Team Health Holdings, Inc. Q1 2010 Earnings Call Transcript

Executives

Tracy Young – Vice President Communications

Greg Roth – President, Chief Executive Officer

David Jones – Chief Financial Officer

Analysts

Joanna for Kevin Fishbeck – BofA/Merrill Lynch

Brian for Adam Feinstein – Barclays Capital

Gary Taylor – Citigroup

Shelley Gnall – Goldman Sachs

Robert Mains – Morgan Keegan

Andreas Dirnagl – Stephens Inc.

Ralph Giacobbe – Credit Suisse

Team Health Holdings, Inc. (TMH) Q1 2010 Earnings Call May 12, 2010 10:00 AM ET

Operator

Welcome to the Team Health fiscal first quarter 2010 earnings conference call. Today’s call is being recorded. (Operator Instructions) At this time, I would like to turn the conference over to Tracy Young, Vice President of Communications at Team Health.

Tracy Young

Good morning everyone. Before we begin, let me remind everyone that in accordance with the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, the company knows that certain matters to be discussed by members of management during this call may constitute forward-looking statements including remarks about future expectations, anticipation, beliefs, estimates, plans and prospects.

Such statements are subject to risks, uncertainties and other factors that may cause the actual performance of Team Health to be materially different from the performance indicated or implied by such statements. Such risks and other factors are set forth in the company’s filings with the Securities and Exchange Commission.

A reconciliation of adjusted EBITDA to net earnings calculated under GAAP can be found in our earnings release which is posted on our website at www.teamhealth.com and in our Form 10Q.

I will turn over the call to our President and Chief Executive Officer, Greg Roth.

Greg Roth

Thank you, Tracy, and good morning everyone. I’d like to welcome you to Team Health’s first quarter 2010 earnings call. In addition to Tracy, I’m joined by Dr. Lynn Massingale, our Executive Chairman and David Jones, our Chief Financial Officer.

I will start with a discussion of the drivers of our first quarter results and our growth strategy. David will review our financial performance. I will then provide some concluding remarks before we open up the call for Q&A.

First, I’d like to thank our physicians, other clinicians and administrative employees for their hard work and dedication during the quarter. Job one at Team Health is caring for the patients of our client hospitals.

Financial highlights of our first quarter of 2010 include, net revenue less provision for uncollectibles grew 4.3% to $365 million. Net earnings were $16.3 million or $0.25 per share after adjustment for debt redemption related costs and a favorable prior year professional liability loss reserve adjustment.

Adjusted EBITDA excluding the prior year professional liability adjustment was $38.6 million and adjusted EBITDA margin was 10.6%. Our first quarter results reflected strong growth from our recent acquisition activities but were constrained by declines in same contract fee for service patient volume.

As we stated previously, the relative contribution of our three primary revenue sources, same contract, net new contracts and acquisitions, experienced some volatility on a quarter over quarter basis, and the most recent quarter was a good example of that reality.

Acquisitions were the largest contributor to revenue growth. The completion of our IPO has enabled us to be much a more active participant in the M&A marketplace. Four acquisitions that we closed in 2009, particularly in anesthetics made a solid contribution to revenue and earnings.

Some additional color on anesthetics; the integration is going well and is on track. Anesthetics, like all acquisitions was immediately accretive to earnings and is achieving its financial objectives. Anesthetics has provided a solid new platform for growth where we are leveraging our existing infrastructure to scale this business and be responsive to accelerating demand in the market.

We are expecting contributions from our two most recent 2010 acquisitions to positively drive results in the second quarter and the balance of the year. All of these have been well-managed operations and easily and rapidly integrated to our organization.

Same contract revenue growth was below our historical trends for the quarter. The first quarter was a challenging period for this business due to softness in patient volume which experienced overall decline. Historically, our first quarter has been a strong volume quarter. We previously discussed volumes returning to more normalized levels following the record numbers of 2009.

However, in Q1 2010, we encountered a benign flu season, low relative H1N1 volume as well as weather related issues, which impacted EV visits significantly across many parts of our nationwide hospital network.

