Pediatrix Medical Group, Inc. (MD) Q2 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MEDNAX Second Quarter Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I'll now turn the conference over to your host, Mr. Charles Lynch, Vice President, Strategy and Investor Relations. Please go ahead, sir.

Thank you. Certain statements and information during this call -- 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. Now I'll turn the call over to our Chief Executive Officer, Dr. Roger Medel.

Thank you, Charlie. Good morning, and thanks for joining the call today to discuss our 2014 second quarter results. This morning, we reported results from operations for the second quarter that demonstrated strong growth and continued to be driven largely by our successful execution of the long-term growth strategy. Our revenue for the quarter grew by 12.5% with contributions from acquired practices of more than 9%, and same-unit growth of over 3%. Same-unit NICU days were up year-over-year, continuing the growth we've seen there in recent quarters, and so were the same-unit anesthesia case. We also saw good margin trends with operating income and net income growth, both exceeding 14%, and EPS growth of more than 16%, all faster than our revenue growth. We continue to add practices through acquisitions, with 3 groups joining our American Anesthesiology division during the quarter. In April, we added 2 groups, one is Fredericksburg, Virginia, and one in Kingston, New York. And in May, we added Anesthesia and Pain Management Group in Melbourne, New Jersey. Anesthesia and Pain Management provides ambulatory anesthesia and pain-management services for outpatient procedures at Short Hills Surgery Center and Hudson Crossing Surgery Center, including general and regional anesthesia, pediatric, cosmetic and acute pain management for post-operative pain. Finally, today, we announced the acquisition of Associated Anesthesiologists of Joliet and its affiliated entity, which on a combined basis, employ 88 full-time anesthesia providers and serve 13 locations in Southern Illinois and Northern Indiana. With that, today, in 2014, we've added a total of 7 practices to MEDNAX, 6 in American Anesthesiology and 1 in Pediatrix Medical Group. So I'm happy with the success of our acquisition pipeline and confident that we will continue to be active through the remainder of this year. But in addition to these practice acquisitions, which we will continue to pursue and for which we continue to have a very active pipeline, I want to talk today about how we're thinking strategically of ways that we can complement this growth while adding greater value to our hospital partners. First of all, we will be far more responsive and proactive in looking to broaden our existing hospital relationships. For example, as most of you are aware, over the past several years, we significantly expanded the scope of neonatal and pediatric services we provide to the TriStar system in Nashville, which has provided a great growth avenue for us, and at the same time, enabled TriStar to enhance its service offerings in the Nashville community. This quarter, Arizona Pediatric Cardiology Consultants, our pediatric cardiology practice in Phoenix; and Phoenix Children's Hospital Heart Center formed a joint venture that will provide comprehensive community-based care, as well as pediatric cardiovascular surgery and other subspecialties at Phoenix Children's Hospital. Our practice has been providing care at Phoenix Children's for more than 25 years and this venture further formalizes and expands our relationship with that business. This is a strategy that broadens our service offering within the Phoenix Metropolitan area, offers new growth potential for us and recognizes the close relationships we've had with Phoenix Children's for years. And while this is a formal joint venture, I think that either through JVs or in partners like with TriStar, we will continue to pursue these type of opportunities across our divisions. There are great chances to create more integrated care models, alongside our local health systems, not only related to our footprint within Pediatrix Medical Group, but also related to our broader footprint across the company. And as we look at that footprint, we see a number of areas of opportunities that we will pursue. The second strategic step we're taking is as we look at our operating infrastructure and the services and support we provide to our physicians, in the past, we've always done this with an internal focus, building our own solutions to support our own physicians. Looking forward, we will continue to make those investments, but over and above that commitment, we're increasingly interested in adding tools to our infrastructure that might be available to us through acquisitions or partnerships rather than just by building them ourselves. So also during the second quarter, we acquired a company called Surgical Directions. Surgical Directions is a collaborative team of anesthesiologists, operating room nurse executives and perioperative business strategists that develop and provide solutions to streamline patient throughput, enhance anesthesia service levels, increase surgeon and patient satisfaction, decrease cost and implement strategic perioperative growth plans to hospitals and health systems. We see this business as a positive component of our organic growth potential, both immediately and in the future. In addition, a number of our own anesthesiologists have worked with the company and found their input to be extremely valuable, which led us to consider and then act on the idea of acquiring them. We think more of our practices can benefit from Surgical Directions' services and the company has free rein to market itself on, essentially, an intercompany basis. To the extent that we can provide our anesthesiologists with an additional tool to improve their practices, we think there's a great potential value there. We also think the workflow solutions they focus on could be relevant to our Pediatrix Division, and Surgical Directions will have conversations with those Medical Directors in that division as well. And just as importantly, I think there's potentially a great value we can unlock by taking a look at the tools we bring to bear to date to support our own physician, and thinking about beginning to export those tools potentially through the provision to outside physician groups and hospital systems of the very services we already provide to our own national group practice. We're obviously in the early stages of addressing this opportunity, but I anticipate that we will continue down this path as well, and that opens us up to consider businesses like Surgical Directions that can help us develop a platform for new revenue growth. So overall, I think initiatives like this will be complementary and hopefully meaningful so -- to our future growth, and I don't think they would be possible without our existing footprint, infrastructure and relationship. And as talked about in the past, I believe our positioning as a large national group practice is more relevant and valuable than ever as the healthcare industry evolves over the coming years. The broadening of our scope to include bigger system relationships and new avenues of revenue growth can complement our established strategy of adding new practice. This will particularly be the case as health systems seek to expand their service offerings and as the broader health care market seeks new solutions to prepare for health care reform and to operate more efficiently and with a greater focus on quality and outcomes improvement. And just as importantly, they leverage the strength that we already bring to the table for our physicians and for our hospital partners, the clinical, technological and operational capabilities that enable them to take great care of their patients. And with that, I want to turn the call over to our Chief Financial Officer, Vivian Lopez-Blanco.

