Pediatrix Medical Group, Inc. (MD) Q1 2014 Earnings Report, Transcript and Summary

Charles W. Lynch - Vice President of Strategy & Investor Relations Roger J. Medel - Co-Founder, Chief Executive Officer, Director and Chairman of Executive Committee Vivian Lopez-Blanco - Chief Financial Officer, Principal Accounting Officer, Vice President and Treasurer Karl B. Wagner - President of American Anesthesiology

Ryan Daniels - William Blair & Company L.L.C., Research Division Kevin K. Ellich - Piper Jaffray Companies, Research Division Brooks G. O'Neil - Dougherty & Company LLC, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Ralph Giacobbe - Crédit Suisse AG, Research Division Brian Tanquilut - Jefferies LLC, Research Division Gary P. Taylor - Citigroup Inc, Research Division Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division Darren P. Lehrich - Deutsche Bank AG, Research Division Brian Zimmerman - Goldman Sachs Group Inc., Research Division Ryan K. Halsted - Wells Fargo Securities, LLC, Research Division Dana Hambly - Stephens Inc., Research Division

Ladies and gentlemen, thank you for standing by. Welcome to the MEDNAX First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Vice President of Investor Relations, Mr. Charles Lynch. Please go ahead.

Thank you, Greg. 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 assessment made by MEDNAX's management in light of their experience and their perception 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. With that, I'll turn the call to Roger.

Thank you, Charlie. Good morning, and thanks for joining our call today to discuss our 2014 first quarter results. This morning, we reported results from operations for the first quarter, and I'm very happy with the way we started this year. Our revenue for the first quarter increased by about 13%, with growth attributable to contributions from recently acquired practices of over 9% and same-unit growth of just over 3%. We did see some impacts from the winter weather on our anesthesia volumes, but impressively, our NICU days were up for the quarter. I'm also pleased with our margin comparisons this quarter versus 2013. Thanks to stable profit after practice expense margins and continued controls over our G&A, we generated operating income growth of about 14% with net income by EPS growth of 15%. Our acquisition pipeline in 2014 remains very strong, so I'm confident that the acquisitions we've completed so far this year and the additional groups we're pursuing will contribute to continued strong operating growth beyond this year's first quarter. During the first quarter, 3 practices joined MEDNAX, 2 in our American Anesthesiology division and 1 in our Pediatrix Medical Group division. In late January, physicians and the senior associates based in Baltimore joined our American Anesthesiology division, our first anesthesia practice located in the state of Maryland. The physicians at this practice have been the sole providers of anesthesiology services to Greater Baltimore Medical Center since 1965, as well as the Sheppard and Enoch Pratt Hospital, and 4 surgical centers throughout the greater Baltimore metropolitan area. In late February, Great Lakes Anesthesia associates, based in Grand Blanc, Michigan, joined our American Anesthesiology division, the second group to join that division in Michigan. Great Lakes provides anesthesia services to Genesys Regional Medical Center in Grand Blanc and 3 surgery centers located in the greater Flint metropolitan area. And in early March, Piedmont Neonatology in Greensboro, North Carolina joined our Pediatrix Medical Group division. Piedmont has been providing neonatal and pediatric services to Cone Health Women's Hospital for 20 years and will begin providing NICU services at Alamance Regional Medical Center this summer. Since the end of the first quarter, we have also added Fredericksburg Anesthesia Associates in Fredericksburg, Virginia to our American Anesthesiology division. Physicians at this practice provides anesthesia services to Mary Washington Hospital, Stafford Hospital and Fredericksburg Ambulatory Surgery Center. And finally, today, we announced the addition of Cross River Anesthesiology Services in Kingston, New York to American Anesthesiology. Cross River provides services at Northern Dutchess Hospital, HealthAlliance of the Hudson Valley and Kingston Ambulatory Surgery Center, as well as several office-based locations throughout the Hudson belt. Our acquisition pipeline remains full, and I am certain that we will continue adding practices to both of our divisions throughout this year. As I've discussed last quarter, the timing of getting from a letter of intent to closing has extended based on greater hospital involvement in the process, but we're clearly managing through that process as our successes so far this year demonstrate. Another topic I will touch on is parity. We're now in the second year of the initial 2-year program. And at this point, we have received, at least, some parity payments from all of the eligible states in which we operate. True, this has been a long drawn-out process but we continue to gain more visibility of what is due to us and Vivian will give you more details on this issue. We were also pleased to see an extension of parity payments beyond 2014, included in the President's Budget published earlier this year. Clearly, this doesn't provide any guarantee that a parity extension will happen but it does give our industry a louder voice with lawmakers as we continue our efforts to educate them about the importance of these payments in creating access to Medicaid services for the millions of Americans newly enrolled in that program. We've also had some success at the state level. We continue our grassroots efforts on our behalf and in partnership with larger advocacy groups to have individual states extend parity payments themselves beyond this year. As I think you know, the state of Nevada indicated back in 2013 that it will do so. Thus far, this year, 4 additional states, Maryland, New Mexico, Colorado and most recently, Maryland -- Michigan, have taken at least some steps towards doing the same. Nothing is final until it's final, of course, but we're extremely pleased that this level of support at the state level, and we will continue to work for additional successes, particularly this spring, as most states approach the end of their fiscal years. Now before I turn the call over to Vivian, I also want to share some thoughts from our annual Medical Directors' Meeting which we hosted at the end of March. As some of you may know, we host this meeting each year with all of our medical directors in order for us to share ideas and best practices and take the measure of where we stand strategically. This year, the theme of our Medical Directors' Meeting was A Path for the Future: Solving the Challenges of Modern Health Care. And more than ever before, we're finding that one of the biggest challenges of modern health care is how a health system can measure the quality of care that it is providing and use those measurements to help improve that quality and demonstrate those outcomes. I know that a lot of the focus this earnings season has been on the early benefits certain providers are seeing from health care reform implementation. So the real challenges that move from volume to value, creating data group systems, improving patient outcomes and satisfaction, those challenges still lie ahead. And that's where we come in. We've been able to demonstrate over a long period of time that we can identify opportunities to improve outcomes through our data warehousing and analytic capability, address those opportunities through quality improvement protocols and create benchmarking tools to measure the improvements that we make. Last year alone, in our 2 divisions, we oversaw more then 1.8 million neonatal intensive care unit patient days and provided more services to more than 1 million anesthesia cases. This patient experience, combined with our ability to capture, analyze and use the data from that experience with our BabySteps and Quantum Clinical Navigation Systems, is how we're solving those challenges for ourselves as an organization and how we're creating real value for our hospital partners as well. And none of that will be possible if we weren't at the bedside, taking care of patients every single day. So one thing that I thought interesting, coming out of Medical Directors' Meeting, is that while I think we've always been positioned well as a national physician group, now the value of that positioning is even greater than ever. I made the analogy for our medical directors that we, the physicians, are the software of the health care industry. And I happen to think that our software in particular is better than anyone else's. And something we intend to continue to support by keeping our focus on being a patient-centric organization, dedicated to providing great patient care. Fortunately, the success we had providing that care also enables us to continue growing. And I'm certainly pleased that our financial results continue to be a good indication of that. So let me turn the call over, at this point, to our CFO, Vivian Lopez-Blanco, for a review of our results, and then we'll go into Q&A. Vivian?

