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Q4 2022 Earnings-Transcript
Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer series. Instructions will be given at that time. And as a reminder, this call is being recorded. I’d now like to turn the call over to our host, Mr. Charles Lynch. Please go ahead, sir.
Charles Lynch: Thank you, operator. Good morning, everyone. I’ll quickly read our forward-looking statements, and then we’ll get into the call. Certain statements and information during this conference call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on assumptions and assessments made by Pediatrix’ management in light of their experience and assessment of historical risk €“ historical trends, current conditions, expected future developments and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today, and Pediatrix undertakes no duty to update or revise any such statements, whether as a result of new information, future events or otherwise.
Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company’s most recent annual report on Form 10-K, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including the sections entitled Risk Factors. In today’s remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning’s earnings press release, our quarterly reports on Form 10-Q and our annual report on Form 10-K and on our website at www.pediatrix.com. With that, I’ll turn the call to our Executive Chair, Mark Ordan.
Mark Ordan: Thanks, Charlie, and good morning, everyone. I’m here with Dr. Jim Swift, our Chief Executive Officer; and Marc Richards, our Chief Financial Officer. We announced in December my transition from CEO to Executive Chair; and Dr. Jim Swift’s move from COO to CEO. This has been a naturally smooth transition since we had worked so closely on virtually all issues. It also capped a year-long process to sharply reduce executive leadership and other people-related overhead costs, which has also enabled fully qualified and proven leaders to assume larger roles at Pediatrix. Over the course of 2022, we saw overall stable volumes and payer mix, both of which ended the year on a strong note. We reduced leverage and improved on our sector-leading financial position.
Our revenue cycle transition process, as we have reported, has been very difficult and remains a key operational priority. Within our fourth quarter results, the revenue headwinds caused by our RCM vendors delays in billing activities and extended AR persisted, but were largely offset by negotiated direct financial support provided by the vendor. Marc Richards will detail these offsetting factors in his discussion of the quarter. Since this poor performance persists today, just as in the latter part of 2022, we expect our vendor to provide all necessary support to repair this situation as they knew was necessary in Q4. We believe the plans we discussed on our last call to address the shortfall are the right ones, and Jim will detail where we are today with those plans.
Lastly, we continue to be overwhelmingly in network with constructive dialogue with payers in places where we’re not. We, along with our government relations team and outside advisors continue to work hard to help defend against improper rules applied to what we viewed as a fair and bipartisan No Surprises Act. Now I’ll turn the call over to our Chief Executive Officer, Jim Swift.
Jim Swift: Thanks, Marc, and good morning, everyone. I’m pleased to speak to you today as the CEO of Pediatrix, the company I joined almost 15 years ago. I’ve had the privilege of serving and expanding roles during my tenure here, which has allowed me the honor of working closely with our great position and clinical leaders, our operating team and, of course, our leadership team and Board of Directors. For many of you, I hope I’m also a familiar face and voice having participated in these calls as well as other events over the past several years, touching on our strategy and growth. This morning, I’m pleased to announce that following my appointment, we have named Dr. Curt Pickert, formerly our Chief Physician Executive as Chief Operating Officer, and Lee Wood, formerly our Senior Vice President of National Operations as Executive Vice President of National and Market Operations.
I want to congratulate Curt and Lee, both longstanding Pediatrix leaders in their new roles for our operating team. I’ll speak plainly about our outlook for 2023, which reflects the continued burden from our RCM transition activities. Mark Ordan has spoken during the past few years of our view that Pediatrix has fundamental earnings power, which we define as adjusted EBITDA of $250 million and above. We believe that we’re not for the shortfall from the RCM transition we would today be reaffirming this position for 2023. Mark Richards will give additional details underpinning our preliminary 2023 outlook, but at a high level, this outlook contemplates a similar headwind to the adjusted EBITDA that we experienced in 2022, related to our RCM transition activities or roughly $15 million.
The key difference is in 2022, we bore the brunt of that impact in the latter part of the year, while in 2023 it is far heavily weighted in the first half of the year, followed by expected improvements in the second half. Since last fall, we have added meaningful internal RCM staffing, some at a senior corporate level, more at a regional level, and in some instances at practice level. Our primary focus is to ensure full continuity throughout the RCM functions, particularly at the front end where we identify the most prominent root causes of documentation, and billing delays, avoidable non-aisles and other critical steps that have extended our AR cycle. Just as important, we’ve been able to isolate those areas where we’ve identified underperformance in order to validate that they are a deep gaps on the part of our and our vendor’s operations, and not driven by external forces.
