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Team Health Holdings (NYSE:TMH)

Q1 2014 Earnings Call

April 30, 2014 8:30 am ET

Executives

Greg Roth - Chief Executive Officer, Director and Member of Compliance Committee

David P. Jones - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Darren P. Lehrich - Deutsche Bank AG, Research Division

Brandon Fazio - UBS Investment Bank, Research Division

Jack Meehan - Barclays Capital, Research Division

Jonathan Chan

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Ambarish Jajodia - Goldman Sachs Group Inc., Research Division

Joanna Gajuk - BofA Merrill Lynch, Research Division

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

Gary P. Taylor - Citigroup Inc, Research Division

Richard C. Close - Avondale Partners, LLC, Research Division

Operator

Good morning, and welcome to Team Health's 2014 First Quarter Earnings Conference Call. Today's call is being recorded and we've allocated an hour for prepared remarks and Q&A. [Operator Instructions] At this time, I would like to turn the conference call over to Mr. Jeff Grossman [ph], Investor Relations at TeamHealth. Thank you, sir, you may now begin.

Unknown Executive

Before we begin, let me remind everyone that during this call, TeamHealth management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipation, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and most recent Form 10-K as filed with the Securities and Exchange Commission.

The company does not undertake any duty to update such forward-looking statements. 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 most recent Form 10-K and Form 10-Qs. A reconciliation of adjusted EPS to net earnings and diluted net earnings per share calculated under GAAP can be found in our earnings release. I will now turn the call over to Greg Roth, Chief Executive Officer of TeamHealth.

Greg Roth

Thank you, Jeff, and good morning, everyone. Welcome to TeamHealth's First Quarter 2014 Earnings Call. I'm joined by David Jones, our Executive Vice President and Chief Financial Officer; and Mike Snow, our President. I'll start with a discussion of the main drivers for our first quarter results and David will review our quarterly financial performance in more detail. I will conclude with an update for our 2014 outlook before we open up the call for Q&A.

As always, I'd like to thank our physicians, other clinicians, our administrative employees for their hard work and dedication during the quarter. Our #1 priority is caring for the patients of our client hospitals. Our team continues to do a truly outstanding job. I'd like to start with an update regarding some recent events.

We are pleased with the financial performance and the progress on integrating the outstanding emergency medicine and anesthesia groups that joined TeamHealth during the past year, including one of our larger recent acquisitions, Kentucky-based MESA Medical Group, whose clinicians care for over 600,000 patients annually.

Moving to reimbursement, the final 2014 Medicare physician fee schedule reflects a 2% increase to emergency medicine and a 1% increase for anesthesia. Additionally, we were encouraged that Congress enacted an interim solution to the SGR issue that provides a 50-basis point increase in Medicare rate through the end of the first quarter of 2015. Both of these items provide additional support for revenue growth over the remainder of the year.

Now moving on to our financial results. We are pleased with our momentum and our results for the first quarter as we delivered solid growth in net revenue, adjusted EBITDA and adjusted EPS in a continuing weak volume environment, coupled with challenging weather conditions in a number of our markets.

First quarter highlights include net revenue increased over 11%, representing our 14th consecutive quarter of double-digit top line growth. While adjusted EBITDA increased 19% with an adjusted EBITDA margin that increased to 11.2% as we continued to focus on achieving cost efficiencies.

Our portfolio approach to revenue growth continues to be successful, with growth in Q1 generated from all 3 of our sources: acquisitions, same-contract and net sales. In Q1, acquisitions continued to be the largest contributor to revenue growth. We believe this demonstrates our continued success in positioning TeamHealth as an attractive solution for high-quality physician groups so that they can provide enhanced services to their existing hospital customers in a rapidly changing health care environment. The acquisitions that we completed in 2013 and '14 provide solid contributions to revenues, earnings and cash flow between quarters. We remain active in the M&A process, we continue to see a solid yield pipeline for flexible capital structure in place to support future growth initiatives.

While we see some increase in the competition for acquisitions in the market, particularly in the anesthesia market, valuation multiples are still reasonable. We believe an increased level of merger activity will help attract successful groups into discussions about the benefits of becoming part of a large and stable organization in a complex operating environment. Both the ED and anesthesia staffing markets remain extremely fragmented, and we remain positive regarding our ability to continue to grow through acquisitions and attractive valuations.

Same-contract was the second largest contributor to revenue growth. Our same-contract growth was driven by a strong increase in estimated collections per visit, which offset the decline in volume. Although volume trends were soft throughout 2013, we believe weather conditions in several of our markets further impacted the volume decline realized in the first quarter of 2014.

While it's difficult to determine the precise impact for specific factors such as weather on volume trend, our volume weakness was more pronounced in our northern and eastern markets that experienced the challenging weather conditions this quarter than our southern and western markets. However, we did see some slight improvement in volume trends towards the end of the quarter, when weather appeared to be less of an issue.

Despite the pressure from weak volume, our same-contract revenue grew due to our strong performance on our average collection rate. Specifically, we generated strong revenue cycle performance and saw an increased benefit for the Medicaid parity program.

Net sales was our third largest contributor to growth during the quarter. Hospitals continued to look to partner with large organizations that have the scale, resources and infrastructure to drive results and are increasingly choosing TeamHealth as their partner. We continue to see increasing levels of interest from hospital systems that want to contract on a multiple-hospital or a multiple-service line basis. With our variety of clinical service lines, we are well positioned to take advantage of this trend in the market.