Thanks, Roger. Good morning, and thanks for joining our call. I wanted to add some details to Roger's comments on our first quarter results. At the top line, our net patient service revenue for the 3 months ended March 31, 2014, increased by 12.7% to $566 million. 9.6% of this growth came from recently acquired practices with American Anesthesia Practices contributing 74% and Pediatrix Medical Group acquisitions, the remaining 26%. Same-unit revenue grew by 3.1% with revenue attributable to net reimbursement-related factors growth of 3.4%, while volume decreased by 0.3%. On the reimbursement side, the majority of our same-unit growth was related to parity revenue. The remainder of our same-unit growth came from net reimbursement-related factors principally due to continued modest improvement in reimbursements received from third-party commercial payors, partially offset by a slight negative shift in our payor mix, with a percentage of patients covered by commercial programs decreasing by about 20 basis points compared to last year. Same-unit volumes decreased by 0.3% for the first quarter compared to 2013. We had strong growth in neonatal services with NICU days of 1.6% and solid growth in other pediatrics services, primarily newborn nursery with pediatric cardiology up as well, while volumes were down in maternal-fetal medicine and anesthesia. Looking specifically at our anesthesia volume, while it's difficult to pinpoint the precise amount of impact this winter's weather had on utilization, based on our own review, it did indeed have an impact, and we estimate that our same-unit volumes likely would have been slightly positive absent that effect. Turning to parity. As of the end of the first quarter, we had received, at least, some parity payments from all of our eligible states. But the specific amounts and the timing and frequency of parity payments continues to vary widely across both states and payors within those space. In Q1, we recorded roughly $14 million in parity revenue, or about $0.04 per share, after the impact from incentive compensation and income tax. Our profit after practice expense for the 2014 first quarter was $173 million, up 12.3% year-over-year. Profit after practice expense margin decreased slightly by 11 basis points. We continue to generate operating efficiencies within our general and administrative expenses. These grew by only 9.6% over the prior year, significantly slower than revenue, and G&A as a percent of revenue declined by 30 basis points versus last year to 10.3%. This slower growth in G&A expenses enabled us to generate operating income growth of 13.7% to $104 million, and our operating income margin of 18.4% increased by 17 basis points versus the prior year period. Finally, both our first quarter net income and diluted earnings per share grew by 15% as compared to the prior year period or more than 2% faster than our revenue growth. For the quarter, weighted average diluted shares were $100.7 million, slightly lower than the prior year. We spent roughly $117 million to buyback shares during the quarter under our previously announced share repurchase program which equated to a repurchase of roughly 2 million shares. Looking at our balance sheet, we had cash and cash equivalents of $19.8 million at March 31, 2014. Accounts receivable at March 31 were just over $350 million, an increase of approximately $30 million as compared to December 31. Days sales outstanding increased by about 4 days to 50.2 for the 2014 first quarter as compared to the fourth quarter of '13, primarily related to the integration of acquired practices. The total amount outstanding on our $800 million revolving credit facility was $248 million at March 31, 2014. Lastly, during the first quarter, we used $49.8 million of our cash to fund operations compared to a use of $18.4 million last year. As you'll recall, our operating cash flow is typically negative during the first quarter of the calendar year as we use cash and amounts under our revolving credit facility to pay bonuses principally to our physicians and 401(k) plan matching contributions that have accrued throughout the prior year. Moving on to our outlook for the 2014 second quarter. As we announced in this morning's press release, we expect that our earnings per share for the 3 months ending June 30, 2014, will be in a range of $0.75 to $0.79. The range for our 2014 second quarter outlook assumes anticipated same-unit revenue growth of 3% to 5% year-over-year. This same-unit revenue growth will be driven primarily by net reimbursement growth, including the impact from parity. The forecast estimates volume to be flat up to 1% for the 2014 second quarter as compared to the 2013 second quarter. Included in our 2014 second quarter is approximately $0.04 to $0.05 from Medicaid parity, net of the impact from incentive compensation and income taxes. Now, I'll turn the call back over to Roger.

