Q4 2022 Pediatrix Medical Group Inc Earnings Call
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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 serious.
Scott will be given at that time, if you should require assistance during the call. You can press Star then zero and I was reminded this call is being recorded.
I'd like to turn the call over to our host Mr. Charles Lynch. Please go ahead Sir.
Thank you operator, good morning, everyone I'll quickly read our forward looking statements and then we will 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 1095.
These forward looking statements are based on assumptions and assessments made by pediatrics as 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 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 Dot pediatrics Dot com.
With that I will turn the call to our executive Chair Mark Gordon.
Thanks, Charlie and good morning, everyone I'm here with Dr. Jim Swift, our Chief Executive Officer, and Mark Richards, Our Chief Financial Officer, We announced in December My transition from CEO to executive Chair and Dr. Jim Swift 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 is also enabled fully qualified and proven leaders to assume larger roles at pediatrics.
Over the course of 2022, we saw overall stable volumes and Payor 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.
Persisted, but were largely offset by negotiated direct financial support provided by the vendor.
<unk> will detail these offsetting factors in his discussion of the quarter.
Since this poor performance persist today, just as in the latter part of 2022, we expect our vendor to provide all the necessary support to repair the situation as they knew was necessary in Q4.
We believe the plans we discussed on our last call to address this 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 advisers continue to work hard to help defend against improper rules apply to what we viewed as a fair and bipartisan no surprises that I will turn.
The call over to our Chief Executive Officer, Jim Swift, Thanks, Mark and good morning, everyone. I am pleased to speak to you today as the CEO of Pediatrics 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 am 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 am pleased to announce that following my appointment we have named Dr. Curt Picker, formerly our chief physician.
Decorative as Chief operating Officer, and Lee would formerly our senior Vice President of National operations, as executive Vice President of National and market operations.
I want to congratulate Kurt and Lee both long standing pediatrics 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 or Dan has spoken during the past few years of our view that pediatrics has fundamental earnings power, which we define as adjusted EBITDA of $250 million and above we believe that were it not for the shortfall.
The <unk> 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 EBIT that we experienced in 2022 related to our RCM transition activities or roughly $15 million.
The key differences in 2022, we bore the brunt of that impact in the latter part of the year, while in 2023 as 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 of the senior corporate level more of a regional level and in some in.
As is our 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 dot aisles and other critical steps that are extended or a cycle.
Just as important we've been able to isolate those areas, where we've identified underperformance in order to validate that they are indeed gaps on the part of our at our vendors 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 the areas. We first targeted we've seen performance improvement in the form of reduced backlogs better productivity through the step functions of the front end processes moving from these early positive steps to full.
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 a reported results over the coming several quarters.
Turning from our focus and urgent.
Urgent efforts on revenue cycle.
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 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 gross rose moderately.
For the year. Despite a difficult comparison in 2021, we have successfully removed a major layer of executive level overhead as well and other targeted and important to note non clinical areas.
We don't have a crystal ball on the ultimate effects of the notes 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 network. Today. We also continue to look closely at the labor market and possible challenges, we may face, but volatility.
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 begin 2023 with a conservative and durable debt structure with low leverage significant borrowing capacity and extended maturities falling 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 a very close working relationship with our world class.
Ciliated clinicians.
And most important our mission take.
Take great care of the patients it is 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 a foundation of care careful 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 platform.
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 is stronger and more efficient than anything we could have done on our own working with Kurt Lee and our senior team alongside of our affiliated clinicians and support team I am <unk>.
<unk> and excited by what's ahead with that I will turn the call over to Mark 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 on 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.
It was largely offset by an advance against older are provided by our RCM vendor.
On the cost side, this incremental Q4 revenue largely flowed through or 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% to $2 1 billion and G&A expense as a percent of revenue should be comparable to 22 were just under 12%.
Our preliminary outlook for adjusted EBITDA of $235 to 245 million contemplates a rough $15 million of 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 and 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 <unk>.
Impact of ongoing RCM transition activities.
Finally, we do not anticipate any additional cares funds in 'twenty three.
In 2022 contributed $6 $7 million and adjusted EBITDA, mostly in the first quarter of last year.
