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IPC The Hospitalist Company, Inc. (NASDAQ:IPCM)

Q1 2014 Earnings Conference Call

April 23, 2014 5:00 PM ET

Executives

Evan Pondel – Head-Investor Relations, PondelWilkinson, Inc.

Adam D. Singer – Chairman and Chief Executive Officer

R. Jeffrey Taylor – President and Chief Operating Officer

Rick Kline – Chief Financial Officer

Analysts

Ralph Giacobbe – Credit Suisse Securities LLC

Matt J. Weight – Feltl & Co.

Kevin K. Ellich – Piper Jaffray Companies

Brian Tanquilut – Jefferies LLC

Ryan S. Daniels – William Blair & Co. LLC

Darren Lehrich – Deutsche Bank Securities, Inc.

Gary P. Taylor – Citigroup Global Markets Inc.

Ryan K. Halsted – Wells Fargo Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the IPC The Hospitalist Company First Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Evan Pondel of PondelWilkinson. Please go ahead.

Evan Pondel

Thank you, operator, and good afternoon, everyone. With us today from management are Dr. 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 estimated 2014 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 2013 annual report on Form 10-K filed on February 26, 2014 under the heading risk factors in 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. Also please note that our comparisons, unless otherwise specified, are to the first quarter of 2013.

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

Adam D. Singer

Hey, thank you Evan and thank you everyone for joining our call. And the first quarter marked another milestone for us with nearly 1.8 million patient encounters resulting a 12% increase in encounters and a 13% increase in revenues. These growth rates are against the comparable quarter of last year. So an unusual spike encounters from the flu epidemic that affected many of our markets.

From a headcount perspective, headcount grew 18% closing the quarter with 1,713 providers. Though Jeff and Rick will go into more detail of our financial results, overall our results for this quarter were in line with our internal forecast. As we talked about during the year end earnings call, we have been investing in the expansion of our recruiting resources and we expect the majority of the related benefit of this investment to occur in the second half of the year. Our current acquisition pipeline looks similar to what we were at this time a year ago with last year being the best acquisition year in the company’s history. Overall, we feel confident about the direction of the company and look forward to the opportunities that lie ahead.

With that I'll turn it over to Jeff.

R. Jeffrey Taylor

Thanks Adam. Our first quarter results were overall in line with our internal forecast. They were a number of factors that affected our comparable results. First, we had a difficult comp this quarter as our growth in revenues were somewhat needed by the prior year’s flu epidemic, which we believe contributed an estimated 45,000 to 50,000 additional encounters at normalized levels. We also believe this year’s severe weather conditions negatively impacted our volumes in several of our markets and specifically our post-acute productivity.

Post-acute encounters this quarter were 28.2% of total encounters compared to 23% last year. Our adjusted EPS which was flat with last year at $0.57 was impacted by both gross margins and overhead. Since Rick will cover overhead, I’d like to talk about the drop in our gross margin from 26.8% last year to 26.3%. 50 basis point decline is due to a combination of the following three factors: acquisitions, under-performing practices and the exit of a few contracted facilities. As would be expected with the level of acquisitions brought on last year, some of the acquired practices, although operating profitably may not be operating at full margin in comparison to other practices.

It may also take some time to optimize the margin of certain acquisitions as the integration process can take several quarters. We also experienced some margin decrement during the quarter related to a handful of practices for the level of attrition associated Locums cost and changes in productivity levels have created a temporary negative impact on margins.

While these practices were still profitable, we remain focused on the related issues in order to improve their margins to optimal levels over time. The gross margin for the quarter was also impacted by a small number of practices where we are exiting a contracted facility and have wound down or in the process of winding down the practices. All of these practices have been operating below normalized margins with some experiencing volatility and operating results over previous periods.

Consequently, decrease from our year-end headcount of 1,765 to 1,713 at the end of the first quarter is largely due to these practices being shutdown. It is important to note that with approximately 300 practices company-wide we will from time-to-time experience the effects of these factors. Well, the degree will vary somewhat with every period. From 2014, we continue to expect that our contribution margin will be between 26.5% and 27%.

Looking at same-market statistics, same-market revenue growth was 8% for the quarter with same-market encounter growth of 7%. Adjusting for the exciting of certain contracted facilities discussed previously, our same-market revenue growth would have been 10%. Same-market revenue per encounter decreased less than 1%, primarily from the adoption of sequestration cuts beginning in the second quarter of last year, offset by current year physician fee schedule increases.

