IPC The Hospitalist Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.21.13 | About: IPC The (IPCM)

IPC The Hospitalist (NASDAQ:IPCM)

Q4 2012 Earnings Call

February 21, 2013 5:00 pm ET

Executives

Evan Pondel - Vice President

Adam D. Singer - Co-Founder, Chairman, Chief Executive Officer, Chief Medical Officer and Member of Quality Committee

R. Jeffrey Taylor - President, Chief Operating Officer, Director and Member of Quality Committee

Richard H. Kline - Chief Financial Officer

Analysts

Matthew J. Weight - Feltl and Company, Inc., Research Division

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Ryan Daniels - William Blair & Company L.L.C., Research Division

Ralph Giacobbe - Crédit Suisse AG, Research Division

Kevin Campbell - Avondale Partners, LLC, Research Division

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Dana Vartabedian - Deutsche Bank AG, Research Division

Operator

Ladies and gentlemen, welcome to IPC The Hospitalist Company Conference Call. [Operator Instructions] I would now like to turn the call over to your host for today's call, Mr. Evan Pondel of PondelWilkinson.

Evan Pondel

Thank you, operator. With us today from management are doctor Adam Singer, Chairman and Chief Executive Officer; Jeff Taylor, President and Chief Operating Officer; and Rick Kline, Chief Financial Officer. Before we begin today's call, I would like to review the Safe Harbor statement.

Certain statements and information in this conference 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 in this conference call may include, but are not limited to, those statements regarding financial guidance for 2013. Revenue and diluted earnings per share, projected operating results, revenues, earnings and IPC's growth opportunities and strategy.

Forward-looking statements are often characterized by terminology such as may, anticipate, will, expect, estimate, project, positioned, strategy and similar expressions. Although IPC believes that the expectations reflected in any of its forward-looking statements are reasonable based upon existing trends and information and IPC's judgments as of today, actual results could differ materially from those projected or assumed based upon a number of factors, including those factors set forth in its 2011 annual report on Form 10-K filed on February 23, 2012, under the heading Risk Factors and IPC's other filings with the SEC.

IPC's future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent known and unknown risks and uncertainties. IPC does not intend and undertakes no obligation to update its forward-looking statements to reflect future events or circumstances.

With that, I will now turn the call over to Dr. Adam Singer, Chairman and Chief Executive Officer of IPC.

Adam D. Singer

Thank you, Evan and thank you, everyone for joining our call today. 2012 was another exciting year for IPC as evidenced by the strong operating results that we reported this afternoon, both for the fourth quarter and the full year 2012. We are pleased to again report a record milestone for the fourth quarter, with more than 1.4 million patient encounters. And excluding the impact of the net change in fair value, double-digit growth in operating income, net income and diluted earnings per share.

During 2012, we successfully completed 15 acquisitions for a total investment of $68 million, which included estimated future earn-out payments. This compares to a total investment of $25 million in 2011. We also achieved a new record high in our provider workforce. As of year-end, we had over 1,400 providers, an increase of 217 since year-end 2011. Overall, we are very pleased with our recruiting efforts and the status of our acquisition pipeline.

With the Affordable Care Act affirmed by the Supreme Court in 2012, we believe that our considerable resources, financial stability, industry-leading infrastructure, continues to make us both an acquirer and an employer of choice in the hospitalist industry.

As has been widely reported, the emphasis of reform is to move attendance to lowering costs and improve patient outcomes. Although it's not exactly clear how these objectives will be achieved, we believe that we are well-positioned to address the challenges and opportunities presented by the Affordable Care Act.

For instance, starting in 2013, facilities will be penalized for relatively high readmission rates. We believe that we've been ahead of this curve as we've been a pioneer in the field of transition management. We believe that our call center provides premier service by working with our patients and our providers to reduce poor outcomes and prevent unnecessary readmission.

The development of our post-acute practice across our markets is key to our strategy to further lower healthcare costs, reduce average patient length of stay and to lower readmission rates. We believe that this approach combining acute and post-acute providers, coupled with our call center, lead to best practice standards, expert hand-offs and stationary systems to track patient flow.

We believe that any system of facility-based care will require expert hospitalist providers. To this end, we continue to develop our physician education and leadership program. We believe that we are developing industry leaders through the IPC UCSF Hospitalist Fellowship program. In 2012, our second class of providers graduated, and a third class matriculated.

