Team Health Holdings (TMH) Michael D. Snow on Q4 2015 Results - Earnings Call Transcript

| About: Team Health (TMH)

Team Health Holdings, Inc. (NYSE:TMH)

Q4 2015 Earnings Call

February 23, 2016 8:30 am ET

Executives

Jeff Grossman - Managing Director, Solebury Communications Group LLC

Michael D. Snow - President, Chief Executive Officer & Director

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

Analysts

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Joshua Raskin - Barclays Capital, Inc.

Brian Gil Tanquilut - Jefferies LLC

Gary P. Taylor - JPMorgan Securities LLC

Kevin Mark Fischbeck - Bank of America Merrill Lynch

A.J. Rice - UBS Securities LLC

Gary Lieberman - Wells Fargo Securities LLC

Matthew Borsch - Goldman Sachs & Co.

Ana A. Gupte - Leerink Partners LLC

Operator

Good morning and welcome to TeamHealth's Fourth Quarter 2015 Earnings Conference Call. Today's call is being recorded and we've allocated an hour for prepared remarks and Q&A.

At this time, I would like to turn the conference over to Jeff Grossman, Investor Relations at TeamHealth. Please go ahead, Mr. Grossman.

Jeff Grossman - Managing Director, Solebury Communications Group LLC

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. Some of these statements can be identified by terms and phrases, such as anticipate, believe, intend, estimate, expect, continue, could, should, may, plan, project, predict and similar expressions.

The company cautions that such forward-looking statements, including, without limitation, those relating to the realization of the expected benefits of the IPC acquisition, the company's future business prospects, revenue, working capital, professional liability expense, liquidity, capital needs, interest costs and income wherever they occur in this or in other statements attributable to the company, are necessarily estimates reflecting the judgment of the company's senior management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements.

Factors that could cause our actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to, current or future government regulation of the healthcare industry, exposure to professional liability lawsuits and governmental agency investigations, the adequacy of insurance coverage and insurance reserves, as well as those factors detailed from time to time in the company's filings with the Securities and Exchange Commission.

The company disclaims any intent or obligation to update forward-looking statements herein to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time. In addition to our earnings release and Form 10-K, we have also prepared a financial supplement that presents financial highlights of the quarter. The reconciliation of adjusted EBITDA to net earnings calculated under GAAP can be found in our earnings release and our financial supplement, both of which are posted on our website, www.teamhealth.com and in our most recent Form 10-K. A reconciliation of adjusted EPS to net earnings and diluted net earnings per share calculated under GAAP can also be found in our earnings release and financial supplement.

I will now turn the call over to Mike Snow, President and Chief Executive Officer of TeamHealth.

Michael D. Snow - President, Chief Executive Officer & Director

Thank you and good morning, everyone. Welcome to TeamHealth fourth quarter 2015 earnings call. I'm joined by David Jones, our Executive Vice President and Chief Financial Officer. I would like to start with a discussion of the main drivers for our fourth quarter results and David will review our quarterly financial performance in more detail. I will then provide an update on our integration efforts with IPC and will conclude with an update on our 2016 outlook before we open up the call for Q&A.

First and foremost, I would like to thank our physicians, other clinicians and administrative employees for their hard work and dedication during 2015. I also want to extend a welcome to the clinicians and administrative employees of IPC. The ongoing integration of all of our acquisitions is well underway and I want to commend our teams for the great work they have done in this critical area.

Our philosophy is as simple as our goal is singular. We believe better experiences for physicians lead to better outcomes for patients, hospital partners and physicians alike. And our team continues to do an excellent job. As evidence of this, TeamHealth was again named by FORTUNE magazine as one of The World's Most Admired Companies for 2016. Congratulations to our team on this great honor.