Our revenue per encounter was also impacted by the increased mixed of post-acute encounters. Admittedly, we’ve had a bit more volatility this quarter with a small portion of our business. As we work to improve the profitability of our practices, we remain focused on growing the company through recruitment and acquisitions.

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

Rick Kline

Thanks, Jeff. Please refer to our earnings release for a complete review of our operating results since I am only going to briefly discuss a few other financial highlights that haven’t already been mentioned by Adam or Jeff.

Adjusted net income for the quarter was $10 million or 2.1% above adjusted net income last year and adjusted EPS was flat at $0.57. As Jeff described, the components effecting the gross margin as part of the decline in earnings, I will cover some of the results regarding G&A costs.

G&A costs for the quarter were 16% of revenues compared to 15.6%. As we talked about with the introduction of our 2014 guidance, G&A expenses were anticipated to rise given the investments we are making in technology and recruiting resources.

Between the high and low-end of the guidance, annual G&A costs are estimated to be in the range between 16.3% to 16.1%. While we are seeing the increased recruiting costs now, the related benefit in the form of increased hiring is still anticipated to follow the natural on-boarding cycle, which generally occurs in the second half of the year. Therefore, incremental revenues from these efforts will probably not be felt until the third and fourth quarters.

With regard to the balance sheet, we ended the quarter with $23.3 million of cash compared with $25 million at year-end. We paid down $5 million of our outstanding debt during the quarter to bring the quarter and debt balance to $85 million. DSO or day sales outstanding on accounts receivable was up to 58 days from 56 days at year-end. The increase in DSO is due to recent acquisitions and Medicaid parity. Our single largest state, Texas, has indicated Medicaid parity payments will commence May 1 while they previously indicated payments will begin this past March. At this point, Texas is our only remaining state that has not begun paying parity and it does affect our DSO.

In regards to guidance, we are reframing our 2014 guidance as previously announced in February. We continue to expect revenue to be in the range of $720 million to $732 million and adjusted earnings per diluted share to be in the range of $2.41 to $2.51. Please refer our earnings release for the assumptions related to the EPS guidance.

With that, we’d now like to open the call up to any questions

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will be coming from the line of Ralph Giacobbe from Credit Suisse. Your line is open.

Ralph Giacobbe – Credit Suisse Securities LLC

Thanks. Hi, guys. So I guess, first, just on the reaffirmation of guidance, 1Q is generally your strongest quarter. And even if I consider some of the weather impacts, tough comp and some of the cost issues that you talked about, still implies a pretty steep ramp, kind of as we move through the year. So can you help us sort of in getting comfort with that in terms of the magnitude as we think about the back half of the year of how that would flow through from both, I guess, top line and margin perspective?

R. Jeffrey Taylor

Ralph, this is Jeff. As we stated on the call, this quarter is tracking right on top of our internal forecasts that were created before the year started and on which our guidance was based. We will see a stronger performance in the second half of the year. No question about that. Part of that is our expectation and what we’re seeing in early returns on the hiring and recruiting front. And what we know we have in the works in terms of practice development across the platform.

In terms of margins, we expect to outperform this quarter on gross margin because obviously we are below the guidance range on our gross margin. I think as we exited these terminated contracts that will have a positive impact on margins for the rest of year. They have noticed that the G&A is actually a bit below where we thought it was going to be. So we’re happy about that. It’s down sequentially from the second half of the last year. We expect strong revenue increase and solid margin performance for the rest of the year.

Ralph Giacobbe – Credit Suisse Securities LLC

Okay. And then, just in terms of the exiting of the contracted facilities, I guess who exited and why and it’s because these contracts are going – hospitals are now sort of consolidating that piece or what’s the driver of that?

R. Jeffrey Taylor

It’s a mixed bag. Some we exited, too much work for too little return. One was the hospitals were acquired by another company that did their work in-house and wanted to convert to that model. The smallest of them, it was a de minimis contract, but one of them was a bundle. The first piece of business is lost to a bundle. It was a tiny contract we had acquired in an acquisition.

Ralph Giacobbe – Credit Suisse Securities LLC

Okay. And then just as it relates to the underperforming assets, I guess, can you give us any sense of what percentage of your book that is, maybe what the underlying issues are and how quickly you can get those resolved?

