Nov 5, 2008
Executives
Bob Kneeley - Director, IR Roger J. Medel, M.D.
- CEO Karl B. Wagner - CFO
Analysts
Dawn Brock - JPMorgan Sudeep Singh - Deutsche Bank Securities, Inc. William Bonello - Wachovia Capital Markets Gary Taylor - Citigroup Deepak Chaulagai - Dougherty & Company Brooks O'Neil - Dougherty & Company
Operator
ladies and gentlemen thank you for standing by. Welcome to the Third Quarter Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, instructions given to you at that time.
[Operator Instructions]. As a reminder this conference is being recorded.
I'd now like to turn the conference over to your host, Mr. Bob Kneeley.
Please go ahead.
Bob Kneeley - Director, Investor Relations
Thanks, and good morning, everyone. Thanks for joining our third quarter earnings call.
And before I'll open the call up for comments from management, I just want to read our forward-looking disclosure. Certain statements and information during this call may be deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on assumptions and assessments made by Pediatrix's management in light of their experience and their perception of historical trends, current conditions, expected future developments, and other factors that 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 Pediatrix's most recent Annual Report on Form 10-K, including the section entitled Risk Factors. Now before I turn the call over to Roger Medel and Karl Wagner, I would like to ask for your cooperation in giving as many as possible the opportunity to participate during the Q&A session.
I am requesting that you limit your questions to one question and a follow-up during the Q&A session. We will allow for you to requeue with additional questions after that.
At this point, let me turn the call over to Roger. Thanks.
Roger J. Medel, M.D. - Chief Executive Officer
Thank you, good morning, and thanks for joining our call today to discuss our 2008 third quarter results. Our result this quarter are telling two stories: One of our company that is executing on the clearly defined growth strategy developing a new platform within the anesthesia services area, and a lot of our company that is bumping up against what appears to be cyclical issues within our core neonatal operations.
Our 15% revenue growth for the 2008 third quarter is largely the product of acquisitions. Acquired revenue improved contributions from our Fairfax and Atlanta anesthesia practices.
Two of our three groups in that specialties. The third Anesthesia Group critical health systems of Raleigh, North Carolina was acquired in the last day of the quarter and you will see contributions from that factors impact our fourth quarter results.
Same-unit revenue growth was 1.2% and was positive because of reimbursement increases from commercial payors and volume growth at our office-based practices. Our same-unit revenue comparisons continued to be pulled down by lower neonatal intensive care units patients' volume, which we've been experiencing since March of this year, and a shift toward government payors that occurred during the third quarter, which we announced last month.
During this call both Karl Wagner and I will be focusing our comments on issues around managing our growth and working through this apparent cyclical issue. I do want to emphasize that we continue to grow our business, and we continue to invest in the resources necessary to support our business.
During the 2008 third quarter, we bought two anesthesia practices. At the start of the quarter, Georgia Perioperative consultants joined us.
Today our Anesthesia Group at Atlanta's Piedmont hospital and Piedmont stay at [ph] hospitals, as well as at a few ambulatory surgery centers there. At the end of the quarter as I said, we've acquired another large Anesthesia Group critical health systems of Raleigh, North Carolina which has longstanding relationships with three hospital systems and several ambulatory surgery centers in that community.
These practices joined our Fairfax group, which was acquired during the 2007 third quarter. Within a little more than a year, our America anesthesiology group has added three well established anesthesia practices more than 450 clinical professionals working at pediatric [ph] care hospital and three very attractive rapidly growing U.S metropolitan areas.
We are seeing the clinical infrastructure investments in our base business paying dividends, as we process anesthesia practices which is helping us to establish the reputation for a physician's tempered National Anesthesia group. Has excited who we are about our progress in anesthesia thus far, please allow me to remind you that this also a very strong year for base business acquisitions.
With 10 base business acquisitions, four neonatal groups, three maternal-fetal practices, and pediatric cardiology practices. This year we have exceed our guided estimates for 2008 base business acquisitions of 70 to 75 million.
We continue to grow our base business and we continue to see opportunities to grow this business. In each of our acquisitions announcements it was a hint of the reasons why this practices are joining.
Reason is that we believe would allow us to attract additional groups for the foreseeable future. Our largest neonatal acquisition of the year 25,000 patient they practice in Akron, Ohio, they joined last month as worked on a number of neonatal collaborative studies.
As part of our group they are looking to expand the breadth of evidence based foods they are using to improve patient care. This is also a practice and enjoyed a great relationships with its principle hospital partner.
The physicians and the hospital are working together conducting outreach in an effort to expand their referral base in Northeast Ohio. In Nashville we acquired a maternal-fetal medicine practical that has a national it's not international reputations for clinical research.
As part of our national group they now have the ability to collaborate with other groups across the country. The experiences that we can offer physicians joining our group are very different from what they are finding by remaining in private practice, and that's the ability for physicians to focus on patient care.
It's one of the many reason why we are optimistic about our ability to continue to acquire practices. We're also confident that our model has properly aligned the physicians' interest.
I want to bring you back to one of the underlying tenets tenants of our model, which is our practice for using cash of our -- at our acquisitions currently. I need to face to say that given the market volatility of the past year and we issued stocks to fund some of our acquisitions, we would have physicians groups who would be unhappy.
Fortunately our physicians received a stable liquid currency at closing, and we successfully integrated those groups into our national practice. Finally, I want to talk with you about our management infrastructure.
