Envision Healthcare Holdings' (EVHC) CEO William Sanger on Q2 2014 Results - Earnings Call Transcript

| About: Envision Healthcare (EVHC)

Start Time: 17:00

End Time: 18:01

Envision Healthcare Holdings, Inc. (NYSE:EVHC)

Q2 2014 Earnings Conference Call

August 06, 2014, 17:00 PM ET

Executives

Craig Wilson - SVP and General Counsel

William A. Sanger - CEO

Randel G. Owen - EVP and CFO

Analysts

Andrew Schenker - Morgan Stanley

Ryan Daniels - William Blair

Ralph Jacoby - Credit Suisse

Darren Lehrich - Deutsche Bank

Frank Morgan - RBC Capital Markets

Brian Tanquilut - Jefferies

A.J. Rice - UBS

Kevin Fischbeck - Bank of America Merrill Lynch

Gary Taylor - Citigroup

Josh Raskin - Barclays Capital

Matthew Gilmore - Robert W. Baird

Operator

Welcome to the Envision Healthcare Holdings Second Quarter 2014 Conference Call. At this time, all participants are in listen-only mode. (Operator Instructions). Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

Now I will turn the call over to Craig Wilson, General Counsel. Thank you. You may begin.

Craig Wilson

Thank you. I’d like to welcome everyone to Envision Healthcare’s second quarter 2014 earnings conference call and introduce our speakers; Bill Sanger, President and CEO; and Randy Owen, CFO and COO.

Before we begin, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties as described in our SEC filings, and actual results may vary materially.

Forward-looking statements in the press release that we issued today along with our remarks today are made as of today, August 6, 2014 and we undertake no duty to update them as actual events unfold. Today’s remarks also include certain non-GAAP financial measures including adjusted EBITDA, adjusted free cash flow and adjusted EPS. You can find a reconciliation of these measures in the tables included with our press release, which is also available in the Investor Relations section of our website at www.evhc.net. All comparisons including our presentation today are for second quarter 2014 to second quarter 2013 unless otherwise noted.

I will now turn the call over to our President and CEO, Bill Sanger.

William A. Sanger

Thank you, Craig, and good afternoon to everyone. Q2 was another successful quarter for Envision Healthcare. Revenue was up 19.6%, adjusted EBITDA up 26.6% and adjusted EPS was $0.28. The overall majority of our growth continues to be organic, which we believe to be the result of our integrated service offerings across all business segments. 60% of our revenue growth was driven by net new contract wins, 25% from same store and 15% from acquisitions.

EmCare’s net new contract wins continued at a record pace and contributed 15.4% to the overall revenue growth of 21.2%. AMR delivered its strongest performance in many years with 16.7% revenue and 33.1% EBITDA growth. EmCare’s second quarter revenue growth of 21.2% was primarily driven by 20.3% organic growth of which 50.4% was from net new contract wins, same-store contract growth increased substantially from Q1 and from prior year, partially driven by the benefits of healthcare reform.

New starts in the quarter are projected to drive approximately $85 million of annualized net new revenue. When combined with the starts of Q1, our first six months of new contract wins are expected to produce approximately 200 million of annualized new revenues.

Late in the quarter, we announced the acquisition of Phoenix Physicians which is expected to add an estimate of $125 million in annualized revenues in approximately 800,000 patient encounters. This acquisition expands our presence in South Florida, adds new service offerings and further advances our market-centric strategy.

The acquisition also brought us two new service lines; pediatric and OB/GYN hospitals which we see as an additional platform for growth. The acquisition provides us substantial opportunity to cross sell our integrated service offerings to these new hospital clients and likewise to cross sell new services to our current and our future hospital partners.

On the innovation front, EmCare continues to be a market leader. We recently added a new offering to our suite of technology solutions. This offering, which we refer to as DASH, Direct Admit System for Hospitals, and further extends our integrated model into the community physician’s office.

This innovation utilizes proprietary software that improves coordination of care between our hospitalist and community physicians by streamlining the hospital direct admission process. Currently, there are a dozen hospitals and 650 community providers utilizing our system. We believe that as we expand this technology we will further solidify our existing relationships, facilitate our organic growth and provide a platform for further integration with AMR and Evolution Health.

At AMR, net revenue growth of 16.7% and adjusted EBITDA growth was 33.1%. Revenue growth was primarily driven by new contract wins and same market increases which was partially driven by the positive aspects of healthcare reform. We are benefiting from our large 911 contract wins in 2013 as well as wins in the first half of the year. In addition, we continue to be successful with our IFT and managed transportation businesses. This is the result of improved sales approach in targeted markets, better our time performance for ambulance transports and new managed transportation agreement wins.

At AMR, we had a 150 basis point improvement in operating margins from leveraging our high revenue base, market rationalizations and our investments in technology. Our technology investments while not yet fully implemented have resulted in more effective crew scheduling and deployment. We’re very encouraged by their exceptional results at AMR and believe our improved win rates, our market-centric strategy and acquisition pipeline will enhance our growth and further solidify us as the market leader.

On the Evolution front, we continue to push forward with health plans and health shift in collaboration. We have begun implementing services with Fundamental in the initial target markets. As a reminder, Evolution Health entered into a national agreement with Fundamental to provide post-acute care services throughout their organization. We have also entered into a post-acute pilot with hospital systems in Texas and California as well as a pilot in Nevada with a major health plan. We are confident these pilots will result in long-term relationships with health systems and health plans and provide a basis for further expansion of the program.

Recently Evolution Health was awarded six projects by CMS for their bundled payment care improvement initiative. Under these programs, Evolution Health will provide post-acute comprehensive care to certain Medicare patients beginning January 2015. We believe these programs will provide Evolution Health the opportunity to be a proactive participant in the formation of post-acute care bundling and risk adjusted reimbursement methodologies.