Thanks, Roger. Good morning, and thanks for joining our call. I want to add some details to Roger's comments on our second quarter results. At the top line, our net patient service revenue for the 3 months ended June 30 increased by 12.5% to $596 million. 9.2% of this growth came from recently acquired practices with American Anesthesiology practices contributing 79% and Pediatrix Medical Group acquisition, the remaining 21%. Same-unit revenue grew by 3.3% with revenue attributable to net reimbursement-related factors growing by 2.6% and volume increasing by 0.7%. On the reimbursement side, the majority of our same-unit growth was related to parity revenue. The remainder of our same-unit growth for net reimbursement-related factors was due to continued modest improvement in reimbursements received from third-party commercial payors and a positive shift in our payor mix, with a percentage of patients covered by commercial programs increasing by 30 basis points compared to last year. On the volume side, we saw good growth in anesthesia and continued growth in neonatology services with NICU days up 0.7% and solid growth in other pediatrics services, while volumes were down in maternal-fetal medicine and pediatric cardiology. Turning to parity. In Q2, we recorded roughly $16 million in parity revenue or about $0.05 per share after the impacts from incentive compensation and income taxes. This is the first quarter in which we lacked parity revenue in the year ago period. In last year's second quarter, we recorded about $2.5 million. Our profit after practice expense for the 2014 second quarter was $201 million, up 12.9% year-over-year. Profit after practice expense margin increased slightly by 12 basis points. Our general and administrative expenses grew by 11.4% over the prior year, slower than revenue. And G&A, as a percent of revenue, declined by 10 basis points versus last year to 10.2%. Overall, our operating income grew by 14.4% to $130 million and our operating income margin of 21.8% increased by 35 basis points versus the prior year period. Finally, our second quarter net income grew by 14% and diluted earnings per share grew by 16% as compared to the prior year period. For the quarter, weighted average diluted shares were 99.9 million, down about 1.2 million shares from the prior year. This is due to the repurchase activity that we undertook early in the year. We sent roughly $127 million this year to buyback shares under our previously announced share repurchase program. Looking at our balance sheet. We had cash and cash equivalents of $17.7 million at June 30. Accounts receivable at June 30 were $327 million, an increase of approximately $42 million as compared to December 31. Days sales outstanding at the end of the second quarter were 50, down slightly from the end of the first quarter. The total amount outstanding on our $800 million revolving credit facility was $179 million at June 30, down from $248 million at the end of the first quarter. Lastly, during the second quarter, we generated cash flow from operations of $134 million, compared to $127 million last year. Moving on to our outlook for the 2014 third quarter. As we announced in this morning's press release, we expect that our earnings per share for the 3 months ending September 30 will be in the range of $0.82 to $0.86. The range for our third quarter outlook assumes anticipated same-unit revenue growth of 2% to 4% 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 0.5% to 1.5% for the quarter as compared to the 2013 third quarter. Included in our third quarter estimate is approximately $0.05 of parity -- Medicaid parity net of the impact from incentive compensation and income taxes. Now I'll turn the call back over to Roger.

Think you, Vivian. Let's go ahead and open up the call for questions, please.