Last month I spoke with you about our decision to change our name to MedMax and our ticker symbol to MD starting next year. That decision reflects the growth of our anesthesia services business and the optimistic views that we hold for that business and for our base business.
It's also part of this moving towards a holding company structure. Early into third quarter of this year, we promoted two of our executives to new leadership positions within what will become our Pediatrix divisions, once the reorganization is complete.
Dr. Frederick Miller now serves as President of our Pediatrix division, which encompasses our neonatal pediatric intensive care, maternal-fetal and pediatric cardiology physician services, as well as our hearing screen program.
David Clark is Chief Operating Officer of the Pediatrix division. Frederick was a Pediatrix veteran.
He joined us in 1991 and has served in various leadership positions most recently as Regional President for our Atlantic regions, where he has done a tremendous job building that region since the year 2000. David Park has been with Pediatrix since 2001, when we acquired a Magella Healthcare where he served as Vice President of Development.
During the past seven years, he's been a member of our Regional Operations team in Texas and most recently have served as Senior Vice President, Operations at Pediatrix. I'm very pleased that we were able to fill this new positions from our existing management team.
People who understand our operations, our culture, and our approach to be opportunity presented towards. These executives have been part of our long term success in managing our practices more efficiently.
And we're confident that they will continue to making important contribution going forward. With that let me turn the call over to Karl, for discussion of our financial results to the quarter.
Karl?
Karl B. Wagner - Chief Financial Officer
Thanks, Roger. I'm going to spend the next few minutes going to our financials results for the three months and nine months ended September of 2008, provide a quick overview of our results.
We are growing our business including our anesthesia services. Our neonatal business is facing what we believe is a cyclical challenge and our margins are changing as an anticipated reactions should both at our acquisition mix and base business challenges.
In the third quarter our revenue grew by 15% over the comparable prior year period to $267.2 million. As Roger said almost all of that growth is attributable to acquisitions completed during the past 12 months.
Same-unit revenue growth was 1.2%, which can be broken down into net positive reimbursement growth even after the payor make shift of 1.7%, and net volume decline of one-half of 1%. On the reimbursement side, our ongoing improvements in reimbursement from third party commercial payors has been slightly offset by the shift to government payors.
There has been no change to our contracting strategy a result of the efforts, and we expect continued contributions in this area on a go forward basis. The government mix shift is affecting revenue in and margins.
To give you a sense of magnitude a 1 percentage point increase from government reimbursement resulting approximately $10 million annualize reduction in revenues on average. That average amounting very dramatically by the markets in which the payer makes it current.
But, as we've said this is across our national network. For this quarter we saw a change of approximately 2 percentage point to our payor mix.
If you recall my comments on the October call our payor mix is unchanged in July, the government payors as a percent of all payors increased significantly during the month of august. During September our mixed improve slightly from the August levels.
And as we said in this morning's press release, the impact of the mix shift was 2.2% reduction in same-unit revenue in 2008 third quarter. Assuming payor mix stays at current levels throughout the fourth quarter, we're expecting to impact from the change to our mix will be a 3% reduction of same-unit revenue.
On the volume side the 1.5% decline of overall volume consist of 3.4% reduction of our neonatal business, which is towards the low end of our guide range of minus 1% to minus 4%, offset by roughly mid single-digit volume growth from our office base practices. Our maternal-fetal's medicine physicians are seen higher demand principally from referring obstetrician and pediatric cardiologist are building their referral base among both obstetric and pediatric physicians and we think this demand driver will continue.
I have given you a lots of observe in the discussion of same-unit revenue components. So, this should help you understand the rest of the income statement discussion.
As I continue to discuss our income statement, all we comparing our 2008 results to non-GAAP numbers for 2007. This non-GAAP presentation excludes costs associated with the stock option review and a detailed reconciliation table is included in our press release, which is available in our website at www.pediatrix.com.
For the 2008 third quarter profit after-process expense was $96.2 million up 3% from the prior year period. Profit after practice expense margins declined by 410 basis points to 36% for 2008 third quarter from 40.1% for the prior year period.
Operating income declined by 2.4% to 62.2 million for the third quarter and 63.7 million for the 2007 third quarter. General and administrative expenses were 11.5% of revenue down 25 basis points from the prior year.
Operating margins decline by 406 basis points year-over-year to 23.3 million for the 2008 third quarter. As I said last quarter our margins are shifting for several reasons.
We're seeing initiatives of lower in acute patient volumes in the payor mix shift affecting our margins. As we have said we believe both these issues are results of current economic conditions.
At a fundamental level our acquisition mix has had and we will continue to have the affect of reducing practice level margins. This year our acquisitions are weighted heavily towards anesthesia in office-based practices both of which have lower margins than our neonatal business.
As the Raleigh acquisition closed into our fourth quarter results and beyond it is dynamic we will continue. When you look at volume growth and the practice related expenses required to support that volume there is a fundamental difference between our neonatal practices and our other practices.
In NICU there is a step function to staffing levels. But, we don't have to change schedules or add staff in the next premature baby as admitted.
There is a point in which volume requires additional clinical resources in order to provide appropriate clinical care. More directly related to our P&L, we typically see the revenue and then add the staff.
During the third quarter we've added new added neonatal physicians for filings commitments we've made earlier this year. Including to follows we're usually complete their training at the end of June and start working for us during the summer.
