Team Health Holdings' (TMH) CEO Greg Roth on Q2 2014 Results - Earnings Call Transcript

Jul.30.14 | About: Team Health (TMH)

Team Health Holdings, Inc. (NYSE:TMH)

Q2 2014 Results Earnings Conference Call

July 30, 2014 08:30 AM ET

Executives

Jeff Grossman - Investor Relations

Greg Roth - Chief Executive Officer

David Jones - EVP and Chief Financial Officer

Mike Snow - President

Analysts

Kevin Ellich - Piper Jaffray

Jonathan Chan - Credit Suisse Group

Brandon Fazio - UBS

Brian Zimmerman - Goldman Sachs

Whit Mayo - Robert W. Baird

Gary Lieberman - Wells Fargo

Darren Lehrich - Deutsche Bank

Jack Meehan - Barclays

Richard Close - Avondale Partners

Joanna Gajuk - Bank of America Merrill Lynch

Rob Mains - Stifel

Operator

Good morning, and welcome to Team Health's 2014 Second 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 over to Jeff Grossman, Investor Relations at TeamHealth. Please go head Mr. Grossman.

Jeff Grossman

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, and good morning, everyone. Welcome to TeamHealth’s second 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 second quarter results and David will review our quarterly financial performance in more detail. I will conclude with an update for 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 number one priority is caring for the patients of our client hospitals and our team continues to do a truly outstanding job.

We are very pleased with our second quarter of 2014. Similar to past quarters our strong market position and the successful execution of our growth strategy resulted in strong financial results. The outcome of this quarter was further enhanced by health care reform tailwinds which we believe was evidenced by same contract volume growth of 3.2%,, a significant improvement in our payer mix.

Second quarter highlights include net revenue less provision for uncollectibles increased over 16%, representing our 15th consecutive quarter of double-digit top-line growth, while adjusted EBITDA increased 41% with an adjusted EBITDA margin of 12.8%.

Our portfolio approach to revenue growth continues to be successful with growth in Q2 generated from all three of our sources; acquisitions, sales and same contract. In Q2, acquisitions were 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 healthcare environment.

The 13 acquisitions which we completed in 2013 and in the first half of 2014 provide solid contributions to revenues, earnings and cash flow between periods. We remain active in the M&A process and have a flexible capital structure in place to support future growth initiatives. To be clear, we are currently working on multiple acquisitions and remain bullish on our ability to grow in a meaningful way through our acquisition strategy.

Recently, we have seen conversions in the market between our M&A process and our sales process. We refer to these situations as hybrids. These hybrid opportunities are characterized as acquisitions but our primarily driven by our sales force and result in the deployment of capital to help secure the contracting opportunity with the hospital and provide continuity with the existing provider groups. This quarter approximately one-fourth of our revenue growth from acquisitions was driven by hybrid acquisitions.

Moving to net sales, which comprises two factors sales production and contract retention. Full year 2013 was our best year for sales production in the history of Team Health. As half way through this year, our 2014 sales production is on track to surpass our robust 2013 sales results. While our sales production was strong, our realized net sales amount was modest due to pressure on contract retention.

As a reminder, our long-term client retention rate normally falls between 92% and 98%. Our retention rate for this quarter was at the low-end of our normal rate. As I mentioned during the Q1 call, due to prior year client retention, we projected net sales contribution to be lower than normal for Q2 and Q3. We'll lap these issues in Q4 and are comfortable with our client retention performance over the long-term. Hospitals continue to look to partner with larger organizations to 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 multiple-hospital or multiple service line bases. And with our multiple clinical service lines, we are well positioned to take advantage of this trend in the market.

Same contract was a significant contributor to revenue growth. Our same contract revenue was driven by strong increases and estimated collections per visit and volume growth 3.2%. The increase in estimated collections per visit was driven by outstanding performance on revenue cycle processes, commercial and Medicare rate increases, Medicaid parity revenue and the continued improvement of our payer mix.

During the first quarter 2014, we saw the emergence of positive reform related trends that we believe as the second quarter financial results reflect continuation of these trends. Specifically we realized significant declines in the percentage of self pay visits and corresponding increases in the percentage of Medicaid visits again this quarter. The vast majority of this payer mix improvement occurred in Medicaid expansion states but we also realized some modest improvements in the non-expansion states.

We are pleased to see that our payer mix has sequentially improved for each of the first six months of 2014. We are also tracking the favorable impact of exchange patients on payer mix and currently believe exchange patients only represent approximately 0.5% of our total volume. However, similar to the improvement in payer mix, we have seen a sequential increase in the number of exchange patients that we are tracking each month anticipate that exchange patients will continue to constitute a larger percentage of our volume over the remainder of the year and into 2015 and 2016.

We are also pleased to see that 3.2% growth in same contract volume this quarter, after we are experiencing the challenge of a lower utilization environment in the first quarter 2014 and all 2013. While it's difficult to know exactly what factors drive overall volume growth, we continue to believe that the expansion of coverage is a factor in supporting the recent high utilization trends in the hospital emergency department.