Thank you, Vivian. I think we're off to a great start this year, and I look forward to the opportunities as we continue to grow. With that, let's open up the call for questions. Operator?

[Operator Instructions] Your first question comes from the line of Ryan Daniels from William Blair. Ryan Daniels - William Blair & Company L.L.C., Research Division: Vivian, maybe a quick one for you on Medicaid parity. I know we've talked about this every quarter. But now that every state is effectively paying you, are you moving forward and thinking of that kind of $15 million, $16 million as a true run rate on accrual basis each quarter, or is that still incorporating some catch-up payments or some lines in payments as we go forward?

So it's still a little bit of a mixed bag, Ryan. It's -- basically, of that $14 million, we have roughly about 2 accrued. Our method of accrual is still consistent with what we started within the fourth quarter, which we have to see a trend of -- more than the states, to be candid with you, as the payors. And once we see that they're consistently paying, then we start accruing them. So there's still a bit of payors that have started to pay but we haven't seen that consistent trend yet, but as soon as we see that, we continue to then implement the accrual for that specific payor. Ryan Daniels - William Blair & Company L.L.C., Research Division: Okay, and let me ask it a little differently. Do you know then based on your what you're getting paid and how many payors are paying, how much upside you still have on a full run-rate basis or how close we are to kind of maximum quarterly parity revenues?

Yes, I mean we're getting a little bit more clarity on that. Although, we still have a couple of states where we've gone back and forth with them on, really, the reconciliation of the rates that they're paying. So there's still some of that but I do think that we should see it increasing. When you compare, on the second quarter, when we go through the forecast, you remember that last year, we started to accrue $2.5 million, I think, it was in the second quarter of 2013. So I do think that it will start going up slightly. I mean we -- our forecast includes about $1 million more than what we had in the first quarter of this year. Ryan Daniels - William Blair & Company L.L.C., Research Division: Right. Okay, and then final question, just on the share repurchase. I don't know if that's just timing, but it was the first time in a while we've actually seen the share count go down. So was the intention there to kind of start it bigger at the front of the year to have that benefit all year? Or was it just more of a timing issue or maybe a change in capital deployment, any color there?

Well, I think it shows that we're certainly behind our stock, and we do believe that we wanted to take advantage of buying back the dilution when we felt it was a good time to do it. So there wasn't anything other than that to it. If there isn't really any change in the capital structure as you mentioned, it was more taking advantage of the opportunity and then buying back the dilution, really, for the year.

Your next question comes from the line of Kevin Ellich from Piper Jaffray.

So just going back to the share repurchase question, Vivian. Of the deals that you've done this year, have you used any stock or equity off of your shelf registration?

Not yet.

Okay, great. And then, it looks like margins, both operating and EBITDA have stabilized and we've seen some improvement last quarter and this quarter. How confident are you that we're going to continue to see this sort of improvement throughout the year? And do you have much more leverage? You guys are doing a really good job on G&A, it looks like.

Yes, I mean, we're always hopeful that as we continue to integrate these practices, that does provide some leverage on the G&A margins, and so it will be a big part of the assumption of that. We're always looking to improve certainly items in our revenue cycle management and other areas. So I'm hopeful that, that will continue. And as you know, it's a big function of that as related to the acquisitions.

Got it. Okay. And then looking at -- speaking of acquisitions. Looking at the anesthesia business that was disclosed in the 10-K, when I took the number of cases and your anesthesia revenues, it looks like revenue per case in anesthesia was down about 10% to 11% in '13. Just wondering what's causing that. Is that a function of the mix of practices that you're buying?

Yes, I would say that because as you know, it just depends on, like, with our neonatal business, the payor mix of the practices that you're acquiring.

Okay, great. And then last question. On the weather impact, I guess, how did you parse that out? I know it's hard to pinpoint and know exactly how much of the case volume was affected by weather, but I mean, how do you know it wasn't utilization and just seasonality with higher deductibles and co-pays?