This staffing levels are required to support the practices based upon the historical volume levels and will support growth that we anticipate in the future. With our anesthesia and office-based practices staffing growth and related costs precedes volumes.
In anesthesia operating room isn't open and procedures don't happened unless there is initiatives provide the care. In time we do expect and In fact we were seeing improvements in our anesthesia practices particularly from contracting improvements and better oversight in the collection functions.
Continue with our income statement discussion, our net interest expense was 639,000 for the third quarter, as we've increased the use of our line of credit and this compares with net investment income of $2 million in the 2007 third quarter. Our provision for tax rate is 39.25%, which is consistent with our guidance.
Income from continued operations was 37.4 million, and we earned $0.81 per share based on a weighted average 46.2 million shares outstanding for the September 30, 2008 period. This compares with income from continued operations of 40 million for the 2007 third quarter or $0.79 per share based on a weighted average 50.3 million shares outstanding.
In the 2007 third quarter, we had income from discontinued operations of 759,000 or $0.02 per share, resulting in net income of 40.7 million or $0.81 per share. That's a lengthy income statement discussion, but I hope it gives you some perspective on what we're seeing and how it is flowing through our statements.
We get back to the review of the quarter. We ended the 2008 third quarter with modest cash balance of $12 million.
As we continue to use our cash in line of credits to fund acquisitions. Accounts receivable was $151.5 million at September 30.
AR has grown by 6% from September 30, 2007, which is considerably lower than our revenue growth. Resulting decline in day sales outstanding can be largely attributed to our ongoing revenue cycle management.
We ended the quarter with $171 million outstanding on our revolving credit facility, and that includes payments for two acquisitions completed on the last day of the quarter. Cash flow from operations was $83.1 million, up 32% from the 2007 third quarter.
The growth in operating cash flows can be largely attributed to improvements in the working capital accounts considering [ph] the accounts receivable in the timing of tax payments. We invested our quarterly record $188.7 million to complete five acquisitions during the quarter.
And the bulk of these investments were in the Raleigh and Atlanta anesthesia practices. Nine months results on a GAAP basis for the 2008 and 2007, our revenue grew by 15% to 770.5 million year-to-date.
Operating income of 176.6 million is up 13% from the first nine months of 2007, and income from continued operations excludes the metabolic screening lab that we sold earlier this year was $107.7 million, up 8% from the prior year. Earnings per share from continued operations for the nine months of 2008 were $2.26, up 14% from $1.99 for nine months of 2007.
Our 2008 cash flow year-to-date from operations was $113.1 million, up 14% when compared with the same period in 2007. Finally, I want to discuss our outlook for the going forward period.
In the 2008 fourth quarter, we're now expecting to earn between $0.77 and $0.81. Assumptions for the fourth quarter includes same-unit NICU volume with no change or decline up to 2% on a year-over-year basis.
Actually our preliminary information on same-unit volume for October shows patient days equal to October of last year. And this is the first month we haven't seen a negative year-over-year comparison since February.
Given the volatility we have seen over the last several months. I think the conservative call is for range of unchanged to minus 2% for the quarter.
On payor mix, remember that we saw government reimbursement as a percent of overall payor mix increase in August. So our third quarter results will include only two months with the higher government payor mix.
For the fourth quarter, we are assuming a full quarter impact of the payor mix shift was about $2.5 million reduction in anticipated revenue. As of today we have payor mix information for about three quarters of the month of October and its suggesting that our fourth quarter payor mix is starting out at the same level at September, which means a higher percent of our revenue mix, which is coming from government payors on a year-over-year basis.
Looking at our business historically, we typically see slightly less neonatal volume in the fourth quarter than in the third. That's just a function of the time of the births in the country including premature births.
Our office-based and anesthesia practice volumes are driven largely by several appointments and procedures. The way the weekends and holidays fall is one fewer business data in 2008 fourth quarter than the third quarter and our assumption of that period includes one less day of revenue from these practices.
We're very much encouraged by our business development pipeline, and we can provide some guidance for 2009 acquisition. In our base business, we now expect to invest 70 million to 75 million to acquire neonatal, maternal-fetal, and pediatric cardiology practices.
We expect the multiple state for these practices based on pro forma contributions will remain within our historical ranges. We are also expecting to complete two to three anesthesia practice acquisitions throughout 2009.
It's difficult for us to predict the timing of these acquisitions, and I expect that we will continue to provide you with specific accretion estimate when these transactions are announced. At this point, it will be difficult for us to make predictions about NICU patient volume or payor mix of 2009.
We continue to see reimbursement growth as a result of contract improvement from third quarter commercial payors and those improvement could be offset in whole or in part by higher government payor mix. We'll have to wait to see how the current economic conditions will affect our business going forward.
We hope to provide you with future information on our fourth quarter earnings call in February. At this time let me turn the call back to Roger.
Roger J. Medel, M.D. - Chief Executive Officer
Thanks, Karl. Before opening up the call for questions, let me address the topic that is probably top of mind given that we're now on day one of the 2012 presidential campaign.
In recent weeks it's become fairly clear that healthcare initiative moved lower down on the priorities either in terms of appetite for major reform or for ability for fund that reform. I think that our new administration is going to be hard press to advance swiping reform.
It is clear however, that the legislative agenda for 2009 will include some form of physician fee [ph] schedule fix, and we will address SCHIP, the Supplemental Government Insurance Program for Children in some ways. As a reminder SCHIP is a small piece of our business and the best way to ensure that it remains a small piece of our business, is through effective crowd out language.
