Pediatrix Medical Group, Inc.

$70 million of adjusted EBITDA for 2022. On a labor front, I'll share shortly how we'll be focused on ensuring that pediatrics continues to be the organization that people really want to be part of. We all know the challenging labor environment, and this has only deepened our commitment to our amazing clinical team and to our equally amazing support team. On payer relationships, we continue to have constructive discussions around the country including in many states where we've successfully renewed contracts in a fair manner and on schedule. Let me update you on our organizational priorities. I'll start with our people. As a non-physician leader, I'm constantly in awe of the dedication of all of our clinicians have to this company's mission, and I'm likewise confident that our dedication to physician leadership will always keep our organization focused on our highest priority, which is providing great patient care. To that end, we are establishing a Physician Executive Council represented by many of our specialties to enable our affiliated physicians to advance their skill and knowledge for the sake of patients. This group will meet directly with me to ensure my firsthand understanding of issues and opportunities on the minds of our affiliated clinicians. This is also an opportunity for them to have a far better understanding of our decision processes. Dr. Curt Pickard, our Executive Vice President of Clinical Services, is chair of this council, and Dr. Mack Henson will serve as an advisor to the group. On that note, Mack will be transitioning away from his role as president of our women's and children's organization on June 1st, and I want to personally thank him on behalf of the entire organization for all that he has done for the company. Mack has been an invaluable physician leader since he joined pediatrics in 2003, and given his experience and judgment, I'm pleased that in addition to advising our physician Executive Counsel, he will continue to remain as a senior advisor to me and the rest of the team here. Across our entire organization, ensuring that pediatrics is the place of choice for people to practice and to work is absolutely a priority for us in today's market. That's true within our affiliated practices, and it's equally true across all of our non-clinical support teams. A key reason our affiliated practices can be fully devoted to our patients is the work of an amazing group of support professionals in all areas of our operations. On our February earnings call, I talked about a number of steps we've taken, including our commitment to our ESG goals and ensuring that we are truly an equitable organization. Here again, I believe that my deep personal involvement and commitment will ensure that our efforts do not let up on behalf of our teams and that diversity and inclusion are truly in our core and just not a couple of two buzzwords. I also talked about the importance of a strong brand. And in March, we formally introduced our new pediatrics logo, which you'll now find throughout our website and which is being rolled out across our affiliated practices. Further to that, you'll recall that in 2020, we asked our shareholders for approval to rename the company as Pediatrics Medical Group, signifying a return to our core focus and in caring for women's and babies and children. This year, thanks to the great strides of our amazing marketing team, we are now in position to formally return to the Pediatrics name for our corporate entity as well. I'm excited to complete this full return to Pediatrics, which is a well-known and highly respected name nationwide, and will signify our commitment to be the employer of choice, a trusted partner to hospitals and clinicians across the country, and a public company that can meet the high standards of you, our shareholders. The Pediatrics name and brand is also integral to our growth, Following our acquisition earlier this year of a second urgent care clinical platform, Nightlight of Orlando, bringing us to 21 urgent care centers, we've begun the process of de novo development of pediatrics-branded primary and urgent care clinics in several of our key markets with the goal of opening new clinics before the end of this year. As I've said in the past, we'll also contemplate additional opportunistic acquisitions But I believe that these de novo development opportunities give us the chance to tailor the location, size, and layout of clinics exactly to our existing market footprint. Since this is still a new business area for pediatrics and has real estate as a key component to it, we've also added to our senior team a head of real estate who will play a key leadership role in our clinic development and report directly to Dr. Jim Swift, whose role within the company is also expanding. Building a presence of primary and urgent care clinics in our key markets also gives us opportunities to reinforce our brand, since these locations will carry the pediatrics name. Before I turn the call to Mark, I want to thank our people, the clinicians caring for their patients, the operators, and the myriad support teams that make pediatrics the special organization that we are. We continue to operate in a changing and challenging environment, but despite that, the dedication I see every day to our highest priority Our patience has never wavered. It's that dedication that motivates me and that gives me confidence that we can continue to succeed, grow, and serve all of our stakeholders well. Now I'll turn the call to Mark for additional financial details.