Did I tell not you guys I hired a weatherman in the finance department? No. Basically, we're looking at the trends of before and after, like some average trends, and we can see where it's very clear where the volume went down, specifically in certain days that we know that the weather was out there and not good. And certainly in areas like Atlanta, Virginia and all of that. So it's quite obvious when you look at the day-to-day activity and you compare that to an average. As you said, Kevin, it's not a science, but it certainly is very noticeable that those days had a big decrease compared to prior weeks, same-day volume. So it is kind of obvious.

Your next question comes from the line of Brooks O'Neil from Dougherty & Company. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: I have a couple questions. First, I understand that a very large hospital company indicated that their birth rate had increased by about 4% in the first quarter. And I'm just curious, obviously, you saw some volume benefit. But can you tell us what you guys are seeing across your contracts as it relates to birth rate, and any thoughts you might have about the future, as you are Yogi now, will be helpful?

Well, we didn't -- certainly we didn't see 4%. We did see increases in volume across our network. Probably closer to 1%, 1.2% is what we saw. So hopefully that is the beginning of a stable and continuous increase in birth. We didn't see 4%. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Sure, not 4? Okay. And then just curious if you can share any thoughts about the pipeline, what you're seeing out there in the marketplace? Any differences that you're seeing right now relative to what you've been seeing over the last, say, 12 months or something would be very, very helpful.

It certainly continues to increase. Our pipeline is accelerating. We have, as you saw, seen some deals that completed this year. What we're seeing is some larger goods also coming to market. So we think that this is a trend that's going to continue over the next foreseeable future. And I think there's just a lot of interest and excitement within the specialties in which we take an interest in to join or to do something with their practices. It's definitely accelerating from our standpoint. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: That's great. And then I'm just curious, how do you feel about the state of your organization on the anesthesia side? I know you and Karl and the team have been investing and working hard over the last couple of years, but can you give us a feel for -- it seems like you probably feel like you're ready to scale that business pretty aggressively?

I'm not so sure about Karl anymore.

He's sitting right here, obviously.

We think we have a great team. We're always looking to improve. We certainly don't have a perfect team. We're looking at all of the areas from revenue cycle management to master contracting, and so we're looking at our structure, we're constantly rethinking whether we have the right structure or not. As you know, we are structured now according to our specialties. So we have a neonatology and pediatrics kind of structure and an anesthesia kind of structure, and we're constantly asking ourselves whether that is the right structure, whether we have to be more geographically structured. And so we're -- we've got a good team in place. It's not a perfect team. And we're constantly reevaluating whether we're doing things correctly or not. And we'll continue to do that. We have made a number of investments in building our infrastructure, bringing in some middle level managers, all of that is already in place. And so we're happy with where that is currently, but we're always looking to improve.

Your next question comes from the line of Kevin Fischbeck from Bank of America.

I just wanted to -- actually, can I go back to that first question? I think the HCS comment was more the commercial volumes have increased 4% from up there. Same store number was probably closer to what you guys are showing overall, but that kind of begs the question about your payor mix in the quarter. Was there any differential between the pediatric payor mix and anesthesia payor mix in the quarter or is it all kind of generally the same?

Yes, both were slightly up. But I have to tell you, as I've said to you guys on the last few quarters, I'm still very encouraged with the payor mix trends because 20 basis points, we consider that pretty good as it relates to not such a big movement. Over the last couple of years, if you go back in the first quarter, we had a lot more significant shift in payor mix to government payors. And this is more in line with what we've seen over the last couple of quarters, which is a slight increase.

I'm actually looking at the chart myself right now as we speak. It shows that -- I agree, it's definitely encouraging. But I guess, just because it was positive last couple quarters, is there any issue about geography or anything else you'd point to us as far as where the mix changed?

No. I mean, it's a slight shift. So there's really nothing that stands out, Kevin, from that.

Okay. And then the volume number was, I thought, also quite a good number, and Roger highlighted that as well. Anything you would highlight there on the birth trends, geography-wise or is that also relatively broad based?

Yes, that's relatively pervasive which is, again, encouraging on the neonatology side, all of the related services there. Again, with anesthesia and MFM, certainly on the anesthesia side, a lot of it's related to weather, we believe.

And I guess, if I remember correctly, you said that this quarter, from the pricing side, more of it, I guess, the majority of it was parity. I thought last quarter you said something to the effect of really half of it was parity. I just wanted to see if I have that right, and if I did, is it probably that commercial maybe decelerating a little bit or how do I think about that?

Well, first of all, honestly, I can't remember if it was half last quarter. I'd have to go back. But I can tell you, this quarter, when we talk about commercial pricing, remember there is some timing to that. So it doesn't mean that it's not consistent quarter-to-quarter because it depends on the contracts that are coming up for renewals and the ones that have escalators in it. So it's not a number that's that evenly spread throughout the quarters of the year.

Okay, but nothing you would just highlight as a change in trend on the commercial pricing side?

Say that again, Kevin, I couldn't hear you.

There's nothing you would highlight as a change in trends or anything going on, on the commercial side?

No, no. No trend changes, no. Not at this point.