[Operator Instructions] And first go to Ryan Daniels with William Blair. Ryan Daniels - William Blair & Company L.L.C., Research Division: Roger, I wanted to start a little bit with your commentary about providing services to outside physician groups. Maybe talk a little bit more about who the team is that's looking at that. And then, any more color you might have on how you would market that. I assume you can leverage your business development pipeline to market to groups. And number two, you're thinking things like electronic health records or HCIT or more revenue cycle management. Just any color there would be great.

Yes, thanks, Ryan. We are looking at revenue cycle management as the place to start. We think that there are some opportunities there for us as we go across the country and spend time with other medical groups. So we're looking both at an internal group and the potential acquisition of a company that's involved in revenue cycle management already. Ryan Daniels - William Blair & Company L.L.C., Research Division: Okay. That's helpful. And then, maybe quick one for Vivian. I assume the Phoenix JV is what appeared this quarter in the earnings and unconsolidated. So number one. And then, number two, maybe just any more color on what you're seeing in the market if you think, by offering that JV opportunity, it will open up, longer term, more of these partnership opportunities for the company.

Yes, so obviously, Ryan, that's -- yes, the JV that's in the financial statements and there will be more color once we file the Q and the notes. But yes, I mean, I think as you guys have seen in other markets, we have seen where basically this does create a partnership that we think is beneficial to serving those patients in that area. And so potentially, there will be more of these.

Next, we'll go to Kevin Fischbeck with Bank of America Merrill Lynch.

I wanted to take and have you expand a little bit on the conversation about deepening relationships with the customers. It wasn't clear. Is this about doing what you've kind of alluded to in the past around getting the key contracts and adding more pediatric services or were you actually talking about kind of cross-selling anesthesia into existing contracts or even adding other additional service lines outside of those 2 core?

Well, we are talking about everything. Everything is on the table right now. We're evaluating our strategy and our partnerships with our hospitals. And at this point in time, we've got the capital to be able to invest in the things that are attractive to us. The world of health care, right now, appears to be changing, and so what we're doing is, as always, taking some small steps and evaluating what the opportunities are for us. We have had requests in some of our hospital partners to provide other services, and we're looking, not only at hospital-based services, but at other potential specialties as well.

Yes. And I guess, that was going to be -- my follow-up question is, you've had some of your competitors in the industry talk about kind of cross-selling and deepening relationships for years now. I mean is there -- what's kind of spurred this new focus from the company? Is it that you're getting more inbounding -- inbound questions around this or is there something else driving that discussion?

Yes, we have had a request or two, not that many from -- and a conversation or two with some of our hospital partners. But frankly, we just haven't seen any horse trading going on with the bulk of what we do, which is neonatology and anesthesia. I think that there is some of that going on with emergency room and hospitalist services and those kinds of things, but we really have not seen anything in our world. We have been approached again and have had a couple of conversations with hospitals about providing additional services. But in our fields, in our specialties, we're not seeing that kind of -- those kind of requests.

Okay. Do you have any numbers around, historically, how much these types of expanding services have added to growth over time? Do you get 1% or 2% of revenue growth each year from doing that? Or is it not that much and you want to move it to some sort of sustainable consistent addition to revenue?

So Kevin, it's Vivian. So I think we have talked a little bit about these programs in the past because we have talked about expanding these services to pediatric hospitalists as well as OB-GYN hospitalist program. But really, they are opportunistic, and so it's not something that we've set a target to, say, this is going to be x% of the organic growth because honestly, some of these will just be coming depending on what the opportunities are in the market. And so that's not really the scope of it. It's more to be able to enhance the services we provide to our hospital partners and continue to be relevant in the services that we provide. So that's more how we look at it.

Okay. And maybe just last question. On parity, what's your expectation for next year? I think we found 6 states and plus D.C. that have, on their own, looked to extend the Medicaid parity rates. Is that consistent with what you've seen so far, or do you know of more? And then, what's the thought process on whether we'll see more of those happen by year end?

Okay. And so we have seen the parity extended beyond 2014 in Maryland, Colorado, Nevada, New Mexico, Michigan and, additionally, Florida has legislated about a 10% increase over the pre-parity levels prior to 2012. As we -- and it is our #1 focus for our legislative agenda. We've got people across the country working on this. It also has been -- there's been other groups that have joined us. The Florida Medical Association now has joined recommending that parity be kept up, and we've got the American Academy of Pediatrics and others. And there's 6 months left before the end of the year, so we're hopeful that we'll be able to see other states join in. As we calculate the amount of revenue that we have recovered or that we will recover from the states that have already legislated, going forward, we think it's about a 20% makeup of the parity. So those states, for us, represent about 20% already moving forward into -- beyond 2014 of the parity revenue.