R. Jeffrey Taylor

It’s a fairly small portion of the overall book of business. It’s a single digit number of practices. It’s staffing imbalances more business than we have providers to staff or loss some pieces of business certainly on the other side that we now have to rebuild business and we have the provider base. We always have a subset of practices in any quarter that’s in this bucket that we look at. That’s why our practice margins are not always 28.5% while they’re down in the high 26s and 27 range. Occasionally we have a quarter where we have a bit more of it than our normal background noise as we did this quarter. There is nothing

here that is a long standing structural problem. We should be able to improve these over the next couple of quarters.

Ralph Giacobbe – Credit Suisse Securities LLC

Okay. That’s helpful. And then just my one last one if I could squeeze one in. Can you tell us how much parity you booked in the quarter maybe compared to last year? And then the pricing dips even sequentially when you had sequestration as a pressure point. So are you seeing mixed shift? Is there anything in terms of acuity level and/or maybe the behavioral impact of physicians that you’re seeing just given some of the government overhang stuff that’s out there? Anything along those lines would be helpful. Thanks.

Adam D. Singer

The decrement we’ve seen in revenue for encounter is almost totally driven by the increase in the post-acute mix as a percentage of our overall mix. It’s not an acuity issue or a behavior issue. We continue to believe our doctors continue to credit appropriately for the work that they’re doing. Parity, we booked in this quarter essentially at the same levels we were booking in Q4 last year. So we really haven’t added anything at same rate. So we are booking the second half of last year.

Ralph Giacobbe – Credit Suisse Securities LLC

Okay. Thank you very much.

Operator

Thank you. Our next question will be coming from the line of Matt Weight from Feltl and Company. Your line is open.

Matt J. Weight – Feltl & Co.

Hi, good afternoon. In terms of the sequential decline in the total hospitalists, Jeff, I think you alluded to a lot of that from exiting some of the contracts. Can you quantify how many physicians that is?

R. Jeffrey Taylor

Well, the majority of our net decline there is represented in that handful of practices. It’s important to note that absent a lot of acquisition activity, our workforce will shrink in Q1 every year because of no hiring season and the attrition sort of trickles along all year. So it’s not unusual apps and acquisitions forced to decline a bit, but the majority of that net decline was in those exited facility.

Matt J. Weight – Feltl & Co.

Okay. And then I think you know historically also with our apps and acquisitions, you see some softness in the second quarter as well. Is that reasonable to expect this year, again apps and acquisitions?

R. Jeffrey Taylor

Softness in terms of relative volume.

Matt J. Weight – Feltl & Co.

Total hospitalists, yes.

R. Jeffrey Taylor

Total hospitalists, yes, because the hiring season does not kick until the latter part of the industry.

Adam D. Singer

I don’t know I would depict the softness, I mean it is what it is. So we grew year-over-year and this was the period where we don’t add as many minus absent the acquisition.

R. Jeffrey Taylor

Year-to-year and what we expect strong growth, but sequentially absent acquisitions the headcount could drop.

Adam D. Singer

Yes.

Matt J. Weight – Feltl & Co.

Okay. Fair enough. And then in terms of – Jeff, the revenue encounter that you talked about the decline there due to post-acuity mix. So it’s safe to use that figure kind of going forward throughout the rest of the year. There wasn’t anything unusual in this quarter.

R. Jeffrey Taylor

No, nothing unusual. The only question would be it’s safe to use that number going forward assuming that the mix between post-acute stage exactly why it is, which it has improved the past 11 quarters.

Matt J. Weight – Feltl & Co.

Right. I understand that. And then just kind of looking at ….

R. Jeffrey Taylor

Matt, let me add one more thing. We believe we are seeing, although it’s very early on, but we believe we are seeing a bit of improvement in the insurance mix and the self-pay will have a much clear view of this by the end of the second quarter.

But if, in fact that trend is real, and possibly even accelerates because of the late nature of the sign-up and at the end of Q1. We could see a little tail in the other way, which we’re hopeful of that. We’re not guaranteeing yet.

Matthew J. Weight

You want to expand on what you’ve seen in terms of self-payment coming on?

Adam D. Singer

Well. It’s very early, we’ve seen a decline that's largely in line at this point with the assumptions we made in our guidance of what we guessed it would be. March is still too early to even include because with people identified as self-pay, we hold those bills for a while where we try to research insurance coverage. So we have a clear picture, January and February. And it looks like it’s down some, which we would expect it to be and other people seem to be seeing the same thing.