To be clear, as of today, our overall RCM performance has not yet improved on a sustained basis. However, we have been able to demonstrate that additional staffing, properly deployed can correct the front end deficiencies we identified. In the areas we first targeted, we’ve seen performance improvement in the form of reduced backlogs, better connectivity through the step functions of the front end processes. Moving from these early positive steps to full sustained improvement at scale is taking time. But we believe we are on the right track and our vendor is committed to the increased operational support required to improve the process. As a result of this work, we are confident that we can enable a highly functional RCM infrastructure. As we and our vendor continue to push our improvement plans, our goal is that this progress translates to our reported results over the coming several quarters.
Turning from our focus on urgent efforts on revenue cycle, I’ll back up and speak at a higher level. I am enthusiastic about the opportunities we have to build on the core fundamental strengths of our organization, which deserves a mention. Demand for the services that our affiliated clinicians provide has been strong. For 2022, our same unit patient volume increased by approximately 2% highlighted by acceleration in the fourth quarter. Same unit burst across the hospitals where we provide services rose moderately for the year, despite a difficult comparison in 2021. We have successfully removed a major layer of executive level overhead as well in other targeted, and important to note, non-clinical areas. We don’t have the crystal ball on the ultimate effects of the No Surprises Act, but we do continue to be overwhelmingly in-network.
And as Mark mentioned, we are in constructive discussions to be back in network in certain instances where we are not in network today. We also continue to look closely at the labor market and possible challenges we may face. But volatility in our cost has been muted compared to other areas of healthcare. We have a strong balance sheet. We repaid substantially all of our borrowings on our revolving credit facility in the fourth quarter, and we began 2023 with a conservative and durable debt structure with low leverage, significant borrowing capacity and extended maturities following last year’s refinancings. We believe our hospital and clinician relationships are strong and combined with this financial strength offer us the opportunities for both organic and inorganic growth.
We are focused directly on these hospital relations and on a very close working relationship with our world-class affiliated clinicians. And most important, our mission, take great care of the patient. It’s a clear one. And the commitment to that mission spans our entire organization, both clinical and non-clinical. As a physician, I know firsthand that this is vital and it informs all of our decision making. Our passion for our patients, clinician, hospital partners, coupled with our adherence to strong and conservative business principles, gives us real confidence in turbulent times. This also provides foundation for care for growth. We are in promising discussions with a number of health systems on ways we can expand what we do. We believe there are opportunities for targeted, acquisitive growth in our core, and we continue to expand and refine our pediatric, primary and urgent care platforms.
As noted in our press release this morning, we believe that our outlook for the coming year represents a realistic achievable near-term financial profile for our company, and it is both my privilege and priority to build on that outlook as we look beyond 2023. To summarize, we have many strengths and many opportunities. We believe that once we can look back on our current RCM challenges, we can have a platform that’s stronger and more efficient than anything we could have done on our own. Working with Curt, Lee and our senior team alongside our affiliated clinicians and support team, I am confident and excited by what’s ahead. With that, I’ll turn the call over to Marc Richards.
Marc Richards: Thanks, Jim. Good morning, everyone. I’ll start with certain components of our fourth quarter results. Our same-unit volumes were strong and payer mix was stable. Within the pricing component of our same unit revenue, we detailed in our press release the impact of the funds received from the CARES program, which were significant in the prior year. Underlying RCM performance presented a similar headwind to what we discussed in Q3, but was largely offset by an advance against older AR provided by our RCM vendor. On the cost side, this incremental Q4 revenue largely flowed through variable comp within practice, salaries and benefits. And our malpractice expense was also elevated, which we view as specific to the quarter and not an ongoing trend.
As a result, adjusted EBITDA was within our expected range for the quarter. Turning to 2023, we expect net revenue of $2 billion to $2.1 billion and G&A expense as a percent of revenue should be comparable to 2022 or just under 12%. Our preliminary outlook for adjusted EBITDA of $235 million to $245 million contemplates a rough $15 million RCM headwind, which, as Jim discussed, is expected to be heavily weighted towards the first half of the year. For reference, we estimate that the headwinds resulting from our RCM transition activities totaled roughly $15 million to $20 million in adjusted EBITDA in 2022. In terms of our quarterly earnings progression, we anticipate that our first quarter adjusted EBITDA will represent 16% to 18% of full year adjusted EBITDA, which is largely due to the normal seasonality of our financial results but also to our outlook for the impact of ongoing RCM transition activities.