Thanks, Mark. Good morning, everyone. I'll provide some details on our quarterly results as they relate to our revenue cycle management transition process and then add to Mark's comments on our outlook to financial positions. Related to revenue cycle, there are two factors within that transition process that modestly impacted our first quarter revenue and financial results, which I would classify as primarily timing related. As you'll see in our balance sheet, our accounts receivable increased sequentially by roughly $16 million, which brought our DSOs to 59 days at March 31st versus 55 at December 31st. This reflects an increase in unbilled AR related to the transition to R1. We were not surprised directly by this extension since there was an expectation there would be some delay as R1 automated various functions that had previously been manual in nature. But it was modestly beyond our expectations as of quarter end. Based on our normal reserving practices for the aging of receivables, our Q1 revenue was slightly affected by this. However, we view this AR aging predominantly as a timing matter. We expect our DSOs to return to historically normal levels over the course of this year, and correspondingly, we also expect a historically normal collection of these amounts. But also related to our RCM transition activity, we also saw a slight uptick in our self-pay receivables, which are not managed by R1, but by other third-party vendors. For context, I'll point out that self-pay, which for us is true self-pay, typically represents only 1% to 2% of our total revenue. So it's a fairly nominal amount. That said, we saw a modest increase in these true self-pay balances, which, as you might imagine, carry a lower collection rate. This also had a modest impact on our revenue for the first quarter. Mednax utilizes several third-party vendors to manage these accounts separate from R1, and we are working closely with these vendors to first determine whether this is a temporary or ongoing shift and second, to ensure that we optimize the collectability of these accounts. Net-net, the combination of these two items are the primary pieces within the modest decline in our same unit pricing in Q1, which again, we believe is primarily related to the timing of our RCM transition to Q1. Offsetting these revenue items, our cost trends in G&A were favorable in Q1, primarily reflecting lower professional fees and the net savings in RCM expenses following our transition to R1. At the practice level, underlying salary trends remained at historically normal levels at our existing practices. All told, these modest variances from our internal expectations yielded adjusted EBITDA largely in line with our expectations, prior to the contribution from the CARES funds we received. As our first quarter results relate to our outlook of adjusted EBITDA for the year, as Mark noted, we're maintaining our underlying expectations for 2022 of revenue in the range of $2 billion and adjusted EBITDA of at least $270 million. Within that outlook, We expect our adjusted EBITDA for the second quarter to be roughly comparable to or slightly higher than the prior year's 66 million, with growth in adjusted EBITDA re-accelerating in the second half of the year. I'll close with a quick overview of our financial position. On March 31st, balance sheet reflects the refinancing of our capital structure that we completed during the quarter. with total borrowings of $799 million and only a modest amount of cash for both gross and net leverage of approximately three times on trailing adjusted EBITDA. Our debt structure is fairly evenly split between fixed and floating rate debt, and all of our borrowings under our revolving credit facility and term loan are prepayable. This refinancing significantly reduced our ongoing debt service costs. Based on our March 31 borrowings, we expect our quarterly interest expense to be approximately $8 million compared to $12 million in the first quarter of this year and $17 million in the fourth quarter of 2021. We also believe our current debt structure provides us with an efficient capital structure that offers optimal flexibility and liquidity for the foreseeable future. I'll turn the call back over to Mark.

Thanks, Mark. We're ready for any questions.

Cynthia, if you can open up the line for questions, we'd appreciate it.

Certainly, and ladies and gentlemen, if you wish to ask a question, please press 1 and then 0. You will hear an acknowledgement tone. You may remove yourself from queue by pressing the same 1-0 command. Once again, for any questions or comments, press 1 and then 0. And one moment, please. And we will go to the line of Tao Key with CIFL. And your line is open.

Thank you. Hi, good morning. You have taken the opportunity to refinance the debt before. The rate moved much higher. I'm wondering if you have seen any changes in the acquisition market or your pipeline, whether the costs of capital have increased. And also maybe give us an update on, you know, kind of how your year-to-date acquisitions and NOVA activities track relative to your expectations.

Well, we've seen some change in pricing in the acquisition pipeline. Given the uncertainties that are still out there on acquisitions on pricing relative to the surprise billing legislation. We've been a little bit more cautious to take a stab because we want to see how things level out a little bit. We do think that all of this dislocation will provide opportunities for us, and our team is working on those now. I don't know, Jim, if there's anything you want to add to that.