Lastly, the Medicaid parity program continues to support revenue growth this quarter, as we did not recognized any Medicaid parity revenue during the first half of 2013. We continue to assume that the Medicaid parity program will expire at the end of this year. However, given the increase in overall Medicaid enrollment 2014, we believe the access to care this population continues to be a challenge, we're working with other provider groups to educate for an extension of this program on its current terms in 2015. We will continue to update you as we receive more information about any other developments around this effort.

In summary, we are pleased with our financial performance this quarter and are well positioned for the future. I will now turn the call over to David, to provide additional detail. David?

David Jones

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

In the second quarter of 2014, net revenue increased 16.4% to $675.1 million. Acquisitions contributed 8.7%, same contract revenue contributed 7.5%, and net sales contributed 0.2% of the increase in quarter-over-quarter growth. Within the 8.7% of revenue growth from acquisitions, 2.2% of the revenue growth came through the hybrid sales opportunities as described earlier.

Same contract revenue increased 43.5 million or 8.3% due primarily to an increase of 8.6% in estimated collections on fee per service visits that provided a 6.5% increase in same contract revenue. The increase in the estimated collections per visit was primarily attributable to increased managed care and Medicare reimbursement rates and increase in average patient acuity levels and Medicaid parity revenue. We also benefited from a significant improvement in payer mix led by decline in the percentage of self-pay fee per service accounts and a shift primarily in the Medicaid. A 3.2% increase in visits contributed 2.3% of the same contact revenue growth between quarters, while contract and other revenue constrained growth by 0.5%.

Acquisitions contributed 50.6 million of revenue growth and net new contract revenue increased by 1.2 million. Medicaid parity revenue recognized in the second quarter was 8.5 million of which 7 million was same contract revenue. Medicaid parity contributed 1.5% to consolidated revenue growth and 1.3% to same contact revenue growth between quarters.

In regard to overall payer mix changes in the quarter, we realized increases in Medicaid, Medicare and commercial patient volumes and declines in self-pay and other patient volume. Medicaid patients as a percentage of total visits increased 330 basis points to 29.3%. Medicare patients increased 40 basis points to 24.8% and commercial patients increased 20 basis points to 26.6%, while self-pay patients decreased 380 basis points to 17.4%.

Professional service expenses of $510.1 million increased 12.2%. As a percentage of net revenue, professional service expenses declined to 75.6% from 78.4%. On a same contract basis, professional service expense increased by 3.1% and as a percentage of net revenue decreased 370 basis points to 73.5%.

Professional liability costs were $23.6 million compared to $19.1 million. And as a percentage of net revenue professional liability costs were 3.5% and 3.3% in 2013.

General and administrative costs were $72 million compared to $56.9 million in 2013. Included within general and administrative costs were contingent purchase and other acquisition compensation expenses of $9.3 million in 2014 and $9.9 million in 2013. Excluding the contingent purchase expense, core general and administrative costs increased to $62.8 million from $47 million.

The increase in core general and administrative expenses was due primarily to the inflationary growth in salaries and new physicians, increases in incentive and equity-based compensation, severance costs and deferred compensation expense between periods. Also included in the increase was approximately $3.1 million of an accelerated recognition of equity compensation expense primarily associated with the previously disclosed amendment to the employment agreement of our Executive Chairman. As a percentage of net revenue, core general and administrative costs increased to 9.3% in 2014 from 8.1% in 2013.

Net interest expense decrease to 3.4 million due to a decrease in term loan balances and interest rates between periods. Second quarter 2014 reported net earnings were $30.2 million or $0.42 diluted net earnings per share compared to $18.4 million or $0.26 diluted net earnings per share in 2013.

The 2014 financial results reflect contingent purchase compensation of $9.3 million and non-cash amortization expense of $11.1 million. By comparison, 2013 net earnings reflect contingent purchase compensation of $9.9 million and non-cash amortization expense of $9.5 million.

Excluding these items, diluted net earnings per share increased 39% to $0.61 in 2014 compared to $0.44 in 2013. Fully diluted outstanding average shares increased 1.5% to 71.9 million shares in the second quarter of 2014, primarily due to new equity grants the exercise of stock options and an increase in the average share price between periods.

Adjusted EBITDA grew 41.1% to 86.2 million compared to 61.1 million in 2013, while the adjusted EBITDA margin increased to 12.8% in 2014 compared to 10.5% for the same quarter in 2013.

Cash flow provided operations during the quarter increased to 40.5 million compared to 21.6 million in 2013. There were 1.2 million of contingent purchase payments made in the second quarter of 2014 and none in 2013. Excluding the impact of this item, operating cash flow reflected an increase of 20.1 million between quarters.

Looking at our results for the first six months of the year net revenue increased 13.9% to 1.32 billion, acquisitions contributed 8%, same contract revenue contributed 4.5%, and net sales growth contributed 1.4% of the increase in net revenue. Same contract revenue increased by 5.2% due to increases in estimated collections on fee-for-service visits up 8.5%, while fee-for-service visits declined by 0.2%.