Matthew J. Weight

Fair to say how much it was down?

Adam D. Singer

Our guidance implied it would be down a little less than 1% from the low 5s into the mid-4s and that’s kind of what we saw in January and February.

Matthew J. Weight

Great. And then, just I’ll guess I’ll squeeze one more in here. Looking at your same-market encounter growth over the last the quarters, kind of in the 7% to 6.5% range. The comps should ease going forward here. So, I mean, would you expect them to see kind of a step up in the acceleration in that figure here?

Adam D. Singer

We would hope to and the comps indeed are less daunting going forward.

Matthew J. Weight

Okay. Thanks for the color Ad.

Adam D. Singer

Thanks, Matt

Operator

Thank you. Our next question will be coming from the line of Kevin Ellich from Piper Jaffray. Your line is open.

Kevin K. Ellich – Piper Jaffray Companies

Hi, guys. Just wondering, can you quantify what sort of impact weather had this quarter?

Adam D. Singer

It’s difficult to do an exact, calculation on that Kevin, but we did see, weekday volumes on our entire platform down in the neighborhood of 3,000 of 4,000 encounters from what they were running immediately before the storm. And depending on which storm you counted either last one, two or three days a little impact on the acute, but much more impact on the post-acute. So we were disappointed in that because as we said the revenue numbers we posted right where right on our internal numbers. Without the weather, we would beat our internal numbers and the way we have them spread. Without the weather, we wouldn’t have gotten to the way you guys had it spread. It would have been in-between the two.

Kevin K. Ellich – Piper Jaffray Companies

Got it. Okay. And then, going back to I think it was Ralph’s question and may be you answered this and I missed it, but thinking about contracts that you’ve exited do you have visibility on any other contracts or facilities you plan to exit as the year goes on?

Adam D. Singer

There is nothing that we’re planning now or that we are aware of, that are at risk for the risk of the year. But we are always continuing to monitor if we have situations that are substandard and we don’t feel. We’re going to be able to fix them adequately and are taking disproportional resource. We can always begin that process ourselves as a subset of these with that way, but I don’t expect anything in the next quarter or two.

Kevin K. Ellich – Piper Jaffray Companies

Okay that’s fair. And then actually you guys called out sequestration having an impact on the pay market revenue per encounter that annualizes I think it annualize on April 1 right so, is that embedded in…

Adam D. Singer

That’s a Q1 impact only Kevin, yes.

Kevin K. Ellich – Piper Jaffray Companies

Right, right so the annualizations embedded in your guidance, right?

Adam D. Singer

That’s correct.

Kevin K. Ellich – Piper Jaffray Companies

Got it okay. And then Rick, I was wondering as may be you could help us out, Texas accounted for about 17% of your revenues in 2013, so once you started to get those payments I guess what sort of impact should we see come May 1?

Rick Kline

Well, it’s based on May 1, but I think indications are that’s when they will begin. There’s still cumulative amounts that sound like they are going to trail, and I don’t know how many quarters is going to take to recover those cumulative amounts, keep in mind we have they have moved this date out of it, I think originally there is going to be February and became March and became the end of April another thing, April 1, so…

Adam D. Singer

May 1.

Rick Kline

I’m sorry May 1, so I think for us to get caught up completely what the OS could be at after the end of the year.

Adam D. Singer

Definitely.

Kevin K. Ellich – Piper Jaffray Companies

Got it okay, and then but it will help the DSO at some point.

Adam D. Singer

And they have actually told us, they don’t think we know.

Rick Kline

Where we read it’s available from their postings.

Kevin K. Ellich – Piper Jaffray Companies

Okay, and then one last one, I take a stab at this, I missed your same market growth pretty substantially man made. And had a good question on the day market encountered growth, wondering if you could help us, what’s your expectation for the same market growth is here. I mean we’ve been tracking here and now a little bit below where it has been historically? Are we should be see it meaningful acceleration back to the mid-teens and I guess when will it take to us their.

Adam D. Singer

Absent significant acquisition activity in same market, you will not see going back to mid teams. I think it will trade roughly in the area where it is maybe enhanced a bit by the comps getting easier and if were successful as we hope in our recruiting efforts hopefully we have a little more boost to that in the second half. But kind of the 9, 10 is more of a goal for us in the mid-teens unless we happened to have a big in market acquisition.