We are excited about the opportunities available to us in 2013 and we have confidence that under our proven business model, we will continue to achieve significant growth in 2013 and beyond in patient encounters, providers, revenue and earnings.

I'll now turn the call over to Jeff Rick who will cover some of the operating and financial highlights. Jeff?

R. Jeffrey Taylor

Thanks, Adam. We reported solid performance in the fourth quarter with encounters growing 18% and revenues rising 17% when compared to Q4 of 2011. And despite the planned exiting of certain contracted facilities in the third quarter as discussed in our previous quarterly call, we achieved same-store revenue growth of 9.3% over the prior year quarter. If we had not exited these contracts, same store revenue growth would've been in double digits. As we continue to place emphasis on a patient-centric approach to health care, our post-acute practice for the fourth quarter of 2012 has grown patient encounters to approximately 23% of our business as compared to 18% for the same period in 2011.

Similar to prior quarters, we did experience about a 2% decrease in same-market revenue per encounter, which was largely attributable to the growth in post-acute encounters.

As Adam mentioned, we achieved a record high in our provider workforce. As of year-end, we had 1,418 providers, representing an 18% increase over prior year. This impressive growth in workforce is complemented by our turnover rate that continues to remain stable as compared to prior years. The fourth quarter gross margin was 27.1%, a slight improvement compared to 26.9% in the prior year quarter.

As we have discussed in previous calls, we anticipate going forward that our gross margins will continue to be near 27%. Our gross margins may be affected by items such as the variability of margin related to the mix of practices acquired, higher locum tenens costs related to contracted facilities or a higher concentration of de novo practices operating at less than full margin. But we do believe it is important to continue to open new practices either on a de novo basis or under hospital contracts as part of our overall growth strategy.

We're very pleased with the expanded footprint that we have achieved in 2012 through recruiting, contracting and practice acquisitions. We also remain very encouraged by the strategic operating and growth opportunities available to us in 2013 under our acute and post-acute platforms.

I'd now like to turn the call over to Rick to review the quarterly financial results. Rick?

Richard H. Kline

Thanks, Jeff. For a complete review of our fourth quarter notes, please refer to our earnings release, as I'm going to briefly discuss a few other financial highlights that haven't already been mentioned by Adam or Jeff.

With respect to overhead, our general and administrative expenses for the fourth quarter amounted to 16.3% of revenues as compared to 16.1% of revenue in the prior-year quarter. Excluding stock-based compensation, G&A expenses for the quarter were 15.2% of revenue compared to 15% in the prior year quarter.

On an annual basis however, G&A excluding stock-based compensation improved 20 basis points over 2011. Acquisition activity in 2012 was significantly higher, with 15 acquired practices at more than double the amount spent for acquisitions in 2011. During the fourth quarter, we acquired a practice in the state of New York, which represents a new market for us. New markets will result in increased regional cost. But over time, will also provide further growth.

While we continue to believe there are opportunities to further leverage our overhead over the long term, we do experienced periods where additional investments to support growth and clinical excellence are necessary. In recent periods, we've seen that trend as more emphasis has been put into recruitment, acquisition and clinical support, including information technology.

The net change in fair value of contingent consideration was a $200,000 credit to expense for the quarter as compared to a $1.7 million credit to expense in the same period last year.

Under the accounting rules for acquisitions, we're required to book an estimate of the urgent ultimate earn-out payment at the time of acquisition. Then each quarter, we're required to adjust the liability based on the most current data. Because we pay a multiple of EBITDA, a relatively small reduction in EBITDA can result in a larger reduction in the earn-out payment, which is what happened in the fourth quarter of 2011.

The fourth quarter of 2012 also reflects a higher tax rate of 39.1% compared to 36.4% in the fourth quarter of 2011 due to recent changes in California state law that were enacted during that period. Adjusting for a more comparable tax rate and excluding the change in fair market value of contingent consideration, both net income and earnings per share for the quarter would have increased 16%.

Excluding the effects of the net change in fair market value, our operating margin was 10% for the quarter compared to 10.1% for the prior year quarter and diluted earnings per share increased to 10% to $0.49 from $0.44 in the prior year quarter. Including the net change in fair value, earnings per share for the fourth quarter was $0.50 on a diluted basis compared to $0.51 for the fourth quarter of 2011.