Our next question is from Darren Lehrich with Deutsche Bank.

I wanted to just, first, get an update on the narrative, Roger, that you've talked about in the past regarding deal complexity and some of the added due diligence steps that you feel like you needed to take with hospitals for some of the deals in the pipeline. And just get a sense for, really, where we are in that process.

Okay. Well, as you've seen, the deals are happening. It is taking longer to get through the process, but we continue to get these deals done. We've done 6 already so far this year, and we believe that, given the fullness of our pipeline and where we are in the negotiation processes, we believe that we will continue along the same path for the remainder of the year. So the deals are getting done. It's just taking longer to do them, but we do believe that we'll continue to get these deals done for the rest of the year.

Okay. And then, just as it relates to the equity component. I know you've talked in the past that we might start seeing some of the deals have some equity component for perhaps just some of the physicians. I'm just wondering if any of the deals this year had that structure, and if it we should be expecting any in sort of the near-term pipeline to have that structure.

Yes, we had a couple of deals in the pipeline that have that structure. But that isn't any -- hasn't been any kind of a deciding factor. I mean, it's nice to have, and a couple of groups have elected that, given the choice, that some of the people in that group would take that. But I don't think that, that's keeping us from getting deals done.

Okay. That's helpful. And then, just last thing, if I could here. I wanted to go back, Vivian, to the joint venture. It sounds like we'll get a little more detail in the 10-Q. But can you just maybe help us think about what is the structure that this joint venture is? And is it sort of a standard joint venture model that we ought to be thinking about to the extent you are doing some more joint venturing?

Yes, so it is a standard model. And so for the purposes of the accounting rules, you have to consolidate it because it has a management services agreement and it's considered a variable interest entity, and so that's kind of why it's consolidated. But I would tell you that I think it's the typical type of joint ventures, so.

And the services inside of the venture, just so we understand. You talked about who the partner is, but what services are inside of it?

Well, I mean it would be the management services that we provide on an ongoing basis, which is the billing, the collecting and all of that, as well as then you have the physician services component.

Our next question is from Brooks O'Neil with Dougherty & Company. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: I just wanted to follow-up first on Kevin's questions on parity. If I was listening correctly, Roger, you said the states that have already extended it would represent about 20%. Maybe either you or Vivian could help us to think about, just to pull it out, how much benefit parity you expect for 2014. And hence, if they didn't extend it across the board, how much of an impact would that 80% be for 2015?

Right. So basically, we had another $15 million or so that we reported in this quarter, and we have set it for the next quarter. Again, remember, this year is a little bit of a -- I'm glad you asked the question, Brooks, because I don't want to overstate the 20%. Because this year, we are catching up for money that we wouldn't have gotten last year because the money started to come in so late, and so basically, it's roughly $20 million -- I'm sorry, $10 million up roughly about in the $50 million range or so. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: $50 million? Then just help us think about this. I'm getting older all the time, like everybody, I guess. But the benefit -- I mean, the sharing with the physicians and then the taxes, what kind of an EPS impact would that be having, do you think, this year?

Well, I'm not -- I mean, again, we've had about roughly about $0.05 per quarter this year. So again, we're going to -- we're recording it as we can accrue it. And so that's -- I don't know what else I can tell you about that as far as how... Brooks G. O'Neil - Dougherty & Company LLC, Research Division: No, that's helpful. And then, do you hear anything about extending it at the federal level as opposed to the states right now?

Well, the budget that the President has presented does have the extension at a federal level, but I don't think anybody expects that budget is going to pass. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Yes, okay. And then, I was just curious if you -- clearly, our friends at AMSURG have stepped into the fray with their acquisition of Sheridan. I'm curious if you see any impact of that in the marketplace at all at this point or if you expect any?

I think it's too early. They just closed the thing a couple of weeks ago. So I don't -- I haven't seen or heard anything that I want to talk about. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Sure. And then, anything changing in sort of the core trends, the percent of babies admitted to the NICU or birth trends that you see that are worth talking about?

No. NICU days, as you know, were up and that's kind of very exciting for me because it's the third quarter in a row where we see that, so that's kind of exciting. The admit rate during the second quarter was up slightly from the prior year, and the length of stay was down slightly from the prior year, all within historical ranges. But I don't think we're seeing any changes there at all. Brooks G. O'Neil - Dougherty & Company LLC, Research Division: Sure. And then, just one on sort of the strategic things you talked about. Obviously, if I'm hearing you correctly, you're pretty excited about what I would call the traditional pipeline. So I guess, I'm assuming you're looking for a little incremental pop on the growth from some of these strategic initiatives, or how are you thinking about that?