Net new contract growth excluding the military operations made a positive contribution to overall revenue growth between quarters. As expected, overall net new contracts were impacted by a decline in our military staffing business which was in line with what we discussed on our fourth quarter conference call.

As we experienced softer patient volumes at the beginning of the quarter, we accelerated our performance in areas of our operating plan. Specifically, we focused on revenue cycle performance, special service expense, as well as general and administrative costs.

In addition, we continue to make significant investments in professional staff recruiting, client services, patient safety initiatives, revenue cycle processes, professional liability cost management and information technology resources to support our growth strategy.

We believe this focus and these investments will favorably impact our financial performance for the remainder of the year by improving our average collection per patient and maintaining our operating margin line with the potential for soft same contract volume growth.

In terms of our military staffing business, the government appears to be emphasizing opportunities for small businesses as reflected following the completion of the most recent contract renewal process last fall. While we are still the largest military hospital staffing provider, we anticipate that the military staffing revenue will continue decline for the balance of 2010.

However, we have consistently right sized our cost structure for this business and it has consistently generated positive cash flow.

Our organization continues to be excited about the strength of our strategic position and the opportunities for profitable growth organically, by acquisition, through opportunities in the adjacent service markets over the remainder of 2010 and beyond.

We have a strong M&A pipeline with over $65 million under LOI and the current environment is yielding some very attractive growth opportunities. We remain focused on the operational metric improvements that we provide our clients, as this will continue to drive our high position in hospital contract retention rate, enable our sales team to win new hospital contracts, continue to make Team Health an attractive choice for potential acquisition partners.

Our debt redemption during the quarter strengthened our capital structure and increased our financial flexibility to accelerate growth and adjusted EBITDA, free cash flow and earnings.

Finally, we believe the over arching health care industry trend will provide significant support for our growth strategy. Although we believe that any significant potential benefits from the passage of the recent Health Care Reform Legislation are likely to be realized more definitively beyond the 2010 timeframe, we continue to firmly believe that Team Health is poised to benefit from any changes through increases of fee for service volume and an improved payer mix.

In addition, due to the increase in complexity in delivering quality health care services and the urgent need for effective management of hospital-based services, we believe the demand for our services will grow.

With that, I will turn the call over to our Chief Financial Officer, David Jones, to provide a more detailed look at our quarterly financial results.

David Jones

Good morning everyone. Following the market close yesterday, we issued a press release and also filed our Form 10-Q reporting our first quarter 2010 financial results. My comments today will review our first quarter results and highlight and expand on some of the key issues for the company during the quarter. Unless specifically noted, all comparisons of our financial performance are between first quarter 2010 and first quarter 2009 results.

Net revenue less provision for uncollectibles increased 4.3% to $364.5 million. Acquisitions and non-military net growth contributed 6.1% and 1.3% respectively of the growth between quarters.

Previously announced net contract changes within our military staffing division resulting in a decline of 3.3%. The quarter over quarter decline in same contract fee for service visits and non-fee service revenue, total same contract revenue growth was below our historical trend in contribution 0.2% of overall net revenue growth.

Same contract revenue was $315.1 million compared to $314.6 million. Increases in estimated collections on fee for service visits of 2.8% contributed approximately 2% of same contract revenue growth.

Contributing to the increase in estimated collections per visit were increases in commercial and managed care contracting rate, an increase in the average acuity level of patients and ongoing improvements within our revenue cycle process.

Due in part to the lack of a discernable flu season on a nationwide basis, and adverse weather conditions in certain sections of the country, fee for service visits in the quarter declined by approximately 14,000 visits or 0.8%. This contributed a 0.6% decline in same contract revenue growth between periods.

To provide some perspective, first quarter of 2009 was essentially flat compared to the first quarter of 2008. The historical trend line for same contract volume growth in the first quarter of 2010 would have indicated volume growth of between 2.5% and 3.5%.

The actual volume resulted in a revenue shortfall compared to such trend lines of between $7 million to $9 million Daily volume in March, while still soft, reflected an increase over January and February daily volumes. Declines in contract and other revenue primarily associated with the military division, constrained same contract revenue growth by 1.2%.