Acquisitions contributed 92.9 million of growth and net new contract revenue increased by 16.3 million, Medicaid parity revenue for the first half of 2014 was 17.3 million of which 14.8 million was same contract revenue. Medicaid parity revenue contributed 1.5% to both consolidated and same contract revenue growth between periods.

Reported net earnings were $54 million or $0.75 diluted net earnings per share compared to $36.5 million or $0.52 diluted net earnings per share in 2013. The 2014 financial results reflect $19.4 million of contingent purchase and non-cash amortization expense of $22.2 million. Financial results for the same period of 2013 include 20.2 million of contingent purchase and non-cash amortization expense of $18.4 million.

After excluding these adjustments diluted net earnings per share were $1.15 in 2014 compared to $0.88 for 2013. Adjusted EBITDA grew 30.2% to 158 million compared to 121.3 million in 2013 while the adjusted EBITDA margin increased to 12% compared to 10.5% for the same period in 2013.

Cash provided by operations for the year grew to 74.6 million compared to $54.9 million in 2013.

There were $1.2 million in contingent purchase payments included in our operating cash flows for 2014 and no contingent purchase payments in 2013. Excluding the impact of the contingent purchase payment, core operating cash flows in 2014 increased 38%, between periods.

For the year, capital expenditures were $12 million compared to $7.4 million in 2013. Net cash paid in 2014 for acquisitions was $7.7 million, including the $1.2 million of contingent purchase payments. In 2013, cash paid for acquisitions was $12.6 million.

Turning to the balance sheet categories. As of June 30, 2014, cash and cash equivalents were $93.4 million. Total outstanding debt was $493.4 million, with $250 million available under the revolving credit facility. The decrease in outstanding debt of $8.1 million during the year was due to scheduled term debt payments.

As of June 2014, net accounts receivable totaled $424.4 million compared to $392.4 million as of December 2013. Overall days in accounts receivable declined to 58 days compared to 58.2 days at December 2013.

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

Greg Roth

Thanks David. As we look ahead to the remainder of the year, we believe that we remain well-positioned to achieve revenue and earnings growth. We continue to implement our acquisition strategy, execute on new contract sales and drive improvements in same contract performance and deliver strong operating cash flows.

As a result of our performance in the first half of 2014 and our expectations about future operating trends and growth opportunities, including the potential benefits from healthcare reform, we have increased our projection for net revenue growth for fiscal year 2014. We now estimate our annual net revenue growth for 2014 to be between 13% and 14% which is an increase from the prior guidance of 11% to 12%.

Additionally, we’ve seen an improvement in our year-to-date adjusted EBITDA margin and now expect that the 2014 full year margin could range between 11% and 11.5% with the potential for additional upside if the recent trends in volume and pair mix continue.

Consistent with prior guidance, we anticipate that the benefit from the Medicaid parity program will be in the range of $32 million to $34 million which is reflected in our revised revenue projections. In closing, we are pleased with the strength for 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

Thank you. (Operator Instructions). Our first question today is coming from Kevin Ellich from Piper Jaffray. Please proceed with your question.

Kevin Ellich - Piper Jaffray

Good morning. Thanks for taking the question. I guess first off, we’re seeing a nice improvement on the payer mix from expansion of coverage. Greg, you made a comment in the prepared remarks about exchange patients. Could you give us a little bit more color as to what you guys are seeing and what you expect going forward from exchange enrollment versus Medicaid expansion? And then I have a follow-up for David.

Greg Roth

Okay. What we see and what we see is what we’ve said and that is we believe that given that the Medicaid program was a known relatively functional program, we expected to see the Medicaid payer mix impact early and strong and we’ve seen that. And so far on the exchange side, we believe that -- we thought it would take a little longer for that to kick in. And we’ve only seen about 0.5% of our volume right now is from exchange payers but we’ve seen that go up sequentially six months in a row. So we do believe that this is building and so we’re pleased with that. And then the other part of that exchange is we are getting paid relatively well on those patients. We see getting the low end of managed care on the rate.

Kevin Ellich - Piper Jaffray

Okay. That’s helpful. And then for David, on the professional service expense which was down nicely. Is that fixed or is that -- or will there be a catch up later in the year like in Q4, as revenues continue to get better?

David Jones

Well, I think that is one where we saw a nice benefit this particular quarter. But it is -- we described that line item; it’s sort of fixed in the short run but it’s variable in the long run. And over time, we do typically see some deterioration in that second part of the year, most acutely in the fourth quarter where we typically have some higher staffing costs around the holiday season and periods like that. So, while we saw nice trends there, we do think particularly in the fourth quarter as we normally see, could see some uptick in that going forward.

Kevin Ellich - Piper Jaffray

Okay. Sounds good. Thank you.

Greg Roth

Thank you.

Operator

Thank you. Our next question today coming from Ralph Giacobbe from Credit Suisse Group. Please proceed with your question.