Well, you know the pipeline is very full, and I am encouraged by the fact that we continue to get these deals done. I think we have found some languages, et cetera, that helped our hospital partners feel better and continue down the path of getting these acquisitions closed. And so I think that we've got 5.5, 5 months left of the year and I think that we will get more of those deals done. Now in addition to that, we talked about Surgical Directions and we think that, that's a very exciting acquisition for us because they have a long track record of helping hospitals in the operating room, run their ORs more efficiently and save a lot of money in their timing and their turning over the operating rooms, et cetera. And so they have a good reputation, and we think that we can offer that to our hospital partners as well, as another service that we can bring to them that will create more value, if you will, further relationship between American Anesthesiology and the hospitals. We're looking at enhancing our revenue cycle management offerings so that we won't just be focused internally, but we've got I think an opportunity to provide those services. And we've got great expertise in the whole revenue cycle management managed care contracting, coding, billing, collections, and we think we can offer that to some external parties, as well as some of our hospital clients that might be able to benefit from that. Now in addition to that, as I said, everything is on the table. We are looking at other specialties, both hospital-based and not hospital-based, and we'll continue to go down the path to see what other investments in the health care, if you will, in the physician spot that makes sense for us. We like the business that we're in. We think we're in the right business. We understand that in this industry, nothing happens without the physicians. You've heard me say before, there aren't any prescriptions that get written, there aren't any admissions that get made to the hospital, there aren't any lab tests that get ordered, there's no x-rays that -- nothing happens until the physician makes the decision. And that's why I'd like the business that I am in because we're in this gigantic industry, we're right in the middle of it.

Our next question is from Gary Taylor with Citi.

A couple of questions. On the Surgical Directions acquisition, I just wondered if you could give us maybe just a little more on size and scale of that, whether that's -- number of revenue, employees, number of clients, just some sense for how large that is. And is the business model really kind of one-off consulting engagements or is there a continuing revenue stream associated with the service they provide?

So on the size of it, it's really not significant as it relates to moving our needle here because it is small as it relates to MEDNAX, in general. So I figured somebody was going to ask that. I don't -- I think more of the contracts have been a one-time, but I do know that they have sometimes follow-up on them because they are improving metrics within an OR and sometimes they do have some shared savings approaches and all of that. So -- but it's kind of early for us to tell. Again, as Roger mentioned in his prepared comments, Gary, we have and continue to use them in some of our practices, but they also have a business outside of American Anesthesiology that they want to continue to pursue, and we're encouraging that, as well as potentially expanding some of their services within the pediatrics arm as well. So it's kind of early to tell, but it is relatively small as it relates to MD consolidated.

Okay. Second question, given the conversation in the market around bundling of services and your flexibility and willingness to consider other specialties down the road. Roger, you'd made the comment about not seeing a lot of horsetrading in your key specialties, which jives with what we're seeing in the market. You have -- maybe to kind of address that even more, do you have a contract or client retention in NICU versus anesthesia? I mean, is there any -- in the last 12 months, has there been any turnover at all in your practices?

No.

Neither side of the business, right?

Neither side.

Okay. And then, last question. I just wanted to see if there was a little more color. When we look at that same-unit pricing of 2.6%, the press release says it's principally due to the parity growth and the math suggests that, that's accurate. I understand there's a lot of mix things happening there. There's mix of anesthesia versus the core pediatrics business. There's mix shift between government and commercial. There's mix shift within anesthesia between hospital base and ASC and pain management. So really, really, it's impossible to look at that 2.6% and really have an understanding about any changes in terms of pricing or just collections. So when you look at the Pediatrix side and the American Anesthesiology side, how do you kind of look at sort of core pricing growth in those businesses?

Sure. So Gary, we do look at those separately and we do have, as far as the managed-care work plan, we'll have one for both of those divisions. So I can give you some color on that. Both of them are still either getting very respectable increases in -- as it relates to what they had for their work plans. Obviously, the dialogue with payors continues to be very challenging but, nonetheless, they both have positive growth in that area. As it relates to the p-mix, again, we're pretty encouraged with that. Both sides of the house really have had some favorability in that, and so we represent it consolidated, but we do look at it separately, and they're both moving in the right direction.

So just -- would it be fair to say if you took -- let's say, there was no Medicaid parity this quarter and that same-unit pricing looks roughly flat year-over-year, would the biggest driver of that just be the shift or the faster relative growth in anesthesia versus the Pediatrix specialties that would be the primary mix driver to that lower number?