The provision for uncollectibles was $267.5 million. As a percentage of total net revenue, the provision for uncollectibles was 42.3% in 2010 compared to 41.2% in 2009. As a percentage of fee for service revenue only, the provision for uncollectibles was 51.7% in 2010 compared to 51.5% in 2009. The current period results reflect a modest decline from 51.9% in the fourth quarter of 2009.

In regard to fee for service payer mix changes, we continue to realize a decline in self-pay volume as a percentage of total volume. Specifically, self-pay fee for service visits declined to 20.8% of total fee for service visits compared to 21.3% in 2009. This also represented a decline from 21.7% in the fourth quarter of 2009.

Medicaid patients as a percentage of total visits increased to 26.2% from 25.3% during 2009. However, the Medicaid percentage of patient volume in the current quarter reflects a decline from the Medicaid percentage of 27.7% realized in the fourth quarter of 2009.

Professional services expenses of $282.8 million increased 5.2%. As a percentage of net revenue less provision, professional service expenses were 77.6% compared to 76.9% in 2009. Professional liability costs were $5.9 million compared to a benefit of $6.7 million in 2009.

Included in the financial results for both periods are favorable adjustments to prior year professional liability reserves. The first quarter of 2010 reflects a favorable reserve adjustment of $7.2 million based upon the most recent actuarial estimate of prior year professional liability losses.

This beneficial adjustment is due to favorable loss development on historical periods as well as continued positive trends in the frequency and severity of reported claims. The favorable adjustment in the first quarter of 2009 was $18.8 million.

Excluding the benefit of the prior year reserve adjustment in both periods, professional liability costs were $13.2 million and $12.1 million. As a percentage of net revenue, adjusted professional liability costs were 3.6% compared to 3.5%.

General and administrative costs were $30.8 million compared to $29.2 million in 2009. As a percentage of net revenue less provision, these costs were 8.5% in 2010 compared to 8.4% in 2009.

Net interest expense declined to $5.8 million from $10.1 million due to reduced levels of outstanding debt associated primarily with the bond redemption and lower borrowing rates on our term loan facilities. We recognized approximately $1.3 million of interest expense on bonds that were redeemed during the quarter.

Reported net earnings were $10.9 million or $0.17 diluted net earnings per share compared to $25.9 million or $0.52 pro forma diluted net earnings per share in 2009. The 2010 results included costs associated with our bond redemption of $16.2 million.

The financial results for 2010 also reflected a favorable adjustment of professional liability reserves related to prior years of $7.2 million compared to a favorable adjustment of $18.8 million in 2009. After excluding these adjustments, diluted earnings per share were $0.25 compared to $0.29 for 2009.

Please note that 2009 earnings per share amounts are pro forma for the retroactive effect of the conversion of the company’s limited liability equity interest into shares of common stock at the time of the December 2009 IPO.

Adjusted EBITDA was $45.8 million compared to $59.5 million in 2009. Excluding the impact of the prior year professional liability reserve adjustments in both periods, adjusted EBITDA was $38.6 million and $40.7 million respectively in each quarter.

Excluding the impact of professional liability reserve adjustments, adjusted EBITDA margin in 2010 was 10.6% compared to 11.6% in 2009.

Looking at our cash flow element, cash used in operations for the quarter was $10.7 million compared to cash provided by operations of $30.3 million for 2009. $13.8 million of cash cost associated with the bond redemption including $2.8 million of accrued interest payments on the redeemed bond, were included within 2010 results.

In addition to the bond redemption, other items contributing to the change in operating cash flow between quarters were increased levels of accounts receivable funding and increases in the required funding of current liabilities including prior year incentive plan liabilities during 2010.

Capital expenditures were $1.2 million compared to $1.5 million in 2009. Cash paid for acquisitions was $4.2 million compared to $2.7 million in 2009.

Financing cash flows benefited from $21.8 million of net equity proceeds associated with the exercise of the underwriters over allotment option, the proceeds of which were applied to the bond redemption.

Turning to the balance sheet categories, as of March 2010, we had cash and cash equivalents of approximately $15.7 million and a revolving credit facility of $125 million without getting us back to $7.2 million of undrawn letters of credit.