Kevin K. Ellich – Piper Jaffray Companies

Got it. That’s helpful.

Adam D. Singer

Thanks Kevin.

Operator

Thank you. Our next question will be coming from the line of Brian Tanquilut from Jefferies. your line is open.

Brian Tanquilut – Jefferies LLC

Good afternoon guys. Jeff or Adam, I know we talked about how the contract exists and drove the number of doctors down sequentially. but if you don’t mind just giving us your views on turnover. Yeah I know you don’t give it – during the year but how much position turn over relative to last year in Q1?

Adam D. Singer

Pretty much cracking right along, has really not the much shift actually for the last couple of years I mean number

Rick Kline

So still in that sort of mid-teens range.

Brian Tanquilut – Jefferies LLC

Obviously the contract termination added a bit to it, but what we are seeing is we look forward we’ve seen no reason to think that demand has been normalized those out.

Rick Kline

Its funding right as it affected.

Brian Tanquilut – Jefferies LLC

Okay and then. As we think about the hiring pipeline so obviously you started investing in adding more people to the hiring squads so to speak. This time comparing it to this time last year are you starting to see the pipeline start to get bigger already and it knows this in early stages but I guess excluding the new dollars that you spend on the hiring staff as sort of the same store basis what does the hiring pipeline looks like for you guys non-recurring right now?

Rick Kline

The answer is yes. We are seeing enhanced performance already. We’ve more catches, we have more interviews, we have more contracts offered, we have more contracts already signed than we did at this stage last year. And I hope that the gap between this year and last year will expand as the year goes forward. But we are already nicely ahead of last year.

Brian Tanquilut – Jefferies LLC

And then the last one from me and easing on guidance obviously as we look at our model and look we did in Q1, I mean the ramp, I think it was Ralph mentioned that ramp is pretty steep, so what level of acquisition have you baked in, because I am sure that you have your state market assumptions. But what level of acquisitions have you baked in to get to your numbers. I guess is one way of asking or another way would be as you look at the pipeline, is it enough if less that you hit only 75% of looking the pipeline for you to get to numbers for the year?

Rick Kline

Well, we don’t have our pipeline baked into our numbers for the year. We made some assumptions on same market acquisitions based on things already in hand and well underway at the time guidance was given. But nothing in terms of new market acquisition or nothing in terms of the other myriad of deals in the pipeline that are not that far along.

Adam D. Singer

To answer your last question, we did 75% of the pipeline and got it down now as opposed to late in year, we do have a very good year.

Brian Tanquilut – Jefferies LLC

Hey, after the follow-up to that point you made. In your guidance did you include the contract exit at the time that you baked or you build your guidance?

Rick Kline

Some of them we knew about at that time, some of them we did not.

Brian Tanquilut – Jefferies LLC

Okay got it. All right thanks guys.

Rick Kline

Yes.

Operator

Thank you. Our next question will be coming from the line of Ryan Daniels from William Blair. Your line is open.

Ryan S. Daniels – William Blair & Co. LLC

Yes, thanks for taking the question guys. You mentioned in your prepared comments about some weakness in particular in the post acute care site, given the weather. And I am curious why that would be disproportionately impacted versus the acute side.

Adam D. Singer

Okay, yes it’s a good question, Ryan. If part of it relates to the frequency and the necessity of visits in the post-acute. In the acute side, we are seeing every patient everyday. In the post-acute side, we are seeing the patients as often as they need to be seen that maybe three or four times a week in the first week or maybe once or maybe twice a week, depending on the patient. But when you have an extreme weather event on a Tuesday or Wednesday the providers can make the determination too dangerous to get there, I can see that person tomorrow instead of today.

And still meet their needs and I know if they are critically ill and they know that they have to be seen I will do the same thing acute docs have to do. And I will get there on snowmobile or dogs clutter or whatever they have to do. But there is a little more flexibility in the timing of the post-acute business. The medical necessity is still there, but the acuity is less. So it turns up the timing and it created first encounter.

Ryan S. Daniels – William Blair & Co. LLC

Okay that makes sense. And then you also highlighted some of the acquired assets which lower than corporate margin. And I am curious if you are indicating there that those are performing below plan or are you just highlighting the fact that you had a belly of M&A activity in anytime that comes into the business you’re going to see kind of a margin pressure from that ahead of your ramping the margins up.