I just think there continues to be interest among the different subspecialties and primary care specialties in the acquisition market.

What about transaction volume? Has that been affected by the cost of capital?

Only slightly. As we said on our last call, our focus has been on the primary and urgent care side. So that's where we've seen growth and it's been very helpful and we want to digest that properly. But we foresee a continuing flow of transactions and I'd also point to the areas which are also of key interest to us, which is working with our major hospital systems to look at areas where we can fill in and be better and even fuller partners to them. And that's, I would say, a very big thrust of what we're doing right now.

And on the labor front, I know that you mentioned that labor costs remain at historical levels, but that kind of stands in contrast with what we see on the hospital side, where they're seeing accelerating labor costs increases. I'm wondering what's your outlook on the position salary and benefits growth for the rest of the year? Do you expect that to accelerate from here? Would you see that to be relatively stable?

We're not forecasting any material difference. I would say we're working harder than ever to recruit and retain people. And I think It wasn't – I certainly didn't mean it as just fluff some of the comments that I made. I think that this is a time when our recruiting team and our whole organization just has to double down. We as executives have to double down our own efforts personally to attract people to the organization. I mentioned the Physician Executive Council and the work that Dr. Pickard does, making sure that there's such a close alignment between the organization and our key clinicians so that people – really feel this is the home for them and they want others to join us here. I think that that's something that we're really doing quite well. In our human resources department, we have a terrific recruiting team. And as we saw the wind shifting, we added to that team since that's really part of the heart of what we do. So we're not forecasting anything materially different. except that we're working materially harder to make sure that we keep things on track.

Okay. Appreciate it, Connor. Thank you for taking my questions. Thank you. Thanks, Steph.

Thank you. Next, we will go to the line of A.J. Rice with Credit Suisse, and your line is open.

Hi. Thanks, everyone. First, maybe just to ask about your discussions with managed care, Any changes? Obviously, people are focused on whether there will be any impact from surprise billing. Any updated thoughts on pricing terms of arrangements that you're seeing versus – and also any move to going out of network on the part of payers?

Well, one of the reasons that we feel good about our 270 number, AJ, is that we haven't seen – a material shift. We have had, as I mentioned, very good dialogue with all of our major payers. We've had renewals on schedule and in line with our expectations. So there's been a cross-current of things, but certainly not a wave in a negative direction that people had feared. Now, I can speculate that after the Texas Medical Association ruling and the reaction from the government to say that they'll get back and think about where they're going to be. We had hoped that there would be clarity by April of this year, and I think that that was what many people expected, and the latest they've said is there'll be clarity by early summer, so I would say until there's clarity, everybody out there is in a little bit of limbo. Having said that, during this time, I would think, you know, I've read everything I can read. I think people realize that the the government is being very thoughtful about what they've done and what would be the right way to do things. And I think we feel at least modestly more comfortable, but we'll have to wait and see. So until we learn further, things seem to be moving along okay.

Okay. And maybe a follow-up question. You mentioned that you're making a push toward health systems to try to you know, see what you can do there. I know it's been a while since you announced the Memorial deal. That was a big deal. Do you think the pandemic has sort of slowed hospitals being willing to discuss potential making changes of significance like NICU management or whatever? And now that the pandemic seems to be subsiding a bit, are those discussions picking up? Is that part of what your push is about or? is it pretty much status quo?

Hey, Jay, this is Jim. Actually, we're seeing more activity with the health systems and what they perceive as their needs, and I think that's what we're trying to fill. What we see is both on the inpatient side, it's not accelerating from the standpoint of them looking at different opportunities. I think what they're really looking at is how do we support them on the ambulatory side with some of these subspecialties that really you know, lead to being able to manage patients on the inpatient arena. So our engagement at a national level has been very good with the large health systems, and on a local level, I would characterize it, you know, as a strong relationship that we're trying to build on to look at all the services, both inpatient and ambulatory.

Okay, great. Thanks a lot. Thank you.

Thank you. Next, we will go to the line of Ryan Daniels. with William Blair, and your line is open. And Ryan, please check your mute button.