I would now like to comment on the outlook for the remainder of the year. Given the traction we are seeing with our net new contract wins, our robust organic and acquisition pipeline complemented by early benefits of healthcare reform, we are increasing our annual guidance of which Randy will provide more details.

Before I turn the call over to Randy, I would like to take this opportunity to thank our 33,000 team members and affiliate clinicians for their constant commitment to our patients, our partner hospitals and fellow colleagues. Without the teams’ tireless efforts, these extraordinary results would never be possible. Thank you.

Randy G. Owen

Thank you, Bill. As highlighted in the earnings release we just posted, our net revenue for the second quarter was 1.08 billion, a 19.6% increase driven by a 21.2% increase at EmCare and a 16.7% increase at AMR. As noted, adjusted EBITDA for the quarter was 134.2 million, an increase of 26.6%. Adjusted EBITDA margin was 12.5%, an increase of 70 basis points.

We reported a net loss for the quarter of 2 million compared to net income of 9.6 million in 2013. The reduction in net income was primarily attributable to a 66.4 million pre-tax charge related to the early debt extinguishment in June 2014 offset by lower interest expense from debt retirements in 2013. Adjusted EPS in the quarter was $0.28 and GAAP diluted EPS was a negative $0.01.

EmCare net revenue was 690 million in the quarter and increased 21.2%. Of that increase, 73% came from net new contract wins, 23% came from same store and the remainder came from acquisitions. In addition to record setting net new contract wins, we saw a significant increase in our same-store growth driven by additional ED volumes.

On a same-store basis, the year-over-year revenue increased 5.5% from an increase in weighted patient encounters of 5.3%. For ED and hospitalist services, volume increases in Medicaid expansion states were 5.6% compared with volume increases in non-Medicaid expansion states of 4.1%.

Total EmCare self-pay volume mix dropped 200 basis points in the first half of the year from 20.1% at the end of last year to 18.1% in Q2, a further reduction in self-pay of 40 basis points from Q1. We believe this highlights the continuing payer mix shift and increased utilization of previously uninsured patients.

Within Medicaid expansion states, self-pay mix was 400 basis points lower in the second quarter '14 compared to year end 2013, and a further reduction in self-pay of 160 basis points from the first quarter. We saw a corresponding increase in Medicaid and Medicaid HMO mix. In EmCare, almost 50% of our volume is in Texas and Florida, which at this time have not expanded the Medicaid program.

The overall health reform impact is not as significant as it may be in the future if those states provide some expansion or make a change to their Medicaid program. The contract growth in the last year in non-expansion states like Texas and Florida, approximately 23% of our current volume is in Medicaid expansion states.

From a rate perspective, ED net revenue per visit increased 2.9% in the quarter due to the impact of changes in payer mix and rate increases. This was primarily offset by lower revenue per encounter in other service lines which included changes in one of our anesthesia MSA contracts, lower Medicare census at Evolution Health and the startup of the UHS joint venture.

Total revenue related to health reform, payer mix changes and parity was 9.7 million in the quarter. This included parity revenue of 7.3 million. Year-to-date, revenue from changes and parity was approximately $18 million.

EmCare adjusted EBITDA increased 23.4% to 87.1 million with an EBITDA margin improvement of 20 basis points to 12.6%. This includes 1.5 million in acquisition costs primarily for the recent Phoenix Physicians acquisition in June. This margin difference is largely due to improvements in our operating, insurance and general administrative costs offset by increased compensation costs as a percent of net revenue.

While margins improved, our compensation costs were higher as a percent of net revenue due to an 80 basis point increase in start-up costs from a 200% increase in revenue from new contract wins over the last year. Start-up costs in Q2 were 20 basis points lower than what we saw in Q1. We have seen success in lowering our start-up costs and expect to see this continue on a per contract basis over time.

To put these into perspective, expenses that we incur to start up a new contract represent approximately a half turn of EBITDA for each contract starts, which we believe is an effective investment for obtaining new contracts. On a same contract basis, the increase in volume and the rate have led to an improvement in margins of 230 basis points year-over-year.

AMR net revenue was 385.3 million, an increase of 16.7%. Of that increase, organic revenue was 57% from contract wins in the same market increases and 43% came from acquisitions. Organic growth was driven by a 5% increase in net new contract wins and a 4.6% increase in existing market revenue.

In existing markets, our weighted volume increased by 3.6% and revenue per transport increased by 1%. Same market volume increases in Medicaid expansion states were 4.4% and 1.5% in non-expansion states. The increase in revenue per trip was primarily driven by an improvement in payer mix as a result of lower self-pay and higher Medicaid mix in Medicaid expansion states.

Total AMR self-pay volume mix dropped 250 basis points in the first half of the year from 19.3% at year end to 16.8% in the second quarter of 2014, an additional 30 basis point reduction in self-pay from the first quarter. The reduction in self-pay and Medicaid expansion states was approximately 400 basis points with a slightly higher increase in Medicaid and Medicaid HMO mix. The net impact of mix changes in existing markets contributed approximately 3.8 million in additional revenue in the quarter and 6 million year-to-date.

AMR adjusted EBITDA for the quarter increased 33.1% to 47.1 million. The increase is attributable to a combination of revenue growth and improved efficiencies as highlighted by Bill. Adjusted EBITDA margins increased 150 basis points to 12.2%. Compensation and benefits as a percent of net revenue was lower by 250 basis points primarily related to operating efficiencies and the impact of the TMS acquisition as managed transportation expenses are primarily included in operating expense.

When combined together, comp and benefits and operating expenses declined 180 basis points over the second quarter of 2013. Insurance expense was higher as a percent of net revenue due to a 1.2 million in unfavorable prior year insurance development compared to a favorable adjustment of 0.3 million in Q2 of '13.