No, I mean, I think we have good pricing in anesthesia, as well as PDX.

Got it. So that's a relative revenue per unit, I guess, that you're measuring but...

Yes.

Our next question is from Brian Tanquilut with Jefferies.

First question for you. Just to piggyback on Brooks' question from Sheridan. Have you seen any change in multiple expectations on anesthesiology now that Sheridan is owned by AMSURG?

Well, I think the Sheridan acquisition did create some unrealistic expectations. We have walked away from a deal that just didn't make sense for us on a multiple basis. But in the meantime, we have gotten 4 other LOIs with other groups that we're able to come to terms with on not crazy multiple basis. So I do think that, that needle was moved, at least following that announcement and some expectations were, I think, moved a little bit higher, yes.

Okay. And then, in your press release, you talked about operating efficiencies as one area that you're focused on. Do you mind just sharing with us what you're working on in that regard? So that we can kind of think about margin trajectory going forward.

Yes, well, it's Vivian. I do think that it is partly related to the growth on the acquisition line and, certainly, parity. So as we've said before, that helps as it relates to the G&A line. So that's more specifically what we're talking about. As Roger mentioned on the operating efficiency, one of the things we're looking at is -- and namely why we thought that Surgical Directions was a good way to look at some of the perioperative processes and scheduling and things like that. But in our business, as you know, from -- for the cost of service line, it's hard to move the needle on that because of the quality of care as it relates to the physicians. We're always looking at it on anesthesia as it relates to scheduling. Obviously, NICU side, a lot more related to the volume increases. And then obviously on the revenue cycle management, that's where we've talked about in the past that we continue to consider that one of our core competencies and do consider that to be improvements as we kind of run practices through our own processes. So it's kind of all of the above. I don't think there's any change there, other than some of these other strategic initiatives that potentially will help us with that going forward.

Again and, Vivian, since you mentioned surgical in the consulting business. As you think about buying non-anesthesiology or non-pediatric practices, how do you guys think of -- how's the decision process like? As you figure out where you want to go, whether it's an ROIC or an MPV analysis or from a strategic perspective, how do you guys decide that we'll go through a revenue cycle or we'll buy an ED or hospitalist? I mean, what are the parameters that you work around?

Well, okay, the ED and hospitalists would be a little bit different because those would be more based on, like, how we look at our own deals, right? But it is certainly slightly a different margin profile, as you guys would expect. For the other business lines, it's similar to looking at another type of business, which you're going to look at it based on a multiple of the earnings of that business, kind of like you would do for any other type of business. Again, part of what we look at is not only financial, but is it complementary to the serving, that the offerings that we're trying to expand, and can that be also somewhat synergistic in the future? So some of that, to be candid with you, we don't have all of that nailed down at the moment because I think some of that, as Roger talked about, is kind of evolving.

Okay. And then, last question for me, you highlighted how maternal fetal was negative during the quarter. Is that a leading indicator for NICU volumes down the road?

No, I really don't -- I mean I don't know if you want to talk a little bit more about...

Yes. There was a time when we thought that, that would be the case but over time, that has not proven to be the case. Because what's happening is that the obstetricians -- the general obstetricians don't really want to take care of the high-risk patients except when they don't have any patients to take care of, and then all of a sudden, they stop referring patients to the maternal-fetal medicine guys. And so it's more a function of the obstetricians not referring as many patients to the maternal-fetal medicine specialists than there being fewer patient to be sent around.

Our next question is from Kevin Ellich with Piper Jaffray.

I jumped on the call late, so if any of this has been answered, I apologize. But Roger, good to see same-unit NICU volumes up 70 basis points. It sounds like some of the hospitals have been reporting stronger volume trends, I think, HCA, on their call, said neonatal admissions were up 9%. Just wondering if you could help us bridge the gap in terms of birth trends at your host hospitals and what's going on, on the volume front.

Well, when compared to the prior year period, birth at our hospitals were up 27 basis points. So I don't -- I'm not sure where that 9% number -- that's a huge number for HCA. Not sure where that's coming from.

Right. Are you -- have anything changed in the competitive landscape or have you seen any changes in the dynamics on that front?

Can you expand a little bit more what you mean by the competitive landscape? I mean...

Are any of the smaller neonatal practices coming into your markets or host hospitals and getting any share, do you think?

No.

Okay. That's helpful. And then, on the acquisition front. You've talked a little bit about a third specialty. I guess, how -- what's the timing? Do you have any...