Essentially were pro opponents of SCHIP as a safety mix. It should not compete against private sector health care plan.
The last time SCHIP was address in late 2007, we were comfortable with the crowd outline which... that was inbuilt at that time.
We've taken a lot of time with our formal comments. And at this point, I would like to open up the call for questions.
Operator? Question And Answer
Operator
All right. [Operator Instructions].
And our first question comes from the line of Dawn Brock with JPMorgan. Please go ahead.
Dawn Brock - JPMorgan
Good morning, guys.
Roger J. Medel, M.D. - Chief Executive Officer
Good morning.
Dawn Brock - JPMorgan
So, my first question actually has to deal with the commentary from the acute care hospitals over the last couple of quarters regarding a deemphasize on OBGYN admissions and volume. And my question is really more of the fact that, if they are not necessarily saying that their commercial admissions are dropping and their own, but why does that deemphasizing their focus on that volume.
Is that a potential issue for you guys? Is that something that you would see in your host hospitals, or is that an incorrect connection to make because a hospital with NICU would naturally not deemphasize those services?
Roger J. Medel, M.D. - Chief Executive Officer
What did they mean by deemphasizing the services? I mean, I am afraid [ph] shows up with me, it's really deliveries has to be delivered.
What do they mean they are deemphasizing those services?
Dawn Brock - JPMorgan
Yeah. it's interesting I mean I think that, that you are thinking along the lines as I am that what if we get and do have cardiologist delivering the baby.
But, the commentary is more around going after higher service lines in those markets will maybe a competitor has a strong OB service line where they are actually going to stop emphasizing those services. They will continue to have small beds attributed to OB.
But, they're going to essentially shift those beds over to other higher end services where possible?
Roger J. Medel, M.D. - Chief Executive Officer
We don't believe that we are loosing market share to other hospitals in our community. We don't think that that's what's going on and we think we know that.
If a group of obstetrician stops delivering their patients at our hospital and move their practice to a different hospitals, we would know that. And we don't have any evidence that that's what's going on.
So I mean I don't know what they mean by deemphasizing, you know, OB services as the demand going to be marketing more services differently or something like that, that could be going on, but I still think is hard to say that went up when the mother comes into the hospital, she is ready to deliver I mean I still think its the obstetrician who bring patients to the hospital. I don't think mothers decide where they are going to deliver, based upon pads and the newspaper.
Dawn Brock - JPMorgan
I think the idea is the fact that it is a very, very low profit center for the hospital even though I think that obviously as we all know, it is a place where you actually develop your relationships and develop stickiness within a community. It seems though they are stepping away from that bed.
I appreciate your answer there. And I guess the other question that I have my follow-up would be you talked a little bit about the cyclical challenge could you talk or maybe just give us your thinking around whether or not you've kind of focus in mother or not do you think its more economic whether or not you do you think that is more reversion to the mean, whether or not you feel as there is any additional clarity around that right now?
Roger J. Medel, M.D. - Chief Executive Officer
I think that our best guess is that the payor mix shift is related to the economy, I think it's clear to see that, as people loose their jobs. They loose their health insurance, and so I think we can attribute to payor mix shift to that.
I think as far as the drop in first its still very difficult for us to make... to reach it concludes in it and so what is going on and that's because we still see significant variation on a month-to-month and quarter-to-quarter basis going on across the country and so while we see still continue to see that one month in particular, day or a particular reason maybe down in double-digit, the following months there maybe flat or up in single-digits in the other way around.
So for us it continues to be difficult to say exactly what is going on. Our best guess at this point is that it is just a reversion back to the mean of 4 million babies that was the norm for the late 90's and through the early 2000.
Karl do you want to add to that?
Karl B. Wagner - Chief Financial Officer
No I think, I mean think Roger is right, I mean I think right now it's difficult for us to clearly understand what has cause the change in births whether it is economic or reversion, but it is happening. I do believe the payor mix is representative of an economic change has occurred if we would expect if economic, when economic times change in the you'd see that come back would be our expectation.
Going back to your first question on hospitals, deemphasizing their OB services, I don't think that we would expect to see that units that have level acute care, most of our patients are cared for level two units although we do have a mix of growth level two and level three units that we're in. I think the level three units, I wouldn't expect to see deemphasize in the OB care because it's been developed for that strengthening of the OB care in the hospitals.
In addition, especially the large level thee are typically very profitable for hospital. So I would expected to see would not want to loose that profitability in the hospital and deemphasize the OB services.
Dawn Brock - JPMorgan
Perfect. Thank you very much guys.
Operator
Thank you. Our next question comes from the line of Sudeep Singh with Deutsche Bank.
Please go ahead.
Sudeep Singh - Deutsche Bank Securities, Inc.
Hi. Good morning guys.
Thanks for taking the question. I guess just a piggyback off of Dawn's question, just curious to hear kind of your take on and whether you guys actually even get this kind of information from your hospital clients, but just curious to get a sense for of your hospital clients and just the overall portfolio.
How many of them are really with regard to their OB and NICU budgets, how many of them are continuing to invest going into '09 and how many of them do you think would keep their budgets some what flat going into '09?