Cash flow provided by operating activities improved significantly due to improved earnings, reduction in EmCare DSO and lower interest payments. Operating cash flow was 63.7 million in the quarter compared to a 12.7 million outflow last year for a net improvement of 76.4 million.

Accounts receivable increased 22.8 million in the quarter compared to 13.8 million in last year due to the impact of accelerated contract growth. The net cash impact of growth was improved due to a three-day decrease in EmCare DSO in the quarter. During the quarter we saw significant decrease in Medicare enrollment related collection delays on order balances and recent contract starts. July cash was also very positive and we continue to expect a reduction in EmCare DSO throughout the year.

Net cash used in investment activities was 184.6 million compared to 23 million last year and primarily driven by acquisitions of 163.5 million in the quarter. Net cash provided by financing activities was 92.5 million compared to net cash used in financing activities of 7.4 million. This net change was primarily due to the bond refinancing in June 2014. Adjusted free cash flow improved by 62.3 million and was 43.5 million in the quarter compared to a cash outflow of 18.8 million last year.

From our strong results in the first half of the year, our continued growth prospects and benefits from healthcare reform, we are revising our 2014 annual guidance. We expect 2014 adjusted EPS to be a $1.15 to a $1.20, up from our previous guidance of $1.10 to $1.15 and 2014 adjusted EBITDA to be 553 million to 558 million up from our previous guidance of 538 million to 545 million.

Our guidance assumes that healthcare reform benefits continue but we’ve not assumed that volumes we saw in the quarter will continue at the same level or mix will change significantly as we’re unable to predict those trends at this time. Our previous guidance assumes some level of acquisition activity in 2014 and the net impact of recently completed acquisitions is included in our guidance with a larger benefit expected in 2015. Bill?

William A. Sanger

Thank you, Randy. Operator, we’d now like to open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). First question; Andrew Schenker, Morgan Stanley, your line is open.

Andrew Schenker - Morgan Stanley

Thanks. Good afternoon. Maybe just talking a little bit more on the reform benefit here, I’m just doing some back of the envelope math. It sounds like if you were running about 20% uninsured volume on an expansion basis, down 400 basis points if that’s correct, so you’re assuming about a 25% decline. Obviously, a still strong number but a little bit lower than what we’ve been saying from maybe some of the hospitals. Can you maybe talk about the trends you’re seeing in those expansion states? And also incorporate in that anything you’re seeing on the exchange side of things?

William A. Sanger

Andrew, it’s hard to compare it specifically with what the hospital is showing. Obviously we have been seeing each month a continuing change in that mix. So as I mentioned, the change in sales price mix in Q2 was even more than what we saw in the initial quarter. Look, I would expect that would continue. Some of that is dependent on utilization and in some cases people understanding what coverage they have and utilizing those services. On the exchange side, we have some data. I think it’s limited at this time. We have been seeing some improved volumes. So, for example, in May based on what we could track, we had about 0.5% of our volume that we saw was from exchanges. That’s increased to 1% in June. So while we’ve not made any major assumptions here, we are seeing some increasing trends in the non-expansion states as well.

Andrew Schenker - Morgan Stanley

Okay. And just maybe following up on that, on the volume side in general, is there any way to narrow and identify what increased volumes maybe attributed to Medicaid specifically and more specifically any guess on how many of them were previously uninsured utilizing more, entering the system more versus just a mix shift or overall just greater utilization? Thanks.

William A. Sanger

Well, I think Andrew it’s hard to maybe as specific as what you’re asking. Clearly if you look at the significant mix shift 400 basis points here and expansion states moving to Medicaid, we believe obviously that the increase in volume is – health reform is clearly a factor in that increase in volume and we saw more of that increase continuing throughout the second quarter. So, as I said in the talking points, we’ve not really assumed the same level of volume in the back half of the year. We’ve assumed basically about half of the volumes that we saw in the quarter. We’ve used that in terms of our kind of – coming up with our guidance.

Andrew Schenker - Morgan Stanley

Thanks.

Operator

Next question; Ryan Daniels, William Blair, your line is open.

Ryan Daniels - William Blair

Yes, guys, thanks for taking the question. Bill, maybe one for you on Evolution. Given the success you’re seeing there with foundation, the new CMS award, and then the new pilots. I’m curious if you could talk a little bit about one, the capacity you have to manage a greater influx of patients. And then number two, if you expand that, will that be something you look to do internally through hiring or is that maybe an area of focus for M&A going forward?

William A. Sanger

Ryan, it will be a combination of M&A and target markets as well as growth internally. There are distinct markets in which we have identified through our relationships with these pilot systems as well as with various health plans. We’ve targeted certain acquisitions in those markets, but we have a very excellent capacity of growing organically for the number of providers we have in these various marketplaces. So you’ll see a combination of both.

Ryan Daniels - William Blair

Okay. Perfect. Maybe two reform-related questions and then I’ll hop off. First, you mentioned that a lot of your volumes in EmCare in particular are in non-expansion states like Texas and Florida at present. I’m curious if you have any thoughts on the potential for those two actually see this Medicaid expansion after the election cycle, number one?

William A. Sanger

Let’s answer the first one. We don’t have any first-hand knowledge. We have heard particularly in Florida rumor of discussions occurring relative to the state 2015 looking at some type of Medicaid expansion. I can’t give you specifics of that but I do know that there are a group of Republican states that are giving a serious consideration relative to expanding the Medicaid program.

Ryan Daniels - William Blair

Okay. Perfect. And then the second one just on Medicaid parity. There has been a handful of states now that are pushing to move that into 2015. I’m curious; twofold, number one, if you think ED would be included in that and number two, if you’ve done any work to see how much exposure you have to those potential states that are extending it? Thanks, guys.