From a balance sheet and capital resource perspective, we believe we are very well-positioned and continue our strategy of growing the business. In connection with the increased pace of acquisitions in 2012, we drew $20 million from our line of credit during the fourth quarter. From time to time, we may draw on our line as needed depending on the number and size of acquisitions. We continue to see a steady flow of further acquisition opportunities on our pipeline. From a liquidity standpoint, our DSO, or day sales outstanding for accounts receivable of 52 days is stable in spite of heavier flow of recent acquisitions, and is reflected in our growth and operating cash flows.

Turning our attention to 2013. We plan to continue our path to growth through recruitment, acquisitions and contracting with facilities. For 2013, we anticipate revenues in a range of $597 million to $607 million; with diluted earnings per share in the range of $2.15 to $2.25. These estimates assume weighted average shares outstanding of 17.2 million; a 38.3% effective tax rate; stock compensation expense of $7.3 million; and depreciation and amortization expense of $4.7 million. Though further details concerning the implementation and administration of Medicaid parity are still in process, the 2013 guidance does take into consideration estimated revenues for Medicaid parity. Please refer to our earnings release for further details regarding our 2013 guidance.

Adam D. Singer

Thank you, Jeff, Rick. We are very proud of the company we've built over the last 16 years and I'm looking forward to a successful year in 2013 and with that, I'd like to open up the call to questions, if there are any.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Matt Weight of Feltl and Company.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Could you just -- I think you mentioned that your guidance incorporates the parity estimate. Can you quantify what you expect off of that?

R. Jeffrey Taylor

Yes, this is Jeff. We've evaluated the law, we talked to intermediaries to make ourselves comfortable that we feel this is going to be paid. And then we frankly took kind of a conservative swag at the estimate, but we feel we had to include the revenues because it is the law. It's only approximately 1%, 2% of revenue in the forecast.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Okay. And do you have any sense on in terms of cash flow timing when you might start realizing that?

R. Jeffrey Taylor

Most likely beginning toward the end of Q2 or early Q3.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Okay. Sounds good. And then during the quarter, it looked like the productivity was tracking slightly higher than what we were estimating. Was there anything in there that may have driven that up? I don't know if there was any flu-related impact, anything that you may comment on?

Adam D. Singer

There was very limited flu impact in the quarter. We did see a spike in volume right at the very end of the year, literally in the last several days of the year, which did carry over fortunately, into January. But Q4 is normally a slightly higher productivity quarter for us and I think it just came in more in line with our normal experience than maybe what happened in Q '11 -- Q4 of '11, I'm sorry.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Okay. You saw the increase in sense of productivity that you didn't experience last year. Is that fair to say?

Adam D. Singer

Yes.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Okay. And this may be kind of splitting hairs, or getting down too close here. But your gross margin at 27.1%, I don't think you've been above 27% since the first quarter of '11, so is there anything else kind of that drove that? Did you have lower locum tenens expenses? Or what caused that?

Adam D. Singer

It was a combination of things. We have maintained the locum tenens expense over the last few quarters at down to our normal levels and that did continue. A slightly higher productivity helps and if you look back over our history, Q4 is usually a slightly better margin quarter. We do book estimated payments as we go during the year but we're a bit conservative, so there's probably a little bit of truing up also on things in Q4. But you're right, this is slightly higher than we've seen in several quarters. We do not expect to continue north of 27.5. The midpoint of our guidance is in the very high 26s for next year.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Okay. And then last question here. In terms of hiring. Obviously, a strong fourth quarter. Are you expecting what you saw last year in terms of the spillover in the first quarter?

Adam D. Singer

No. We did have quite a few adds in Q1 of last year. I think there's obviously some of that this year; we are seeing some onboarding but not to the extent we did in Q1 of the last year. I think we did a better job of getting them in on time this year.

Matthew J. Weight - Feltl and Company, Inc., Research Division

So you expect more of a normalized hiring in the first quarter versus what you had last year, is that correct then?

Adam D. Singer

Correct.

Operator

Our next question is from Kevin Ellich of Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

First off, Jeff, just going back to the gross margin. I think you said that the midpoint of your EPS guidance is high 26s, did I catch that right?

R. Jeffrey Taylor

Yes. Very high 20s, I think the math comes out like 26.9, Kevin.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. Got it. And then I was going to ask about the variability of gross margin but I think we all have a pretty good idea there. I guess the other question I had was, G&A was a little bit higher, was there anything unusual in that? And I guess, since needing a question for Rick, if you could touch on the tax rate, why it was a little bit higher than we expected.