Your next question comes from the line of Ralph Giacobbe from Crédit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: I want to understand the -- on the pricing side. If I sort of do the math and try to back out parity, it did look like pricing was softer in the quarter. We're calculating about up 60 bps. And I think, last quarter, if you do the same exercise, up about 3%. So I guess, is it all payor mix related or is there something else sort of dragging that down? And then the other piece to this is, sort of, you talked about patient days up 1.6% which would sort of suggest higher length of stay. And I would think that, that would drive acuity up and also help the pricing number there. So maybe can you talk about the acuity mix side of that as well, and maybe if that helped at all in the quarter, what that was in the quarter?

Okay. So as far as the average length of stay, really, there's no big changes to that either. I mean, it's totally within the range. But you do bring up a good point, which is that there's several components to impact pricing. Acuity being one, which, in this quarter, it was slightly up but, again, not necessarily anything out of the ordinary. And there's other things that impact that line as well, which is some of contract revenue items and coding utilization, price increase, all of the things that you mentioned. So again, there's not really a trend there. The dollars for the contracting in this quarter is lower than what we had in the fourth quarter. Again, not reflecting a trend, just reflecting that there is seasonality to that, as I mentioned before, when these contracts come up for renewals and when the escalators kick in, but we haven't seen there be a difference in that trend. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. And then with anesthesiology growing to be a much bigger piece of the business, I think it's over 30% now. Any thoughts or expectations on sort of breaking out segment details and just from a transparency standpoint as well, kind of going forward, or what's the threshold we need to see to maybe get the breakdown between the divisions?

Okay. So we do consider that. And again, what we've said before to guys, we're consistent. It really isn't related to the rules because we're aggregating based on the accounting rules. It's more of going back to have more mass because when we do decide to potentially break it out for the purposes of having more transparency with our investors, we do have to go back several years because that's how the rules work. And so we want to just make sure that there was enough mass in there so that we don't give away any competitive information there. So it's been more related to the competitiveness of the business versus anything else. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, that's helpful. And then just my last one. Can you give us a sense of maybe same-unit margins and whether -- and the magnitude of the improvement there? And maybe just the actual level of same-unit margin in the first quarter versus sort of non-same-unit?

Yes, we don't -- as you know, we don't specifically quantify that because it does kind of change from quarter-to-quarter. But what I can tell you is that, yes, there is obviously same-unit certainly on the neonatology side favorably impacted with the parity, as you would expect, because that's a pricing increase. So that's been helping that margin.

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

Roger, if you don't mind just talking about deal valuation in anesthesiology, especially. You've done quite a number of deals here to date. I just wanted to see if multiples have started to change in that space?

Yes, we do see a little creep in the multiples. They're not at the same level as they were a year ago. They're not crazy high, but they certainly have crept up a little as we see more competition come into the market.

And then you alluded to how the hospitals are basically the reasons for some of the delays or the pushback on deal timing. What kind of discussions are you having with those hospitals as they look through the contracts and look to sign off on some of these acquisitions?

Okay. Yes, I think the hospital is feeling -- hospitals are feeling a lot of pressure, and like the rest of us, aren't really sure what this is going to lead to. And so what they want to have is just the flexibility to be able to participate in whatever things happen to come down the line. So with that, I mean, hospitals don't want to own -- the majority of hospitals don't want to own these hospital-based practices. They just want to have real partners that when the hospitals decide they're going to join this or that organization, that they're going to get cooperation from their hospital-based physicians. And of course, it's one thing to have a local group that has been with you for the last 10 or 20 years, and it's another thing to have a large national group practice coming in and out. And so they just need to get comfortable that they're going to have a real partner when that next comes in, in helping them accomplish and achieve their goals and their objectives. And those are conversations that just take time. And fortunately for us, we are able to point to a number of clients that have been partners -- hospital clients that have been partners with us for many years and eventually get them comfortable that we will be good partners, that we will cooperate with them, work with them because we both have the same goals in mind. But it does take longer. It's just -- it doesn't just take 1 conversation. It takes a number of meetings and conversations and reassurances, et cetera, to get to that point.

What about the discussions with the physicians, Roger? I mean, once the leaders of the group have agreed to sell or to sign an LOI with you guys, I mean, convincing the other doctors in the practices, has that conversation changed over the years?

Well, I think those conversations have gotten easier, actually. Because I think that most groups will not sign a letter of intent until their whole group has agreed to it. So it's not like we're meeting with 1 or 2 leaders signing an LOI. And then, oh, by the way, tell their 60 other partners this is what we've done. By the time we get to LOI stage, most of the group has agreed to move forward. So that conversation, because of the pressures in the marketplace, because of the changes in the business of health care, the legislation, Obamacare, et cetera, et cetera, physicians, in general, are feeling like they need to do something in order to respond to all of these external pressures. And so I'm not saying that all of them are doing that. But the vast majority, particularly when you have larger groups -- one of the differences that I pointed out in the past is that anesthesiology groups by nature tend to be larger than neonatology groups. And those larger groups just tend to have a more significant structure of government, group government structure, in place. And so they have group leaders and they're more business-oriented, and they have a better -- it's not like a 4 or 5 or 6 physicians in a group of neonatologist. When you have 40 or 50 or 70 anesthesiologists and another 40 or 50 or 70 nurse anesthetists as part of your group, your governance is much more substantial. And so that helps as well.