William A. Sanger

Ryan, we don’t have a lot of data at the moment in terms of what that can mean in those states. And look, I don’t know if that would include ED services. Obviously, we I think with others in the industry through associations are obviously very active in trying to communicate the fact that there’s such a shortage of physicians. People can’t get access unless they utilize those services which is why you’re seeing some of these volume increases. So, I don’t know that we have anything definitive on that.

Ryan Daniels - William Blair

Okay. Thanks, again, guys.

Operator

Next question comes from Ralph Jacoby, Credit Suisse. Your line is open.

Ralph Jacoby - Credit Suisse

Great. Thanks. Just wanted to maybe delve into the same-store stats on the EmCare side a little bit. The 5.3% volume obviously a strong showing. Within ED it was 4.2 sort of suggesting much higher volume in non-ED. And then similar on the other side, pricing up 0.2 overall with ED up 2.9 suggesting sort of pricing in the non-ED was sort of much lower. So just trying to understand those moving parts and reconcile the volume and the pricing?

Randel G. Owen

Yes. Ralph, let me just kind of go through a couple of those points again because there was a lot of stats that I went through here. When you look at – overall we had the 5.3% increase in volume, okay, on a same-store basis. When you look at ED and hospitals and that’s really where we obviously anticipated more of those volume changes related to reform, we actually saw higher volume increases in the Medicaid expansion states. That was 5.6%. But we also saw strong volume in the non-Medicaid expansion states. That’s the 4.1%. So we saw strong volumes really across the country in all of our contracts. From a rate perspective, you’re right. We had about 3% on the ED. I mentioned a couple of items that were driving some of the lower yield on some of the other services. Some of that again was a change. We had one of our MSA contracts where the revenue on that is lower this year than it was last year. I think there’s no volume on that. It really goes straight to rate. On the Evolution Health side which obviously is a part of EmCare, there has been more of a focus on looking at sort of managed care and commercial patients as we start thinking about that model. And so we didn’t have as many of the Medicare census which on just a revenue basis is a higher number. And in the third thing I mentioned in the UHS joint venture, remember we just started that and we did start that initially with existing contracts that we had. And so we did go through in lower subsidies in some of those contracts which impacted some of that yield and for example hospitalist and anesthesia. Obviously long term, we’re very excited about the joint venture and new contracts that will be coming. So we feel very good about that.

Ralph Jacoby - Credit Suisse

Okay, all right. That’s helpful. And then just back to sort of the reform question and I may have missed this or misunderstood. Did you say the total sort or revenue related to reform and parity was 9.7 million in the quarter and that the parity revenue was 7.3?

William A. Sanger

That’s correct. 18 million year-to-date in total.

Ralph Jacoby - Credit Suisse

Okay. And then so in the quarter that’s 2.4 million from ACA to the revenue line.

William A. Sanger

Yes.

Randel G. Owen

And from EmCare, it’s a little over one. We didn’t see as much I think as others did in the first quarter. We saw some more. Most of that really was obviously in the second quarter when you look at the year-to-date numbers. And given EmCare’s 23% of our volumes in the Medicaid states, we expected a lower number. We’ll see how that goes with the expansion side as we’re just starting to see data of additional utilization in some of those states as well.

Ralph Jacoby - Credit Suisse

What’s the pass-through or what are you keeping sort of down to the EBITDA line of that revenue versus to the physicians?

William A. Sanger

Ralph, it does vary obviously depending on markets and initial markets. I think we’ve always said that overall on a mature basis, we would expect to retain probably 50%, 60% of that. Some of that we’ll share with our joint venture partners obviously and some of that goes with physicians and sharing with our partners through some subsidy changes as well as the joint venture arrangement. So that’s what I would consider.

Ralph Jacoby - Credit Suisse

Okay. And then last one, if I could. Just the non-controlling interest line, it looked like it was sort of zeroed out this quarter. Why is that or maybe how do we think about that line item going forward?

Randel G. Owen

Ralph, we’ve talked about that a little bit before is that when you look at the level of activity, the level of start-ups and the level activity in the joint venture – UHS obviously just started up, so we don’t expect to have any significant profit sharing here especially early on. And even with ACA there’s still a lot of new activity and so with start-up costs they’ll start out as lower margins and tend to balance that out. So I think by the end of the year we could see some number in there. My best estimate at this point it’s hard to say. It could be a few million, but those tend to – would tend to see that probably later in the year as contracts and starts tend to mature.

Ralph Jacoby - Credit Suisse

Okay, all right. Thank you.

Operator

Next question from Darren Lehrich from Deutsche Bank, your line is open.

Darren Lehrich - Deutsche Bank

Thanks. It’s Darren Lehrich from Deutsche. So I wanted to start out with a question here just on the AMR IFT trend, they definitely are looking a lot better. I guess I just want to hear from you, Randy, the numbers again on just same-store related transports and what you’re seeing there? And then I guess just more strategically, Bill, can you just share with us what you think you’re doing any different that’s seeing some of these AMR volume trends start to really improve here?

William A. Sanger

Sure. While Randy is pulling out those numbers, Darren, I’ll…

Randel G. Owen

Well, I’ve got that, Bill, and then I’ll turn it over to you. So, Darren, our total volume on a same market basis was up 3.6%. The other point I have is if you look at it in Medicaid expansion states, our volumes were actually 4.4%, so even higher, but we still saw positive volumes in non-expansion states. That’s was 1.5% and so overall it’s 3.6%. Really growth in both the 911 and in the IFT and I’ll turn it over to Bill to kind of talk about some of those differentials.