Jonathan Chan - Credit Suisse Group

Hi, good morning. It’s actually Jonathan Chan on for Ralph. On certain question on the ATA benefits you saw on the quarter. Could you maybe provide some color on the differences between Medicaid expansion states versus non-expansion states?

Greg Roth

Yes. This is Greg, thanks for the question. What we're seeing is on the expansions states obviously we've seen a nice lift on the Medicare side, sorry on Medicaid side we've seen a significant improvement in that payer mix on the expansion states going from self pay to Medicaid.

On the non-expansion states, we’ve still seen a little bit lift and a smaller improvement but still improvements from self pay to Medicaid. Interestingly enough on overall volume, we saw overall volume up in both segments, both in the expansion states and the non-expansion states and interestingly enough was actually overall volume was a little higher growth in the non-expansion states on overall.

So the takeaway is, on the expansion states more of the payer mix shift and on the non-expansion states a little bit higher increase in volume than the non-expansion but both had increase in total volume.

Jonathan Chan - Credit Suisse Group

Got you, thanks. And then just one other follow-up. Can you talk more about the hybrid strategy your referenced in the prepared remarks like how do the sales effort start-up costs and capital out based compared traditional M&A or new sales and the bundling play a role here?

Greg Roth

Yes, I have take this, this is Greg again. We're pretty excited about this hybrid strategy. What we're seeing and we've talked about this in prior quarters and I remember maybe it was a year or so ago we talked about the compression on the margin from net new sales. And the good news is that sales is going very well, 2013 was our best year ever in sales production as far as signing contracts and in ‘14 we are actually doing better than that.

The other part of that is with these hybrids we are able to eliminate much of the start-up cost and which causes the margin compression on the new contract performance. So we are very excited about that usually it doesn’t take a great deal of capital but it helps us stabilize a good work force at the beginning of the lifecycle of the contract. And so we see this as a very good use of our capital and it is a business leading because we are try to be very clear and say that we have three growth buckets. We have net sales, we have M&A, we have got same contract and now we are seeing this hybrid process really come into fruition and as said earlier we had about 2% growth from hybrid that sitting in M&A, but in our view it probably makes us much sense to have it on the sales side and our sales team looks at it as a sale. So we are very bullish it’s good for the company, it’s good use of our capital.

Jonathan Chan - Credit Suisse Group

Got you, thanks for the questions.

Operator

Thank you. Our next question today comes from A.J. Rice with UBS. Please proceed with your question.

Brandon Fazio - UBS

Hi, it’s Brandon Fazio for AJ. A couple of things, first just trying to get a sense for your guidance for the second half just what you are benefit assumes for same store pricing and sort of same store volumes underlying that guidance?

Greg Roth

I think in general as we look at our guidance, we just to frame it up again, we talked about going from on the revenue side, going from 11% to 12% to 13% to 14%. We're holding our guidance steady on Medicaid parity which is $32 million to $34 million, so that's the same.

And what is new is our same contract revenue prior was 2% to 4% and now we are raising that from 4% to 6%. So, we're really seeing the big benefit in our same contract. On net sales, we talked about the lower end of the 2% to 4%, probably a little slightly under that 2%.

M&A will continue to be 6% to 8% and we're now taking our margin from 10.5% up to 11% to 11.5%. And as we look at the increase in same contract 4% to 6%, what we're really hedging right now is if you recall, we've had prior to this quarter, we had 5 consecutive quarters were the volume, same store volume was negative 2% or worse. And in the first quarter this year, we had actually more than a negative 3% growth rate in the first quarter and that negative 3% has swung to a positive 3%.

So, we are being a little bit cautious on that and we're not sure that is going to continue, I think there is a probability that nice volume change will continue, but we're not really building that, much of that into our guidance. So, I would say that we're probably still David, looking at maybe a really building in maybe a 1% to 2% increase in volume and probably that works out through probably rates probably close to about 6% I would say.

Brandon Fazio - UBS

Yes. I would say that we on our first quarter call we've talked about we had a view continuation of soft volume coming through the same contract. So clearly the second quarter is encouraging. I think that we probably little more optimistic on the soft volume. Pricing has been a real driver as it was this quarter and it was first quarter.

Now that potentially could moderate a little bit because you may recall the timing of when we recognize a Medicaid parity, we have recognized all of the Medicaid parity benefit for '13 over the quarters three and four. So in itself put a little bit of pressure on the pricing, but I think we are trying to be recognized, we've seen some more positive trends emerged this quarter very encouraging, acknowledging that we have taken the guidance up on both revenue and margin. And if we continue to see some positive trends particularly on the payer mix and volume as we noted in the release there could be some upside on the margin opportunity there.

David Jones

But to key things in perspective that the two things that we can't manage are payer mix and volume. And the good news is on the payer mix we've had six sequential improvements in payer mix this year. So we're pretty excited about that. And there is a potential that we could sequentially get better yet. But given that this is something that's brand new to the industry we can't really count on that sequentially getting better every month.

So we're guiding to pretty much our current payer mix that continues to tick up there is upside. And then if the volume continues to grow as it did in the second quarter there is upside with that as well.