Yes.
Turning finally to our balance sheet, we repaid substantially all remaining revolver revolver borrowings and ended the year with net debt of just under 640 million leverage of two six times.
With that now I will turn the call back over to Jim. Thank.
Thank you Marc operator, let's now open up the call for questions certainly thank you ladies and gentlemen, if you do wish to ask a question. Please press one and then zero on your telephone keypad you can withdraw your question at any time by repeating the one zero command and if you're using a speaker phone. Please pick up the handset before pressing those numbers. Once again, if you have a question you may press.
One zero at this time.
Just one moment here.
Okay.
And it looks like we'll go to Ryan Daniels with William Blair. Please go ahead.
Hey, guys. This is Jackson on for Ryan Daniels, just wanted to start off and touch on the margin expectation just kind of curious how we should be kind of thinking about margins heading into 2023, especially as it relates to the AAR reserves.
Just given that you kind of expect the headwinds to subside more in the second half and 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.
Hey, Jack it's Mark Richard Good morning.
I would expect margin trends in 'twenty three.
To continue very similar to what we saw in 'twenty two.
Certainly with our expected ramp relative to our RCM transaction activities, we would expect those to marginally improve towards the second half of the year, but entering into 'twenty three I would expect similar margins.
As we saw in 2002.
Okay Awesome. Thank you just as a quick follow up to just kind of curious how the recovery efforts have trended this quarter.
It was accumulative $20 million prior to this quarter.
Before.
I know it seemed that it was the recovery efforts were 10 slower than you originally expected and that this is an area that you were monitoring and addressing so just kind of curious how those efforts have progressed and the success rates of increase thanks.
Recovery efforts relative to our RCM activities.
Yes, correct.
Yes, I'd say they remained relatively unchanged moving from the third quarter ended the fourth quarter in terms of our core RCM activity.
Okay Awesome. Thank you and then just a quick last question here I am just kind of curious how labor has trended this quarter and kind of what your expectations are for 2023.
Yeah, we've seen.
Labor trends in the quarter with respect specifically to clinical compensation in the 5% range kind of quarter over quarter. Jim has got some more details in terms of 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've stated.
Awesome. Thanks, guys.
And next we go to a J rice with credit Suisse. Please go ahead.
Hi, everybody.
Just because you mentioned a couple of times in the prepared remarks are you seeing any more activity on the part of payers to try to.
Moving out of that work and then and then go to arbitration or is it still steady state I couldn't really tell from the prepared remarks.
Hey, Jay This is Jim no at a 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 can certainly 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.
Okay.
<unk>.
Usually.
The last number of calls the pediatric urgent care effort has been on.
Topic of discussion and you didn't really spend any time on that.
Data on what's happening there.
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 is going to be leading our primary care initiatives with those clinics. So the activity continues.
Okay, and then maybe my last one you called out two.
Two expense items I think in the quarter.
A little step up of 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 as that.
Is that on your books is that going to continue to be on your books or is that part of.
As well as getting revenues right, but part of why the outlook improves in the back half of the year that some of that will go away.
Hey, Jay its Marc with respect to the incremental staffing efforts 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.
Okay and does that paid out at some point or is that a permanent step up on labor.
I would say that remains unknown unknown at this point.
Okay, and then on your malpractice comment anything there.
Okay.
With respect to the Spike in the course of the fourth quarter. This this is really related to normal year end activity and settlements related to that activity.
Okay alright. Thanks.
And next we'll go to <unk> Chickering with Deutsche Bank. Please go ahead.
Yes. Good morning, guys. Thanks for taking my question just a follow up to <unk> question there.
You talked about make sure that your commercial payers are following proper rules for the no surprise Act.
Just a couple of questions here what percent of court cases are going to arbitration.
<unk> ratio is still 75% and can you quantify the revenue loss in these cases.
What the revenue contraction was in those cases.
Okay.
Yes, I think from our standpoint.
Standpoint, one thing on the idea of process, we feel that we have a very robust process.
For the claims that we submit.
And it's a very small number of claims that we've entered into that process and I would say that we have been.