Roger J. Medel, M.D. - Chief Executive Officer
Well typically the hospitals invest in as far as our areas is concern is more an investment in capital equipment, and so that's more a function of specific needs if bass nets [ph] needs to be changed or ventilators or that kind of stuff I would not expect that in our medical directors, which is, there is one in each unit participate in the budgeting process with the hospital. So they'll get together with typically the nursing director and start talking to next year about what kind of equipment they think might be needed in the ICU.
Typically if there is like, I want a new ventilator because it does double back or whatever, then the... that's more all the, I'd like to have kind of presentation.
I don't think there is too many of those going on this year. But, I haven't heard from our medical directors that there are any specific I need or I must have a piece of equipments that the hospital is not buying.
So I haven't heard any specific complains from our medical directors about this budgeting cycle being different from any of other one.
Sudeep Singh - Deutsche Bank Securities, Inc.
Okay.
Roger J. Medel, M.D. - Chief Executive Officer
We would... I want to view that add to it is there are several units that have discussions and plans to expand their neonatal unit.
And we haven't heard any discussion from the hospital saying that they don't plan to continue and go forward with those projects in the future. So we haven't heard the plans to pullback on the capital that had committed in the past.
Sudeep Singh - Deutsche Bank Securities, Inc.
Okay. And I guess just a follow-up to that would be as an outsider looking into this business.
Can I make a simple assumption and assume that any given market, if you have two hospitals and one is continuing to invest in the OB whereas one is not or keeping their budgets somewhat flat or even cutting their budget as it relates to OB or the NICU. Can we assume that the one that continues to invest could actually win?
Hypothetically, could win market share in terms of birth volume or is that too simple than assumption to make?
Roger J. Medel, M.D. - Chief Executive Officer
I believe that that would be a longer-term situation with that to occur. The OBs in the markets typically placed their offices close to the hospital that they would be delivering at.
So over the long-term, if a hospital can recruit OB practices just as we look, relocate their offices closer to their campus. That clearly would improve the deliveries at that hospital.
On a immediate change, it would take time for that to occur. OB practice would be to make decisions on where they were going to deliver, how they would move there, and several of their patients for the near term would already be planning the delivery at the hospital that they are at, so all of that would have something to do.
Karl B. Wagner - Chief Financial Officer
Yes, I would also add to that I think it depends again on what they mean by deemphasizing, I mean if they are going to start cutting back nursing staff than yes, because our situations depends tremendously on the nursing staff. The mothers show up they are in labor and they're waiting for their nurses to call the obstetrician who doesn't want to sits there for six hours and tell them that the mother is ready and fetal monitoring script [ph] is looking okay, etcetera, etcetera.
So if it's a matter of the obstetrician going to have the nursing staff or the equipment that they need. I think the answer is yes, that you could see then that hospital loose market share typically.
Sudeep Singh - Deutsche Bank Securities, Inc.
Great. Thank you.
Operator
Thank you. Our next question comes from line of Bill Bonello with Wachovia.
Please go ahead.
William Bonello - Wachovia Capital Markets
Good morning. Yes, just a question around the neonatal acquisitions, I'm just curiously if you can speak a little bit to how you get comfortable with how much to spend for additional NICU acquisitions given the current mix and volume trends?
Roger J. Medel, M.D. - Chief Executive Officer
Looking at our pipeline, we're managing for the long-term, we believe that this is cyclical and we're looking at obviously current volumes and that does have an impact on what we're paying for practices because with the volume going down on the payor mix exchanging, they are not just changing perhaps. And they are changing for everybody across the country and so it does have an impact on the what we are paying for the practice.
William Bonello - Wachovia Capital Markets
So is it possible that yes volume and mix returns tomorrow normal for historical trends in a way you kind purchase the practice in it at a discount?
Roger J. Medel, M.D. - Chief Executive Officer
That's what we're finding on.
William Bonello - Wachovia Capital Markets
Okay, that's great. I will get back in the queue.
Thank you.
Operator
Thank you. Our next question comes from the line of Gary Taylor with Citigroup.
Please go ahead.
Gary Taylor - Citigroup
Hi, good morning, a few quick once first on the comment about the October patient has been flat year-over-year is there any geographic color you can provide I guess particularly Florida has been an area of concern, but anything else you can discuss on that?
Roger J. Medel, M.D. - Chief Executive Officer
As I said earlier we just haven't been able to make head or tails. What's going on geographically and you will see one state or one region that will be negative during that quarter or a month and will be exactly the opposite, the following quarter or the following month.
So for us it's just continues to move up and down in a manner which does not allow reach any significant conclusions.
Gary Taylor - Citigroup
Obviously does imply your large... your large markets must have done better and October just given how much your business there I guess?
My second question is can you talk about how much of lag if any in the job environments, employment environment, there is in terms of how it impacts your business in other words, you get a pregnant mother, she has benefits because her husband has a job. The husband looses his health benefits, loses his jobs two months before delivery.
Is that child at the end in NICU necessarily going to be Medicaid such that your payor mix shift is tracking in a very real time way, what's happening in the job environment or is there some other mechanism where by you may still have commercial benefits for that child?
Roger J. Medel, M.D. - Chief Executive Officer
Yeah. Well as you know, there is the cobra effect which is a...
if somebody looses their job, they still have the right for 18 months to continue to buy health insurance from their employer. I think that will play a significant role particularly with the pregnancy for two reasons, one is that a pregnancy is sort of a planned its not like, you have an accident two months after you lose your job.