Brandon Fazio - UBS

Okay. And it's fair to say that for Medicaid parity, you’ve absolutely put a specific dollar number it’s probably easier to do. With reform I think you’re talking about doing that before, is it just too hard to parse out a specific number at this point or something do you think you’ll be able to do maybe in the third quarter call?

Greg Roth

Yes. I think what we can do is we can talk about the two pieces, I think on the payer mix, I am going to ask David to answer that question. I think on the volume side that is the combination of reform and the economy which is very interesting is the fact that the non-reform or the non-expansion states had better volume growth than the expansion states, makes us believe that there is definitely an economic lift in that. So we can’t tell you what percent of the 3% increase was due to reform. However, David I think it’s pretty fair to say that reform is manifesting itself on the payer mix you, might want to dollarize that topic.

David Jones

Yes. I mean we think the payer mix is clearly reform, I mean there is always going to be some organic movement there, but the magnitude of the change we’re seeing this quarter and last quarter I mean we’re really calling that reform. That’s probably -- we estimate that is about $4 million of revenue benefit this quarter. And just to come back to the earlier comment you referenced the parity is clearly reform related that’s $8.5 million. So between $8.5 million of parity and probably $4 million of payer mix that’s $12.5 million of revenue this quarter from reform. And as Greg said I think the volume is certainly getting some support from reform, but I don’t think we have any insight or anyway to parse how much of that’s reform versus just organic changes.

Brandon Fazio - UBS

Thank you.

Operator

Thank you. Our next question today is coming from Brian Zimmerman from Goldman Sachs. Please proceed with your question.

Brian Zimmerman - Goldman Sachs

Hi thanks, good morning. I guess my first question is I was curious how much pressure you’re seeing on the net sales growth that was carryover from last quarter. So I guess that another ways what would your retention rate have been, if you back out the impact from the first quarter?

David Jones

On the pressure on net sales, I think is important to frame it up that we normally run a contract retention rate of 92% to 98%. And we have had as we have talked about in prior calls. We've been at the low end of contract retention. And keep in mind these contract terminations happened 2013. So this is a bit of old is that we had some contract terminations in 2013 that are manifesting itself in 2014.

The good news is our contract retention rate of actual term this year is significantly better. So one the '13 is working itself through. We see the pressure really came through for, this is the third quarter, we believe that next quarter will look somewhat like this quarter on contract retention which will work itself through. We believe that the fourth quarter 2014 will be back in our normal range again. And that sales continue to grow very, very nicely. So we see that a fourth quarter realizing going back to our normal net sales in the fourth quarter.

Brian Zimmerman - Goldman Sachs

Okay. So it sounds like that’s just carryover from last year, but retentions are doing well, if you [max] that up. My follow-up questions on the acquisition pipeline. Just curious what opportunities you're saying? We've been through two quarters this year,, it seems like you're spending a bit less on acquisitions, you commented that the pipeline remain strong. So just any additional color you could give us on what opportunities you're saying and just on multiples that are out there?

Greg Roth

Yes. I think that on our actual pipeline we are focused on emergency services and on anesthesia primarily. As we’ve talked about earlier, some of these acquisitions were smallish; they ended up being more the hybrid opportunities and the hybrid opportunities, don’t really cost us that much in a way of capital. And a lot of these acquisitions just take time and they are choppy. We are actually very bullish on our M&A pipeline; it’s as strong as it’s ever been. And they are not closed till they are closed but we are very excited about M&A and we think that we will be closing several, either ED and/or anesthesia transactions over the next year.

Brian Zimmerman - Goldman Sachs

Alright, thanks a lot.

Operator

Thank you. Our next question today is coming from Whit Mayo from Robert W. Baird. Please proceed with your question.

Whit Mayo - Robert W. Baird

Hey, thanks. Good morning. Greg, just bank on the hybrid growth model you referenced, is there a number that we should think about if we look back over the past 12 months, how much of your acquired growth would have come from that hybrid opportunity, anything just to give us a sense of how that’s trended historically?

Greg Roth

Yes, I think what I would say is probably in ‘13 it was minimal and in ‘14 it’s probably about 2%.

David Jones

Yes. It’s 2% this time. I think it’s really been running, that’s where 1% or 2%. So, these things aren’t necessarily new; we are seeing a few more of them but we have always had these scenarios where the acquisition that resulted really the initial contact, came from sales folks, reaching out the hospitals, hospitals wanting to do something with TeamHealth and really the hospital helping to facilitate some transaction with the income of group.

Whit Mayo - Robert W. Baird

Got it. And my second question is just on Medicaid. Maybe I’m not thinking about this correctly, but presumably the majority of your Medicaid eligible patients that comes through the ED, at least in the first quarter, theoretically shouldn't be too dissimilar from the second quarter. And I guess I’m just curious, can you talk about what really drove the change in the second quarter versus Q1 in terms of Medicaid, is this a lagging, capturing that with the accounting, just eligibility, building and experience? I guess, I'm just curious what the primary factors were driving the sequential improvement? Thanks.