William A. Sanger

Yes, as I highlighted we’ve taken a different approach towards the IP market which is very consumer oriented. We’ve substantially through changes in our deployment improved our on-site performance, which is a critical component of IFT contracting. In addition, we’ve changed the scale and scope of our sales team. So I think a combination of those factors has really been beneficial for us in terms of signing some system contracts which has really been the driver for us towards our IFT growth.

Darren Lehrich - Deutsche Bank

That’s helpful. And then I guess just going back to the uninsured numbers. I think you gave us mixed figures so we can probably calculate, but just to confirm. You saw about a 10% reduction overall in uninsured ED visits. Is that the right way to think about it, Randy? And can you just talk a little bit about trending through the quarter, whether that level improved as you went through the quarter?

Randel G. Owen

Yes. I think if you look at overall – I guess there’s kind of two pieces for that, Darren. So if you look at that in the first half of the year, we’ve gone from – for all of EmCare, from 20% down to 18%. Let’s call it 10% or 200 basis points. The real difference and then obviously in the first quarter when we measured, it was about 160 basis points change and then that grew to 200. So we are continuing to see some continued movement in the Medicaid side. I think as people kind of realize what they had and utilize kind of those services. The bigger impact when you look at EmCare is really on the Medicaid expansion states. So given that it’s just 23% of our volume today, it’s not as significant when you look at the total. But when you look at those expansion states, I think it’s fairly consistent with what we’ve seen or heard from others is that we had a 400 basis point reduction in the Medicaid expansion states. Again, most of that went straight Medicaid or Medicaid HMO. So we’ve definitely seen a much larger reduction in those Medicaid expansion states.

Darren Lehrich - Deutsche Bank

Okay, that’s great. Thanks a lot.

William A. Sanger

Yes, you bet.

Operator

Next question; Frank Morgan, RBC Capital Markets, your line is open.

Frank Morgan - RBC Capital Markets

Good afternoon. I was hoping you can provide some commentary on anything you’re seeing in the acuity level of these patients presenting in the ED either in expansion states or non-expansion, whether it’s Medicaid or exchange?

Randel G. Owen

Frank, I don’t have any hard stats here but look in general our acuity levels are a little lower I think as you would anticipate. I think a lot of these as we saw previously even back to Massachusetts and whatnot is that a lot of these are not real true emergencies but utilizing them for primary care because they can’t get access to a physician. So we have seen some lower acuity and obviously that affects the yields some. But I haven’t seen anything for it was materially different.

William A. Sanger

Frank, generally speaking if you look at the Medicaid population compared to the rest of the patients we see, it is a lower acuity because of use of primary care and just because of the expansion, we happen to see an increase in acuity due to the expansion at all.

Frank Morgan - RBC Capital Markets

Okay. And then I was hoping for maybe just a little bit of color on how you see the future contracts coming up opportunities on the AMR side and do you see any larger deal opportunities on the EmCare side like you did with the Phoenix transaction? Thanks.

William A. Sanger

Sure. Let’s take AMR. First, we’ve continued to grow our IP business through some of the differentiating strategies that I just shared with a question that Darren just asked. As relates to some of the larger 911s, we have signed several smaller 911 contracts and we’re still awaiting two major contracts that we talked about for a while. And I’ll just digress here a moment because I just think it’s important you understand the dynamics of the 911 marketplace. In Buffalo where metro is the incumbent and recently got a 90-day extension as the community and particularly they look at whether or not the change is appropriate at this time. We continue to be confident that there are many agreements out there under our competitors that will go out to bid and will be successful in the future. San Diego, which has been delayed for almost a year now, is really up at the state level. The state of California has essentially taken a very aggressive position in looking at the RFPs particularly those that are being released by cities versus counties and they’re reviewing all city RFPs. So we expect that to take a little time. Along the same lines, we do feel very encouraged that those will come out and we’ll be successful in the future. We’ve also applied for Certificate of Need in the state of Arizona which we believe we’ll hear very soon. The state of Arizona was a very restrictive state and with some of the challenges with our competitors in that state, some of the providers and some of the insurers of assets that go into the state to insure that the 911 transport is intact and that communities will be left in a solid position. As it relates to EmCare, one of our real differentiating factors with EmCare has been our ability to sign national agreements. We have continued to expand our relationship with HCA. There are other systems in the RFP process. We’re part of responding to those RFPs and relatively confident, Frank, that we’ll be successful on those contracts on a go-forward basis.

Frank Morgan - RBC Capital Markets

And maybe on the acquisition side of EmCare.

William A. Sanger

On EmCare, obviously you announced a sizable acquisition for us. I will say there are several acquisitions that are out there in the marketplace of at least the size of the Phoenix Physicians and we believe that those acquisitions would best be suited under a relationship with EmCare and we’ll continue working through those acquisitions.

Frank Morgan - RBC Capital Markets

Thank you.

Operator

Next question; Brian Tanquilut, Jefferies, your line is open.

Brian Tanquilut - Jefferies

Hi. Good afternoon, guys. Congratulations.

William A. Sanger

Hi, Brian. Thanks.

Brian Tanquilut - Jefferies

Bill, just wanted to follow up to those comments you made to Frank’s question. So as we think about the contracting pipeline for EmCare and do you mind just giving us some color on what sizes you’re seeing and then what types of agreements these are? Are these still the ER hospitalist or are these more diversified bundle agreements and are they national in scale or are they more regional?

William A. Sanger

Probably about 34% of our contracts that are in the pipeline are related to cross selling or related to system agreements. We’ve been very successful in signing multiple contracts whether it’s for hospitalist ED or for our new emerging service line which is a combination of surgery, anesthesia and hospitalist. We do sign the single contracts but they’re becoming less and less prevalent and particularly as you look at our pipeline. The majority of those are for multiple bundled services.