Largely successful in doing that we've won over 80% of the time with our packet that submitted in the <unk>. So we're fairly confident and we think that sends a message to the payers by the way.
That they see that.
With that success rate that theyre going to move to to have us come back in network. So I think again, we've been largely successful there.
Yeah.
Okay.
Second question on the crash.
Operational costs here are they spiked almost $20 million in the fourth quarter.
That's a pretty big jump versus we have seen this level since 2020, we're doing all the consulting fee. So can you give us details of sort of what was in that number and what you assume for you guys.
Operational costs for 2023.
Sure, It's Mark Richards again.
That number represented exit costs associated with those executives.
Were terminated at the end of the year.
There were a significant amount of executives in that pool.
And going into 'twenty, three we do not expect any transition and restructuring expenses.
Okay, Great and then last question here just looking at the <unk>.
Net leverage ratio is two six.
EBITDA sort of flat.
Flat ish or down last couple of years.
What's the right leverage that you guys will be running out and does this does it de leverage ratios on the 23.
EBITDA guidance or change how you look at acquisitions for next year. Thanks.
No I don't think so we've said in the past.
<unk>.
We're very comfortable in the three times range.
Certainly.
Our leverage will move from quarter to quarter as we.
Draws on our credit facility, but I would say as a general rule of thumb, we like three times.
And we also have plenty of cash flow in order to do <unk>.
Actions such as acquisitions I will say, we've talked about in previous quarters that we're being prudent with regard to no surprise that in how we look at targeted acquisition and that kind of principle will continue through we do think there is opportunity, but we'll be wise in <unk>.
Conservative in that regard.
Great. Thanks, so much.
Yeah.
And next we go to Whit Mayo with SBB SBB Securities. Please go ahead.
Thanks, guys.
I mean, you guys have made some material progress, reducing G&A and <unk>.
Two our 2022.
I feel like you've communicated previously that the target for 2022 was $250 million for G&A and it came in around 230, I know theres some natural inflation inside that number offset by whatever you took out.
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 are targeting this year. Thanks.
Hey, it's Mark Richards.
Yes, you are right, we made significant progress in reducing overhead throughout all of 'twenty.
Two.
We think and as we indicated in our guidance for 'twenty three we think that.
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 2003 to that in 2002.
In the sub 12, 11, 5% to 12% range of total revenue.
Okay.
Okay. So there.
No additional initiatives to.
Further reduce debt 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.
Well, we had we had savings over the course of 'twenty two winter permanent savings of over of over $25 million.
An offset to that is obviously, we pay we pay fees to RCM vendor and other things that hit the overhead line item.
But but the savings that we achieved over the course of the last over the last year are permanent savings.
Concentrate at the executive level and on the people side. Okay got it so $25 million is the number that you took out of the organization that should be.
Recurring going going forward, Okay. That's that's.
That's helpful.
I'm a little confused on the malpractice comments I mean looking at your 10-K.
In period malpractice costs were actually lower year over year. It was like $53 million versus 56 last year and there was another $4 million favorable.
Prior year development.
So I don't know Mark can you maybe flesh that out just a little bit more maybe there was just something elevated in the fourth quarter, but not necessarily in the full year.
Yes, that's correct. So it was one event and we don't see that going forward. There is no pattern and we haven't seen that in the past and we don't anticipate that because you never know in terms of malpractice. So that was just one event in the fourth quarter. Okay. And then one last one here sorry, I'm still a little confused on this is just a.
A write down in the fourth quarter I presume there was one and then our one absorbed that for you. They made you whole.
And what are you assuming in terms of perhaps up a headwind in 2023.
Well in terms of a headwind.
We've said that we expect a headwind in 'twenty three to be approximately $15 million and adjusted EBITDA related to <unk>.
Continued rate erosion.
Looking at the fourth quarter.
Of 22.
Our net patient service revenue of course reflects all the ins and outs.
Related to write downs in the associated billings in the quarter. So that's all contemplated both both in the rate discussion.
And in.
<unk>.
And then what we saw in.
In total revenue for the quarter, so im not sure Theres no real direct write off related to that it's just our revenue recognition.