Greg Roth

This is Greg and David might want to chime in because there is a not a crisp answer to this one. But I believe what we think is the whole notion of having healthcare reform has really highlighted that there is a benefit out there for people. And I think that just all the news has energized people into looking at healthcare.gov and finding out actually that they’re eligible for Medicaid. So, I think that there is just a lag from the marketing. And as we said, it's unusual to seeing such a nice clean line that sequentially every month has gotten better and better and better.

So, I would say it's probably a combination of marketing and there might be a little bit lag on the financial side David. But I think it's pretty much just a more of a social issue, people learning about the benefit and just signing up and realizing that this is a great benefit and sharing the word.

David Jones

Yes. I think the other thing that's different from the exchange program clearly is the exchange program has defined enrollment periods. The Medicaid program, what’s happened is eligibility has expanded so with someone may be did not due to the process of signing up and then access system in June, they realized they’ve got Medicaid eligibility and they can’t be enrolled at that point. So that does allow little bit for a building process on your utilization trends with that peer category.

Greg Roth

And then the third thing is hospitals do a really nice job of understanding their patients and seeing their patients eligible for Medicaid now. So we are recipient of their good work. So hospitals are working very hard to talk to all their patients that are self-pay patients, and help them find some funding source through Medicaid. And as you know, we expect extract that data from the hospitals, probably a week or so after they’ve had a chance to work on that. And we are the recipient of that new found information.

Whit Mayo - Robert W. Baird

Great, thanks.

Operator

Thank you. Our next question today is coming from Gary Lieberman from Wells Fargo. Please proceed with your question.

Gary Lieberman - Wells Fargo

Good morning. Thanks for taking my questions. You increased the EBITDA guidance, the margin to 11% to 11.5% and you noted that there could be some upside to that. You had a good quarter, you are at 12.8%. Can you talk about what you view as the key variables that would account for the difference and whether or not you guys do above that 11% to 11.5% range?

Greg Roth

I think the key variables are -- I think the thing that we’re comfortable with is managing the company. And when we look at managing the company, if you force the number, we’re looking at with -- I think we’re at 12% margin for the first half of the year which forces us to a little bit lower margin for the second half of the year. And that normally happens as David said earlier, often there is a pretty big swing in margin for us especially in the fourth quarter. So, that’s the part that we can manage and that’s the part that’s historical that is a downward pressure on margin.

And as David also said, we recognized the 100% of last year’s Medicaid parity in the second half last year and this year we’ll recognize just half of the Medicaid parity in the second half of that that year. So those are the downward pressures on margin that we can manage and that are knowable. And what we don’t know is really the sequential six months in a row of payer improvement. And there are two pieces to that on the payer mix. One is the sequential movement from self-pay to Medicaid which we’ve seen in a big way. And the newer piece to that is the reform and that is people going through exchanges and that has improved every month since the beginning of the year. And so the big question will be when will that start to really manifest itself in material numbers that would be similar to Medicaid, because if you remember, we go way back when David laid out our framework around numbers, we’re talking about half of the people will end up on Medicaid and half people end up on exchanges.

So we still have that other half sitting out there. So, when will that -- how much more, how much faster will this self-pay to Medicaid ramp up because I think that we talked about generally half the people eventually -- half the uninsureds will be on something. And I guess David, we’re looking at -- we’ve gone from call 21% to 17%. So we're clearly not at the halfway point. And so we have that self-pay to Medicaid and not knowing what’s going to happen with the self-pay to the exchanges.

And then the other big upside is this just really good 3% volume quarter and if that continues if we have another couple of quarters at 3% that's clearly upside that we've not built into our guidance.

Gary Lieberman - Wells Fargo

Okay, great. And then if I could just ask a follow-up on the contract retention, it looks like even sequentially the contract revenue was down I guess what would’ve cause that, it sounds like on a year-over-year basis you're comfortable that once you get through this quarter or third quarter should be need your company sequentially was down. And what are you doing to better retain those contracts?

Greg Roth

Yes. I think that what we seen this is relatively knowable, and we had mentioned last quarter that we expected those numbers to flow through. Because most of these contracts or frankly all these contracts happened last year, so we know about that. And we know that there will be one more quarter like this, next quarter the same discussion will be going on and then in the fourth quarter we believe that this will be completely aggressively resolved.

And then the good news is most of these contract losses weren’t from core performance. We clearly have very, very good performance, but there were some chop in the market last year with systems really resettling and moving some contracts around. And that's a pure one-time event that will never happen again but we saw that last year and this year we are not seeing it and as a matter of fact our notifications this year for contract retention is extremely strong. And so from the operating side, we are very bullish on contract retention.

Gary Lieberman - Wells Fargo

Great, thanks a lot.

Operator

Thank you. Our next question today is coming from Darren Lehrich from Deutsche Bank. Please proceed with your question.