Moving to health care reform, we continue to benefit from the Medicaid parity program and we anticipate additional opportunities from the expansion of coverage that began this quarter, primarily from improving payer mix and support for volume growth as the new insurer begins to access the health care system. We believe that the Medicaid expansion will be the earlier positive impact in health care reform, while a potential benefit from the increase in coverage through the health care exchanges could lag due to the March 31, 2014 enrollment deadline. As a reminder, approximately 50% of our ED visits are in the 28 states that expanded or who are planning to expand their Medicaid program, while several of our other key states continue to evaluate their options and may expand in the future.

We realized some modest improvements in payer mix in the quarter that is consistent with this perspective. Specifically, we saw a decline in the percentage of our self-pay, fee-for-service accounts and an increase on our Medicaid percentages. While the payer mix improvement is an initial positive trend, we believe it will take some additional time to fully discern the specific impact of health care reform in our 2014 financial results.

In summary, despite difficult operating and weather environment, our focus on revenue growth and cost efficiencies helped us to achieve our solid financial results. We are pleased with our financial performance for the first quarter and are well positioned for the future. I will now turn the call over to David to provide additional detail. David?

David P. Jones

Thank you, Greg. Following the market close yesterday, we issued a press release reporting our first quarter of 2014 financial results and filed our Form 10-Q. Our comments this morning will review our first quarter 2014 results and I will also highlight -- expand on some of the key issues for the company during the quarter.

In the first quarter of 2014, net revenue increased 11.4% to $641.7 million. Acquisitions contributed 7.2%, same-contract revenue contributed 2.6% and net sales contributed 1.6% of the increase in quarter-over-quarter growth in net revenue. Same-contract revenue increased $14.9 million or 2.9% due primarily to an increase of 9.1% in estimated collections on fee-for-service visits that provided a 6.2% increase in same-contract revenue.

The increase in the estimated collections per visit was primarily attributable to increases in managed care reimbursement rates, average patient acuity levels and Medicare reimbursement, in addition to Medicaid parity revenue. We also benefited from a modest improvement in payer mix, led by a decline in the percentage of self-pay, fee-for-service accounts. Continued soft utilization trends in the first quarter of 2014 resulted in a 3.1% decline in visits, which reduced same-contact revenue growth by 2.2%, while contract and other revenue constrained same-contract revenue growth by 1.1%.

Acquisitions contributed $41.2 million of revenue growth and net new contract revenue increased by $9.6 million. Medicaid parity revenue recognized in the first quarter was $8.8 million, of which $8.1 million was same-contract revenue. Medicaid parity contributed 1.5% to consolidated revenue growth and 1.6% to same-contract revenue growth between quarters.

In regard to overall payer mix changes in the quarter, we realized increases in Medicaid and Medicare and declines in self-paying commercial patient volume. Medicaid patients as a percentage of total visits increased 100 basis points to 27%, Medicare patients increased 70 basis points to 25.1%, while self-pay patients decreased 140 basis points to 19.5% and the percentage of commercial patients declined 30 basis points to 26.5%.

Professional service expenses of $501.3 million increased 10.7%, primarily due to acquisitions and new contract growth. As a percentage of net revenue, professional service expenses declined to 78.1% from 78.6%. On a same-contract basis, professional service expense increased by 1.7%. And as a percentage of net revenue, decreased 90 basis points to 76.3%.

Professional liability costs were $20.3 million compared to $18.7 million in 2013. And as a percentage of net revenue, professional liability costs were 3.2% in both periods.

General and administrative costs were $62.2 million compared to $58.1 million in 2013. Included within general and administrative costs were contingent purchase and other acquisition compensation expenses of $10.1 million in 2014 and $10.3 million in 2013. Excluding the contingent purchase expense, core general and administrative costs increased to $52 million from $47.9 million.

The increase in general and administrative expenses was due primarily to growth in salaries and new positions, increases in incentive and equity-based compensation, recruiting costs and legal fees, partially offset by a decrease in severance costs and deferred compensation expense between periods. As a percentage of net revenue, core general and administrative costs declined to 8.1% in 2014 from 8.3% in 2013.

Net interest expense decreased to $3.4 million due to a decrease in term loan balances and interest rates between periods. First quarter 2014 reported net earnings were $23.8 million or $0.33 diluted net earnings per share compared to $18.2 million or $0.26 diluted net earnings per share in 2013. The 2014 financial results reflect contingent purchase compensation of $10.1 million and noncash amortization expense of $11.1 million.

By comparison, 2013 net earnings reflect contingent purchase compensation of $10.3 million and noncash amortization expense of $8.9 million. Excluding these items, diluted net earnings per share increased 23% to $0.54 in 2014 compared to $0.44 in 2013.

The results in the first quarter of 2014 include a $1.8 million net gain on the sale and disposal of assets, including the sale of certain assets related to our clinic operations. Fully diluted outstanding average shares increased 2% to 71.4 million shares in the first quarter of 2014, primarily due to the exercise of stock options and an increase in the average share price between periods.

Adjusted EBITDA grew 19.2% to $71.8 million compared to $60.2 million in 2013, while the adjusted EBITDA margin increased to 11.2% in 2014 compared to 10.5% for the same quarter in 2013. Cash flow throughout our operations during the quarter was $34.2 million compared to $33.3 million in 2013.