Finally, we do not anticipate any additional CARES funds in 2023, which in 2022 contributed $6.7 million in adjusted EBITDA, mostly in the first quarter of last year. Turning finally to our balance sheet. We were paid substantially all remaining revolver borrowings and ended the year with net debt of just under $640 million, leverage of 2.6x. With that, now I will turn the call back over to Jim.
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Jim Swift: Thank you, Marc. Operator, let’s now open up the call for questions.
Operator: Certainly. Thank you. It looks like we’ll go to Ryan Daniels with William Blair. Please go ahead.
Jack Senft: Hi, guys. This is Jack Senft on for Ryan Daniels. Just wanted to start off and touch on the margin expectations. Just kind of curious how we should be kind of thinking about margins heading into 2023, especially as it relates to the AR reserves. Just given that you kind of expect the headwinds to subside more in the second half, I just kind of wanted to make sure that your expectation €“ or what your expectations are for the second half of this year? And just kind of wanted to see if you’re on track to still kind of see the margins improve in the second half. Thank you.
Marc Richards: Hey, Jack, it’s Marc Richards. Good morning. I would expect margin trends in 2023 to continue very similar to what we saw in 2022, certainly with our expected ramp relative to our RCM transaction activities. We’d expect those to marginally improve towards the second half of the year. But entering into 2023, I’d expect similar margins as we saw in 2022.
Jack Senft: Okay. Awesome. Thank you. Just as a quick follow-up too, just kind of curious how the recovery efforts have trended this quarter and I think it was cumulative $20 million prior to this quarter. Before I know it seems that it was the recovery efforts were tad slower than you originally expected. And that this was an area that you were monitoring and addressing. So just kind of curious how those efforts have progressed and if the success rates have increased. Thanks.
Mark Ordan: Recovery efforts relative to our RCM activity.
Jack Senft: Yes, correct.
Mark Ordan: Yes. I’d say they remained relatively unchanged moving from the third quarter into the fourth quarter in terms of our core RCM activity.
Jack Senft: Okay. Awesome. Thank you. And then just a quick last question here. I’m just kind of curious how labor has trended this quarter and kind of what your expectations are for 2023? Thanks.
Mark Ordan: Yes. We’ve seen labor trends in the quarter with respect specifically to clinical compensation in the 5% range kind of quarter-over-quarter. Jim’s got some more details in terms of
Jim Swift: Yes. And a fair amount of that is related to our contract labor as we brought new programs on organic programs on in the last quarter. So again, we don’t see that necessarily as a trend going forward and we really have not seen material effects of the volatility as I stated.
Jack Senft: Awesome. Thanks, guys.
Operator: And next we can go to AJ Rice with Credit Suisse. Please go ahead.
AJ Rice: Hi everybody. Just because you mentioned a couple times in the prepared remarks, are you seeing any more activity on the part of payers to try to move you out of network and then go to arbitration? Or is it still steady state? I couldn’t really tell from the prepared remarks.
Jim Swift: Yes. AJ, this is Jim. No, it’s steady state. We really not €“ have not seen additional activity or change in behavior by payers where we are in network. And again, as stated, we’re working considerably right now with some of those out of network issues, and we have €“ we feel very strongly that we’re going to be successful, so no material changes.
AJ Rice: Okay. Usually, the last number calls the pediatric urgent care effort has been a topic of discussion and you didn’t really spend any time on that. Any update on what’s happening there?
Jim Swift: Yes. We’re continuing to open up locations in parts of the country in certain geographies, and we have a team of folks working on that inclusive of a new physician that we brought on Board who’s going to be leading our primary care initiatives with those clinics. So the activity continues.
AJ Rice: Okay. And then maybe my last one, you called out well, two expense items. I see €“ I think in a quarter a little step up in malpractice. I wondered if that was just a normal year-end true up, or is there anything else going on there? And then the incremental labor that’s been taken on to deal with the revenue cycle management issue, is that on your books, is that going to continue to be on your books or is that part of as well as getting the revenues right, but part of why the outlook improves in the back half the year that some of that will go away?