Well, you should see the looks I'm getting. Well, we are interested in moving forward. I can't tell you that it's going to be a month or 3 or 6. We are going to evaluate, as we have done in the past. Like I said before, everything is on the table. So we're looking, not only at hospital-based specialties, but also office-based ones. We are going to enter a business that makes sense more than anything else financially, and that we see growth opportunities in. And that helps us with other hospital relationships and those kinds of things. The last time I said I was going to enter the anesthesia business, we sort of led an onslaught of others who decided, "Me too," so I'm not doing that anymore.

I remember. That makes a lot of sense, so -- and then, going back to the -- Brian's question on maternal-fetal medicine, I guess. How much was that down? And what do you think is going on in terms of why maternal-fetal and pediatric cardiology is down?

Well, some of that has to do with just reimbursement for echocardiograms having gone down. So particularly on the cardiology side, they tried to cut the reimbursement for the echoes for the adult population. And while doing that, they also took our pediatrics population down, which they theoretically didn't intend to do but now, it's being harder to correct. So I think, a, when births went down, fewer patients were being referred from the general obstetricians to the MFMs, and b, the whole ultrasound reimbursement package has gone down.

Okay. That's helpful. And then, I found it interesting that you moved into Joliet, that's a nice-sized anesthesia acquisition. Hope you didn't take any offense to the reference to Notre Dame Football.

Our next question is from Ralph Giacobbe with Crédit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: I just wanted to go back to the pricing side. X parity, and you were sort of flattish this quarter despite some kind of pair mix benefit. When I look at guidance for next quarter, the parity benefit starts to close to fully comp in. So sort of your comfort level on that acceleration in pricing as we think about 3Q.

Yes, I mean, I think that again, yes, parity is lapping and we'll have a little bit more. I think, last year's third quarter was about $10 million or so that we recorded. But again, some of the things with the pricing are related to timing of them. And so we do continue to expect, not only that managed-care pricing, but again, we're encouraged there, Ralph, with the p-mix. And hopefully, that will -- that certainly was a factor in that guidance discussion related to pricing. Ralph Giacobbe - Crédit Suisse AG, Research Division: And when you say timing of things, is that like sort of one-time adjustments or incremental revenue that you typically get to sort of think about that gives you sort of comfort in the third quarter? Just trying to understand the timing.

Yes, I know. The timing means that maybe a contract that I would've negotiated in the first quarter gets delayed and moves to the third quarter. So we do look at what's on the table as it relates to what I was mentioning earlier on the work plans that we have and what's yet left to be negotiated. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, all right. Fair enough. And then, what are the average rate increases you're getting on the managed-care book?

So basically, we've said before, and I'm going to stick to that at the moment, that we're getting mid-single digits there. And again, we try to have those contracts be multi-year contracts that have escalators in them that are up. Of course, the escalators are south of that. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. And then, anything to call out in terms of reform in the quarter, I guess, maybe specifically on the anesthesiology side? And then, the general mix improvement that you talked about, was that specifically in NICU, or was that in both NICU and anesthesiology?

No, it was in both NICU and anesthesiology. Ralph Giacobbe - Crédit Suisse AG, Research Division: And on the reform side? Anything...

Yes, I haven't -- I mean, on the reform side, I really don't have any new news to report there other than, I think, the headline news that everybody is seeing. Again, for us, we continue to work on the parity initiatives, both at the state and federal levels. So that's basically more on that end as far as -- I don't know if you mean reform as it relates to are we seeing any changes because of people signing up to exchanges, is that more what you mean or... Ralph Giacobbe - Crédit Suisse AG, Research Division: Yes, just in -- I mean, I guess, that'd specifically be more on the anesthesiology side just in terms of whether you think that aided the quarter. I know it's probably a tough question for you guys in your seat. But if there's any way to measure that or if you thought that, that was helpful at all in the quarter?

You know what, I really haven't seen that, and as we talked to our folks, they really have not mentioned that to us, and I haven't really seen much of that. On the Pediatric side, the things that -- the products that we've seen on the exchange products really have had similar pricing to what we've seen for the same products that were not on the exchange. So that's basically what I've seen so far. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay, that's helpful. And just my last one, it sounds like there's some new ventures for you all. Some of them sound more, I guess, fee-based, is that fair? Like fee-based revenue that we should think about coming in. And I guess, as it relates to kind of disclosure going forward, granted that there's still small pieces and growing pieces, but will that be sort of separated out for us or is that just going to be sort of tossed into the sort of overall revenue?