Can you hear me now? Yes, we can. Please go ahead. Okay, sorry about that. Hi, Nick Speakout on for Ryan. Thanks for taking the question. I guess just to start on the inflationary front, just wondering if there's any other areas where that is kind of likely, those pressures are likely to show up I guess, outside of the typical kind of wage inflation?

Hey, Nick, it's Charlie. As I think about that throughout our P&L, I think you can imagine the answer is going to be that there's always the possibility that that can show itself virtually anywhere, just based on what you and we all have seen on the labor front, supply chain front, whatever the case may be. You know, in real time, our experience, as you can see, in the first quarter has been pretty favorable. As Mark Richards mentioned, at the practice level, as we look at underlying salary trends, and I'll add, you know, to date so far this year, looking at underlying turnover trends, we're seeing historically normal activity. in our GNA, our corporate and non-clinical functions, we also have, at least in a timely fashion, the benefit of all the changes that we've made over the past year, which have afforded us some good opportunity for savings, regardless of that inflationary environment. So I think that's helped us insulate us from a lot of those outside forces. But it doesn't mean that they're not there. We've just had some pretty good opportunities to work against them.

Got you. Thanks. And then kind of on that savings front, I think last quarter you mentioned that the last component of the R1 RCM transition was on the ambulatory front end functions. I think you targeted, you know, mid to late 2022 to kind of see, you know, the benefits of that. Is that still, you know, the target and how are we on that front?

Hey, Nick, it's Mark Richards. I can speak to that for you. Yeah, the ambulatory piece is still slated towards the tail end of this year, and that's still within our project plan.

Got you. Thanks. And then I guess just one last click on the BRAVE integration. I think last quarter you mentioned it should take a couple more months. Is that pretty much fully completed by now?

Well, the Brave Integration, that's a technology company that we have a relationship with through an investment we made, and we're working with them now on their EHR and technical platform for our digital front door. So we feel good about where we are and the status of that, and obviously we're working with them in concert with some of the ambulatory pediatric primary urgent care rollout that we're doing, so that relationship is working well.

Just to clarify on that, Nick, the relationship with Brave is an investment that we have in that organization, so it was not an outright acquisition. For us, the opportunities it brings us are just what Jim brought up. It's the access and availability of the investments that they have made in a pretty advanced IT and operating platform to support primary urgent care clinics, and that's where our focus is.

I would also add, you know, they have a terrific team and culture, and there's a real partnership that I don't think you'd find in most investor-investment relationships, which has been very beneficial for us.

Great, yeah. So just kind of on the, like, the efficiencies that you're gaining from that kind of partnership, are you kind of mostly experiencing the majority of those efficiencies you kind of expect with that?

No, I think that's still increasing as we speak. As we both transition clinics to new locations and open new clinics, I think that's when we'll feel the full effect of it.

Okay, great. Thanks, guys. Thanks, Nick.

Thank you. Our next question comes from the line of Whit Mayles. with SVB Securities. And your line is open.

Hey, can you hear me? I just heard something funny. We do. Okay, cool. Hey, on the reserving methodology, I didn't really think you guys added higher reserves until they age out more than 90 days, maybe 180 days. So I'm just trying to wonder which receivable category this was. Was this related to receivables in this quarter or was this something that's more you know, 90, 100, even further out, just maybe help me understand, you know, the timing of the age out.

Hey, Whit, it's Mark Richards. How you doing? You know, it's a little bit of both. And you see the age out in the DSO. Certainly, I don't want to get into the intricacies of our accounting policies, but every day matters from that perspective. And it is more or less a cumulative view as those receivables age and go through the pipeline.

So just to be clear, so is the reserving policy like if we go from, 30 to 90, 60 to 90, whatever it is, every time you go into that next bucket, automatically, 100% of the time, you apply a higher reserve against that receivable. I would think that there would be some exceptions here, given that it seems like there's timing and this manual automation. So I guess I'm trying to make sure I understand the methodology. I know you said you didn't want to talk about it, but it might be helpful.

Well, no, I mean, that's a fair point. Yes, we do our... history and our reserving methodology is built off of that history. And, and, you know, absent, absolutely compelling information to the contrary, we wouldn't, we wouldn't change that methodology, you know, despite the fact that we are seeing kind of a, a one time, uh, event here at Mednax transitioning, uh, our RCM function. So I would say we need to prove out the efficacy of all this in the coming months.