Brian Tanquilut - Jefferies

Okay. And then Randy, as we think about the guidance, you raised the guidance slightly here for the year. What sort of reform expectations have you baked in for the back half of this year and to the guidance adjustment?

Randel G. Owen

We haven’t I guess given specific numbers here. I guess what I would say is that one, we don’t expect any big change in parity. If you remember initially we had 17 million to 20 million already included in our initial guidance. So we’re seeing numbers that are a little above that but not significantly more. I think from a guidance standpoint, obviously I think – I believe there’s some conservatism there. Obviously we saw significant volumes in the quarter and we’ve not made the assumption that that’s going to continue at the same rate. It may but that’s something that’s hard to predict at this time. Look, we think there was a pretty solid increase in guidance given kind of where we are in the range and I do think that there is some opportunity to see some additional health reform benefits throughout the year and I think we’ll need a little bit more time on that, especially in some of the exchange or non-expansion states.

Brian Tanquilut - Jefferies

Got it. And then last question for me. As we think about the ACA joint venture and the UHS joint venture, I know you said UHS is in very early stages but how penetrated would you say we are now in the HCA book at this point?

William A. Sanger

Probably about 50% on a single service and about 30% on multiple services, so we believe there’s a fair amount of runway left.

Brian Tanquilut - Jefferies

Got it. Thanks guys.

William A. Sanger

Thanks.

Operator

Next question from A.J. Rice, UBS. Your line is open.

A.J. Rice - UBS

Hi. Thanks. First off, I think in the prepared remarks you guys mentioned a lot of opportunities you’re pursuing on the Evolution Health side. I know when we exited the year last year you were running about 110 million annualized run rate. Is it materially different now? And if these opportunities come to fruition, might it be materially different next year? Any sense of where that’s at that you can provide?

William A. Sanger

Yes, it’s too early to provide guidance relative to just Evolution Health and there’s a lot of material change at this point in time. These multiple pilots that we have throughout the country are really a test of our performance. We’re very, very confident based on the patients we’ve seen so far that these would translate into pretty significant contracts over the next 12 months.

A.J. Rice - UBS

Okay. And then maybe just flush out a little bit further if we could what, Bill, you described as the pediatric or OB/GYN hospitalist opportunity. Are you focused mainly on the type of (indiscernible) management type of opportunity or we’re seeing some others in the broadly defined space go after or are you looking at something more broad than that?

William A. Sanger

No. We really at this point in time have not really focused on the (indiscernible). When we talk about OB/GYN and pediatrics, it’s primarily related to the hospitalist non-intensive care space.

A.J. Rice - UBS

Any sense about how big that opportunity will be or what the competitive landscape is if you could share maybe?

William A. Sanger

Yes, I think the competitive landscape is very segmented. It’s too early to say what we believe the expansion opportunity of those two sub specialties of hospitalist will be, but we have been asked historically by many of our clients particularly as it relates to pediatric hospitalist.

A.J. Rice - UBS

Okay, all right. Thanks a lot.

William A. Sanger

Thanks, A.J.

Operator

Next question from Kevin Fischbeck, Bank of America Merrill Lynch. Your line is open.

Kevin Fischbeck - Bank of America Merrill Lynch

Okay, great. Thanks. Obviously you guys raised guidance or at least the high end of your range as far as the quarter goes and I think when you provided guidance you had basically just kind of an estimate of what you would look like. So is it right to assume that really coming above the high end of the range is largely the June month came in better or are there any other factors that led to the upside in the quarter?

William A. Sanger

Kevin, I think that’s fair. I mean obviously we saw improving performance throughout the quarter. I think I mentioned even from a volume perspective we continue to see that. So I think that’s fair.

Randel G. Owen

I think we’re also trending improvements in our cost structure particularly at AMR and we continue to see that on a go-forward basis and we believe we’ll continue to see margin improvement at both of the operating divisions.

Kevin Fischbeck - Bank of America Merrill Lynch

Okay. When you think about the guidance, it sounds like you’re being conservative I guess. I never felt companies were being conservative on their guidance, but as far as the volumes go, is there a reason to seeing that the volumes really won’t persist at these levels? Any better sense and kind of why the volumes were so weak over the last two quarters and why this was the quarter where it snapped back?

William A. Sanger

Kevin, I guess a couple of things. One, it’s hard to predict and going up there on a limb to assume that things are going to continue at the same rate. So I think that’s probably why you’re seeing a lot of people be conservative until you have more history, right, to your point. Q1 as we all know was challenging for us and for everyone especially on a comp basis given weather and last year’s flu and all that stuff. And it does seem as though it’s taking a little longer when you look at additional volumes at least on the Medicaid side we saw more of that and kind of to your point volumes sort of improving a little bit every month and saw a lot more of that in Q2. And I think we all just want to see a longer period of time before you’re going to commit to that kind of a volume level.

Randel G. Owen

Yes, keep in mind like the rest of the industry these volume trends really only over the last couple three months at most and for us to really call that a trend, we’d like to see at least another quarter. We are somewhat encouraged by the volume increases but cautious to get too aggressive at this point in time.

Kevin Fischbeck - Bank of America Merrill Lynch

So this is – the volume increases obviously it’s better in reform states but it was still pretty strong in the non-reform states. So that has at least signaled that potentially this was something broader based to make sense.

William A. Sanger

Kevin, again, I’ve heard others and I think we’re in the same boat. We felt like it would take longer to get a feel for the exchange side of things just given the late enrollments and all that kind of stuff and what we saw in the Medicaid side. So, I think we’re encouraged by the fact that volumes were really solid across the whole country including those non-expansions and I think that’s where we’re probably maybe more telling in the next quarter when you look at sort of those volumes.