And last question for me, Roger. About a year ago, you guys talked about a pilot you're running with HCA with the Centennial hospital for pediatric surgery. I just wanted to get an update on that, kind of like as a way to get a gauge on your relationship with HCA and what you guys are doing with them on the pediatric side?

Yes, okay. Well, we have a good relationship with HCA. We run more than half of their neonatology use across the country. We're not in a lot of their anesthesia practices. But we have a very good relationship with them. That 1 pediatric surgery practice is doing well. It's -- there are pressures in that marketplace and reasons why it may not have grown as much as we would have liked for it to grow. But in general, that practice is doing about as well as we thought it was going to do.

Your next question comes from the line of Gary Taylor from Citi.

Just a few tidbits. One, I know this has already been touched on, but just going back to the share repurchase. I know historically, generally, the thought process was not using the balance sheet, really, for using repurchase, using free cash flow generation. Generally, just generally, typically, just to buy down the dilutions of any options issuance throughout the year. So my question is, is the thought here that really you'll end up taking the fully diluted share count down year-over-year or is it still just generally, as was historically the case, just buying the options solution, the share count pretty stable?

Yes, no changes. It's the same idea as before. We're not going to go out and acquire shares at this point in time, other than just to solve the dilution. But we just got out ahead of it. We thought -- we think our stock is cheap so we went out and got it.

I just wanted to confirm that. The investment income, these are tidbits, but investment income was higher over $1 million this quarter. Is there anything unusual there, recurring there, I guess?

Yes, yes. So what it is, is that we have a small settlement on a case we're working on. And so that's what's recorded in our line.

Okay. And then are you actually receiving parity payments from Texas?

I believe, yes. We have received not a lot, but we did start getting parity payments from Texas, yes.

And you are -- but you are accruing the full value of what you think you will receive, is that correct?

Well, again, the way we do our accrual, Gary, is for any one of these payors, right, is that we want to see the trend of them paying consistently before we start accruing the rest. Because again, there's been a lot of variability of big reconciliation process to make sure that what they're paying us is correct. So once we see that any given payer in any given state or any state is paying us consistently, then we accrue what we expect to get from them once we reconciled and there's a trend of that cash coming out.

Just to clarify, Gary, we're not accruing on a per state basis, we're accruing on a per payor basis. So if we only have 2 payors paying us from Texas, which is I think about what it is right now, that's the only thing that we're accruing. We're not accruing all of Texas.

As for any other state.

Okay. And then last question, just going back to the cash flow. Obviously, I understand it's typically use of funds, always a use of funds in the 1Q, but it was more of a use of fund this year than last. I know it looks like payables are the real differential and maybe some growth in payables in the fourth quarter reversed, and that's why it was more of a drain here in the first quarter. But anything else to add just on the cash flow number?

Yes. So you're right, it is in that line. But it is -- I'm happy to report it is related to paying higher bonuses versus last year to our physicians, as well as an increase in the 401(k) match that was accrued as of last year.

Your next question comes from the line of Rob Mains from Stifel. Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division: Just about everything I have was asked, just have one last for you, Roger. The acquisitions, you said now, 2 of these calls in a row, that you're seeing sort of the finish line -- the run to the finish line is getting stretched out a little bit. Yet you've had a fairly active year so far. Can we -- is there anything to surmise maybe from the size of the deals that have been completed to date that the delays that you've alluded to are more marked when you're talking about bigger practices than smaller ones?

No, I wouldn't say that, Rob. It does seem that way, but what I think is playing a role here is that when you're dealing with smaller practices, it's just easier to get through the employment contracts, the credentialing issues, all of the issues with the acquisition contract. I mean, when you're talking to 12 or 15 physicians, it's just easier to get through that than when you're dealing with 60 physicians and 60 nurse anesthetists. Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division: And that will be the case even if the hospitals weren't slowing things down, I assume.

Yes, the issues with the hospitals wanting their physicians to participate and to be good partners are the same, independently of the group size. Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. So I think you said this earlier, that in the pipeline there are kind of the beachhead type deals that you've done in the past, as well as the types that you've completed to date?

Absolutely.

Your next question comes from the line of Darren Lehrich from Deutsche Bank.

Two questions here. First, Roger, I wanted to just go back to your -- some of your prepared remarks with regard to the medical directors' meeting and how you're measuring quality and some of the things that we've heard about for a long time here. I guess, just as it relates to your ability to measure quality and talk about it in a more sophisticated way to the hospitals, now I can see how that certainly improves your retention. I guess I'd be curious just to get an update on whether you think that can drive more contract growth with some of your existing practices and particularly in anesthesiology. Maybe just comment a little bit about your contract growth and how you leverage the existing practices in the region?