If I look at the balance sheet allowance, it was 79%, I think. It used to be 78%. I mean, just simplistically, that 1% would imply a $15 million impact against the gross AR level. Is that the right way to think of the revenue impact, Mark? And does this actually, should we think of this reversing itself?

That's directionally right.

I'd say that number's probably a little high, but directionally, that's certainly a good way to think about it. So if there was, let's say, a minus $10 million, just to make a number up for the sake of this argument, in the first quarter, if all things play out, do you get that $10 million back as a good guy in the next few quarters?

Yeah. Yeah. I mean, that's the timing premise here, that despite the fact that receivables have aged beyond our normal kind of aging policy, those are fully reserved. And as those receivables are collected in the future, there's the efficacy of the process. So, yes, that's the timing component.

Okay, and maybe one last one here just on this topic. Can you just go into a little bit more detail about this manual versus automated issue? I'm just trying to visualize and understand exactly what it is, and also if you maybe, are payers turning back in on any additional claim edits? I mean, we're hearing, you know, some things. I'm just trying to you know, understand exactly the root cause of this. I mean, I think that the numbers are fairly small, I guess, in the grand scheme of things, but I appreciate it.

Yeah, I mean, they are. They are. And, of course, you know, part of the reason we went with R1 was due to their technology and the investments they made into automated business intelligence that, of course, we didn't have. It's kind of that simple.

But this is not about a change in payer behavior.

Right. Okay, well, I'll just hop back in the queue. Thanks, guys. Thanks, Wade.

Thank you. Next, we will go to the line of Kevin Fishbeck with Bank of America, and your line is open.

Great, thanks. Maybe just to follow up on that, can you give your sense of what core pricing was, X of CARES money and X of RCM issues?

Yeah, Kevin, we didn't see any meaningful variances in there from what we've typically experienced over the past several years. And to repeat some comments that I've made in the past around that, our normal experience on just underlying pricing without the distortions of pair mix items like this has generally been in this kind of 1% to 2% range. driven by normal managed care rate change, meaning escalators and the like, typically offset somewhat by Medicaid pricing. So those are the core drivers in there. And then, as you know, another component within our calculation of same unit pricing is correct in admin fees, which, again, for this quarter were, you know, up, somewhat, but not in a very meaningful way on a same-unit basis. So those are the pieces I'd say that, you know, this quarter, absent some of these distortions and variances, was historically normal.

Okay. And then when we think about the RCM issues, you mentioned the two, you know, how should we think about the magnitude of the two? Is it kind of like R1 is a bigger of the two? Is it two-thirds, one-third? Or how should we think about

I'd probably think of it more of a half and half.

Okay. And then it sounds like on the self-pay side, you believe that it's a temporary issue, but it also sounds like you're still kind of working with your vendors to understand what drove it. I guess what at this point makes you think that it's temporary if you're still doing that work?

Well, it was really just a phenomenon in a – in the first quarter in a flip, you know, with, uh, our, uh, our one transition that leads us to pause and dig deeper, uh, on that.

Okay. And then, um, just maybe the last question then, as far as the price, I think last quarter, you kind of said that your discussions with managed care were a little bit mixed, that you had some contracts going, uh, normally at higher rates. So I'm waiting to see how things settle out. It sounds like this quarter, uh, It sounds like you're saying things are happening on time. So is that a change? Are companies looking to, you know, just kind of move forward, or are there still kind of some still taking that wait-and-see approach and maybe more than normal will renew in the back half?

Overwhelmingly, we're seeing companies wanting to renew and not putting things off. We have enjoyed being overwhelmingly networked, and we continue to. And our providers – clearly continue to want to be in the network. So we are more people today than we feared we might be.

Great. Thank you.

Thank you. And a final reminder, if you have any questions or comments, press 1 and then 0. Again, 1 and then 0 for any questions or comments. And one moment, please. And allowing a few moments, I'm showing no questions in queue. Please continue.

If there are no questions, we are set for this morning. Thank you all for your understanding and support. And reach out to us if we can be of further assistance. And have a great and optimistic day.

Thank you very much. And ladies and gentlemen, that does conclude your conference call for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.