Relative to our aging policies and.
In the fourth quarter, our one backstop.
On the <unk>.
A portion of our receivables.
That was a onetime event, which would directly supported.
Our numbers because they realize that they had been very deficient.
Coming into the fourth quarter.
Okay, sorry, one last follow up.
Oh, sorry is just.
With any of the AAR that you've already previously written off or are you, making any progress to collect any of that or all of the initiatives focused on the bills going out the door today.
A couple of things on that certainly there is a lot of initiatives on the.
Bill is going out the day as I mentioned earlier with respect to the revenue that we recognized in 2002, we believe any any difference in bad debt expenses is appropriately recognized and therefore reflected in our P&L.
Okay. Thanks, guys.
And next we go to Kevin Fischbeck with Bank of America. Please go ahead.
Okay.
Great. Thanks.
Yes, I guess, it's still not clear to me how the.
Our one.
Payment is working is it is it flowing through your revenue number or where does it show up I guess in the P&L.
It's in revenue.
Okay. So youre pricing includes the <unk> impact I, just don't think about like what.
What do you think ex cares.
<unk> XR, one but with normal.
Performance on collections, what do you think pricing would have looked like in the quarter.
Down about 200 basis points.
It sounded like sort of either of those factors.
Ex those factors, even though commercial was up in the quarter. So what else I guess on a mixed basis, so what else.
What's causing it down.
200 basis points.
Yes, Kevin its Charlie for the fourth quarter, the predominantly the comparison of cares dollars as they flow through which was.
Pretty significant in the fourth quarter of 'twenty one.
Digging through all of those variable pieces, whether it is.
The impact of.
The Rev cycle process.
<unk> dollars and the like we're still looking at an underlying price trend in the range.
All at one two between 1% and 2%.
The 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 contracted admin fee revenue within pricing.
And that usually has some some increase to it in the fourth quarter it was fairly modest.
Okay. So you think underlying pricing is 1% to 2% is kind of a go forward.
What are you thinking about once this is all stabilized.
I don't see any reason for it to be different from that.
And then just to understand when you go back to the other question that was asked before this cause.
When we think about companies that have go through these types of disruptions I guess theres 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 but theres actually a period of outperformance I guess.
You start collecting on old receivables.
Is that the right way to think about it or is the fact that are willing to backstop that you've kind of taken away from them.
Of that.
Catch up opportunity I mean is there how should we be thinking about.
But it looks like when we get the other side of it.
I think our forecast is that we're going to get back to the right level over the coming quarters.
There may be some bump from additional collections, but 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 we should be.
Okay.
Try and round out this.
One payment dynamic.
You guys mentioned that you are putting extra costs and to improve collection, some of which you're taking some of which they are taking.
And the $15 million include those costs.
You're undertaking.
And that may or may not be.
Permanent.
No that is that is solely related to our expectation of the flow through of revenue impact of.
The AAR process as we've talked about the last few quarters.
Any kind of incremental costs that we're incurring or believe we might incur an additional staffing is embedded within our outlook for G&A for this year that that sub 12% G&A that mark referenced.
But we're still in discussions with with our vendor if there are additional labor costs that are needed.
On how we share those costs because they they.
They stepped up.
Nearly and help help cover a lot of the costs that we incurred from additional labor in Q4, and we have talked to them about the need to to continue that.
That bolstering by them for cost that we need to get back to.
To get back on track.
Okay and then just.
The clarification on a question earlier I think you said youre not seeing any change in behavior from payers.
Now where do you just want to make sure I understand.
<unk>.
Two things one is rate updates from payers in network are consistent with what youre, saying that youre 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 <unk>.
During the last couple of years, you could still be overwhelmingly but to have it go from five four.
4% to 6%.
I just want to make sure.
We're not missing anything there.
Yes, Jim.
It Hasnt changed.
Again, we've had a few of the payers, where we have been out of network and as I said, we've been very successful in the itr process.
And we have not seen a trend.
Payers coming to us to look to move us out network, it's very very stable.