As previously noted, we redeemed $157.5 million of the 11.75% senior subordinated notes which resulted in a reported loss on the extinguishment of debt of $14.9 million. The loss from the bond redemption consists of the payment of bond premiums in the amount of $11 and the non-cash write off of $3.9 million of previously deferred financing costs. Scheduled debt payments of $1.1 million were made on our term debt.

As a result of the debt reduction, our total outstanding debt as of March 2010 was $452.5 million with no amounts outstanding under the revolving credit facility.

As of March 2010, net accounts receivable totaled $250.3 million compared to $237.7 million as of December 2009. Overall days in accounts receivable were 62.9 days compared to 62.3 days at December.

I’ll now turn the call back over to Greg for his concluding remarks.

Greg Roth

We are pleased with our performance during the quarter in light of softer patient volume and our ability to offset some of this volume softness with cost management and revenue enhancement initiatives. As we stated on our fourth quarter call, we anticipated that 2010 would be a challenging comp year for our organization due to the expected decline in H1N1 flu patient volumes and continued pressure on the military staffing revenue.

We have confidence in our ability to manage factors within our control such as acquisition, new contracts, revenue cycle and operating expenses. We are maintaining our 2010 annual revenue growth guidance of 6% to 8% which includes an expected decline in our military contracting division revenue of 3% to 3.5% of total revenue.

We anticipate that we’ll be in the mid to lower end of that revenue growth range in 2010. Longer term however, we continue to view our revenue growth rate opportunity in the range of 8% to 10%. We expect to continue to generate adjusted EBITDA results that will enable to meet our targeted margin of 10% for this category.

We firmly believe that the strength and flexibility of our business model and the performance of our physicians, other clinicians and administrative employees will continue to enable us to respond effectively to a rapidly changing and more complex environment and continue to generate consistent profitable operating results.

With that operator, would you please open the lines for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Joanna for Kevin Fishbeck – BofA/Merrill Lynch.

Joanna for Kevin Fishbeck – BofA/Merrill Lynch

My first question is around the impact of flu and weather in the quarter and maybe you can quantify somehow the impact of these two. What I’m trying to get is a sense of what the core same store growth in the quarter.

David Jones

The challenge is really trying to tease out exactly how much of an impact the weather had and what we saw in our volumes in a same contract basis was an overall decline of 0.8%. If you think about the historical growth rate with ER visits on a same contract basis, our view is that normally runs about 2.5% to 3.5% period over period. So a decline of the 0.9% certainly was below those normalized levels of growth.

We think certainly a major element of this had to do with the flu. That’s consistent with what we’re hearing from others that have reported volumes. We can look at some CDC statistics and see that the reported levels of flu incident in the first quarter of 2010 trailed what we saw in 2009 so we think that’s definitely a big driver of this.

To a certain extent, the way we have some visibility about the weather is we look at some of the territories where we provide staffing and particularly some of those Atlantic and mid Atlantic regions. We certainly saw some softness in those volumes and we do think not only were they impacted by the flu, but particularly in the February period, were probably impacted as well by some of these weather conditions.

We mentioned on the call the trend in the quarter on a per day basis, we did see softness throughout the quarter, but on a per day basis, March was up a little bit over what we were seeing in both January and February. Again, I think that’s consistent with what we’re hearing from others that have reported similar trends.

Joanna for Kevin Fishbeck – BofA/Merrill Lynch

Interesting in the quarter, sales trends have been better than what we would have thought and maybe you could comment a little bit what has driven that and maybe did a weak flu season impact that somehow?

David Jones

Yes, we did see a decline in the self-pay as a percentage of total revenue on a quarter over quarter basis. And just to reiterate, we say 20.8% in the first quarter of 2010. That compares to 21.3% first quarter of 2009. That is a trend we have been seeing for several quarters now. That probably started back in 2008 where we’ve seen just a modest decline in the self-pay as a percentage of total volume.

It’s really once again hard to pin down exactly what’s driving that. Last year I think there was some speculation in the industry that with the economy slowing and particularly a lot of construction industry slowing down, many of the workers in the construction industry that were potentially undocumented that would have been in this self pay category, aren’t utilizing services.