There were $50,000 of contingent purchase payments made in the first quarter of 2014 and none in 2013. Excluding the impact of this item, operating cash flow in 2014 reflected an increase of $0.9 million between quarters.

Turning to the balance sheet categories, as of March 31, 2014, cash and cash equivalents were $56.6 million. Total outstanding debt was $497.5 million with $250 million available under the revolving credit facility. The decrease in outstanding debt of $4.1 million during the quarter was due to scheduled term debt payments.

As of March 2014, net accounts receivable totaled $405 million compared to $392.4 million as of December 2013. Overall, days in accounts receivable declined to 57.7 days compared to 58.2 days at December 2013. I'll now turn it back -- the call back over to Greg for his concluding remarks.

Greg Roth

Thanks, David. The first quarter was a good start to 2014. We expect to see our positive momentum to continue. I will now close with our thoughts regarding the remainder of the year.

We continue to target 2014 full year revenue growth to be between 11% and 12%, which includes the benefit from Medicaid parity. Our first quarter performance exceeded our annual adjusted EBITDA margin target of 10.5% as a result of the continued focus on revenue cycle performance, including Medicaid parity and cost-efficient operations. Over the remainder of the year, we will look to drive continued revenue growth and operating efficiencies that could provide some modest upside to our annual target margin.

Here are the main drivers of our guidance for the full year: first, we believe our same-contract revenue growth to be within our more recent historical range of 2% to 4%, which is affected by several factors. As we look ahead to the remainder of the year, we anticipate potential for a continuation of soft volume. However, we believe we have support for same-contract revenue growth to our strong revenue cycle performance and a continued benefit from the Medicaid parity program. Specifically, as we have gained additional insight, we now anticipate the benefit of the Medicaid parity program in 2014 will be in the range of $32 million to $34 million. This is an increase from the 2014 benefit that we discussed during our last earnings call, which we estimated to be between $26 million to $28 million at that time.

Our second driver of growth to support our 2014 projection is net sales. While the net sales metric in any given quarter can be choppy due to the timing of contract starts, we believe that for the full year of 2014, our contribution for net sales will be at the lower end of our historical 2% to 4% range. While our sales results and sales pipeline are strong, we have seen some pressure on net sales due to contract terminations. We do not see this current pressure on net contract growth as a long-term issue and believe that our contract terminations will be in line with our historically strong contract retention performance by Q4 of 2014.

Finally, we are pleased with our M&A performance and our M&A pipeline. We believe our 2014 M&A performance will be in line with our recent historical range between 6% and 8%.

Our guidance does not include other potential benefits that we may see from health care reform. We continue to believe that these benefits could include rate increases from the conversion of the uninsured and additional volumes from newly insured patients. As the enrollment process continues to unfold, we anticipate having and disclosing additional visibility on the potential financial benefit from reform that could be realized in 2014. In closing, we are pleased with the strength of our strategic position and we are well positioned for profitable growth in 2014 and beyond.

And with that, operator, would you please open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is coming from the line of Kevin Ellich with Piper Jaffray.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Great to see the improved payer mix from reform. Greg, just wanted to go back to your last comments on the drivers of your guidance. You made a comment about seeing some pressure on contract terminations. Just wondering if you could provide a little bit more color as to what's going on with that?

Greg Roth

Sure. I'll start with that we have a really long track record of really good contract retention. And if you think about our normal contract retention rate, it usually runs about 94% to 95%, and that's the long-term 30-year view. And we've had swings from 98%, which is where we were when we went public, to 92% in the long term, maybe a couple of years, many years ago, it was down 92%. So -- and our contract retention rate, it's still within our -- I would call it our norm, but we have seen some choppiness in the market with system sales, and really, there's not one big thing that's driving the contract retention rate. We did lose some business in some of the systems sales. However, even in places where we lost business on our system sales, we're still gaining business with those same clients. So we're still in the game with those clients. And we still feel very good about our contract retention in the long term and we'll lap this issue. We don't see this as a systemic issue. And we'll lap this issue, we project in the -- at the fourth quarter of this year. Again, on the sales side, things are going really well. And we normally don't get into these kind of specifics, but we've been growing our sales about 8% a year, year-in, year-out since we've been public or so. So we're very bullish on our sales process. So we believe that sales will continue to plug along. As a matter of fact, last year was our best year in the history of the company on sales and we continue that -- continue to see that grow nicely. And we'll work through some of these issues on contract retention. So we believe that Q2 and Q3, potentially, could have lower than our normal net sales number and Q4 should be back in line and, potentially, at the high end of our net sales number in Q4.

Kevin K. Ellich - Piper Jaffray Companies, Research Division

Got it. That's helpful. And then, just going back to the margin expansion that you saw this quarter, with the revenue cycle performance. You mentioned one of the factors is cost-efficient operations. Wondering if you could expand on what sort of things you guys are doing and how much more room there is for your margins to expand?

Greg Roth

Yes. On that topic, I'll turn it over to David in a minute. But I think that David maybe can talk about on the corporate side. But I think on the operating side, and one of the issues that we have, and again, I'm sure we'll talk more about it later on the call, about health care reform and expansion, all that. But net-net, this was a very unusual quarter where we had a 3%-ish same-contract volume decline. And we're very pleased with our operators that they worked very hard on the staffing side to match the revenue and expenses. And so, I would give our operators a big hand on working closely with our physicians. And our physicians understand that when we have challenging times, that the compensation rate doesn't go up and when times are good, the compensation rate goes up more than average. So I'd say, on the operating side, we did a good job. And maybe David, you might want to throw a couple of items in on the corporate side?