I'd say that there was a fear in the market over the last over the last say 18 months that payers would use this as a weapon and we haven't seen that what we've seen is the normal proper discussions with payors about being in network and in many cases renewing and rates in line with what we.
<unk> had in the past. So if you are asking relative to a a big concern that everybody had we said we have not 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 and more.
Out of network situations and in fact in some areas where.
We've been at a network, even though there were a few we're having very constructive dialogue.
Clear is that is that payers want us in network. We are the premier provider of these necessary services for mothers and babies.
And I think people know that if you wanted to have subscribers you want to have pediatrics.
Physicians and clinicians providing care.
Okay, great. Thank you.
And next we go to reshape <unk> with J P. Morgan. Please go ahead.
How are you doing thanks for taking my question. This one.
Going back on the MSA I think you said that youre, winning 80% of your cases, I believe or I assume you're winning at a rate that is above the <unk>. So a couple of things. One can you confirm that you are winning above the rate.
Above the <unk> and what that multiple looks like and then.
<unk> can you just give us an idea as to how many claims you are running through arbitration with the Dsos are on these claims.
Yes, Jim.
We're actually winning those well above the CPA.
And we see that as a barometer in terms of our ability to contract back in network at relatively good rates.
In the process as everybody has heard the process has been a bit disjointed. We however feel that we've had a.
A great team and if RCM vendor has been one of those people on that team. So the process of submitting the claims and into the <unk> gone very smoothly for us.
On that has the <unk> situation in any way affected your ability to collect on those claims.
No not at all actually that's been a bright spot in the relationship.
And then the TMA summary judgment with regards to the <unk> just curious as to how you guys think it will affect.
Thank you.
Well I think the.
We all can look at the effect that they're shutting down the claims going in after February six.
We look for resolution to that issue and hopeful that there'll be a more judicious view of what should be considered in the IVF process and not just the PPA.
So we remain vigilant and we remain.
Positive that there'll be an outcome there, but none of us can know.
HHS and CMS, what theyre going to deal with that so we're waiting to hear following that court case right now.
Claims can go into the <unk> process that they can't come out so it's going to increase the backlog, which is very unfortunate Fortunately for us because we are 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 <unk> process.
Can restart. So this is the second time that the courts have said that the rulings have been inappropriate and don't merit.
The <unk>.
Bipartisan legislation, but now the stall, which is which is unfortunate again Fortunately for pediatrics. We are overwhelmingly in network and we win we have won overwhelmingly in the cases that have gone into arbitration. So I think.
It is again a signal that that if you look at all the factors that were in the bipartisan legislation it favors a group like ours.
And just 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 Theres a high probability that you could move some of that in to an in network agreement and I was hoping that maybe you could quantify of that amount that is on our network, where do you think there is a high probability of what is the amount that could.
Actually move in network over the course of 'twenty three.
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 have the concern that with the NSA and payer behavior that could get worse to Mark's point, where we are out of network, we feel very very good.
Good about what we're able to do with that and again, we may be in a good position to be.
Back in network.
Yes.
And just the last question now for 23 can you just walk us through your capital allocation policies. Thank you.
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 the 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 <unk>.
Original.
Allocation that we took in 2022 and.
And right now I think we can.
Again have the balance sheet to look at some acquisitions in our core areas that may be attractive and I will say that one of the behaviors. We've seen change with groups 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.
Yes.
Ken.
Next we'll go to <unk> with Stifel Stifel. Please go ahead.
Thank you good morning could you talk about the expectation in terms of potential impact either payer mix shifts or patient volume Medicaid with determination that's expected to start in the second quarter and how much of that is baked into your guidance.
Hi, Tayo, it's Charlie.
Haven't given that a huge priority in our outlook.
We turned in all the changes that have occurred whether it was additional support during the pandemic.
And even going back a long time ago too.
Some of the some of the rules within the original Affordable Care Act.
The nature of the services or our affiliated physicians provide for expecting mothers and newborns.
Virtually I think completely across the 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 is a part of our payer mix based on the based on those changes and indeed, we did not see that in any material fashion through the course of the pandemic.
Yes.
Got you.
And then you called out the $15 million expected revenue headwinds.