I think that is probably still some of that. Certainly the flu and the lighter volumes in the quarter could be another contributing factor. But it is definitely a trend that has been around for several quarters now and it does obviously help when we see a slightly lower percentage of our total mix with that self-pay component declining.

Joanna for Kevin Fishbeck – BofA/Merrill Lynch

You mentioned on the call that you see very attractive opportunities in terms of acquisitions and maybe you can talk about multiples you’re seeing and also the specialties that you’re focusing on in terms of going forward for your acquisitions that you plan to do.

David Jones

We continue to be very pleased with the response that we have with potential acquisition candidates. We did disclose in our 10Q that we have currently signed up under non-binding letters of intent about $65 million.

As we’ve said in the past, that’s a good indication of active interest, but it’s also no guarantee we’re going to close those transactions, but that’s sort of an estimated purchase price that’s in significant dialogue at this point.

The trends we’ve seen in terms of valuation are fairly consistent with what we’ve said before. I would say that the typical tuck in acquisitions generally run from a four to six times EIBTDA. The consideration continues to be a combination of both cash and earn outs over a period of time and that’s still holding true.

Greg Roth

The answer to the other part of your question on the M&A front, our primary focus is the ED service line. We’re also open to the possibility of hospital medicine and potentially anesthesia, but primarily I would say priority one would be ED.

Operator

You're next question comes from Brian for Adam Feinstein – Barclays Capital.

Brian for Adam Feinstein – Barclays Capital

Just to follow up on your comments about the guidance. Is it fair to say that maybe we should look at the revenue guidance as a little bit lower same store growth and maybe a little bit more revenue growth from the acquisitions for the full year. Is that the right way to think about the revenue guidance?

Greg Roth

It is. That’s exactly right. We’re looking at the 6% to 8% for all of 2010 and a little pressure on same contract and a little more lift on the M&A than we talked about in the past.

Brian for Adam Feinstein – Barclays Capital

March was a little bit better than January or February so it seemed like things were picking up. I know you don’t give monthly guidance or anything like that, but just in terms of the trend, was April also better than January and February just in terms of the volume in terms of ER visits?

David Jones

As a matter of policy we don’t comment on inter-quarter activity. But just to reiterate what we did see is that improvement in March, at least on a per day basis. At this point we really don’t have great visibility long term as to how volume trends are going to occur this year.

We certainly have recognized for time that there was some strength in same contract volume particularly second, third and fourth quarter of 2009, so for a long time we’ve recognized there are some more challenging comps as the year progresses.

We certainly hope that volume trends get more favorable, but we’re also preparing the business and the staffing mix to be successful even if these softer volumes we saw in the first quarter continue.

Greg Roth

We are not counting on volume bouncing back to make our guidance numbers.

Brian for Adam Feinstein – Barclays Capital

You’re doing a good job on other cost management so as I noted, you’re not counting on your volumes to bounce back. Maybe just talk a little bit about some of the levers and opportunities as you think about cost management so maybe just a quick update in terms of some of the initiatives there.

Greg Roth

Two things; one, we’re pushing very hard on the revenue cycle side. We’ve talked a lot about that on the road show and again, we’ve been doing these things all along, so it’s not as if we just started these things. We’ve escalated some of our work on the revenue cycle side, doing all the blocking and tackling things such as proper documentation and billing for all procedures and denials management and thing such as patient scoring to make sure that we’re collecting cash on the patients that can afford to pay us.

We’re putting a lot of energy into our cost management. We’re fortunate that we have good operators out there that are managing professional expenses to the revenue line. A lot of our compensation plans are in line with our revenue.

On the SG&A side, we have worked very hard to leverage our SG&A and have been able to make some improvements in that area and hold that line flat to down a little bit. So those are the majority of the leverage that we pulling at this point.

We see a lot of opportunity though. We continue to push on the growth side with the M&A and the sales which we believe will help us the rest of the year.