David P. Jones

Well, yes. Just we, always, obviously, try to run pretty lean on the corporate side. One of the objectives we have is to try to continue to get some operating leverage on our G&A cost and we saw that this year. I think you had a question also about margin. I know Greg had commented a little bit earlier about margin this quarter and sort of expectations going forward. We typically talk about this business as a 10.5% margin business that's sustainable and steady. We obviously did a little bit better this quarter. So while we're not saying we're going to sort of raise the target, I think it does give us some comfort that, if we can continue to execute with some of the benefits we're seeing from our revenue performance, continue to really focus on making sure the staffing levels are in line with where we see the volume trends, that there could be some, I think when you said, some potential opportunity there to do a bit better. Keep in mind, as we go through the year, we do see some choppiness in margin, like historically, the fourth quarter is always a little bit of a soft period for margin. But certainly, gives us some comfort as we start off the year with some pretty good performance, that there could be some opportunities. And again, just to be clear, when we talk about guidance and margin, that did not include some potential additional benefits throughout the year as we see the reform opportunities continue to roll out.

Operator

Our next question is coming from the line of Darren Lehrich with Deutsche Bank.

Darren P. Lehrich - Deutsche Bank AG, Research Division

So I wanted to ask maybe just a couple of things here about the ACA. And I know it's hard to parse out but is there any way you can just give us some rough commentary on what you think the benefits might have been from the reduction in your self-pay, fee-for-service volumes in the quarter? And then a related question just -- David, if you could just remind us what your policy is from an accounting perspective on Medicaid pending? Are you holding up any of these uninsured patients waiting for eligibility approval? Just remind us where you stand on that?

Greg Roth

Yes, well, just to sort of recap. I mean, the thing we really focused on this quarter is the self-pay and we saw a nice decline. I mean, self-pay, as a percentage of our volume, on our fee-for-service business was about 19.5%. And that's really one of the lowest marks we've seen here. We did see some increase in Medicaid. And that's sort of the dynamic, I think, we were expecting in the early part of the year with Medicaid being the more prominent opportunity early on. We think with the exchange deadline of March 31 and the late surge, that we really weren't going to expect to see a lot of potential benefit from exchange enrollment coming through. But we think second, third, even fourth quarter, we could see some of that benefit. And try to estimate, I mean, I would say, it's probably $1 million to $2 million of potential benefit coming through revenue from the payer mix shift. Obviously, we get very little collection on self-pay Medicaid. While it's still not a great payer, it's incrementally a little bit better. So it's a positive trend but not a huge part of the performance this particular quarter. We think that as the exchanges roll out and we may see some opportunities, there's obviously, some things we talked about in prior calls, that it could come through for us there over the remainder of this year, as well as '15 and '16. Specifically, our policy on pendings. When we recognize revenue initially, we're looking at the current payer status. So if an individual comes into a facility and they are uninsured at that point, our initial revenue recognition is going to treat that patient as an uninsured patient. However, as our -- as we adjudicate the claim and process the claim, as we go to file, if there's some information we received where that individual is now a Medicaid-eligible patient, and we can't file Medicaid within our system, that account shifts into a different payer category and there's a higher valuation that's attributed to that. Now one thing I would say that mitigates this a little bit is that, there's usually several days of delay between the actual patient encounter and when we access the medical record from the hospital to do our billing. And in some cases, that you could have seen a patient who was uninsured at the time of service that may be Medicaid-eligible at that point. So if we -- when we go to capture the data and they are now Medicaid-eligible, we will treat them at that point as a Medicaid patient.

Darren P. Lehrich - Deutsche Bank AG, Research Division

That's helpful. And then just the other ACA-related question I had in [indiscernible] buff years, just on parity, the assumptions, obviously, you're raising the numbers. I think we've been working with the 28% figure for the providers that you think you can get eligible, I think was the most recent number. Any change to that? And then any update on the state involvement here in terms of what you're seeing?

David P. Jones

And that, the percentage of providers has held fairly constant and it's sort of a -- it's running really about a 25% sort of eligibility. And again, just as a reminder, it really is based on a physician's board certification in either pediatrics, internal medicine or family practice. So that's sort of what we're looking at and not -- I mean, not all of our physicians have that but some do, and that's where we're targeting this opportunity. We've, again, as you say, raised the number a little bit. It's not necessarily from new states coming in because this -- I think we're sort of where we were at year end in terms of the state participation. We really did a lot of work in '13, and particularly, towards the end of '13 to flip some of those states that we felt we could not participate in into a category where we could participate. Where the growth has come from, is really just as we've continued to work on adjudicating those claims, you'll find opportunities that you perhaps didn't think of initially with patients coming in. And the other thing that's sort of helping to drive this is just growth in that Medicaid population over time also, I think, is why we're seeing a little bit bigger opportunity as well.

Operator

Our next question is coming from the line of A.J. Rice with UBS.