You know you are pregnant and so if you lose your job I think you might be more likely to apply for cobra and the second reason is that the majority of the private pediatrician in fact does not take or except the Medicaid and so that would if you lose your job during the sixth month of pregnancy and lose your health coverage, what it would mean is that at that point in time the mother would have to probably change pediatricians because its likely to that our current pediatrician does not take mediate and so for those two reasons we do think that there is an impact from the ability to maintain you health insurance by choosing the, likely to go with cobra.
Gary Taylor - Citigroup
There could be some lag in this. And you think the cobra, obviously without a job and cobra is expensive.
But you think the incentives is there to pick up cobra even without any poor knowledge of a very expensive NICU you say, just before the pregnancy and that delivery itself?
Roger J. Medel, M.D. - Chief Executive Officer
Yes. And particularly, yes.
Particularly because I believe that most people when they loose their job, they don't just automatically make the election to go into Medicaid. I think that they, the logical thing to do is to start looking for another job and try to get back on track, as quickly as you can.
Yes, I think that depending on [ph] if it's only going to be for a few months you don't have to take cobra for the whole 18 months waiting for the next two or three months.
Karl B. Wagner - Chief Financial Officer
It will also depend upon state eligibility rules, I mean not immediately the eligible for Medicaid program, in a lot of states in addition in some employment situation they may be over keep their benefits for work the low end of a month or depending upon if it was a lay off employer may extend benefits for a period of time, so that will impact that as well but I agree with larger in order to have access to their our nutrition they are going to want to be sure that they have coverage for a period of time.
Roger J. Medel, M.D. - Chief Executive Officer
And some of these mothers if not the first time they have a premature baby, they already know that that's another thing they have a premature baby and some of them are being careful by someone who is already telling them that there is some likelihood that the child will end up in a new born baby.
Gary Taylor - Citigroup
It was good point I appreciate it. And it is fair to say that, you can't tell if some ones on cobra right, it just look like commercial to you?
Roger J. Medel, M.D. - Chief Executive Officer
That's correct.
Gary Taylor - Citigroup
Okay. Thank you.
Operator
Thank you. And our next question comes from line of Brooks O'Neil with Dougherty & Company.
Please go ahead.
Deepak Chaulagai - Dougherty & Company
Good morning, and thank you for taking my call. This is Deepak Chaulagai filling in for Brooks O'Niel.
Karl you made a comment in terms of the improvement you have seen in your anesthesia business. What update can you provide on the continued investment you have made in the technology outside of acquisitions and how they are trending and what your outlook is for the business?
Karl B. Wagner - Chief Financial Officer
While all of our business is strong and I will talk about a few different areas when we talk about a technology, one of the things we have been talking about is the billing systems, one of the nice things about the acquisitions that we completed involve the billing system that they use is the one that we were heading down the path. Using for the practicing as we have already completed acquisitions.
So that will roll in nicely our plan to move forward in bring in house the collection, billing collection for the anesthesia practices that we have. The infrastructure that came with the practice also gives us a quicker step into bringing that in the ability to more efficiently bring that into an environment which use to doing the in-house billing [ph] collections for anesthesia practice.
So we look forward to starting that process and that from an IT standpoint is our biggest first investment in our anesthesia practices. In addition, we're growing from using the infrastructure broadly as well as the infrastructure here working on manage care contracting.
Predominantly is been in fair factor that once we had for year we've seen nice growth which we talked about in the past. On the contracts we've completed, and we continue to do some there.
We've done several contracts at this point in Fairfax and are happy with the way those have moved forward. I think when we look at the factors that we see opportunity by improving the billing in collections image, their contracting functions, bringing if landed [ph] into the billing process that we talked about, that I just talked about for Raleigh.
So I think we do see opportunities, and we do see the investment in the infrastructure and the investment we're making on the IT side for our drilling systems are paying dividends in the future.
Deepak Chaulagai - Dougherty & Company
And just a quick follow-up on that. You've talked about investments two to three acquisitions next year.
I am just curious if that's -- those that you think are platform acquisitions or sort of tuck-ins within your three existing practice that you have right now, any color on that would be helpful?
Karl B. Wagner - Chief Financial Officer
I would expect that next year we will see a mix of that that we may do one or two overall of the larger platform acquisitions and one or two would be tuck-ins. I think the tuck-ins opportunity if they are out there, we may see the opportunity to do more of those smaller acquisitions.
But we will look at that engage [ph] that as we go forward. But I do believe there are opportunity in anesthesia, maybe just with those tuck-ins continues to be very strong and that's something...
now that we've done a few large platform size deals that we will concentrate on those, so that we can bring those and bring improvements to them, and work with them. And I think one of the other thing that we're excited about that we have three large strong clinical practices, they will be bring these practices together so they can share their thoughts and we can work together and developing the clinical structure for American Anesthesiology on a go forward basis and making help us think though how we integrate these profits amongst each other to improve, it's here that's provide and make sure that the service as they are looking for we are providing this.
Deepak Chaulagai - Dougherty & Company
Thank you for you comments. I'll get back in the queue.
Operator
Thank you. And your next question comes from line of Eric North [ph] with RBC.
Please go ahead.
Unidentified Analyst
Karl, Eric here is for Kevin. I'm just thinking about the payor mix shift, is this related to the rising employment, or is it more of a function of volume.
And, if so, can you breakdown the two, three impact that you're seeing?