Mark Ordan: Hey, AJ, it’s Mark. With respect to the incremental staffing efforts that, that both we and our RCM vendor have made, some of that additional cost is will be borne by us and some of it will be borne by the vendor.
AJ Rice: Okay. And does that fade out at some point or is that a permanent step up on labor?
Mark Ordan: I’d say that remains unknown at this point.
AJ Rice: Okay. And then on your malpractice comment, anything there?
Mark Ordan: With respect to the spike in the fourth quarter, this is really related to normal year-end activity and settlements related to that activity.
AJ Rice: Okay. All right. Thanks.
Operator: And next we’ll go to Pito Chickering with Deutsche Bank. Please go ahead.
Pito Chickering: Yes. Good morning, guys. Thanks for taking my question. Just a follow-up to AJ’s questions there. You talked about making sure that your commercial payers are following proper rules for the No Surprise Act. I guess a couple questions here. What percent of our commercial cases are going to arbitration? Is your win ratio still 75%? And can you quantify the revenues loss in this case is? What the revenue contraction was in this case is?
Mark Ordan: Yes, I think from our standpoint, well, one thing on the IDR process, we feel that we have a very robust process for the claims that we submit. It’s a very small number of claims that we’ve entered into that process. And I would say that we’ve been largely successful in doing that. We’ve won over 80% of the time with our packet that’s submitted in the IDR. So we’re fairly confident and we think that sends a message to the payers by the way that they see €“ with that success rate that they’re going to move to have us come back in network. So I think, again, we’ve been largely successful there.
Pito Chickering: Okay. Second question on the transformational costs here, they spiked to almost $20 million in the fourth quarter. That’s a pretty big jump versus we haven’t seen at the level since 2020. We’re doing all the consulting fees. So can you give us details of what was in that number and what you assume for transformational cost for 2023?
Marc Richards: Sure. It’s Marc Richards again. That number represented exit costs associated with those executives that were terminated at the end of the year. There were a significant amount of executives in that pool, and going into 2023, we do not expect any transition in restructuring expenses.
Pito Chickering: Okay, great. And then last question here, just you looking at the net leverage ratio is 2.6. With EBITDA sort of flattish or down the last couple years. What’s the right leverage that ESB running at? And does this €“ does the leverage ratios on the 2023 EBITDA guidance or change how you look at acquisitions for next year? Thanks.
Marc Richards: No, I don’t think so. We’ve said in the past that we’re very comfortable in the three times range. Certainly, our leverage will move from quarter-to-quarter as we make draws on our credit facility. But I would say, as a general rule of thumb, we like three times.
Mark Ordan: And we also have plenty of cash flow in order to do transactions such as acquisitions. I will say, we’ve talked about in previous quarters that were being prudent with regard to No Surprises Act and how we look at targeted acquisitions and that kind of principle will continue through. We do think there’s opportunity, but we’ll be wise and conservative in that regard.
Pito Chickering: Great. Thanks so much.
Operator: And next we can go to Whit Mayo with SVB Securities. Please go ahead.
Whit Mayo: Thanks guys. You guys have made some material progress reducing G&A in €˜22 or 2022. I feel like you communicated previously that the target for 2022 was $250 million for G&A, and it came in around $2.30. I know there’s some natural inflation inside that number offset by whatever you took out. So I’m trying to kind of circle a number like what the permanent G&A savings that you found in 2022 and also is there another savings number that you’re targeting this year? Thanks.
Marc Richards: Hey, Whit, it’s Marc Richards. Yes, you are right. We made significant progress in reducing overhead throughout all of 2022. We think and as we indicated in our guidance for 2023, we think that a lot of that progress has been made and that €“ as a result, we’re probably looking at a similar G&A load in 2023 to that in 2022, in the sub-12 €“ 11.5% to 12% range of total revenue.
Whit Mayo: Okay. Okay. So there €“ no additional initiatives to further reduce that G&A this year? I feel like there was a number that I had in my head, maybe like a $13 million number that you had previously communicated.
Marc Richards: Well, we had savings over the course of 2022, which are permanent savings of over $25 million. An offset to that is obviously we pay fees to our RCM vendor and other things that hit the overhead line item. But the savings that we achieved over the course of the last €“ over the last year are permanent savings. And we €“ and they’re concentrated at the executive level and on the people side.