What was the level, Inc. Fourth quarter could you kind of give us the cadence, though the expectation through the next four quarters on that $15 million.
I think Marc referenced that in the fourth quarter the impact Mb.
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 and if you are asking about 'twenty three as Mark said, we just we think that the $15 million drag in 'twenty three 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.
Okay Gotcha, it mostly in the first half.
So then when we think about the DSO.
Where do you think that might stabilize that in 'twenty three once the <unk> transitions complete thank you.
We don't know we saw.
Positive movement in the <unk> from the third and fourth quarter, but is.
It is a slow recovery to normal.
So we would expect that once again, probably weighted towards the latter half of 2003, when we see our DSO come back in line and we will continue to report on that in coming quarters.
Yes, so when you talk about normal.
Are we talking about kind of pre pandemic levels DSO.
To be a little bit unabated.
Correct pre pandemic levels.
Okay. Thank you.
And next we have a follow up from <unk> Chickering with Deutsche Bank. Please go ahead.
Hey, guys.
Just a follow up just a quick one here.
Coding contract labor, what's your practice salaries and benefits.
<unk> in the fourth quarter.
With right.
In the mid single digit Peter.
Jim referenced and we've given similar comments in the second and third quarters that.
The 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 stand up of new practices.
On behalf of our hospital partners and the some of the difficulties in in those expansions in new recruiting and the like and the need for for Locums and others as we get staffing right and 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 thats, probably baked in there as well.
So let me answer differently, excluding sort of the sort of that.
The higher cost labor kind of in general what was your core labor inflating in the fourth quarter.
Yes.
We still have the same kind of kind of directional comment there Peter.
And that mid single digit range.
And.
Within our within our outlook for 2023.
Versus the historical norm, we're looking at somewhat elevated but not not in a great fashion.
Okay. So if I sort of single digit by mid single digit like 4% to 5% yeah. Okay. So.
So Kevin question.
So normalized pricing sort of one or 2% labor in place inflating either low single digits or mid single digits.
No.
What makes service margins are increasing and the 'twenty 'twenty four and beyond is it is it the pricing gets better than one to two is it the labor comes down to like one or two or is it the amount of G&A leverage you can get off of the business in order to help negate that that negative yield spreads.
Yes.
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 now.
Alright, great. Thanks, so much.
And next we'll go to.
Brian <unk> with Jefferies. Please go ahead, hey, good.
Good morning, guys, Hey, Jim just trying.
Trying to put on your <unk> hat on as I think about obviously, there's a lot of focus here on Rev cycle near term, but once we got past that how are you thinking about.
Where your focus is from a growth perspective.
What do you think will be kind of a good normalized growth rate to be thinking about maybe once we get to 2024.
Yes, I think what we focused on in the last number of years and you know that we reported on this is really around the build out of our organic growth team, which really paid off in 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 I mentioned on the call really these relationships with the hospitals, where we have had.
Household reach out to us and instead of it being a one program theyre looking for there's a suite of programs that they want us to build out around women and children. So we always will.
Talk about the fact that we're not a staffing company, where a program building company and those programs are in women and children's so we've seen a <unk>.
<unk> uptick in that activity when you look at the core areas I think there is a confluence of issues coming down the Pike I think their succession issues in some of these practices on.
Some of the hospitals, where the hospitals are concerned about do they have the right people as the population ages and the physician population. So I think we stand ready both on an organic side, but I would also say on the acquisitive side there is 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 talked about NICU. When you talk about MSM and we're focused on that because.
Really obviously key to what we do on the growth side, but I think it's going to be pretty measured.
Keep our powder dry if we need to in terms of a big.
Position, but there is something out there that is material to what we're doing we're going to go after it.
Got it and then I guess, Mark as I think about just seasonality.
Q1 is always one of the issues here, but maybe if you can quantify for us how we should be thinking about payroll tax first.
For sequential modeling purposes.
I mean, I would look at the first quarter of last year, we would expect a similar load in the first quarter of 'twenty, three which will tail off as those limits are Matt typically.
Towards the end of the first quarter into the second quarter.
Okay got it alright, thank you.
Okay.
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