Rick Kline

It’s the later Ryan. The deals are performing last year. The deals from last year performing essentially to our plan. But we have a couple of large pieces, we did late in the year. One hose gross margins are below and we knew that that going in. Our normal margins because the level of subsidy and the staffing need, another large piece is performing right on our normal matrix for gross margins but the regional G&A is higher because it was an independent platform before and we are cautiously pairing that back to make sure we don’t cut off the necessary service, but overtime we’re continuing to trim those, the G&A costs in that second acquisition.

Ryan S. Daniels – William Blair & Co. LLC

Okay, and then two more quick ones. Just you gave us the percentage of encounters and percentage of revenue from post-acute this quarter, if you have it?

Adam D. Singer

We have it. And in my eyes are good enough to read. As a percent of encounters, it’s 28.2; as a percent of revenue it’s 24.1.

Ryan S. Daniels – William Blair & Co. LLC

Okay thank you. And then last one a little bit more discussion it seems like part of the ramp in the back half of the year is clearly you’re recruiting, can you talk about if you’re doing anything differently there or is it simply just an investment in a larger team to increase your bandwidth for taking on physician? So I am curious if you structurally change that at all and you think that will drive benefits? Thanks guys.

Adam D. Singer

Thanks Ryan. It is in fact both. We’ve added more recruiters as you point out and as we announced. We’ve also narrowed the focus of each recruiter, so they can pay more attention to each market. We’ve restructured significantly the process as it relates to who does what and when in terms of what’s being done centrally by recruiting and what’s done at the regional office. We’ve upstreamed some of those tasks from the region to the corporate recruiting departments in these extra resources and more tightly focus those tasks at the regional level. What we’re seeing in the first four months of implementing this is an enhanced process for us and we believe an enhanced experience for the applicant.

Ryan S. Daniels – William Blair & Co. LLC

Okay, thanks again for the color.

Adam D. Singer

Sure.

Operator

Thank you. Our next question will be coming from the line of Darren Lehrich from Deutsche Bank. Your line is open.

Darren Lehrich – Deutsche Bank Securities, Inc.

Thanks, good afternoon everybody. A couple of things here. First I was interested in getting your thoughts on the recent January report on workload, which seems to suggest that quality diminishes, and more than 15 encounters are scheduled, I guess it is one that get your thoughts whether you agree with this, how you think you guys stack up and you know whether you think that ultimately sets an upper limit on productivity?

Adam D. Singer

Let me just qualify. I don’t believe that article talked about quality being diminished at higher volume, you talked about costs going out at higher volumes. So I don’t – do I believe that I mean that at some point productivity exceeds your capacity to effectively manage the patient. So what that exact level is and for which provider is highly variable. The good news whether you believe that article or not is our general productivities about in that range that they talked about is being pretty – optimal whether it’s a length of stay issue or cost issue or quality issue.

Darren Lehrich – Deutsche Bank Securities, Inc.

Great, okay. So that’s helpful flavor for that. And I guess just as it relates to the contract discussion few things. Can you just discuss the overall environment for contract opportunities and whether you feel any differently about the landscape given some of the trends and bundling that you might be seeing, I think you have referred a small contract that was lost to that but just broadly speaking how do you think that’s impacting your opportunity set?

Adam D. Singer

Well, let me take a first crack at it. So with the bundle the first trend that is serving as a baseline is that hospitals seem to be figuring out that employing their own hospitalists is not working out for them. And so we are seeing a continued trend to outsource the previously employed hospitalist. That is generally good news for us. 50% of hospitalists in the country today are currently employed by hospitals and it’s the way that outsourcing happens, not only would that free up more providers for us to hire, but it creates a lot of contract opportunities and we are seeing our pipeline for contracts increase.

The ER bundle is out there. It is an attractive short-term solution for hospitals that want to keep their current doctors working in that model that – it’s the same model that ER groups follow in terms of cost schedule. And so it’s a very transition and the ER companies are providing a discount to what they’re currently paying and maybe more importantly, providing them a cap on their labor costs should there be a problem. So I think in the short run it’s an attractive solution of whether the ER companies can actually provide true value long-term and further reducing the subsidy or improvement in the hospital metrics under value dispersing that’s unknown right now. And we believe that if we can continue to outperform on those metrics we’ll compete very nicely to the ER bundle or any other model that might emerge to compete with us.