Kevin Fischbeck - Bank of America Merrill Lynch

And then I guess, it makes sense to me to say that the ER volumes might be higher in reform states, but I was little surprised that the ambulance volumes were higher. Is there a reason why that would happen? Was it more inter-facility transports that was driving that or I mean I just try to struggle for why ambulance service would go up in an expansion state?

William A. Sanger

It was really both. But keep in mind the IFT is really a function of admission within hospitals. And so with higher admissions, more transports. As more Medicaid patients came into the hospitals, we’re transporting those to different locations. So it’s a combination of both. I think the 911 increases were frankly just a result of the reason and in IFT we may have seen a result of the expansions.

Kevin Fischbeck - Bank of America Merrill Lynch

All right, great. Thanks.

Operator

Gary Taylor, Citi, your line is open.

Gary Taylor - Citigroup

Hi. Good afternoon, guys.

William A. Sanger

Hi, Gary.

Gary Taylor - Citigroup

A couple of questions. One, Randy, when you broke out the parity and ACA revenue impact in the 2Q and you said 2.4 million for ACA, what exactly are you measuring there? Is that just healthcare exchange revenue?

Randel G. Owen

It’s really Medicaid. When you look at it, it’s really looking and saying what did we see in terms of the reduction in self-pay compared to the increase in Medicaid in terms of volumes and mix and really sort of applying that kind of rate differential is basically what that is.

Gary Taylor - Citigroup

So basically it’s a pickup in that Medicaid revenue versus self-pay. I guess the presumption that all of the self-pay movement is attributable to expansion I guess.

Randel G. Owen

Again, we literally just – we know what we did on the self-pay and obviously looking at that reduction in self-pay and we know what we did obviously on the Medicaid side. So it really is again sort of comparing those two and sort of that rate differential.

Gary Taylor - Citigroup

But for that full 200 basis point decline in self-pay, you mentioned that.

Randel G. Owen

Yes.

Gary Taylor - Citigroup

Okay. And then you commented when you looked at just EmCare and the revenue per visit and you commented on a few things, the UHS JV, the Medicaid census at Evolution. The first time you went through it, I thought you mentioned change and anesthesia and I thought you said MSA contract and I was thinking MSO contract, but…

Randel G. Owen

I guess you can use MSO. If you recall, we’ve had for a period of time a contract with Pinnacle Anesthesia on the MSO side that we had purchased a number of years ago. The group was bought by a third party and so there was sort of a restructuring of that agreement. It’s still in place over the initial term with some restructuring of that and this year they’re just in this period, a lower sort of revenue base on that. But that’s really what I’m referencing there.

Gary Taylor - Citigroup

Okay, so it’s kind of a mix thing.

Randel G. Owen

Yes. And there’s no volume on that. It just goes straight to rate basically.

Gary Taylor - Citigroup

Right, and so now it’s gone, got it. And then Bill, I just wanted to ask you kind of theoretically when you look at EmCare, you guys have been signing new contracts, you’ve been willing to take subsidy out and I guess kind of the market perception is that you’re willing to trade EBITDA margin percentage for gross EBITDA dollars and obviously the market has rewarded you for making that trade. How do you think that impacts EmCare margins longer term? If we look over the last 10 years or so, we’ve seen those margins march 8%, 9%, 10%, 12%, 13% but over the next few years as you continue to kind of cross sell multiple services, is the margin really topped out? Does it come down? Is it still a gross dollar profit play versus margin play or do you think it can be both still?

William A. Sanger

If you look at our margins, they’ve been pretty stable this point in time and frankly the margins that we see through our joint venture in a greater model are consistent with the overall margins. What you’re seeing is a little bit of a compression from our 13% down to 12.8% that really has to do with we’re starting up so many contracts. And as we start these contracts, we’re not buying the group and so we have to reenroll. We have to add new physicians. Some physicians leave and so we’re very confident that we will not see erosion frankly as we stabilize these relationships, I expect EmCare’s margins over time to continue to increase and to get back in that 13% range.

Gary Taylor - Citigroup

Okay. And then finally, is there any rough guess on what these sort of non-same store contract comprise in terms of how much they’re weighing on the consolidated margins?

William A. Sanger

Gary, I don’t have – I guess off the top of my head anything in total in terms of you look at that. I know your question is in terms of new contracts what the blended margin is on sort of the new contracts. I’ll tell you and just as a reference point it’s not unusual for us to see – for example let’s say a mature contract margin is more in that sort of mid teens range to where you may start in the low single digits depending on the hospital having new physicians you have to recruit. But with buyouts and everything you could have that go to a low to mid single digit and it could take six to 12 months to get to that mature margins again depending on the dynamics of that contract. And so that’s what we tried to highlight here was that – and while we had an increase in that, it’s really just a function of we added so many new contracts. And so we’ve tried to think about it and frame it up as saying when you look at that investment, it’s about a half turn if you think of it in a multiple perspective. So obviously we’re very willing and comfortable doing that. We think that’s a pretty cheap investment to get new contracts.

Gary Taylor - Citigroup

Okay. Thank you.

William A. Sanger

Thanks.

Operator

Next question from Josh Raskin, Barclays. Your line is open.

Josh Raskin - Barclays Capital

Hi. Thanks. I was wondering if I could just start, do you have – I know they’ll be in the 10-Q but it’s always helpful, the volume, the payer mix for the volumes?

Randel G. Owen

Josh, I don’t have it in front of me in terms of – you mean in terms of all the different payer classes you mean in terms of maybe the volumes. Yes, I don’t have it. In general what I would tell you is that really about AMR and EmCare if you look especially at the Medicaid expansion states, most of that change, the lowering of self-pay really went straight to Medicaid/Medicaid HMO. There were some minor changes – for example, Medicare nothing material. There were some slight increases on the commercial – again nothing really significant, so I don’t think you’ll see a lot when you go through there. More of it is moving at this point into sort of Medicaid or Medicaid HMO.