Karl B. Wagner - Chief Financial Officer
It's really hard to tell as it's employment or it's the volume and what's really occurring on that, what we are seeing is more of our patients are as a percent are eligible and providing Medicaid as their primary insurance. And that's where we are getting paid from.
Roger J. Medel, M.D. - Chief Executive Officer
Let me answer that Eric that there is a difference between just increasing volume and payor mix shift. To me, if we acquire a practice, a hospital somewhere that has a lot of Medicaid patients, you will see our Medicaid percentage volume grow up.
So that's the reflection of a practice that we've bought that has a lot of Medicaid patients. And we will pay less for that practice because it would be a less profitable practice.
So it's built in to what we are paying. Not as different from say, we see a shift where we have 53% Medicaid and 47% commercial and all of a sudden that changes to 55% Medicaid and 41% insurance.
There was... and that what I think we're talking about here is the shift, and not an increase in volume caused by just acquiring practices that have a larger Medicaid medical.
Karl B. Wagner - Chief Financial Officer
Right. And the shift is the same-unit shift.
We talk about seeing a shift in our mix. It's not a result of acquisition.
It is in the same unit analysis of our payer mix. And that's what we see.
As I said in the third quarter, we saw a two percentage point increase in our government reimbursed patients. That was predominantly from August and September changes as July was the same as the prior year.
Extrapolating that into the fourth quarter, we expect that will be on a full quarter impact, three percentage point change in our payor mix and our whole quarter basis. That's what we're seeing from our payor mix standpoint.
So it was Q3 compared to Q4 with that one percentage point change. We expect about $2.5 million quarter-over-quarter comparison reduction in our revenue because of that payor mix shift.
And what we saw in October was had stayed consistent with the September levels while we said September is slightly more than August, its slightly lower has it been on new shift anywhere near back to where we were in July.
Unidentified Analyst
All right, thank you.
Operator
Okay. And our next question comes from the line of Gary Taylor with Citigroup.
Please go ahead.
Gary Taylor - Citigroup
Hey thanks for taking the follow-up. One other question occurred to me, obviously your physician partners here in practice profitability to a certain degree with the bonus structure, does the 3Q results in the 4Q guidance, does that fully reflect, the I guess a lower bonus accrual for the profitability changes, or is there a still some of that would still come through, is that fully normalized?
Roger J. Medel, M.D. - Chief Executive Officer
The results for the third quarter our expectations for the fourth quarter include any bonus impact we expect to see as a result of these changes during the quarter. So there will be some bonus impact in that's reflected than what we expected.
Gary Taylor - Citigroup
And that would be if you moved into '09 without any additional changes in mix, it would be you fourth quarter guidance would be reflect the same sort of a bonus payout you had seen '09 without any additional mix shift?
Roger J. Medel, M.D. - Chief Executive Officer
Yes I believe that's correct.
Gary Taylor - Citigroup
Okay. Thanks.
Operator
Thank you. Our next question comes from line of Bill Bonello with Wachovia.
Please go ahead.
William Bonello - Wachovia Capital Markets
Okay. Thanks for taking the second question.
Can you just tell us you might have said this Karl when you were talking about Q4, but I wanted to make sure I have it correct. What is full quarter impact of payor mix shift, if it was negative 2.2 for part of that quarter, what is it for a full quarter?
Roger J. Medel, M.D. - Chief Executive Officer
When we said the impact is about 3%. But when you look at the numbers, if we said a one percentage point change, it's about $10 million a year, or 2.5% a quarter.
We're expecting to see a 3% point change in the fourth quarter based upon what we'd seen in the latter part of the second quarter. So the impact on the year-over-year basis is approximately $7.5 million from the same unit basis on a payor mix change.
William Bonello - Wachovia Capital Markets
Okay. Wait.
If one percent is $10 million I get lost somewhere?
Roger J. Medel, M.D. - Chief Executive Officer
$10 million a year.
Roger J. Medel, M.D. - Chief Executive Officer
Sorry. Yup.
Roger J. Medel, M.D. - Chief Executive Officer
half million a quarter, sorry.
William Bonello - Wachovia Capital Markets
Yup, okay and can you just comment on how that flows through to pretax?
Roger J. Medel, M.D. - Chief Executive Officer
I will give you the specific, significant portion, but not all of that will be impacted at the bonus level. Our 50-50 bonus plan while in a significant number of practices is not in all of them.
So that we didn't flow to a 50% flowing through half the bonus levels so would be something less than that, slightly less than that when we look at that number going down and we haven't broken up historically what that feature is.
William Bonello - Wachovia Capital Markets
Okay. So and just so I get that correctly, in other words more than 50% hits pretax.
Roger J. Medel, M.D. - Chief Executive Officer
That's correct.
William Bonello - Wachovia Capital Markets
Okay. Thank you.
Operator
Thank you. And we have another question from the line Brooks O'Niel with Dougherty & Company.
Please go ahead.
Brooks O'Neil - Dougherty & Company
Yes, this really is Brooks O'Niel this time.
Roger J. Medel, M.D. - Chief Executive Officer
Okay.
Brooks O'Neil - Dougherty & Company
Okay. And I apologize, I have got on late so if you've already covered this an excruciating detail, then just let me know, but you are talking about 1%, 2%, 3% of mix shift change in the third and fourth quarters, can you just help us with total about historical perspective and kind of the magnitude of mix shift you've seen.
