Pediatrix Medical Group, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Pediatrics Medical Group third quarter 2022 earnings conference call. At this time, your telephone lines are in a listen-only mode. Later, there will be an opportunity for questions and answers. If you would like to ask a question, please press 1, then 0 on your telephone keypad. You'll hear an indication that you've been placed into the queue, and you may remove yourself from that queue by repeating the 1, then 0 command. If you're using a speakerphone, please pick up your handset and make certain your phone is unmuted before pressing those buttons. As a reminder, your call today is being recorded. I'll now turn the conference call over to your host, Senior Vice President of Strategy and Finance, Charles Lynch. Please go ahead.

Thank you, Operator, and good morning, everyone. I will quickly read through our forward-looking statements and then turn the call over to our speakers. 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 pediatrics management in light of their experience and assessment of historical trends, current conditions, expected future developments, and other factors they believe to be appropriate. Any forward-looking statements made during this call are made as of today. and pediatrics 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.pediatrics.com. With that, I'll turn the call over to our CEO, Mark Ordham.

Thanks, Charlie, and good morning, everyone. Also with me today are Dr. Jim Swift, our Chief Operating Officer, and Mark Richards, our Chief Financial Officer. We're, of course, disappointed by our third quarter results. Compared to our internal forecast, revenue was off by approximately $22 million and adjusted EBITDA miss by approximately $19 million. Roughly half of this variance reflects muted operating results from a handful of factors, primarily related to neonatology volumes and payer mix. However, the largest component of the miss was directly from our outsourced billing and collection processes, which unfavorably impacted revenue and adjusted EBITDA by approximately $11 million and $9 million, respectively. Our actual cash generation was strong in the quarter and allowed us to pay down $60 million in debt and reduce our already conservative leverage ratio to 2.9 times. We are very pleased in this turbulent environment to have such a strong balance sheet, strong liquidity, and very low borrowing costs. As we discussed last quarter, the challenges we were experiencing with our revenue cycle transition to R1 were lessening, with collections activities accelerating, particularly in June. and the unfavorable impact to our second quarter results was about half of what we experienced in the first quarter. We believed that performance and results would continue to improve in the second half of the year, and our previously updated outlook for 2022 reflected this expectation. However, during the third quarter of 2022, as compared to the same period in the prior year, we saw an increased shortfall in billings and collections, such that the impact to our top line was more than twice the $5 million we reported for the second quarter. This impact comes in the form of increased allowances against our receivables, which flows through our income statement as lower reported revenue and which you can see in our earnings release as part of our pricing discussions. I want to be very clear that this negative impact is only about billing and collections and has nothing to do with payer behavior from the No Surprises Act. In total, our revenue cycle management transition has proved to be much more costly than we anticipated. Through the first nine months of this year, we estimate that this transition has negatively impacted our revenue by $25 to $30 million, and our adjusted EBITDA by $15 to $17 million versus our initial outlook on our February call. To be clear, of course, we've had offsetting savings in our GNA from our shift to a third-party provider, as was contemplated in that initial outlook. We have and are taking aggressive steps to address these revenue cycle challenges. We have undertaken a thorough review of our outsourced revenue cycle activities in direct coordination with our practices to determine precisely where weaknesses exist in the current outsource function. Due to the unique nature of our business, we are meaningfully expanding our in-house team with subject matter expertise very specific to the services we provide. We've worked with R1 to identify priority areas for this expansion, and with R1's financial support, we have already started adding a sizable, regionally positioned, dedicated team. Separate of the RCM steps I just detailed, we have completed a reduction in our overhead expenses at the corporate level, which we estimate will reduce our annual G&A expense by approximately $12 to $14 million, beginning here in the fourth quarter. Based on our results through September 30th and our expectation for the fourth quarter, we have updated our outlook of adjusted EBITDA for 2022 to a range of $240 to $245 million. You'll see that at the midpoint, this implies a significant sequential improvement in adjusted EBITDA versus the third quarter, which reflects our current expectations of both revenue and costs based on the steps we have taken and are taking. including the support provided by R1 and their impact on our fourth quarter results. Turning to the No Surprises Act, there has not been any significant activity on the part of the various administrative departments since they published their final rule in August. On payer behavior, we continue to be overwhelmingly in-network. We have heard more references to the final rule, and we've had payers discuss qualifying payment amounts which by their own admission compare specialists with generalists who don't even provide the same services. Since this miscalculation of the QPA was specifically pointed to in the August ruling, we will vigorously protect pediatrics from any intentional under-calculating of this number. My conversations with payers inform me that they are aware that the government is on to this mistake. In the instances where we're out of network, We have completed a number of arbitrations over the past month, and so far our results have been in our favor over 75% of the time. I'll now turn the call over to Dr. Jim Swift to discuss our core operating measures.