Whit Mayo: Okay, Got it. So $25 million is kind of the number that you took out of the organization that should be recurring going forward. Okay. That’s helpful. I’m a little confused on the malpractice comments. I’ve been looking at your 10-K, the end period malpractice costs were actually lower year-over-year. It was like $53 million versus $56 million last year, and there was another $4 million favorable prior year development. So I don’t know, Marc, can you maybe flush that out just a little bit more, maybe there was just something elevated in the fourth quarter, but not necessarily in the full year.
Marc Richards: Yes, that’s correct. So it was one event and we don’t see that going forward. There’s no pattern and we haven’t seen that in the past and we don’t anticipate that. But you never know in terms of malpractice, so that was just one event in the fourth quarter.
Whit Mayo: Okay. And one last one here, sorry, I’m still a little confused on this. It’s just the AR write down in the fourth quarter, I presume there was one and then R1 absorbed that for you. They made you whole. And what are you assuming in terms of perhaps a headwind in 2023?
Marc Richards: Well, in terms of the headwind, we’ve said that we expect the headwind in 2023 to be approximately $15-plus million and adjusted EBITDA related to continued rate erosion. Looking at the fourth quarter of 2022, our net patient service revenue of course reflects all the ins and outs related to write downs and the associated billings in the quarter. So that’s all contemplated both in the rate discussion and in what we saw in total revenue for the quarter. So I’m not sure, there’s no real direct write-off related to that. It’s just our revenue recognition relative to our aging policies.
Mark Ordan: In the fourth quarter, R1 back stopped, our vendor back stopped a portion of our receivables, and that was a one-time event, which directly supported our numbers because they realized that they had been very deficient coming into the fourth quarter.
Whit Mayo: Okay. Sorry, one last follow-up and I’ll get off. Sorry. With any of the AR that you’ve already previously written off, are you making any progress to collect any of that or are all of the initiatives focused on the bills going out the door today?
Marc Richards: A couple of things on that. Certainly there’s a lot of initiatives on the bills going out today. As I mentioned earlier, with respect to the revenue that we recognized in 2022, we believe any difference in bad debt expenses is appropriately recognized and therefore reflected in our P&L.
Whit Mayo: Okay. Thanks, guys.
Operator: And next we can go to Kevin Fischbeck with Bank of America. Please go ahead.
Kevin Fischbeck: Great. Thanks. Yes, I guess it’s still not 100% clear to me how this R1’s payment is working. Is it flowing through your revenue number or is it €“ where does it show up, I guess, in the P&L?
Marc Richards: It’s in revenue.
Kevin Fischbeck: Okay. So your pricing includes the R1 impact. So I’m just trying to think about like what a €“ what do you think ex-CARES, ex-R1, but with normal performance on collections? What do you think pricing would’ve looked like in the quarter?
Marc Richards: Down about 200 basis points.
Kevin Fischbeck: Down about 200 basis points,
Marc Richards: Ex those factors.
Kevin Fischbeck: Ex those factors, even though commercial was up in the quarter. So like, what else, I guess, on a mixed basis? So what else was causing a down 200 basis points?
Charles Lynch: Yes. Kevin, it’s Charlie. For the fourth quarter that’s predominantly the comparison of CARES dollars as they flowed through which was pretty significant in the fourth quarter of 2021. Digging through all of those variable pieces, whether it is the impact of the rev cycle process, the CARES dollars and the like, we’re still looking at an underlying price trend in the range of call it 1% to €“ between 1% and 2%. And that’s a function of normal pricing trends across managed care and governmental payers as well as, as I think you know, we account for our admin fee revenue €“ our contract and admin fee revenue within pricing. And that usually has some increase to it in the fourth quarter, it was fairly modest.
Kevin Fischbeck: Okay. So you think underlying pricing is 1% to 2%, is kind of a go forward way of thinking about it once this is all stabilized?
Jim Swift: Yes, we don’t see any reason for it to be different from that.
Kevin Fischbeck: And then just to understand, I could €“ just to go back to the other question that was asked before this, because when we think about companies that are go through these types of disruptions, I guess there’s two potential implications going forward. One is that you get back to the right run rate, and then the second one is that you collect on things that you didn’t collect. So there’s actually a period of outperformance, I guess, as you start collecting on old receivables from. Is that the right way to think about it? Or is the fact that R1s backstop things kind of taken away some of that catch up opportunity? I mean, is there €“ how should we be thinking about what this looks like when it’s, we get to the other side of it?