Brandon Fazio - UBS Investment Bank, Research Division

This is Brandon Fazio for A.J. Just want to get into volumes a little bit more here. Your guidance, it sounds like you're assuming down volumes for the remainder of the year. I was wondering if you could give some color on how things proved throughout the quarter that you mentioned earlier from January, maybe until March. And then, I also wanted to get into the piece of your business where Medicaid expansion -- how much -- in the states that expanded Medicaid, how much your volumes grew in terms of Medicaid there? Is there any chance of your seeing any better volume trends in those expansion states?

Greg Roth

This is Greg. On the volume side, as we mentioned, we saw the lowest growth in the north. And we saw the better -- the least amount of negative bad news in the south and the west. So really, the north and the east looked worse than the south and the west. And to remind everybody, our demographics as a company look a lot more like the United States than a lot of the investor on hospital systems because of our significant amount of business in the north and in the east. So that's that. When it comes to the Medicaid expansion, we are seeing some nice lift, and it helped the quarter maybe a little bit. But the good news is, we see this is going to help us down the road. And before I get into that, I would like to say, just to clarify one thing, we're not really guiding to negative volume for the rest of the year. We're really guiding probably closer to flattish volume for the rest of the year. Because we do believe that the bad weather did impact the quarter. But getting into the Medicaid expansion, it's interesting that when you start parsing the data and we look at the expansion states, it's very obvious that when you look at the Medicaid enrollment percent change, where the state that had the biggest enrollments in Medicaid, also had a nice lift in their Medicaid volume.

To give you an example, in Kentucky and West Virginia, we had double-digit growth in the Medicaid enrollments from pre-ACA and that double-digit enrollment generated double-digit volume growth in Medicaid volume for the quarter. So that was a very good fact. But unfortunately, when you look at those states in total, as an example, and you use Kentucky and West Virginia as a microcosm of all the expansion states, even though they had double-digit growth in Medicaid, net-net, those 2 states still had negative volume growth. And so that's the factoid that kind of play out that we think that's where things are going is that Medicaid expansion is working. But net-net, for the quarter, we're down in volume. And then when we parse out the Medicaid expansion states from the non-Medicare expansion states, we did see, again, we were 3-ish negative volume for the company and we saw close to 100 to 150 basis points difference between the expansion states and the non-expansion states in total.

Operator

Your next question is coming from the line of Josh Raskin with Barclays.

Jack Meehan - Barclays Capital, Research Division

It's Jack Meehan here for Josh. I wanted to start with some of the commentary in acquisitions. How is reform playing into those discussions? Have you seen any changes in the multiple? Or potentially some pickup in activity, just around some of the new volumes coming in?

Greg Roth

Yes, I think that there's really -- the good news is there's nothing new on this topic. We have a really nice M&A pipeline, we're excited about it. As we said before, really, health care reform has created a lot more interest in M&A because I think a lot of people see health care reform as complexity. And the groups that we're looking to acquire are very good clinical groups but they really don't have the business infrastructure to yield complexity. So net-net, things are good -- excuse me, but that's not new news, that's the same as it has been now for the last year or 2. And as far as the multiples, we've seen -- there are -- there seems to be a lot of buzz about some of these very large anesthesia groups that are out there. And we've seen some multiple expansion for higher prices on those groups. But generally, the bread-and-butter, small to medium-sized ED groups are running about the same multiples and generally the same on anesthesia with maybe a slight uptick in that area.

Jack Meehan - Barclays Capital, Research Division

Got you. And then on the net sales, just wanted to confirm, when you talk about the system sales, were you referring to some of the hospital M&A we've seen? And then, is there anything else in the market you think has changed the retention rate, maybe such as subsidies?

Greg Roth

Well, I think there are a few things. And to be clear, when we're talking about system sales, we're talking about the health care systems that -- the good news is, the market is choppy and more complicated. And we've done a nice job on bidding on some of these multi-contract opportunities. And we won some and we have lost some, for instance, a health care system will go out and bid 10 ED contracts with 5 anesthesia contracts and 5 hospitalist contracts. And we've won some, we've lost some, and we lost a few, and it's just one of those things where we had a culmination of losing a few of those deals on the systems side, and then we had a normal contract retention rate, normal losses for typical things. And we have seen a few contract losses due to the subsidy side and we're just not willing to keep a customer and have a very, very, very low margin. We've seen a few competitors be very aggressive and take a few more contracts in that way. And then every year, and this is not new news, we lose a few contracts or a small number of contracts to a hospital thinking that they can in-source. And that happens from time to time. But more often than not, those don't go all that well and they're back in the market in a few years. So I think that's a little more color on contract terminations.

Operator

The next question is coming from the line of Ralph Giacobbe with Crédit Suisse.

Jonathan Chan

It's actually Jonathan Chan for Ralph today. I just had a couple of questions here. Do you think you can talk about your early experiences you have treating exchange base lives. Maybe walk us through how you're booking these patients compared to the traditional commercial? Is there a kind of meaningful discount relative to your kind of traditional commercial? And maybe any comments on patient cost sharing?

Greg Roth

Yes, what we've seen so far on the exchange lives, for us, broadly speaking, as a framework, vast majority of the contracts where the patients that we think we're going to get from health care expansion through the exchanges have in Blue Cross. And Blue Cross, as you know, is a series of entities. And so far, all the entities that we've worked with, with Blue Cross has come to us, they've come to us and said, "Let's just use our current paper, our current contracts." So quite frankly, we don't see a difference between exchange patients and Blue Cross patients. And to frame it up, let's say that Blue Cross patients usually pay on the -- Blue Cross usually pays on the low end of managed care. So we're actually very excited that most of the business is Blue Cross and it's low-end managed care. And with regard to your second question on the patient portion. We have seen a rise in that patient portion, and it's been going up every year for the last several years. But I would say it's probably slightly up more from our CAGR. But it's not really, I would say, material at this time.