Darren Lehrich - Deutsche Bank

Thanks, good morning everybody. I wanted to just drill down a little bit more into the pricing and the rate growth that we saw here in the quarter and really for the first half of the year I guess just hearing you’ve talked about parity and ACA it seems like that maybe like about a 2 to 3 point benefit to rate and I guess there is some acuity in there and I wanted to just flush out, what else would be in there it seems like your rate and collection growth might be something like 5%, it seems like sort of a big number to sustain so I just wanted to understand what’s driving some of the pricing and the rate growth here?

Greg Roth

Well we have continued to see very good performance Darren coming out of our revenue cycle and we talked about that quite often the investments we have made in that and that’s really runs the whole gamut of just the basics of how you adjudicate claims, how do you follow up on collections our approach to managed care contracting all those things are really what’s driving this, been there the factors that are sort of external and that we do have in some ways react to that we are picking up some benefit there. But I would say that core managed care contracts in claims adjudication, that’s a probably the single biggest thing that drives our pricing opportunity.

We talked already though of about getting the benefit from this positive payer mix, that falls through the parity in terms of the contribution on the same contract parity, that's an element of it as well. Acuity is positive and that's a little bit, frankly unusual, we're not the traditional relationship between volume and acuity sometimes is inverse. And the fact that we actually saw pretty strong volume this quarter and still saw some positive acuity, I think it's reflective that this Medicaid population coming in probably is sicker, higher acuity levels coming through and that's reflected in the pricing as well.

And also we continue to get some positive year-over-year reimbursement from Medicare rates, just on a schedule basis. So, in sort of line up the specific factors, we really are catching some positive trends in most of these areas, revenue cycle, management, included managed care, some positive acuity from a year-over-year standpoint, good trends in payer mix, the benefit from the parity and then the again the payer mix shift as well. So, all those things have been supportive of this pricing we're seeing right now.

Darren Lehrich - Deutsche Bank

Okay. And if I could just follow up on one thing, Greg in the past you guys just had some military business, I know you still do. I'm just curious to get your thoughts on whether you see any discussions around VA spending as an opportunity for you guys in terms of growing that piece of your business?

Greg Roth

Yes, at this point there is lot of flux going on in the government and keep in mind that our military business is only we've grown a lot since the IPO and our military business David is about $100 million around that number. So it's a small part of our business it's still a very nicely managed business. I think that probably there are puts and takes there obviously the DA is in the news which is a positive plus but keep in mind we don't talk a lot about it.

But with sequestration the pressure on the military there is quite a bit of pressure on the military right now to cut their cost. And so I would say that plus minus I think that it's probably a push or so. And but it's a small piece of our business. So we really don’t see that being a big move or one way or the other.

Darren Lehrich - Deutsche Bank

Okay, great. Thank you.

Opeerator

Thank you. Our next question is coming from Jack Meehan from Barclays. Please proceed with your question.

Jack Meehan - Barclays

Hi thanks good morning. Just wanted to get back I guess to the margin gains back half specifically around the labor management. That was helpful commentary on the fix but more variable longer term I guess just more on the staffing side, if we continue to see really good volumes do you think that you're going to need to increase in your staffing as you go into the back half of the year?

Greg Roth

Yeah I think that this is Greg. That could happen keep in mind that we probably had a one quarter benefit that it will continue on from more than one quarter but we want from a negative 3% of positive 3%. So when you have those big swings we normally get the benefit when they go this direction and then we get the detriment when they go on the other direction because David said these are long-term there are semi-variable that in the short run are fixed. But I would say that directionally, probably two factors, one as you’ll see a little more pressure on the staffing margin one because of that time of the year where that’s going to happen because of the holidays and that type of thing and especially in the fourth quarter. And then the second is that if we continue to see bullish volume we will need to add staffing is that that would be a good problem to have, we continue to see 3% plus growth per quarter.

Jack Meehan - Barclays

Got it. Yes, I agreed. And then just as we think about reform and maybe the flow-through sticking with labor expense. Do you think 70% on the new reform benefit is still the right way to think about, what flows-through to adjusted EBITDA?

David Jones

That is -- this is David. That is for how we think about it from a pricing standpoint, but again if we see if we view that there is some benefit from reform coming from volume and again that’s the challenge exactly what is reform driven volume. That is one that probably comes in more like probably a 30% rate because you not only have the sharing from some of the incentive plans but you could also find yourself in a model of having to add some coverage.

Jack Meehan - Barclays

Got it. Okay, thanks guys.

Greg Roth

Thank you.

Operator

Thank you. Our next question today is coming from Richard Close from Avondale Partners. Please proceed with your question.

Richard Close - Avondale Partners

Yes. Thank you for the questions, congratulations. Just want to be clear on the guidance and some of the comments earlier, I believe you’ve mentioned a 1% to 2% assumption for volume in the guidance and is that blended for the year or is that really in the second half?

David Jones

That’s really sort of -- when we talk about guide it is really for the full year and it reflects with the weakness we saw in the first quarter, year-to-date, we still actually are slightly negative on same contract volume growth. So it certainly reflects a full year positive and better trends over the balance of the year. But when we talk about guidance, it’s really sort of an all-in view.