Now moving on to our financial results. 2015 was an outstanding year for TeamHealth. For the full year, we delivered strong financial results with over 27% growth in net revenue and 19% growth in adjusted EBITDA, all while maintaining our adjusted EBITDA margin. These results exceeded our initial expectations for the year. Specific to the fourth quarter, reflecting the consistency of our operating performance, the fourth quarter reflects our 21st consecutive quarter of double-digit revenue growth at nearly 24%, while adjusted EBITDA increased 25%.

During the quarter, our emergency medicine business experienced a mild start to the flu season coupled with strong volume comps from the prior year. But despite these issues, we're able to deliver solid financial results through our balanced and integrated approach and focus on cost efficiency.

As you know, we closed on the strategic purchase of IPC on November 23. The enhancement of IPC's financial performance, the integration of our combined operations, and the achievement of our cost and revenue synergy targets is our main focus. We are continuing to target $25 million of cost and revenue synergies in this year and $60 million of synergies over the three-year period. Our board and management team remain fully committed to the underlying strategic rationale for the transaction. We now have an unparalleled opportunity to assist health systems, clinically manage patients, both inside and outside the hospital.

The ability to coordinate, integrate care delivery will drive high-quality and low-cost outcomes across the continuum of patient care through participation in bundled care and other value-based initiatives. The real value creation opportunity resides in the post-acute operations of IPC, which is stable and growing. As to the legacy IPC hospital medicine practices, physician attrition deteriorated in the second half of 2015, primarily due to escalating compensation by hospital owned practices in selected markets.

To counter this trend, we're working with the IPC management team to develop a new compensation model to help stabilize physician attrition on a margin-neutral basis. Comprehensive IPC practice reviews were completed during January. I came away from these reviews enthused about the cross-selling opportunities and optimistic about market expansion potential. There is obviously a lot of work to do, but the IPC team has embraced our view of future opportunities and the operating discipline and accountability to which TeamHealth is accustomed. Our integration efforts therefore are proceeding well and we remain on track to deliver our synergy target as outlined.

Turning now to our components of growth, same contract revenue growth was a driver of our positive results in the quarter. Our same contract revenue growth was primarily due to an increase in estimated collections and fee-for-service revenue and volume growth of about 2%.

For the fourth quarter, acquisitions provided the largest component of our consolidated revenue growth, driven by both IPC and the more typical acquisitions and hybrid acquisition opportunities. The acquisitions, which we completed over the last four quarters, provided solid contributions to revenues, earnings and cash flow between periods. We've continued to see a convergence in the market between growth opportunities that are a blend of sales and M&A and expect such hybrid transactions will continue to be a growth opportunity for us.

While we have increased our leverage profile as a result of the IPC transaction, we remain focused on continuing to execute on opportunistic M&A growth with strong cash flows and natural deleveraging, but with a clear eye on targeting the most appropriate and optimal opportunities. We will continue to evaluate each individual opportunity with discipline and a robust element of diligence to ensure that it delivers an appropriate return. Finally, net new sales provided a modest incremental benefit to revenue, little under 1%.

With regard to BPCI, efforts to drive performance from this program are well underway, and we remain optimistic regarding the long-term opportunity. Despite the fact we have completed only two complete quarters of participation in this new program, we've early evidence that our program is well-positioned for success. We are seeing some early indications of the results in the pre-program baseline performance, that is to say second quarter of 2015, and the facilities, clinicians and DRGs impacting our program. SNF utilization and length of stay, readmission rates, and medical costs compared to CMS target prices are trending favorably at the baseline. This means our decisions in determining which DRGs and which physician practices to enroll in the program appear to have been effective in setting us up for future success.

An additional important feature of the BPCI program for national clinician groups is the ability to calibrate market and DRG program participation to leverage the unique strengths of the organization. As a result, we have exercised our rights within the program to refine which of our physician groups and which DRGs will participate. We've reduced our total program size modestly to $1.6 billion in anticipated CMS spend from our initial enrollment size of nearly $2 billion. Importantly, despite this reduction in program footprint, we have not diminished our potential program savings and related revenue. While consistently bullish on the longer term impact from our participation in the CMS BPCI program, we've been equally consistent in our caution about projecting the timing and impact of BPCI related revenue.