Marc Richards: I think our forecast is that we are going to get back to the right level over the coming quarters. And there may be some bump from additional collections, but in our forecast and the numbers that we’re forecasting, we are working hard as Jim detailed, to get back to a proper functioning process and get back to the levels that where we should be.
Kevin Fischbeck: Okay. And then just to try and round out this R1 payment dynamic, you guys mentioned that you’re putting extra costs into improved collection, some of which you’re taking, some of which they’re taking, and the $15 million includes those costs that you are undertaking. And that may or may not be permanent.
Jim Swift: No, that is solely related to our expectation of the flow through of revenue impact of the AR process, as we’ve talked about, the last few quarters, any kind of incremental costs that we’re incurring or believe we might incur on additional staffing is embedded within our outlook for G&A for this year, that sub 12% G&A that Marc referenced.
Marc Richards: But we’re still in discussions with our vendor, if there are additional labor costs that are needed on how we share those costs, because they stepped up properly and helped cover a lot of the costs that we incurred from additional labor in Q4. And we have talked to them about the need to continue that that bolstering by them for costs that we need to get back on track.
Kevin Fischbeck: Okay. And then just I’ll ask a clarification on a question that was asked earlier, I think you said you’re not seeing any change of behavior from payers that are in network here. Just want to make sure understand two things. One is, rate updates from payers in network are consistent, is what you’re saying that you’re not €“ they’re not trying to squeeze more out of you to stay in network. And then two, you say you’re overwhelmingly in network, has that percentage changed at all during the last couple of years? You could still be overwhelmingly, but have a go from 4% to 6%, so just want to make sure we’re not missing anything there.
Jim Swift: Yes, this is Jim. No it hasn’t changed. Again, we’ve had a few of the payers where we’ve been out of network and as I said, we’ve been very successful in the IDR process, and we have not seen a trend of payers coming to us to look to move us out network. It’s very stable.
Marc Richards: I’d say that there was a fear in the market over the last, say 18 months that, that payers would use this as a weapon. And we haven’t seen that. What we’ve seen is the normal proper discussions with payers about being in network and in many cases renewing in rates in line with what we’ve had in the past. So, if you’re asking relative to a big concern that everybody had, we say we have not seen that materialize as Jim said in his remarks, we don’t have a crystal ball about the future, but we continue to have constructive relationships. We have not had change in more out of network situations. And in fact, in some areas where we’ve been at a network, even though there are a few, we’re having very constructive dialogue.
What’s clear is that payers want us in network. We are the premier provider of these necessary services from mothers and babies. And I think people know that if you want to have subscribers, you want to have Pediatrix physicians and clinicians providing care.
Kevin Fischbeck: Okay. Great. Thank you.
Operator: And next we go to Rishi Parekh with JPMorgan. Please go ahead.
Rishi Parekh: How you doing? Thanks for taking my questions. One, going back on the NSA, I think you said that you’re winning 80% of your cases I believe, or I assume you’re winning at a rate that is above the QPA. So a couple of things. One, can you confirm that you are winning above the rate €“ above the QPA rate and what that multiple looks like? And then two, can you just give us an idea as to how many claims you’re running through arbitration and what the DSOs are on these claims?
Jim Swift: Yes, it’s Jim. Listen, we’re actually winning those well above the QPA. And we see that as a barometer in terms of our ability to contract back in network at relatively good rates. And the process €“ as everybody has heard, the process has been a bit disjointed. We, however, feel that we’ve had a great team and that our same vendor has been one of those people on that team. So the process of submitting the claims into the IDR has gone very smoothly for us.
Rishi Parekh: On that, has the R1 situation in any way affected your ability to collect on those claims?
Jim Swift: No, not at all. Actually that’s been a bright spot in the relationship.
Rishi Parekh: And then the TMA summary judgment with regards to the QPA, just curious as to how you guys think it will affect you?
Jim Swift: Well, I think, we all can look at the effect that they’re shutting down, the claims going in after February 6. We look for resolution to that issue and hopeful that there’ll be a more judicious view of what should be considered in the IDR process and not just the QPA. So we remain vigilant and we remain very positive that there’ll be an outcome there. But none of us can know HHS and CMS, what they’re going to do with that. So we’re waiting to hear following that court case.