R. Jeffrey Taylor

Yes, Kevin, this is Jeff, I'll address the margin issue. As Rick said in the opening remarks, we periodically have sort of step-function reinvestments in our platform. We've done that this year in our development function, as well as in our medical affairs and clinical programs. We also had a great acquisition year and when we have a great acquisition year, it does trigger incentive payments to our development teams, so there was -- that was in Q4, which added a little to our G&A. I'll let Rick address the tax rate.

Richard H. Kline

Yes, in November, we saw the passage of Prop 39, which does affect how states are apportioning revenue, particularly California, and that's where the impact was. So that really didn't come about until the fourth quarter but that's where we now reflect it, based upon the new rules.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Understood. Okay. And then, Jeff, just going back to your comment about the great acquisition year. I guess, how does the pipeline look this year? Do you think you guys can replicate what you did in 2012?

R. Jeffrey Taylor

The pipeline, Kevin, looks great. I mean, we have a similar pipeline right now as we did in February 2012; whether we'll be able to replicate that or not is to be determined. Obviously, there's variability. We had a great year, well over 600,000 annualized encounters compared to only 254 the year before. And we had a great pipeline in the year. We only did 254. So we would hope to come close to that again but those were very big numbers.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Okay. And then going back to your prepared remarks, Jeff, you mentioned that post-acute, I think, you said was 23% of business. Is that revenues or patient encounters?

R. Jeffrey Taylor

That was on a patient encounter basis. On a revenue basis, it was only 19.5%.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

And then what was it on revenue in Q4 of '11?

R. Jeffrey Taylor

15.4%.

Operator

Our next question is from Brooks O'Neil of Dougherty and Company.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

I have a couple of questions. One, obviously, you mentioned the impact on same market growth from your terminated contracts. But would you be willing to comment on whether you think in the range of 10% is sustainable this year?

Adam D. Singer

Yes, we do, Brooks.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

You think that is?

Adam D. Singer

Yes, and then that again is in the face of the headwind of 2.5 quarters. We will be missing those same contracts we missed in Q4.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

That's terrific. Second question, I guess. Obviously, you have a little drawn on the line of credit. You've commented over a long period of time that it's probably a good sign, not a bad sign that you're drawing a little bit on the line. But would you think, for modeling purposes, we should expect you to pay off that debt in the first quarter or 2? Or do you think the pace of the acquisitions can keep you into the line as you go through the year?

R. Jeffrey Taylor

It all depends on what happens with acquisitions. If we don't do any acquisitions, we'll probably have it paid back by the middle of the year. If we do acquisitions, it will impact that.

Richard H. Kline

And the size of the acquisition.

R. Jeffrey Taylor

And I think the same thing happened last year, as well. If I remember correctly, we drew a little bit.

Richard H. Kline

We withdrew $15 million the first quarter of last year. And I think by the end of June it was paid down.

R. Jeffrey Taylor

It was paid off. And a lot of that is prepayment in malpractice and some other expenses, along with the fact that we had good results of acquisitions in the fourth quarter.

Richard H. Kline

More than doubled.

R. Jeffrey Taylor

More than doubled.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Rick, do you happen to remember what the malpractice prepayment was in terms of dollars?

Richard H. Kline

It's consistent with what we've had in the past and with the growth. I mean it's nothing unusual.

Brooks G. O'Neil - Dougherty & Company LLC, Research Division

Yes. And then I just had one question about an acquisition. Obviously, you made an acquisition of Intensivist Practice. You commented that, that was something that is more or less an experiment, you had another Intensivist Practice already. But any thoughts on what the opportunity is there, whether we're likely more of that in 2013? Or are you going to sort of wait and see how that goes before making additional commitments in that area?

Adam D. Singer

I think the last part of your question is exactly where we are. The experiment is still running. We bought a really nice platform and a really great leader in that, Dr. Levy. But at this point, we're still working through how to integrate that to our acute practices that are on those same buildings and exactly what synergies we can see by integrating those practices both financially and clinically. So the experiment is still running.