Richard Close - Avondale Partners

And then you’ve talked about the improvement six months or each month sequential improvement in the payer mix. And just to be clear again, the second half of the year, you're assuming no, essentially no improvements in the back half?

Greg Roth

Correct. We’re just basically, so we don’t know this trend will continue on. It would be logical to think that it will, but we would hate to stretch and put guidance out there and something that we’ve not seeing historically or something that management can manage. So right now, at this point we’re saying that the volume is not as strong as it was in this last quarter and that this payer mix improvement more or less has plateaued. So we’d like to think there is some upside, both those things continue to improve.

Richard Close - Avondale Partners

Alright. Thank you.

Greg Roth

Thank you.

Operator

Thank you. Our next question today's come from Kevin Fischbeck from Bank of America Merrill Lynch. Please proceed with your question.

Joanna Gajuk - Bank of America Merrill Lynch

Good morning. This is actually Joanna Gajuk in for Kevin today. Just to follow up on the guidance commentary and what you include there from the reform. So is it fair to say that based on your commentary that you thought that improved payer mix add as maybe $4 million revenue benefit in second quarter. So are you saying that you sort of assume this kind of run rate for the rest of the year, quality run rate, so $4 million in third quarter and another $4 million in fourth quarter?

Greg Roth

Yes. We're assuming that the payer mix stays the same that we’ll continue with those numbers. And if it continues to escalate month by month basis there could some opportunity for upside.

Joanna Gajuk - Bank of America Merrill Lynch

Alright. And then on your Medicaid pilot, the commentary on how you believe there is going to be -- if the settlement [expires] next year, there is going to be some access -- the current issues. So would you feel like there is willingness on the state’s mind to sort of pay out of their own pockets to continue to [tally], is there any traction and any kind of support there on the state’s front?

Greg Roth

This is Greg. We have heard that there are some states that are considering that. Quite frankly the states that we have heard has been second hand because they are not states that we’re really strong in. So at this point we don’t see that as a material good thing for us. And we are working hard with other organizations to evocate for to continue the parity payment. But at this point, the law is at the end of the year and that’s our working our pockets of study at the end of this year.

Joanna Gajuk - Bank of America Merrill Lynch

Great, thanks so much.

Greg Roth

Thank you.

Operator

Thank you. Our next question today is coming from Rob Mains from Stifel. Please proceed with your question.

Rob Mains - Stifel

Yes, thanks. I know we are coming up to the end, so I will just give you my two questions and then hop off. First one David, you got about $93 million or so of cash. So, how would you prioritize using that for M&A versus potentially deleveraging? And then question on the acquisition pipeline; you mentioned this is pretty robust, just wondering whether pricing is still same and whether it deals like shared and may have visions of sugar plumps dancing in sellers heads? Thanks.

David Jones

Thanks Rob. I think our priority for cash deployment is number one deploying it for smart acquisitions and we think there are still a so a lot of those in the market. Right now, we've got a very attractive pricing our term loan debt and just that make sense to truly pay down debt. So we're probably under leverage right now, but that's intentional with an eye to being able to take care of hopefully some of these transactions coming out of our pipeline. In regard, to pricing, Greg you want to talk about that?

Greg Roth

Yes, we see that there is probably a slight uptick on the ED side. And we have seen some very big prices out there on the anesthesia side for some of the very large groups. We will probably not pay those really, really high multiples and I heard what you said about them, the altitude for the high multiples. But we still think that we can get nice solid tuck in as these transactions complete at a reasonable multiple. But probably at turn high, I don't see in the past.

Rob Mains - Stifel

Fair enough. Thanks.

Operator

Thank you. Our next question today is coming from [Dana Handley from Stephens]. Please proceed with your question.

Unidentified Analyst

Thanks for getting me. And just on the 0.5% in the exchange patients that you saw, I think that was a quarterly number. Do you have what that would have been in June?

David Jones

No, that was actually for where we are, we’ve ramped up to that since the end June, that's why where we are for the quarter for the most part. And really the quarter and June were pretty similar to each other, we've not seen just a huge impact yet as Greg alluded to, but it's growing. So that's encouraging.

Unidentified Analyst

Okay. That's helpful. Just last one on the non-expansion state, I assume we probably we see nothing this year you are hearing anything that maybe we get some movement in some of those states I know a couple of your bigger ones are non-expansion states.

David Jones

Well I don’t think we're clearly optimistic with the elections right now but there continues to be come dialogue we're in that Knoxville, Tennessee and you hear the governor talking about probably do something at some point but I think there could be some opportunities once we get through the elections, I am not sure we can handicap which states may fall into that category right now.

Operator

Thank you. We have reached the end of our question-and-answer session. I am going to turn the floor back over to management for any further closing comments.

Greg Roth

Okay. This is Greg we appreciate your interest in Team Health and we hope you have a good day. Thank you.

Operator

Thank you. That does conclude today's teleconference. You may disconnect your liens at this time. And have a wonderful day. We thank you for your participation today.

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