Marc Richards: Right now claims can go into the IDR process, but they can’t come out. So it’s going to increase the backlog, which is very unfortunate. Fortunately for us, because we’re overwhelmingly in network, it doesn’t affect us the way it does many other people. But we certainly hope that the government clarifies the rules so the IDR process can restart. So this is the second time that the courts have said that the rulings have been inappropriate and don’t mirror the bipartisan legislation. But now there’s this stall, which is unfortunate. Again, fortunately for Pediatrix, we are overwhelmingly in network and we win. We have won overwhelmingly in the cases that have gone to arbitration. So I think it’s a €“ it is again a signal that if you look at all the factors that were in the bipartisan legislation, it favors a group like ours.
Rishi Parekh: And just the last question on the NSA, as it relates to the percentage that is out of network, can you just remind me of as to what that percentage is? And then I think you had stated earlier that you think that there’s a high probability that you could move some of that into an in network agreement, and I was hoping that maybe you could quantify of that amount that is out of network. Where do you think there’s a high probability or what is the amount that could actually move in network over the course of 2023?
Jim Swift: Yes. I think roughly we have about 5% where we’re out of network. And that’s kind of held traditionally along those lines over the last number of years. Obviously, anybody had the concern that with the NSA that and payer behavior that could get worse. To Marc’s point, where we are out of network, we feel very, very good about what we’re able to do with that. And again, we may be in a good position to be back in network.
Rishi Parekh: And just the last question though for 2023, can you just walk us through your capital allocation policies? Thank you.
Jim Swift: Sorry for that. This is Jim. Listen, I think what, again, as I referenced on the call is that we are going to be very careful about our strategic acquisitions and deployment of capital in that regard. I think we are with a balance sheet where it is. We have plenty of cash flow in order for us to do transactions. At this time, we’re coming off the heels of having the stock buyback. We thought that was an original allocation that we took in 2022. And right now, I think we again have the balance sheet to look at some acquisitions in our core areas that may be attractive. I will say that one of the behaviors we’ve seen change with groups is instead of us having to do prospecting and called groups we have people who have been reaching out to us about interest in being a part of pediatrics.
Operator: And, excuse me, next we can go to Tao Qiu with Stifel. Please go ahead.
Tao Qiu: Thank you. Good morning. Could you talk about the expectation in terms of potential impact on either payer mix shift or patient volume from Medicaid with determination that’s expected to start in the second quarter? And how much of that is baked into your guidance?
Charles Lynch: Hey, Tao. It’s Charlie. We haven’t given that a huge priority in our outlook. We tend in all the changes that have occurred whether it was additional support during the pandemic, anything going back a long time ago to some of the rules within the original Affordable Care Act. The nature of the services are affiliated physicians provide for expecting mothers and newborns, virtually I think it completely across a country has a higher eligibility threshold as a percent of poverty for Medicaid eligibility. So that has tended not to create any movement in our Medicaid mix as a part of our payer mix based on those changes. And indeed, we did not see that in any material fashion through the course of the pandemic.
Tao Qiu: Got you. And Ordan you called out the $15 million expected revenue having from R1, what was the level in fourth quarter? Could you kind of give us the cadence of the expectations through the next four quarters on the $15 million?
Mark Ordan: I think Marc referenced that in the fourth quarter. The impact embedded within our results, although it’s difficult to see in the fourth quarter was comparable to what we experienced in the third quarter of last year.
Marc Richards: And if you’re asking about 2023, as Mark said, we just €“ we think that the $15 million drag in 2023 will be largely in the first half of the year and ramp-up €“ and ramp-up as we approach the end of the second quarter, into the third and fourth quarter.
Tao Qiu: Okay, got you. Mostly in the first half. So then when we think about the DSO, when €“ where do you think that might stabilize in 2023 or once the R1 transitions complete? Thank you.
Mark Ordan: We don’t know. We saw positive movement in the DSO from the third and fourth quarter. But it is €“ it is a slow recovery to normal. So we would expect that once again probably waited towards the latter half of 2023 when we see our DSO come back in line.
Marc Richards: And we’ll continue to report on that in the coming quarters.
Tao Qiu: Yes. So when you talk about normal, right, are we talking about kind of pre-pandemic level DSO or do you expect it to be a little bit elevated?
Mark Ordan: Correct. Pre-pandemic level.
Tao Qiu: Okay. Thank you.