Operator

Our next question is from Ryan Daniels of William Blair.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Clean quarter, so let me ask some big-picture questions. Adam, I guess the first for you. Just thinking about your commentary in your prepared comments about the importance of managing the transition of patients, be it from a hospital to home or to a SNF, can you talk a little bit about the investments you've made to track your outcomes versus cases where you're not involved or maybe some of the improvements that you see with your partner hospitals once you're involved? And if so, is that something that you're using as a big sales pitch to go out and look at these new hospital contract relationships now?

Adam D. Singer

Yes, Ryan, we're doing a lot of work in that area. There's an entire software platform that we picked up in one of the acquisitions in Michigan that we are working hard to expand upon, a system called Eagle. And we developed there, as part of this experiment, a movement center, if you will, which is enabling us in that market where we have very deep -- both acute and post-acute presence. We'll be able to track patients from post-acute facility to post-acute facility to home and to wherever they're going to be, and able to better coordinate the handoffs clinically, which ultimately then lead to increases our data shows. Now, significant drops on readmission rates. We are indeed capturing that data now, we're beginning to create the marketing materials. We have a lot of interest from both individual facilities, both on the post-acute side and the acute side, and the systems on the acute and post-EM [ph] side. They are very interested in what is happening clinically, when you combine these acute and post-acute practices. So I do think that will be a great marketing advantage for us going forward.

Matthew J. Weight - Feltl and Company, Inc., Research Division

Okay. That's helpful color. And then how do you view that from a pricing standpoint? Some other entities that over time have been able to show better clinical outcomes have been able to leverage that for better commercial pricing. Do you think that longer term is something that might be feasible for the organization to achieve?

Adam D. Singer

My quick answer to that is yes. And one of the projects we hope to work on pretty aggressive this year is going back and looking at some of our commercial pricing on all of our products. So obviously, this is going to be part of what we sell when we go out there.

Ryan Daniels - William Blair & Company L.L.C., Research Division

Okay, that's great. And then the last question I have for you, just thinking about the 2013 guidance, which looks solid. What are you thinking about in regards to kind of broader acute care volumes? And the reason I ask, clearly, the last few years, Q4 has been a little bit lower than you anticipated because we've seen a bit of a new normal in acute care utilization, not the typical go in ahead of the resetting of the deductible. So for this year, have you kind of assumed the status quo of the last 2 years or more of a seasonal uptick in Q4, as you think about the full year outlook?

R. Jeffrey Taylor

Ryan, this is Jeff. In terms of our guidance, I think we are assuming -- to use your phrase, kind of a new normal that utilization overall is tamped down a bit for the last couple of years and we expect that to continue. If it doesn't, we'll be pleasantly surprised.

Operator

Our next question is from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Crédit Suisse AG, Research Division

I just wanted to go back to payment parity. Jeff, you talked about 1% to 2% of revenue. Just help us with the flow-through down to the bottom line. Are we taking that and applying kind of 70% to physicians and 30% of what you take tax affecting it and coming up on EPS number?

R. Jeffrey Taylor

That's exactly right, Ralph. It will show through our revenue per encounter as a heightened number, and 70% will go to the doctors.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. So rough math, it's about a dime to your earnings?

R. Jeffrey Taylor

I think it could be at the upper end if everything goes perfectly. We're taking a slightly more conservative view than that.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. All right. And then the guidance assumed that the 2% sequestration cut, and maybe remind us whether that's 100% pass-through or how the pass-through works there?

R. Jeffrey Taylor

The sequestration issue is much more undecided, it's unclear what's going to happen. We have not taken it into account but it would flow through the same way. It's half our business so the 2% becomes 1%. 70% of that, it would be borne by the doctors and only 30% would be borne by us. It's the mirror image of the benefit of parity.

Ralph Giacobbe - Crédit Suisse AG, Research Division

And just [indiscernible] again, you have not assumed that end guidance?

R. Jeffrey Taylor

We have not.

Ralph Giacobbe - Crédit Suisse AG, Research Division

And then, usually at year-end, you give the, I think, the turnovers stats, do you have that number for 2012?

R. Jeffrey Taylor

Well, we said in the prepared remarks, Ralph, that they were stable and we weren't trying to be unduly artful there. The numbers were a little messy in '12 because of the contract exits. So the number optically looked a little higher. But when we took those exited contracts out, the number actually went down to the low 14 level, so we went back and took any closed practices out of the prior year as well. And when you adjust for those factors in both years, our turnover went down about 30 basis points, I think it was like 14.3% to 14%, something like that.