Well, we think, in the first place, that it helps us to attract physician practices, when we talk about the benefits that we can offer these practices as they join MEDNAX and some of the savings and some of the quality measurements that we can expect the new groups to accomplish as well. So that's one thing, it helps us during that process. With our existing hospitals, I would say that it helps, because we are avoiding complication rates in a lot of instances. And so as I look towards, for example, on the newborn side, our rate of -- and one of the big problems with prematures are the blindness of prematurity called retinopathy of prematurity. And it's caused by too much oxygen, too much carbon dioxide, et cetera. And what we have shown over -- one of the things that we have shown over the years is a reduction in our own rate of retinopathy of prematurity, a dramatic reduction of more than 50% in these cases. And when you talk about, forget the human cost and the emotional cost, just the financial cost to patients, that's a significant number. And so we talked about that with our payors, as well as with our hospitals. On the anesthesia side, the whole perioperative process is something that we pay a lot of attention to. And what that means, I just learned about it not too long ago, is one thing is that the actual surgical procedure. But what they thought -- what they mean when they talk about the perioperative process is everything that surrounds that, the pre-surgical, the admission, the postsurgical, the complication rates, a lot of emphasis placed on vomiting and just after the procedures and getting them out of the recovery room quicker and all those kinds of things I'm talking about, I'm turning neurologist [ph] as I tried to tell you. But -- and so those rates are of interest to the hospitals. The hospitals get better rates of satisfaction from the patients as they do their analysis from the patients as to how their experience -- how well their experience went. So that's all the information that we're gathering, and we can use that whether it is as we go to other hospitals, to payors, to other groups, we can use all of that information, saying, "Look at what we have and the things that we have done." I can't really point to a hospital contract, which I think is the question that you're asking, in specific and say, "We got this contract at X hospital because of that." I think it helps and I think it's one more point that we make, and I think it's an eye-opener for a number of our clients, but I can't really specifically point to 1 contract and say, "This is the reason we got this contract at this place."

Okay, that's helpful, in terms of how you're using the data, and it seems like you got a great message. The other question I have for you, and just going back to the parity discussion. I'm curious really at the state level, you mentioned Nevada and now there's maybe about a handful of states that are starting to talk about this. I wanted to hear from you, just at the state level, how are the states thinking about paying for this. And if you can maybe give us some examples of how your advocacy is working along those lines to get just better traction on this topic?

Well, we have, as I said, we have 4 or 5 states that have agreed that they will move forward beyond 2014. Not all of them have agreed to go at 100% of Medicare. Most of them have -- 1 or 2 of them are talking about maybe going to 80%, 85%, 90% of Medicare, which is still great for us, better than nothing, obviously. And we have a very strong advocacy and government relations program. We have, not only at the federal level but in all of the states in which we -- all of the major states in which we practice, we have local representation there as well. We have the second or third largest pack in health care services. And so we had a great message that some other way that we use are statistics, we go and talk to government officials about our reductions in ROP, in retinopathy of prematurity and other things. I think we have a great story to tell. And so we utilize what we have in order to try and convince these government agencies in different states that we need to continue to provide this reimbursement -- increased reimbursement so that we can continue to do the work that we're doing.

Your next question comes from the line of Brian Zimmerman from Goldman Sachs.

Given that this was a fairly unusual quarter with the weather, I was wondering if you could give us a bit more insight on what the volume progression was throughout the quarter? And then for any volumes that you've lost on the anesthesia side, do you think you can get those back in the second quarter?

Yes, so I do think we'll get them back. I'm not sure that they're going to be scheduling all of those surgeries immediately, but I think we will get them back. But I don't -- I can't tell you. As far as the progression goes, I mean, other than what I mentioned to Kevin, which is the way we look at it was just seeing the days where we can clearly see that there was a big decrease in the activity for that day, and you could kind of match it to the weather days. So other than that, I can't really give you any other thing. I think it was like at the end of January, when we have some really bad weather and I think then we have some in February, if I recall. Those were the bigger day peaks, so it was kind of within that time that we could see, yes, like the days that were most impacted, as I look at my notes here, it was like mid-January through the end of February. And then a big impact occurring like at the end of January and mid-February, when we saw some of those bad weather days there.

I mean, these are -- let me just add to that. Well, somebody's already said, the days aren't going to wait, so you saw that the volume for anesthesiology...

This is for anesthesia.

Is up. So this is just on the anesthesia side. And these are elective procedures, right? Any kind of emergencies aren't going to wait either. If you have an appendicitis, you're going to -- whether it's snowing or not, you're going to -- so these are elective procedures or semi-elective procedures. And so I think people will have more time to get their procedures rescheduled.

Okay. So would it be fair to say that March was a bit of -- more of a return to normalization based on that commentary?

Yes, I mean, yes. Honestly, I have to go back and check that. But I do think, again, that even before, some of the January, before the weather, it was better. So yes.

Okay. And then on the acquisition side, based on the all the commentary you've given today, I mean, and just what you've accomplished this year, would it be fair to say that we should expect to see more acquisitions on the anesthesia side of the business for the remainder of the year? Or what sort of mix between anesthesia and neonatal do you foresee?

Yes, we expect all along that the bulk of the acquisitions will come from the anesthesia side. I think we still think we'll do some pediatrics stuff, but the bulk of it will be on the anesthesia side.

Okay. And then I guess most of the pickup in NICU days you've addressed were really from birth rates. You didn't see much of a change in length of stay. Did you see any change on the admittance rates on the NICU side?

No.

No.

Okay. So it was births, okay.