Darren Lehrich – Deutsche Bank Securities, Inc.

That’s helpful. Thanks for that, Adam. And then the last thing just on the contract subsidy, Rick or Jeff, can you provide what the subsidy revenue, dollars or what percentage of revenue was, I think you said, may have exited. So I just want to see how that’s tracking relative to where it was last year?

R. Jeffrey Taylor

It’s about 8% in the period.

Adam D. Singer

With directorship.

R. Jeffrey Taylor

That also includes the post-acute medical directorships, facilities as well as hospital stipends, but that number has come up a bit for us as we’ve got more contracts.

Adam D. Singer

Well, largely the big jump is because of…

R. Jeffrey Taylor

Steward, because of Steward.

Adam D. Singer

And I think, Darren, last year we were around 6.5% range, something like that I think.

Darren Lehrich – Deutsche Bank Securities, Inc.

Okay. So does it round up to 8%? Just curious like what the quarter was, curious if…

Adam D. Singer

It rounds down to 8%.

Darren Lehrich – Deutsche Bank Securities, Inc.

Got it. Okay. Thanks a lot.

R. Jeffrey Taylor

It’s close to 8%.

Adam D. Singer

All right.

Darren Lehrich – Deutsche Bank Securities, Inc.

That’s it. Thank you.

Adam D. Singer

Thanks, Darren.

Operator

Thank you. Our next question will be coming from the line of Gary Taylor from Citi. Your line is open.

Gary P. Taylor – Citigroup Global Markets Inc.

Hi, good evening guys.

Adam D. Singer

Hi, Gary.

Gary P. Taylor – Citigroup Global Markets Inc.

Couple of questions. I know you’ve rehashed through a lot of this, but when I just go back and I think about some of the items that you talked about in the quarter, whether through the way 2013 acquisitions were trending, some of the contracts exits, some of the underperforming practices, all of which you’ve talked about a little bit, which of those really had the largest impact on the quarter? Was any one of those more significant than the others with your comments about how you trended in line with your internal projections on revenue even before the weather impact, but would that be the one item that you isolate as maybe the basis impact or not?

Adam D. Singer

Well, I mean, the weather and last year’s flu really are volume related and it had some impact.

Rick Kline

I would say on the whether, it’s not the biggest release or at least there was probably mostly unexpected. Right and so.

And it does have, some margin impact because incremental encounters will drop through close to 30% if we would add those encounters that we didn’t have on snow days, if you will. But in terms of the margin, the three areas that we highlighted the acquisition or simulation the underperforming temporarily underperforming practices and contract exits, those three are kind of roughly is kind of three relatively similar size chunks.

Adam D. Singer

And remember we always had some degree of that in every quarter so it’s really the Delta, they were just trying to layout all of the issues.

Gary P. Taylor – Citigroup Global Markets Inc.

Got it. And then just going back to your comments on self pay, I don’t think you ever provided revenue maybe for your top states that kind of revenue by state in real detail that kind of math this out. But how do you peg your footprint of revenue and expansion versus non-expansion states. Do you think you’re pretty evenly weighted, do you think you’re skewed more one way or the other?

Rick Kline

We are about 65% of our revenues are generated in the expansion states, 35% in non-expansion states and obviously Florida and Texas serve a big chunk of that 35%.

Gary P. Taylor – Citigroup Global Markets Inc.

Right and so in your comments kind of low 5’s to mid 4’s that’s percent of revenue you are talking about..

Rick Kline

Yes, that would imply 15% to 20% drop in the number itself but going from a low 5’s into the mid range. That we had some estimate of that in our guidance so we gave at the end of the year.

Gary P. Taylor – Citigroup Global Markets Inc.

Sure, and you guys are just piggybacking on the hospitals patient classification into your billing or is that right, so I guess I’m trying to think about.

Rick Kline

Yes, but there is a caveat. Remember hospitals reporting, your overall revenue which is including ER volume or outpatient among others things are in just inpatient numbers. So their insurance mix is not going to fall directly with us we are only taking care of those are get admitted, and because it matters the mix between the patients we see come from the ER versus not ER, where there's a dramatic difference in insurance mix. So we are not going to – our numbers will coincide with the hospitals, insurance mix.

