. Please go ahead.
Good morning, guys. Thanks for squeezing me in after those last two callers. I appreciate that very much. Just to step back for a second on the guidance. To make an apples-to-apples comparison, what would the EBITDA guidance have been in 2019 if you didn't do the new adjustments? Is it just putting the $15 million-$20 million of IT sort of pulling out of that number?
Good morning. That's a tough question to answer because it's unclear if the spend on that project, where it's going to land between $15 million and $20 million, and where it's going to land between 4 and 6 quarters. I think I'm here, of course, for you to make your own assumptions. I would tend to focus people on sort of the $565 midpoint of our guide or the $550-$580 range, and if you want to layer some of that on that, you are more than welcome. I do think
My own personal view and the reason why we are breaking out going forward a line, separate P&L line to include those costs is because I think of them no different really than I would think about integration costs or restructuring costs or we happen to be calling them transformational costs. We view these as step function type project-oriented investments that really to include them in our reported results would somewhat obfuscate the underlying true cash-generating capacity of this enterprise.
Makes total sense. I understand you guys are focusing on EBITDA dollars versus margins. I acknowledge there's definitely structural headwinds sort of impacting some of your revenues. I still want to get a little better feeling for the gives and takes on EBITDA margins. If we sort of back into 2019 revenues, the 2% acquisitions, 1% same store and use that $550 just so I can do a comparison 2018 versus 2019. It looks as though that would result in an EBITDA margin of 14.5% or about 100 basis points lower than last year. Is that the right margin compression to think about when same store revenues are growing 1%? Even just give us a feeling for how we should think about same store revenues versus what you guys need to achieve to get margin stability. That'd be great.
Thanks.
Wow. Okay. That is a mouthful for the last question on this call.
Sorry, I apologize.
Two things. I mean, first, we're more than happy to talk to you later in a bit more detail in terms of making sure we really understand what it is that you're asking. In general, we're just not going to make commentary around margins for all the reasons that I've kind of already said on this call and kind of point people back to our EBITDA. That said, look, our goal is to be constructive and helpful and to try and make sure that everyone has a consistently full and complete understanding of our thoughts about where we stand and where we think we're going.
I would just suggest that you think about, other than the individual distortions in 2018 that we've sort of discussed ad nauseam over the past couple quarters, I would suggest that maybe the best way to think about 2019 is with a focus on adjusted EBITDA and in a general context of essentially, consistent, stable type performance as our overall goal relative to the prior year. Acknowledging that there will be a decent amount of quarter-to-quarter noise on a reported basis given the events of last year.
Fair enough. Thank you very much.
Operator, thank you for helping us this morning, and thanks everyone for being on the call. We're going to go to work and look forward to speaking with you next quarter.
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