The long risk period of program episodes that is to say that from the time of admission plus 90 days post discharge, the Medicare claims lag and the newly created process for CMS quarterly reconciliations, all combined to prevent us from a precise prediction on the timing of program revenue flow at this early stage. We've also consolidated the separate Awardee Convener contracts of the legacy IPC in TeamHealth BPCI programs into a single convener contract with Remedy Partners. We believe this gives us the best opportunity to maximize the potential benefit from this program in the future. As you've heard me say, we believe this is an opportunity to get paid to learn to how to effectively operate in a value-based reimbursement environment, and we believe, we will realize future financial benefits.

I will now turn the call over to David to provide additional detail. David?

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

Thank you, Mike. Following the market close yesterday, we issued a press release reporting our fourth quarter and fiscal 2015 financial results and filed our Form 10-K. My comments this morning will review our financial results and I'll highlight and expand on some of the key issues for the company.

In the fourth quarter of 2015, net revenue increased 23.9% to $979.6 million. Acquisitions contributed 19.5%, same contract revenue contributed 3.6%, and net sales contributed 0.8% of the increase in quarter-over-quarter growth. Within the acquisitions category, new hospital contracting opportunities that were initially developed by our sales and marketing process contributed 4.2% of overall net revenue growth between quarters.

Same contract revenue increased $28.2 million or 4%, primarily due to an increase in estimated collections on fee-for-service visits, which provided a 3% increase in same contract revenue growth. Volume growth of 2% contributed 1.5% of same contract revenue growth, while contract and other revenue constrained growth by 0.5%. Acquisitions contributed $154.3 million of revenue and net new contract revenue increased by $6.4 million.

The benefit from Medicaid parity revenue recognized in the fourth quarter of 2015 was $1.9 million. The fourth quarter of 2014 parity revenue was $12.1 million, of which $11.3 million was same contract. The decline in parity revenue between periods constrained consolidated revenue growth by 1.3% and same contract revenue by 1.4%. During the fourth quarter of 2015, the company recognized net revenue of $81.1 million associated with IPC, which contributed 10.3% of overall revenue growth between quarters. Total IPC revenue for the fourth quarter of 2015 was $188.2 million.

In reviewing payer mix changes in our legacy operations excluding IPC between the fourth quarter of 2015 and 2014, we realized declines in the percentage of self-pay patient in commercial volumes and increases in Medicaid and Medicare volumes. Self-pay patients as a percentage of total visits decreased 80 basis points to 15.6% and commercial patients decreased by 30 basis points between quarters to 25.8%. Medicaid patients increased 80 basis points to 32.1% and Medicare patients increased 80 basis points to 25.3%. On a sequential basis, when compared to the third quarter of 2015, we saw declines in the percentage of self-pay accounts of 40 basis points, commercial patients of 30 basis points, and Medicare accounts of 20 basis points, while Medicaid accounts increased 90 basis points.

Despite the continued improvement in self-pay trends, the changes in payer mix during the third quarter and fourth quarters of 2015 modestly constrained revenue growth after several consecutive quarters of positive contributions to revenue growth previously. Professional service expenses of $777.6 million increased 25%. As a percentage of net revenue, professional service expense increased 70 basis points to 79.4%. On a same contract basis, professional service expense increased by 4.7%, and as a percentage of net revenue, was 78.7% in 2015 and 78.3% in 2014. Professional service expense margin in 2015 was negatively impacted by the loss of parity revenue. Professional liability costs were $26.1 million compared to $24.1 million, and as a percentage of net revenue declined to 2.7% in 2015 from 3.1% in 2014.

General and administrative costs were $89 million compared to $85.2 million in 2014. Included within general and administrative costs were contingent purchase expenses of $5.1 million and $8.2 million in 2014. Excluding the contingent purchase expense, core general and administrative expenses increased to $83.9 million from $77.1 million. The increase in core costs between periods was due primarily to the impact of SG&A cost associated with new acquisitions. As a percentage of net revenue, core general and administrative costs declined to 8.6% from 9.7% in 2014.