Gary P. Taylor – Citigroup Global Markets Inc.

Right, and now I understand that I was just trying to that something else, but I was trying to get out was just kind of patient category of Medicaid pending where a patient comes in looks like they are going to be newly eligible. They haven’t signed-up. Hospitals with different accounting treatments for whether they treat that revenue initially as uninsured revenue or whether we put that in a Medicaid pending box that drops into Medicaid. So do you follow with the hospital duty of your own independent assessment on that patient where would you drop the revenue during a quarter on a patient like that?

Adam D. Singer

We make our own assessment and frankly, we often find that the information we received from the hospitals where they are insured or uninsured either way. So it is not always turnout to be fact, some people are talked to be uninsured turnouts have Medicaid or some insurance or somebody that had an hat in the card, turnouts that was expired as six month ago. And they don’t have insurance, so addressable in two ways.

Adam D. Singer

We don’t have a Medicaid pending bucket so, either in our system they are held uninsured and held out until we identify truly they have or don’t have insurance.

Gary P. Taylor – Citigroup Global Markets Inc.

Got it. And then last question, just going back to another issue, I don’t want to overstate the significance of it, but I had a few questions about us I want to make sure I’ve got a good handle on it. So the Medicaid parity payments, you guys started booking last year I heard your comment that that’s kind of running even sequentially. Obviously there is a modest risk at least that, that funding could go away as we go into 2015. When we think about the EBITDA impact after you share some of that revenue with physicians, we are contemplating that that’s kind of somewhere between $0.5 million and $1 million benefit quarterly it might in the ballpark. You want to refine me a little more.

Rick Kline

I’d have to do the math quickly, it was roughly 5% of our revenues increased around 50%. So 2.5% revenues, 30% of that falls to us. So that’s a 75 basis points, so 75 basis points on a revenue stream is about what you get.

Gary P. Taylor – Citigroup Global Markets Inc.

Okay, thank you.

Operator

Thank you. Our next question will be coming from the line of Gary Liberman from Wells Fargo. Your line is open.

Ryan K. Halsted – Wells Fargo Securities LLC

Thanks good afternoon. This is Ryan Halsted on for Gary. Speaking with the encounter growth question, I guess maybe coming out from a different angle, is there anything specific to the larger transactions that you completed at the end of last year. They may have caused the encounter to kind at a lower rate than you might expect? Maybe not counting obviously the weather impact, but other than the weather impact?

Adam D. Singer

So I think some people Ryan are not sure how you and Gary have constructed the model, but I think when we put out we expect kind of year one expected encounters. That doesn’t necessarily mean that one-twelfth of those encounters happen in the first 30 days and then another 12th in the second 30 days. So I think sometimes some of the models may have the early performance overstated in terms of encountered volume.

Ryan K. Halsted – Wells Fargo Securities LLC

Okay, would you say they are running out of fairly good run rate by this point?

Adam D. Singer

Yes, they are yes.

Ryan K. Halsted – Wells Fargo Securities LLC

Okay. And then as far as the uninsured, do you guys have any sense of the difference between some of the states that have expanded Medicaid and those that have not in your book I guess.

Adam D. Singer

We really don’t have any information right on this call about that. I think we’ll have a lot more information, when we have more time to make sure we have all the right insurances and all those kits sorted through our numbers. So probably by the next call, we really don’t have much color to provide as we have already done.

Ryan K. Halsted – Wells Fargo Securities LLC

Okay, maybe last one. Just again on the parity, I think there was – I think it was in the presidential budget there was some discussion on maybe clarifying the physicians that might qualify for parity payments if it gets extended. Do you guys have any visibility on how that might impact you?

Adam D. Singer

My understanding of reading that unless there have been something else I’ve missed was one thing that was called into question was whether ER Physicians would continue to qualify for parity or not. We have seen nothing that would indicate to us that our internal medicine qualified doctors seeing patients in the hospital would be disadvantaged in anyway by that.

Ryan K. Halsted – Wells Fargo Securities LLC

Okay, great. Thank you.

Operator

Thank you. And at this time, I’m not showing any further questions. I would now like to turn the call back over to CEO, Dr. Adam Singer.

Adam D. Singer

Great, thank you, operator. Thank you everyone for participating in today’s call. We appreciate your continued support and look forward to speaking to again soon. Thank you.

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