It's my sense that in the recent past, Medicaid has represented about 53% of your volume. I am just curious over the year, I know it swings around; everything swings in the business, but are we talking about a pretty steady 53%, or is there a pretty wide swing around that overtime?
Roger J. Medel, M.D. - Chief Executive Officer
Quarter-to-quarter basis, we do see swings in that... in those numbers as we've said in the past, typically in the first half of the year, is a little bit lower Medicaid mix in the second half of the year.
Can't tell you why that is, just historically it's been that way. So we do see that swing on a quarter-to-quarter basis, this is comparison to the same period in the prior year when we are looking at this change.
Brooks O'Neil - Dougherty & Company
Yes.
Karl B. Wagner - Chief Financial Officer
Other, the swing you've seen in the past will make it go up and down. It's because the number that's included in our annual filings is a total company number, not necessarily a same-unit number.
Over the last couple of years from the same-unit standpoint, our payor mix has stayed relatively confident. We have not seen any changes into what we saw in '04 flow through our '05 numbers.
Brooks O'Neil - Dougherty & Company
I appreciate that, and I, again, I am trying to be a jerk here or probe unduly, but obviously there is some suspicion that some of the change in mix is related to the economy, so I was hoping you might at least be able to look back to say 2000-2001, and wasn't there had been any material shifts in the mix on the same unit basis you were describing or even, god forbid, we looked back in 1991?
Roger J. Medel, M.D. - Chief Executive Officer
I think going back to 1991, when we will have the data, so I don't think that something we could do.
Brooks O'Neil - Dougherty & Company
Yes.
Roger J. Medel, M.D. - Chief Executive Officer
Perhaps the 2000-2001 timeframe, we're talking about a much smaller population here at Pediatrix than we have now.
Brooks O'Neil - Dougherty & Company
Sure.
Karl B. Wagner - Chief Financial Officer
Looking at that impacts.
Brooks O'Neil - Dougherty & Company
Sure. So might have said that's, and again I apologize.
So, given the larger population, you probably see great variation across it, but it may tend to smooth out, is that what you are saying, you know, geographically, there is much broader array of regions and much larger number of babies involved. So you are saying that today on the larger population maybe the swings are going to be less significant?
Is that right?
Karl B. Wagner - Chief Financial Officer
I think that's potentially true, although right now what we are seeing is the change in the payor mix is geographically wide spread. We have not seen it isolated to one area.
Brooks O'Neil - Dougherty & Company
So you... one might suggest that whatever is driving that is affecting people and mix across the whole country that not at one particular area.
Karl B. Wagner - Chief Financial Officer
Yes which is why we believe this is more economically based unlike back in '04 where was tracked to a couple of areas and as we booked it that it was directly related to changes in eligibility requirements in a couple of states which is very different from back in '04 period when we saw a change.
Brooks O'Neil - Dougherty & Company
All that make sense. Let me just ask one last question and it's really for clarification.
Roger talked a lot about cobra and I understand that all phenomena what I don't necessarily understand is I had some sense that a mother might be covered by an insurance plan that would allow her for example access to an OB but perhaps she might elect to enroll the baby if born prematurely in Medicaid at the time of the birth and any think you can share with us with regard to how that might work recognize it probably variation state to state would be very helpful?
Roger J. Medel, M.D. - Chief Executive Officer
I think it is available last resort, we can't go to Medicaid, we can't choose to go to Medicaid if we have insurance. If you have cobra and you have child and that child is born, Medicaid is not an option for.
Brooks O'Neil - Dougherty & Company
Okay, okay so the only babies that might get enrolled in Medicaid at the time of birth would be babies that... babies born to mothers that are already in Medicaid?
Roger J. Medel, M.D. - Chief Executive Officer
All babies born just don't have insurance.
Brooks O'Neil - Dougherty & Company
Yes, okay, thank you very much.
Operator
Thank you. [Operator Instructions].
And we have a question from the line of Bill Bonello with Wachovia. Please go ahead.
William Bonello - Wachovia Capital Markets
A just one last question, sort of time we gather the volume and mix. If there is any possibility that the two issues are related in order words, given what you said about a big chunk of private OBs, don't even take Medicaid.
Is this possible that as people loose their commercial insurance, mothers that would have had their baby at the hospitals where you practiced are perhaps being admitted to some other maybe more community type hospital where you don't practice?
Karl B. Wagner - Chief Financial Officer
You know again, we don't think that we're loosing market share, our analysis is that there are fewer births going on not only at our hospitals but also at other hospitals where we don't provide care. So it does not feel for us like we're loosing market share.
William Bonello - Wachovia Capital Markets
Okay. Thanks.
Roger J. Medel, M.D. - Chief Executive Officer
Just a quick follow-up on that. In addition, that would be understandable if we didn't have a fair amount of Medicaid patients coming to our hospitals, already but based upon the mix of patients that we have in our hospitals they are and they are all these significant numbers that are admitting to that hospital because of the Medicaid mix that we have.
William Bonello - Wachovia Capital Markets
Thanks.
Operator
Thank you. And there are no further questions in the queue.
Roger J. Medel, M.D. - Chief Executive Officer
Okay. There are variety of questions.
Thank you for you attention this morning.
Operator
Ladies and gentlemen, That does conclude your conference for today. Thank you for your participation, and for using AT&T Executive Teleconference.
You may now disconnect. .