So to the extent that it would be a material, we would have to disclose it separately, right? But again, it's -- you're right, it would be more fee-based. But at the moment, these items are not material. But if they were, we would certainly do it that way.

And next, go to Chris Rigg with Susquehanna Financial Group.

This is Josh on for Chris. I just have one quick question. It looks like the interest expense was almost $2.2 million in the quarter. Is that a good run rate to model for the back half of the year, or do you expect that to kind of go down as you delever?

Yes, so that was a -- yes, the result -- the biggest chunk of that is the outstanding. So it just depends on the timing of the acquisitions to where we would see that going up or down. As you know, we generate a lot of cash flow, so it's just the timing of the deal. So I don't know if it will go down because honestly, we do have a lot of deals, as Roger said, that are imminent, and so we we'll see what the timing of the close is on those.

Then, we'll go to Gary Lieberman with Wells Fargo.

This is Ryan Halsted on for Gary. Just wanted to go back to volumes. So you saw a decent sequential increase in same-store volume growth, as well as now guiding to a sequential increase. Any comments there just in terms of what kind of volume pickups you guys are seeing?

Well, I mean, as it relates -- I don't know if I understand your question. I mean, we continue to see volume increases. I mean, in the first quarter, we did talk about that we did feel, especially on the anesthesia side of the house, as well as on the office-based side that we did have some challenges because of weather. And so I do think for anesthesia, certainly that's come back. And so on NICU, we have been seeing positive trends, as Roger said earlier on the call, in the recent quarters and continue to just see favorability in that. So really other than that, Gary, I'm not sure if you're trying to get something else out of that answer.

Yes, I was. So a lot of other health care companies have been talking about maybe some improvement in local economies, maybe driving elective surgeries, and I was just curious if you guys are seeing any signs of that.

Well, I have Karl here, so I'll have him talk about that because I haven't really seen much of that.

Yes, from our volume standpoint, you would see a lot more of that in the outpatient surgeries. We're not seeing dramatic growth in that as compared to the inpatient, we're seeing pretty steady growth across all of it. So there's not a clear uptick in those outpatient procedures that would correlate with them being more elective procedures being done.

Okay. That's helpful. Maybe last question. Any updated thoughts on physicians? Are you seeing a decent pipeline of new hires? Any kind of commentary around mix of anesthetists versus anesthesiologists? Just be curious to see how sort of the physician community and all these concerns around shortages, if you guys are seeing any signs.

On the anesthesia side, we're not seeing any issues with the recruiting for anesthesiologists. I mean, clearly, it's market-by-market-based as well. But we're still being able to recruit physicians, as well as CRNAs to all our practices, so we haven't seen any changes to the dynamics that have been going on for the last several years.

We have no problem recruiting, hiring or maintaining our physicians.

Would you say your pipeline of new hires has improved or...

I guess, in general, I would say that we haven't had an issue before, and it continues to not be an issue. So it's not like we're having to search to find candidates. We've got a pretty steady pipeline of candidates coming through and filling in, in the practices that we're in.

And we have our own physician recruiting department that does all the sourcing, the recruiting, the negotiations. I mean, it's all -- that's all done in-house.

And we have a question from Dana Hambly with Stephens.

Vivian, I'm sorry, I missed it earlier. You said on the payment parity of the $15 million or so you're getting per quarter, how much of that was catch-up?

Oh, I don't -- I have that but I mean, most of that -- most payors now have started to pay, and so I would tell you that a lot of it is now current. But I don't really have that breakout because now they've started to pay us on a more regular basis.

Okay. No, I was just trying to -- I think you said earlier that the 20% you're getting, we should probably discount that a little bit on what you're currently collecting but...

Yes, yes, because there still is -- and certainly throughout the first parts of the year and last year, we had a lot of catch-up, right? And so you'll see hopefully less of that, as I've said before. And by the time we get to the fourth quarter, hopefully, most of it will be there, but there will -- there is certainly a piece of that, that is still retro.

Okay, okay. Are all states paying right now?

Yes.

Yes.

They are. Okay. And just last for me. I just got a breaking news alert, I'm not sure it's breaking news, but talking about interest surging on Medicare bundled payment initiatives, and I think you've answered this in the past, but just an update. Are you getting into any bundled payment pilots or any changes to any kind of payment structures?

,No.

No, we have seen some initiatives that are really more related again to quality initiatives that have some payment attachments to that, we've talked about those in the past. But as far as bundles, no, we really haven't seen that yet.

To the presenters, I have no further questions in queue.

Thank you. If there are no further questions, then I'll just thank you for participating this morning, and look forward to speaking with you next quarter.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.