Adam D. Singer

Another way of looking at it though, going forward, is it's probably still going to be about 15%, 15.5% roughly. It's just where we've been running.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Yes, mid-teens, which obviously is a lot lower than, I think -- a few years back, it was closer to that 20% range. So just sort of improvement.

Adam D. Singer

Yes, we're nowhere near that [indiscernible].

Ralph Giacobbe - Crédit Suisse AG, Research Division

And then maybe, if you could remind us what percentage of your markets have acute and post-acute right now? And maybe what you think you can ramp that to by the end of the year. I'm just trying to get a sense of how quickly you can get post-acute up in markets where you have already an acute presence?

R. Jeffrey Taylor

Well, Ralph, we now have, at least, a beginning level of post-acute activity in all of our markets now, which we couldn't say last year. I would say roughly 1/3 of our markets now I would deem sort of mature and fully built out, and the remainder are on their way there. I think it's safe to assume that, that 23% of encounter number we saw in Q4, that, that number for full year 2013 will be higher. I don't think it gets to 30% but it will go higher from where it is now.

Ralph Giacobbe - Crédit Suisse AG, Research Division

Okay. And the last one, if I could. You've obviously borne out a lot of new physicians over the last kind of couple of years. Is there any way to break down, in percentage terms, just to give us a sense of what percentage of physicians have been with you kind of less than a year versus kind of a year to 2 years versus 3 years -- or however, you want to split it, just to give a sense of what percentage of your physician base has been with you, let's say, for over a 5-year period to help us sort of understand what the opportunity is as the newer physicians kind of ramp up.

Adam D. Singer

This is Adam, Ralph. We'll probably have to get -- not probably. We have to get back to you with an actual breakdown. That study is ongoing right now. But I can tell you kind of in a macro basis is that the longevity is getting longer and longer. The percentage of people who've been here 5 years is getting bigger. But I don't have the actual breakdown for this call right now. We can follow up on that.

Operator

Our next question is from Kevin Campbell of Avondale Partners.

Kevin Campbell - Avondale Partners, LLC, Research Division

I wanted to just first ask about G&A as a percent of revenue. I understand the reasons why it's been going up the last couple of quarters. Obviously, you had a number of acquisitions in the fourth quarter as well. So as we start to feel the full impact of that in the first quarter, should we expect G&A as a percentage of revenues to tick up yet again, maybe, in Q1 because of all the deals you did in fourth quarter? And then maybe start to get a little bit of leverage going forward?

R. Jeffrey Taylor

This is Jeff, Kevin. No, we do not expect that. We are expecting leverage in G&A in 2013 and we expect it to commence in Q1. Kind of the 20 basis point range, we feel, is a rational target for us.

Kevin Campbell - Avondale Partners, LLC, Research Division

Great. And your pricing, obviously, is changing because of your mix of business. Do you -- should we continue to expect declines in that pricing as that post-acute business increases as a percentage of revenues, or should it stabilize from where we are today?

R. Jeffrey Taylor

There are 2 factors there. On everything being equal, yes, the rate will continue to fall a bit as post-acute becomes a bigger percentage. But with Medicaid parity and the fact that our underlying Medicare fee structure itself is up slightly, there's a countervailing force there, which I think will result in that number remaining probably more stable this year, could even conceivably go up a bit.

Kevin Campbell - Avondale Partners, LLC, Research Division

Okay so because of the benefits from parity and your Medicare rate increase, that would cause it to be, like you said, flat to potentially up?

R. Jeffrey Taylor

Correct.

Operator

Our next question is from Brian Tanquilut from Jefferies.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Jeff, just a question on the contracts in the hospitals. So in 2012, you exited a few of them. Just wanting to hear what your thoughts are in terms of evaluating existing contractor relationships and if we should expect more of those to happen this year?

R. Jeffrey Taylor

Well, we're continually looking at those opportunities to see if there are things that where our resources could be spent better elsewhere. I think the major exposure to that is past us, but we're continually evaluating things. If we have a small outlying thing that doesn't amount to much and doesn't have great margins, would we consider maybe getting out if we had the opportunity? Sure. And there's always a little bit of churn in our contracts. We win contracts and sometimes we lose contracts. But I think in terms of a process of going through and scrubbing, we're pretty much at the end of that.