Josh Raskin - Barclays Capital

Okay. It just sounds like the first quarter for example that self-pay percentage actually didn’t move just because of the mechanics of the number, so just felt we could – maybe I’ll follow up offline or wait for the Q. And then second question just Medicaid pending, can you remind me what your procedures are around how you’re classifying individuals that show up with no insurance as Medicaid pending. Did you learn anything from the first quarter, i.e., were you being more conservative or more aggressive? Have you figured out sort of where that equilibrium is?

William A. Sanger

Well, I don’t know that I’ll say there’s any sort of big lessons learnt. I think we talked about – when we see a patient, if they don’t have Medicaid I’d say at this point we reflect them initially as uninsured. And then obviously once we know whether we have qualified them or the hospital does or whatever and if they are qualified for Medicaid or if there was an exchange or something different, then we would obviously change that financial class once we build the different payer, albeit Medicaid or whatever. So that process I don’t think is that different where in some cases it can happen fairly quick but sometimes it can take, I don’t know, 30 days or whatever. So I don’t think there’s a big change in that process. But it is common to have what we call transfers, if you will, from a payer mix standpoint as you go through it. We did see more transfers in the first half of this year. I don’t know if there’s a big difference between Q1 and Q2 especially on the Medicaid side just because I think it was – maybe there’s a little more confusion and people are applying or getting applied Medicaid and probably what we’ve seen in the past.

Josh Raskin - Barclays Capital

Right. That’s what I was asking. So when you say there were more transfers in payer mix around Medicaid, that means that as you looked back at the first quarter, it turns out individuals you had previously classified as uninsured were now Medicaid or was it the other way around?

William A. Sanger

No, Medicaid. I mean again that always happens. So for example if somebody came in today and did not have a Medicaid card or was not a part of that program, we would initially reflect them as uninsured. And then obviously if were to qualify them or then bill Medicaid whether it’s a week later or a month later, then obviously that would have been changed to a Medicaid and you’d reflect it at that point in time. So that’s always been the case but I would say there has been more volume just because of the change in reform in there.

Josh Raskin - Barclays Capital

Right, got you. Okay. And then just last question on the Phoenix acquisition. I know it was only I think a couple weeks in the second quarter. But do you guys have an estimate as to the EBITDA contribution in the second half or should we think of the margins as something lower than EmCare overall or just maybe any parameters for that?

William A. Sanger

Josh, I guess we haven’t put out specific numbers on that. I would say that we expect – I think that margins today would be a little lower than the EmCare blended margin. From our standpoint, part of that process in the acquisition was a real opportunity around additional services and selling other revenue and there was also some cost synergies and that’s going to take a little while and that’s why we commented that really next year not only you have the full year benefit but I think in this next six months, you’ll be able to work through some of those cost synergies as well as try to enhance some of the revenue opportunities.

Josh Raskin - Barclays Capital

Okay. So if I threw in 5 million bucks in the second half, I’d be in the ballpark. Is that fair?

William A. Sanger

That’s probably rational.

Josh Raskin - Barclays Capital

Okay. Thanks.

Operator

Next question; Whit Mayo, Robert Baird, your line is open.

Matthew Gilmore - Robert W. Baird

Hi, thanks. This is actually Matthew Gilmore in for Whit today. Just a few quick ones. First as a follow-up to Ryan’s question from earlier, as you think about the Medicaid expansion beyond this year, and I know you mentioned Florida. There are a couple other states that are also kind on the bubble like Pennsylvania, Indiana and Virginia. So can you just sort of help size up what the exposure is to those states in particular?

William A. Sanger

Well, we have a fair amount of business in Indiana as well as Pennsylvania. I could not tell you exactly what percentage of our business is in there, but I would say that between those two states alone, we probably have 60 contracts and like as I said earlier, there are several Republican states that are really giving serious thought to it. I think Indiana is probably ahead of the curve and many states are really looking at that Indiana program that’s going to be put forth by the governor and should probably serve as a model for any Republican state expansion.

Matthew Gilmore - Robert W. Baird

Okay. Thanks. And then on – just sort of curious what your view is of the freestanding ED industry. I know that subsector has kind of gotten a lot of attention recently. But just curious, how you see this? Is it a growth opportunity in terms of ER staffing or a potential competition? And any kind of general thoughts would be helpful. Thanks.

William A. Sanger

Sure. I think if you look at freestanding EDs, I have a personal viewpoint on that and I’ll share that with you. There’s right now about 400 to 500 freestanding EDs. About 20% of those frankly are in Houston and about 25% of those are in the state of Texas. Our biggest challenge with freestanding EDs is really competition for (indiscernible) physicians. We really haven’t seen a drop in volume. As you all know, the freestanding EDs do not see a lot of patients and a lot of those are patients that generally would go to an urgent care center because the general population is very confused as to what is the different between a freestanding ED in a strip mall and an urgent care center in a strip mall. And they use them interchangeably. So I do think we’ll see further expansion. I do believe that the majority of expansion we see in the future will be affiliated with hospitals. If you follow the industry, you know there’s a fair amount of legislative action at the state level afoot that try to ensure that these freestanding EDs have the scope and scale of services that their EDs provide at the hospital setting. So I do think you will see more in the future but at this point in time we don’t see them as a major threat to ED volume.

Matthew Gilmore - Robert W. Baird

Okay, great. Thank you very much.

Operator

Thank you. At this time, I have no further questions.

William A. Sanger

Okay. Thanks, everyone, for your support of the company and trust. Good night.

Operator

Thank you. That does conclude the call for today. You may disconnect your phone lines at this time.

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