Operator: And next we have a follow up from Pito Chickering with Deutsche Bank. Please go ahead.
Pito Chickering: Hey guy’s thanks for taking this follow up. Just a quick one here. Excluding contract labor, what’s your practice dollars and benefits increase in fourth quarter?
Mark Ordan: Was right in the mid-single-digit, Pito. Jim referenced and we’ve given similar comments in the second and third quarters that underlying trend was a little bit elevated from what we expected. Certainly not to the level of volatility you’ve seen elsewhere, but somewhat elevated, primarily related to the standup of new practices on behalf of our hospital partners and the €“ some of the difficulties in those expansions, in new recruiting and the like and the need for locums and others as we get staffing, right.
Jim Swift: Yes. It’s not unusual in that time period because of the holidays that we have €“ to have additional staffing opportunities or challenges of people taking time off. So, that’s probably baked in there as well.
Pito Chickering: Okay. So actually I want to ask differently, excluding sort of the higher cost labor kind of in general what was your core labor inflating in the fourth quarter?
Mark Ordan: We still had the same kind of directional comment there, Peter, right? Kind of in that mid single digit range. And within our outlook for 2023 versus the historical norm, we’re looking at somewhat elevated but not in a great fashion.
Pito Chickering: Okay. So, like if I were sort of
Marc Richards: By mid single-digit, like 4% to 5%. Yes.
Pito Chickering: Okay. So to Kevin’s question, you sort normalized pricing sort of 1% to 2% labor in place, inflating either low single digits or mid single digits. Just, what makes sort of this margin start increasing in the 2024 and beyond? Is it the pricing gets better than 1% to 2%? Is it the labor comes down to like 1% to 2% or is it the amount of gene leverage you can get off of, the business in order to help negate that that negative yield spread?
Marc Richards: There is a volume component in there as well, which carries operating leverage when it’s positive. So that’s just one thing to keep in mind in that equation. Jim, I don’t know if you want to add further?
Jim Swift: No.
Pito Chickering: All right, great. Thanks so much.
Operator: And next we can go to Brian Tanquilut with Jefferies. Please go ahead.
Brian Tanquilut: Hey, good morning guys. Hey Jim, just yes, try and put on your former BizDev that on. You know, as I think about, obviously there’s a lot of focus here on rev cycle near term, but once you got past that, how are you thinking about, where your focus is from a growth perspective and what do you think will be kind of like a good normalized growth rate to be thinking about maybe once we get to 2024?
Jim Swift: Yes, I think, what we’ve focused on in the last number of years and that we reported on this is really around the build out of our organic growth team, which really paid often dividends in terms of, sourcing opportunities with our hospital partners and also sourcing opportunities internal to us that we’re all around ambulatory services. What we’ve seen, going forward now is that, and I mentioned on the call, really these relationships with the hospitals where we have had, hospitals reach out to us and instead of it being a, one program they’re looking for, there’s a suite of programs that they want us to build out around women and children. So, we always talk about the fact that we’re not a staffing company, we’re a program building company and those programs we’re in women and children’s.
So, we’ve seen a, significant uptick in that activity. When you look at the core areas, I think there’s a confluence of issues, coming down the pike, I think there’s succession issues and some of these practices on, in some of the hospitals where the hospitals are concerned about do they have the right people, as the population ages in the physician population. So, I think we stand ready both on an organic side, but I would also say on the inquisitive side, there’s opportunity for us in multiple specialties and in the core you have to remember, I think the core is going to be a big part of this when you talk about NICU, when you talk about MFM and we’re focused on that because that is really obviously key to what we do on the growth side, but I think it’s going to be pretty measured.
We’ll keep our powder dry if we need to in terms of, a big acquisition, but there’s something out there that is material to what we’re doing, we’re going to go after it.
Brian Tanquilut: Got it. And then I guess Mark, as I think about just seasonality and I know Q1 is always one of the issues here, but maybe if you can quantify for us how we should be thinking about payroll tax just for sequential modeling purposes.
Marc Richards: I mean, I would look at the first quarter of last year. We’d expect a similar load in the first quarter of 2023, which, which will tail off as those limits are met typically, towards the end of the first quarter. End of the second quarter.
Brian Tanquilut: Okay. Got it. All right, thank you.
Marc Richards: Okay,
Operator: And currently we have no further questions in queue.
Marc Richards: Thank you very much, operator. Thank you all for joining the call.
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