Adam D. Singer

And I would just add, this is Adam, that we're not evaluating any contracts or worried about any new contracts today that are anywhere near the magnitude of the ones we were talking about last year.

R. Jeffrey Taylor

Right.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Okay. And then Adam, as we think in your prepared remarks, you guys talked about contracting relationships being a driver of growth, obviously. So as we look at your 10% plus, same market revenue growth, what percentage of that do you think or magnitude-wise, do you think would be coming from new contract relationships versus getting practicing rates from hospitals and hiring, basically?

Adam D. Singer

I don't know if we've actually looked at it that way. But what I can tell you kind of subjectively is, we're aggressively working to formalize the relationships we have in our existing markets where we had, if you will, just pure private practices without contracts and converting those to contracted relationships for all sorts of reasons. We continue to aggressively look for new buildings to contract within our current markets. I think it's embedded in the guidance we gave that we are going to grow these same markets either by acquiring some of the smaller practices in these markets, getting more contracts, or adding doctors to our existing practices in these markets. It's all embedded. I really don't have a breakdown for what percentage is what.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

And then last question, just a clarification on Medicaid-Medicare parity. You guys said you're expecting the cash flows to come in late Q2, early Q3. But in terms of revenue recognition, are you guys expecting to recognize that revenue in Q1 or Q2?

Adam D. Singer

We are.

Brian Tanquilut - Jefferies & Company, Inc., Research Division

Q1?

Adam D. Singer

Yes.

Operator

[Operator Instructions] Our next question is from Gary Lieberman of Wells Fargo.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Just going back to your comments on sequestration. Could you help us out with what the impact would be if the sequestration cuts go into effect as they're currently scheduled to?

R. Jeffrey Taylor

Sure. Gary, this is Jeff. Roughly half our encounters are from Medicare programs. So to make the math easy, a 2% cut in rates would be a 1% cut in revenues. And to make the math more easy, around $600 million, which is within our guidance range, that would be a $6 million reduction in revenues, although it would only be for 9 months of the year. 70% of that reduction would be borne by our doctors as our revenue per encounter would go down. So 30% of that, or roughly $1.8 million, would fall to our EBITDA line and then post-tax would be just a little over $1 million, around $0.06 or so. And the $0.06 is a 12-month number, so it would be more like 4.5 or something.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay, that's very helpful. And just out of interest, how come you guys decided not to include it in guidance?

Adam D. Singer

Well, it's just so uncertain whether it's going to happen, it's not going to happen, is there going to be another -- will it be fixed before the end of the year? Will it get kicked down the road a couple of months? We were quantifying it, we know what impact it will have. If it does happen, parity is done, it's on the books, it's the law. This appears, although technically, it is the law now, it's certainly much more -- it hasn't been implemented yet, and it's certainly much more uncertain.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And then on the acquisition front, you talked a little bit about it. But what are you seeing in terms of competition for acquisitions? Is there any pressure on multiples or is it still pretty steady as to what it's been over the past couple of years?

R. Jeffrey Taylor

It's heading steady as it goes. Our multiples are holding and we're not seeing a lot of active competition yet.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. And the pipeline still looks like it's fairly robust?

R. Jeffrey Taylor

Yes, it is.

Operator

Our next question is from Dana Vartabedian of Deutsche Bank.

Dana Vartabedian - Deutsche Bank AG, Research Division

Just going back to pricing. I was wondering if you can update us on the differential, I guess, at this point between average pricing for post-acute versus acute? I think on the last call, you said it was around 15% to 20%?

R. Jeffrey Taylor

It's about 17% on a dollar per encounter basis.

Dana Vartabedian - Deutsche Bank AG, Research Division

Okay. And then, I guess in the past, you've given us the percent of revenue from contract subsidies. Could you provide that for Q4?

R. Jeffrey Taylor

That's still right at about 6%. One extra point, the 17% differential in SNF rates was the rate in '12. As our rates have been updated for '13, post-acute did a little better than acute, so that may squeeze a bit but maybe 1%. It's not a huge movement.

Operator

And I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any further remarks.

Adam D. Singer

Well, I'd like to thank everyone for participating in today's call. And I look forward to talking to you again at the end of the first quarter.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.

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IPC The Hospitalist (IPCM): Q4 EPS of $0.49 beats by $0.01. Revenue of $137.6M (+17% Y/Y) beats by $3.1M. (PR)