Yes.

Yes.

Your next question comes from the line of Gary Lieberman from Wells Fargo.

This is Ryan Halsted, on for Gary. My first question, going back to the anesthesia volume. I just want to clarify, was there an impact from day count?

Well, in the first quarter, we typically do have a few less days. So I can't remember now, but yes, there's a few less days in the first quarter.

Year-over-year or sequentially?

Yes, yes. February.

Okay. So any -- did you have a thought on how that impacted volumes?

Go ahead.

I was just trying to arrive at sort of what the impact on the volumes were from the 1 fewer day. I guess the gist of my question is going back to utilization. The hospital companies have been reporting some decent trends, I think, on elective procedures. And I'm just curious if absent the day count and the weather, were there any signs that, that impacted your anesthesia business?

No. I mean, right now, like I said, the only one I -- we quantified was the weather, when we went back there, I mean, we just haven't really noticed anything else that was significant. I mean, Karl is here, so I'll let him expand on anesthesia volumes.

Yes, lower days didn't have an impact year-over-year. But when you look at where the predominance of our practices are, that weather stream that kept coming and hitting Tennessee, Georgia, North Carolina, the DC area, and Detroit got a fair amount throughout the year, we got some pretty large practices through that area. So it had a big impact on us, but it isn't necessarily going to be indicative of what may be seen nationally in some of these bigger markets. Unlike our neonatal business which is much more dispersed nationally, we don't have it in the anesthesia side at this point. So we did feel the impact of the weather significantly through a lot of our practices. So we had a bigger impact than a lot of the national hospital companies that would have maybe have some offset in other places. So that did hit us. Somebody announced, as Vivian talked about, when we look at the impact of the surgical volume for those days, we did see drop offs on those days and what we didn't see is the change of the trend dramatically on a go-forward basis is that we made up the goals. The trends of the surgical procedures we're doing, the changes we were doing throughout the rest of the months remained pretty consistent. As Vivian said, January started off strong and we continue to see that consistent, but the impact of those days wasn't been able to be made up, so we didn't see a consistent higher level. So that gives us some prompt that it wasn't completely made up in that quarter. We would expect to see some of that coming in to this quarter.

Okay, great. I appreciate the color. My other question is on the Medicaid parity, I'm curious if you're seeing any evidence that the higher payment rates are having an influence on your pediatricians maybe expanding access to Medicaid patients, or is it just that you're getting paid more on sort of the normal volume?

Well, we participate on the Medicaid program. It's really the office-based pediatricians that you're hoping will elect to see more Medicaid patients or those who don't participate at all, to participate. I hear comments from my buddies who are general pediatricians on both sides. Some are saying, particularly those that are already seeing Medicaid patients but maybe limit the percentage of patients they see to 25% of their practice or something, some are saying that they are seeing more patients, they have increased the number of patients. The other -- others are saying that they're not really seeing more patients because it goes away at the end of this year. And so they feel kind of -- another comment I hear, they feel kind of a threat that they would agree to see Medicaid patients and then at the end of 2014, those increase in payments will go away, they now have these patients that they feel responsible for and they're not going to turn away. And so some of them are waiting to see whether their specific state is actually going to prolong or extend the parity beyond 2014.

Your next question comes from the line of Dana Hambly from Stephens.

Roger, just on the -- back to the hospital discussion. I understand the administrators at the hospital would have plenty of questions for you guys. I'm just curious if this is a back-and-forth, where you are interviewing them as well and kind of what questions you would be asking them. And is there anything that you've seen that they've demanded or suggested that would make you shy away from a particular acquisition?

Well, I mean, each hospital contract for us is a negotiation. Some hospitals want to make sure that they're keeping their physicians. They've had a group for a number of years, and they want to make sure that, that group is not going to go away, that we're not going to bring in a bunch of younger guys and less experienced physicians and pay them less and those kinds of things. I would say the majority of our conversations from a hospital standpoint revolve around just their getting comfortable that we're not going to come in and change too much on the clinical side. And that's an easier conversation for us to have because we don't do that, and we have a number of hospitals across the country that we can point them to, to get comfortable with that. What's changed recently, as I said earlier, is this concept that hospitals want to remain flexible and they want to have the ability to participate in whatever payment reimbursement schemes may come along in the picture that they are not really knowledgeable at this point in time. But they want to know they have a partner that's going to be with them. From our standpoint, we're interested in, obviously, the longevity of the management team, but we're also interested in their growth plans. Are they looking to enter into other kinds of arrangements or what are they -- how are they looking to grow in their community and what kind of services are they thinking about providing. So I mean, that's really -- that's always been the conversation with hospitals. Who are you, and are you comfortable with your existing group, and what are your plans for growth within your community.

Okay, that's helpful. And then just last one for me. On the states that have, you said, taken some steps on perhaps extending payment parity, just curious, is that at the state level, is it kind of a fiat decision by someone or do these have to go through a legislative process or does it vary by state?

No, it has to go through a legislative process. It's at the state legislature level.

And at this time, there are no further questions.

Okay. If there aren't any further questions, let me thank you for participating this morning, and we look forward to seeing you again next quarter.

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