Jonathan Chan

Got you. And I just had one other question on just hospital subsidies. If you could remind us what percentage of revenue is derived from subsidies? What's the clinic concentration within hospitals? And maybe, did you see, I guess, disproportionately better mix improvement in hospitals where you saw -- where you have a larger subsidy?

David P. Jones

Subsidies, this is David. They run generally less than 4%. I think it's about 3.6% of our total revenue, the subsidy, is something in that range. And that's actually been trending down. In some ways, it's trending down just because the subsidies usually don't grow as significant. EDs, Joe, I think around 2.5% of our overall revenue. Actually, I should say, ED -- subsidies attached for ED operations are about 2.5% of our overall revenue. So it's not a big part of our business. And these subsidies tend to be concentrated on hospitals that have either very low volumes or very sort of poor payer mix or some combination of the 2. And so they typically also run hospitals, that even if we saw some improvement over the next couple of years from the expansion of coverage, it's probably still not a enough of a lift on the revenue to be able to eliminate a subsidy entirely. There's always going to be some support on some of these contracts, where we're going to have to have subsidies. One of the things we do is where we can, we'll try to find ways to streamline those. But the reality is, certain contracts are just going to have to have a subsidy. And one of the things that we believe in the market is given the sophistication of our revenue cycle and our abilities to negotiate managed care rates and just the ways we conduct ourselves, if we're going to be in a subsidy situation, it's going to be as low as we can get it just because of the strength of our revenue cycle.

Operator

The next question is coming from the line of Gary Lieberman with Wells Fargo.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

In the example you gave earlier about the Medicaid pending bucket, the [indiscernible] patients only spend a couple of days in the Medicaid pending bucket before moving into Medicaid. Is that typical or is there a statistic in terms of how long the average person stays in Medicaid pending before they move into uninsured or into Medicaid?

Greg Roth

Let me just be clear, we don't use a Medicaid pending. I mean, it's -- we basically -- when we access the chart, if the patient has no insurance at the time we access the chart, then it's -- we would classify that as an uninsured patient. We really don't have a great way of knowing if this is a potential Medicaid patient. It's just where we take the data as we receive it. My point was there's -- there could be some shift there. I don't think it's a significant part of our business. But we do recognize, there always are in an emergency staffing environment, people show up and they may not have their records, their information. So there is always a small number of charts that, over time, sort of move from one payer category over to another. But it's -- we've not seen much change in that this quarter compared to historical trends. And generally, it's a relatively small part of the overall business.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. On your average collections, you've continued to make progress there. Can you just sort of refresh us of what you're doing to do a better job in the collections and how much more opportunity you think you have?

Greg Roth

Well, there's a couple of things this quarter we spoke to. We try to sort of highlight and just sort of recap those. Well, obviously, the Medicaid parity benefit, that does show up as pricing, but even if you feel that back, on a same-contract basis, our pricing is just under 7%, which is very strong. I mean, we talked about, for the long-term sort of 2% or 3%. So the things that are sort of boosting that this period -- we talk again a lot about our revenue cycle. And that really gets into just the blocking and tackling, the claims adjudication, we invest a lot in both process and technologies, and we do believe that, the fact we own that, helps us. The other thing that we're seeing in a low-volume environment like we are in this quarter, we get a benefit from acuity. And I think we're picking that up. We talked a little bit about the benefit of some proving payer mix coming through this period. And the fourth thing I would call out is, 2014, we actually are seeing, really for the first time in a couple of years, some positive, modest positive reimbursement on ED physician Medicare reimbursement. So the fee schedule is about a plus-2% in '14. And then the SGR fix added another 50 basis points. So those are some of the opportunities and we think that -- I'm not suggesting we think can just do better than this, but this is sort of a very strong quarter, obviously, for us, on this -- on that particular pricing element.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

And then, just finally, you mentioned that you had lost a couple of contracts. Could you give us some idea of who the competitors are that you're typically seeing? Is it some of the other public guys? Is it a private equity? Or in small shops?

Greg Roth

Yes. I think, this is Greg. When you look at who we lose to, there's ourselves and then our biggest competitor is also a public company. And then there are a handful of regional companies and a myriad of small companies. And we're really not losing disproportionate amount of business. I mean, look at the book of business that we did lose. It's not a preponderance to any one individual competitor. And as I said before, generally speaking, we're -- we did lose some contracts. It was more the larger for-profit, not-for-profit systems than it was the individual hospitals.

Gary Lieberman - Wells Fargo Securities, LLC, Research Division

Okay. Any reason why you think that was specifically to the larger systems?

Greg Roth

Well, I think that right now, systems are cutting larger deals, and I think that we're just having a sorting out right now of people. A lot of the systems are aggregating and aggregating many of their vendors through outsourcers, and it's just a matter of winning and losing certain contract proposals.

Operator

The next question is coming from the line of Brian Zimmerman with Goldman Sachs.

Ambarish Jajodia - Goldman Sachs Group Inc., Research Division

This is Ambarish calling in for Brian. Just had a quick question on your contingent purchase. Is the 1Q number a good run rate for the rest of the year? Or should we be accounting for something in the later quarters?