Brian for Adam Feinstein – Barclays Capital

On the contract renewals, I wanted to get a sense with the reform bill having been passed, is there any change in the negotiations with hospitals in terms of maybe a push back on the subsidy with the expectation that there will be more, the higher collectability from the uninsured. I just wanted to get your thoughts on any change there.

Greg Roth

We’re very open to looking at all those things and very sensitive to all those topics, but I would say at this point we’ve seen no change in behavior really from any of our customers at this point.

Operator

You're next question comes from Gary Taylor – Citigroup.

Gary Taylor – Citigroup

Greg, you had made a comment about the top line guidance and looking towards low to middle end and still being in the 10% margin range. Does that 10% EBITDA margin outlook, is that in general or specifically something you still expect to hit in 2010?

David Jones

We plan to hit that number in 2010.

Gary Taylor – Citigroup

Obviously the same store fee for service comps get much tougher because you start heading into some periods where you had unseasonal flu a year ago and may not have that again so the key to getting back to relatively flat margin after being down in the first quarter is really to move that compensation line. Can you talk a little bit about the timing and flexibility around doing that and also where is there a point where it impacts strategy? So for example, you had a contract where you maybe brought in a physician last year. Now you’ve got this period where volume is weaker and you may not necessarily want to rip that resource out of there. Could you talk about how much flexibility you have and how you think about balancing those kind of things in a period where maybe volume is less than 2.5% to 3.5% that you’d typically be looking for?

Greg Roth

On the margin, last year, the first part of the year, we had a really high margin and we knew that was not a sustainable margin. I believe David said 11% plus. So as we go forward, we’re committed to a 10% margin and we believe we can make it.

As far as the timing of our costs, as we went into the year we were concerned about the volume comp. We have been working hard on the expense side and managing the SG&A side and just doing all the blocking and tackling.

I would say on the professional comp side, we’re very sensitive to that. And you’re exactly right. We can’t, I think you used the term rip cost out, and it takes us awhile to work through hospital partners and make sure that we’ve got the right coverage to do good quality patient care.

So it does take us some time and the good news is, we have good operators and we do have many comp plans that adjust automatically to the lower volumes. The other part of that, tangential to that, it kind of touches on the margin issue, keep in mind with the big comps for the second, third and fourth quarter that were due to flu, that’s also very low acuity business.

So we believe that even though the comps are going to be challenging on the volume side, second, third and fourth quarter, we don’t believe that it’s going to match dollar for dollar on the revenue side because we believe that our acuity will look pretty good the remainder of the year versus last year because of the fact we will not have as much flu as a percentage of our business going forward.

Gary Taylor – Citigroup

The same store revenue ought to look better than the same store volume. The pricing, price mix –

Greg Roth

Make sure we’re on the same page. Relatively speaking, we do believe that although the volume comps will be challenging, that the revenue won’t be as challenging because of the fact that the acuity will be a little higher and a lot of the work that we put into our revenue cycle will be paying off this year and helping us on the rate side.

Gary Taylor – Citigroup

For example 2Q last year your fee for service rate per visit was actually down year over year, so it’s probably flu having some impact on that.

On the adjusted EPS of $0.25, I don’t quite get there if I just add back the professional liability adjustment and exclude the charge and use the 39% reported tax rate. Is there the tax treatment of those two non-recurring items a little bit different such that that gets you to $0.25?

David Jones

There may be another element. Let me just walk through. We are excluding the favorable malpractice adjustments of about $7.2 million and then as it relates to the adjustment we’ve made for the cost incurred on the bonds that were redeemed in both January and a portion in February, keep in mind that when we did the IPO in December we had a 30 day notice period on the bond redemption, so that caused us to incur some residual interest cost in the first quarter associated with those bonds.

Gary Taylor – Citigroup

So that would be excluded.

David Jones

We’ve got $14.9 million reported loss on extinguishment of debt and then we’ve added roughly $1.3 million of interest expense we recognized on those bonds. So that’s the total adjustment which is $16.2 million plus the favorable adjustment on the PLI at a 39% tax rate. That’s how we get the $0.25 per share adjusted.

The implication of that is we’ve got a reported interest expense for the quarter of about $5.8 million. Embedded in that number is about $1.3 million of interest cost associated with bonds that were redeemed during the quarter.