Greg Roth

We actually disclosed sort of our best estimate of the contingent purchase expense in the 10-Q under sort of Note 4. But just to sort of give you where we think we are. We think for the remainder of the year, it's about a $7.8 million expense. And then we think there's sort of, in 2015, about $4.7 million and then $2.2 million in '16. That obviously, is based on where we are today as we add acquisitions. That can change if the underlying performance goes up or down. That can change. That's sort of an estimate at a point in time as of today is sort of where we think those expenses are going to run over the next couple of quarters here.

Ambarish Jajodia - Goldman Sachs Group Inc., Research Division

All right. Also, I have a follow-up. Just wanted to ask, we had some hospitals say that they saw the volume decline coming in from the lower acuity business. Would you -- can you please shed some light on that on your front?

Greg Roth

I would say, generally, we're in the opposite direction right now. Well, if you think about our business, I guess, the answer is, yes, there is lower acuity because what we have seen is, during high volume, we usually see acuity go down and low volume acuity goes up. So as David said earlier, our acuity was up. So by definition, there would've been a drop-off in the lower volume -- I'm sorry, the lower acuity.

Operator

Our next question is coming from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

Joanna Gajuk - BofA Merrill Lynch, Research Division

This is actually Joanna Gajuk filling in for Kevin today. Question on the reform guidance that you guys -- the coverage expansion benefit you don't include in the guidance though but it seems like you did see benefit because the uninsured is now, to your point, one of the lowest numbers you've seen, below 20%. So does it mean that in your guidance, you kind of assume that the self-pay, as a percentage of total volumes, will go back up?

Greg Roth

I think what we're saying is, when we see a definitive increase in volume and a material change to our payer mix, I think that's when we'll say there's more health care reform revenue in our model. I think what we're saying right now is, we're assuming that it stays pretty much steady state as it was the first quarter with the exception of the weather being a little negative. So I think, in summary what we're saying is, volume will be flattish for the remainder of the year and that our payer mix, probably, without any change, we're just risk modeling our payer mix not getting continually better. However, we do believe that over time, our payer mix will get better. As I said earlier, we're very pleased with our improvement in payer mix and just thinking about people signing up to health care exchanges and signing up for Medicaid this year, we believe that will continue to improve. So that is logical, I think, that the payer mix will continue to improve over time. We're just not comfortable in estimating a rate of change of payer improvement.

Joanna Gajuk - BofA Merrill Lynch, Research Division

Okay. So in terms of the parity, I know you expect the numbers to be higher, but can tell us if there was any change in terms of how you view the offset for that in terms of sharing with doctors? And does it mean that also there's some impact on subsidies going down because of parity in some of your hospitals, some of the contracts? And also, the same sort of question in terms of how do you think about those 2 items, the sharing with doctors and subsidies going down? We know going forward, in terms of the benefits from the current [ph] expansion, even though you don't have a number, but can you just give us a color in terms of how we should think about those 2 things, the offsets of parity and then the offsets for the coverage expansion benefit?

David P. Jones

We see Medicaid parity as a bridge. And it's on the books right now, the law, to go away by the at the end of the year. And so, we don't really this as a sea in change, but more as a 2-year bridge to help us get through health care reform as it ramps up. And the fact that our parity number went up a little bit, we -- as a percentage, it's miniscule compared to our overall physician cost. So we don't really see it, Medicaid parity, having any impact on physician comp other than the typical -- some of the contracts have that sharing of revenue, I think, David were saying 30-ish-percent of the revenue is shared with the physician, incremental revenue shared with the physicians. And then lastly, we've not really seen Medicaid parity have any impact on subsidies because I think our hospital partners are very attuned to the reimbursement issues, as well as we. And they understand that this is a short-term patch and will, according to the law, will go away by the end of the year. So it wouldn't do us -- it wouldn't really make any sense to cut our subsidies now and then have the Medicaid parity go away and then next year, we'd have lower subsidies and not have the Medicaid revenue.

Joanna Gajuk - BofA Merrill Lynch, Research Division

So then, how would you frame those 2 items for -- going forward for the -- when the coverage expansion happens? And then how -- will you still expect 30% share on that -- on those additional revenues? And then what will happen with subsidies in that case?

Greg Roth

I think what will happen is long, long, long term, there may be some pressure on some subsidies. But we have to see it and recognize it and we will continue to share the upside. And again, be specific about 30% of the upside, we would share about 70% if we had an upside on volume with the doctors. And if it was just pure rate, we would share about 30%.

Operator

The next question is coming from the line of Rob Mains with Stifel.

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

I've just got one, and that is, Greg, you were talking about competition for acquisition. I think all of us on the call have a pretty good sense of how a team competes for emergency medicine acquisition. When you're looking at the other specialties, what's the value proposition that you're able to bring to the doctors to be able to close deals?

Greg Roth

I think that, right now, we might do a little bit on the hospitalist side, but we don't do that many hospitalist acquisitions. So really, we're talking about anesthesia. And our value proposition is almost identical on the anesthesia side. The nice thing about doing this for a long time, is that there are some people get into the anesthesia space for the first time and learning. But by having this long history of doing it on the ED, we're really taking the past and rolling it forward onto the future, so we know that there are -- 80%, 90% of this is the same between specialties. So we're smart enough to not make the same mistake. So 89% -- 80% to 90% of this is all the same as the ED. But we're also smart enough to know that, that last 10% to 20%, which is specialty-driven, makes a huge difference. So we've really replicated and spent a significant amount of money with a great set of physician leaders on anesthesia, a great Chief Medical Officer in anesthesia, a really solid revenue cycle for anesthesia. And some really nice IT in monitoring quality metrics, and that has really resonated with the anesthesiologists.

Operator

Our next question is coming from the line of Gary Taylor with Citigroup.

Gary P. Taylor - Citigroup Inc, Research Division

I don't think this has been asked but, and not that we're rushing you off, Greg, but is there an update on the CEO search? And what you guys are kind of thinking around the timing of that?

Greg Roth

No, we're -- we've started the search. We have a really good recruiting firm looking at this. We're looking at internal and external candidates and we really have no news on that topic.

Gary P. Taylor - Citigroup Inc, Research Division

Ideal timing, if you would have one? I know you had committed to stay through the calendar year, right?

Greg Roth

Right, I...

Gary P. Taylor - Citigroup Inc, Research Division

Ideally, something by middle of the year would make sense or...

Greg Roth

Well, it would be good to get it done around that time. But the way that we've worked this out is, I agreed to stay until the end of the year. And I also, at the board's wish, agreed to stay 3 months past that. So we're not -- we're taking it very seriously, we're working hard on it. But there's not much anxiety out there about filling it immediately because I've given the company through, really in essence, through March of next year.

Gary P. Taylor - Citigroup Inc, Research Division

And then, I just wanted to ask the question, there's may be been some overemphasis on this call probably on the contract terminations in light of the scale of those, so I almost hate to ask another question about it, but I'm going to, anyway. Obviously, Envision has had some success with HCA with kind of their JV relationship expanding that. They have announced another for-profit system that they're going to be working with. So 2 questions, one, as Envision expands that HCA joint venture, is that a direct threat to a material portion of your revenues?

Greg Roth

No, we really don't see that and we normally don't get into talking about specific clients. But we don't really see that as a great threat. We did lose a little bit of business. But realistically, when we look at our contract retention rate, I would call the -- because you called out HCA/Envision, the joint venture, it probably was less than 1/3 of the contract retention losses that we had. So it was immaterial but it was still out there. And there's such a tremendous amount of this to be had. I think a lot of people think that it's just ourselves and our one other competitor duking it out for every contract in America. And that really is misleading. I would say, of the contracts that we're interested in, not the total market, but the contracts that we're interested in, we probably have roughly 15-ish percent of the market share and our biggest competitor has about the same. So there is just a tremendous amount of upside in the sales side. I do think there's probably a little more discussion about this topic than is really the big picture and the potential of a huge opportunity for us to grow in the future.

Gary P. Taylor - Citigroup Inc, Research Division

I appreciate that. My last follow-up on that is given this trend where you've talked about some of the large systems consolidating vendors, we've seen that in the nurse staffing space, for example, the MSP model, et cetera. Is there -- I mean, does TeamHealth have a strategy to kind of explicitly respond to that trend in the marketplace and that somehow you're going to make yourself more visible or attractive to get after these systems that might be consolidating a number of vendors?

Greg Roth

Yes, we've put a lot of time and energy and that's one of the things that -- we have been doing some of that and we've got several other folks that are working on this, but Mike Snow, our President, is also working on that. We put a great deal of energy into that topic working with the systems. And we really see this working in clinical integration in 2 ways: one, the clinical side, which is the hand-offs between the urgent care clinics, the ED doctors, the anesthesiologists and the hospitalists and its hospitalists can be either the traditional hospital -- hospitalists, which are internal medicine people or the Delphi acquisition that we made not too long ago where we have physicians who are OB hospitalists and orthopedic and general surgery hospitalists. So we're really putting together really twofold. One is clinically, integration at the hospital site, and then from a business perspective, putting those contracts together from a macro site or a macro perspective, look at a particular system or region where they would have x number of those hospital contracts with the various specialties. So we're putting a lot of energy into it, we see a tremendous upside.

Operator

Our final question is coming from the line of Richard Close with Avondale Partners.

Richard C. Close - Avondale Partners, LLC, Research Division

I just want a clarification with respect to the flattish volume comment. Is it by fourth quarter you expect to be flat? Or just progressively improve as we go through the year? Or is that some major change here coming in the second quarter?

Greg Roth

No, I think what we're seeing, is when we started the year, we believed that this year would be flattish and this first quarter was negative 3%, and what we're saying is on a run rate not -- cart out the first quarter. On a go forward, we believe that our volume will be flattish.

Richard C. Close - Avondale Partners, LLC, Research Division

Okay, and then on the self-pay, just to be clear on that, you saw the dramatic improvement or a decent improvement here in the first quarter and the guidance contemplates that's -- hold steady. There's not any major improvement in second, third and fourth quarter?

Greg Roth

But we're not showing, we're not modeling an improvement to what we have now. I think we're basically saying our payer mix will stay the same until we see it change. But however, we believe it will change. But we cannot estimate at this time the rate of change. All right, thanks.

Operator

Mr. Roth, I'd like to pass the floor over back to you for any additional or concluding comments.

Greg Roth

Great. Well, thanks, everybody, for your continued interest in TeamHealth. We hope you have a great day. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. And you may disconnect your lines at this time.

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