Gary Taylor – Citigroup

Trying to get a little better sense of things on the new contract side. For example, first quarter of ’10 you show fee per service new contracts net terminations $15.6 million of revenue basically year over year comparison, and so that’s kind of a trailing 12 month revenue of both new and lost contracts so call that roughly $4 million a quarter. If I think about $4 million a quarter of net new contract growth, can you set my perspective? Does that mean I’m signing $10 million in annualized revenue a year and losing $6 million in terminations or am I signing $5 million and losing $1 million? How do we get around to that annualized net new revenue that gets signed each quarter?

David Jones

Just to sort of reorient. What we’re showing in our revenue disclosure tables to your point, these are contracts that, new contracts net of termination, these are contracts – this is the revenue associated with those contracts that came on at some point during either quarter. So these are contracts grouped together that have not been in for the full three month period in both periods. So that’s what we’re showing here.

To answer your question, what we have talked about is some guidance on a net basis of sales net of terminations ranging anywhere from 2% to 4% of total revenue growth. What’s a little challenging this particular 2010 period is we do have some of this overhang on the military division embedded within that.

But if you go back and look at what we talked about in our press release, we did get contribution on revenue growth from the non-military, about 1.3% net, which is obviously slightly below our expectation for the 2% to 4%.

So that’s really how we think about the components of that, so I don’t know if I’ve addressed your question directly, at least conceptually we do think the net effect of new contracts less terminations long term, we will look for 2% to 4% contribution of overall revenue.

Gary Taylor – Citigroup

I understand what you’re saying. Obviously I wish I could have more numbers so maybe that’s something to think about if possible. Maybe to ask it this way, when I look at, so on the trailing 12 months here, I’m just looking at the fee for service, that $15.6 million of annualized net new revenue, that’s up from a year ago. At that point the trailing was 13.2%. So the fact that number is up is good, but for example, is that number up year over year because presumably because the new contract signings are accelerating or is that number up in fee per service because terminations have slowed, or is it predominantly one or the other or is it really just a combination of the two?

Greg Roth

To peel back the onion, obviously the spectrum number does distort the overall total numbers and we’ve disclosed that spectrum is going to be a compression on revenue of about 3% to 3.5%. Kind of back out that. If you look at the core business, look at the quarter, our first quarter in 2010 I would say that our sales are slightly up.

Looking at one quarter, looking at the quarter and comparing it to 2010 in total, on a run rate we’re slightly above prior year on the sales side and also slightly higher on the terms side or in a negative way in the terms side.

So if you ask the question where is it coming from, what’s the difference, strip it away. Sales are up slightly and as a negative effect, terms are up a little more than they were on a run rate from last year and we have called out some of our contracts on the term side that have caused that number to go up a little bit.

Gary Taylor – Citigroup

And I right that the military staffing piece that you’ve talked about for awhile as a lost contract, that’s all showing in that contract and other revenue right, not the fee for service revenue?

David Jones

Almost exclusively that is contract and other revenue.

Operator

You're next question comes from Shelley Gnall – Goldman Sachs.

Shelley Gnall – Goldman Sachs

I would like to ask a couple of questions about your March same site volume growth trend just to strip out the weather impact or the flu impact. Did you see a slowdown? I’m understanding that there was a little bit of improvement in the volume trend, but it was still weaker than the historical 2.5% to 3.5%. Can you tell me if that trend was consistent across all payer classes or if there were some that were particularly weak and others that were more in line with historical trend.

David Jones

When we look at this, we certainly look at volume and payer mix. We didn’t necessarily look at payer mix by month. We look obviously at the trends payer mix by quarter, so I don’t have great visibility on that.

But if you look, as we look at our data and we look at our same contract volume per day, generally January, February were pretty flat relative to each other and then we saw a little bit of a lift, just under 7% increase per day coming to the March numbers. So that’s how that trended. So we did see a little bit of improvement in March off two months that were somewhat consistent on a per day basis.

As it relates to the payer mix, again I can’t speak for the month, but as it relates to the quarter, the trend that we saw to highlight quarter over quarter, a modest decline in the self-pay. We did see some increase in the Medicaid quarter over quarter but in both cases, the self-pay and the Medicaid, we saw a little bit of a decline sequentially compared to the fourth quarter.

So I don’t know once again if the decline in the Medicaid from the fourth quarter of 2009 or first quarter of 2010 is being impacted by this softer overall flu season. There is some speculation that it could be part of it, but it’s really hard to know with great precision on that point.

Shelley Gnall – Goldman Sachs

The reason for my question is to try to get a sense of if this is just macro consumer pressures that are keeping people out of emergency departments or if there’s any sort of structural change you’re seeing on commercial plan benefit design that could be keeping some payer classes out of emergency department more. Any thoughts on any structural changes here that could be driving the volume or are you thinking at this point it’s mostly a macro economic impact?

David Jones

To contrast what we did see when the Medicaid increases, the last several quarters this has been pretty consistent. We’ve seen declines in the commercial and managed care. I think our view still is that that’s primarily a function of macro economic issues, particularly the higher unemployment rate and the experience over 2009 is consistent with our experience in other periods where there was higher periods of unemployment or elevating levels of unemployment.

You do tend to see some increase in your percentage of Medicaid and a decrease in your percentage of your commercial.

Greg Roth

I think at this point, digging through the data, we’re not seeing anything that’s causing volume decreases or increased because of planned design. We do look at those things.

Shelley Gnall – Goldman Sachs

It sounds like you’re reiterating your margin guidance for 2010 of around 10% so just wondering, you had a pretty nice favorable malpractice adjustment here. Any changes to your internal assumptions for the professional liability expense going forward following this favorable adjustment that maybe helps you get some comfort around that 10% margin guidance or are your assumptions remaining the same?

David Jones

Our internal pricing is unchanged at this point. The actuarial view essentially validated our internal prices, so that at least on a rate is not going to change. Our expense does move up and down with increases in exposure and growth of the business.

The way we do this is, in the third quarter we will get another updated actuarial report and will evaluate trends that we’ve seen. We’ll get an updated view on current year losses from our actuaries and they have the benefit of six additional months of loss development and monitoring trends. So at least for the next quarter, I would not anticipate any changes to our rate.

Once we get the updated actuarial report in the third quarter that could be subject to additional changes just reflecting the actuarial results. I will say, we have continued to see very favorable trends. Those trends seem to be holding up and the key trends that we focus on are the actual development of historical loss periods that serve as the basis for current year estimates that carry forward.

We’ve seen very good trends continuing in the frequency of claims and we continue to have pretty good success in managing the growth of the actual severity of those claims when they come due as well.

Operator

You're next question comes from Robert Mains – Morgan Keegan.

Robert Mains – Morgan Keegan

Just to split hairs a little bit on the adjusted EBITDA number, when you say that you think you can hit your target for the year, is that assuming that the first quarter numbers, the $46 million figure or the $39 million figure?

David Jones

It’s the $39 million.

Robert Mains – Morgan Keegan

If we look out over what we’re going to see for the rest of this year, two of the things you cited in the first quarter were seasonal flu and weather will obviously go away. H1N1 becomes more of a factor when we look at comps when we look at this quarter and forward, and then the military contacting, you started to hit that wall in the fourth quarter. Am I right that those are kind of the main events that we’re going to be lapping compared to 2009 through the rest of this year.

Greg Roth

Those are the main pressure events, yes.

Robert Mains – Morgan Keegan

As far as the military contracting goes, I know it’s still kind of early for this sort of thing but are you getting a sense that the posture that they’ve taken about kind of size of vendor is something that is going to be an ongoing pressure and we should look for maybe some more downsizing in fiscal 2011 or might this have been kind of a one time adjustment and life goes on from a lower level?

Greg Roth

At this point it’s really too early to tell. We’ve put out there about 3% to 3.5% total impact this year, but right now, things are going pretty much according to what we projected that they would go. So at this point we don’t have a lot more clarity and the things that we’ve seen have pretty much lined up with what we anticipated. So it’s really too early to tell.

Operator

You're next question comes from Andreas Dirnagl – Stephens Inc.