Net interest expense increased to $16.9 million, primarily due to the issuance of the term loan B and bonds, in addition to an increase in the amortization of deferred financing costs, partially offset by a reduction in revolver borrowings between periods.

Adjusted EPS, which excludes certain items, increased 9% to $0.61 in 2015 compared to $0.56 in 2014. Under GAAP, the fourth quarter 2015 reported net loss was $9.7 million or $0.13 diluted net loss per share, compared to net earnings of $16.1 million or $0.22 diluted net earnings per share in 2014. The 2015 adjusted EPS reflect adjustments for contingent purchase compensation expense of $5.1 million, amortization expense of $21.5 million, and IPC-related transaction and integration cost of $49.1 million. By comparison, 2014 adjusted EPS reflect adjustments for contingent purchase compensation expense of $8.2 million, amortization expense of $20.4 million, and a $3.6 million loss on debt refinancing.

Fully diluted outstanding average shares remained constant at 72.6 million shares, which due to the net loss reported in the quarter under GAAP was also the basic weighted average share in 2015. Adjusted EBITDA grew 25% to $97.7 million compared to $78.2 million in 2014. And the adjusted EBITDA margin was 10% in 2015 compared to 9.9% in 2014. Excluding the impact of parity in both quarters, assuming an adjusted EBITDA margin of approximately 70% on parity revenue, adjusted EBITDA margin would have been 9.9% in the fourth quarter of 2015 and 9% in 2014. During the fourth quarter of 2015, the company recognized $6 million of adjusted EBITDA from IPC.

Total IPC adjusted EBITDA for the full fourth quarter of 2015 was $13.9 million. Cash flow provided by operations during the quarter was $13.9 million compared to $91.9 million in 2014. Included within operating cash flows were contingent purchase payments of $0.4 million in 2015 and $2.6 million in 2014. Also impacting cash flow in 2015 was $33.2 million of cash transaction integration cost associated with the IPC transaction. Excluding the contingent purchase payments and IPC transaction cost, operating cash flows were $47.5 million in 2015 compared to $94.5 million in 2014. The reduction in operating cash flows between quarters reflects an increased level of interest and tax payments and working capital funding.

Reviewing our results for the full year, net revenue increased 27.6% to $3.6 billion, acquisitions contributed 19.1%, net sales growth contributed 4.3% and same contract revenue contributed 4.2% of the increase in net revenue.

Same contract revenue increased by 4.9% due to fee-for-service volume increases of 5.1%, which increased same contract revenue growth by 3.8%. Increases in same contract estimated collections on fee-for-service visits provided a 0.9% increase in same contract revenue growth between years. Contract and other revenue provided a 0.2% increase in same contract revenue growth between periods. Acquisitions contributed $537.3 million of growth and net new contract revenue increased by $122.6 million. Medicaid parity revenue for 2015 was $3.9 million, compared to $39.7 million in 2014. Declines in Medicaid parity constrained consolidated revenue growth by 1.3% and same contract revenue growth by 1.4% between years.

During fiscal 2015, the company recognized net revenue of $81.1 million associated with IPC, which contributed 2.9% of overall revenue growth for the 12 months ended December 31, 2015. Total IPC net revenue for fiscal 2015 was $737.8 million. Adjusted EPS, which excludes certain items, increased 15% to $2.65 in 2015, compared to $2.30 in 2014. Reported net earnings under GAAP were $82.7 million or $1.12 diluted net earnings per share, compared to $97.7 million or $1.35 diluted net earnings per share in 2014.

The 2015 adjusted EPS reflects adjustments for $17.3 million of contingent purchase expense, amortization expense of $83.6 million and $51.7 million of IPC related transaction costs. Adjusted EPS for 2014 included adjustments for $30.6 million of contingent purchase expense, amortization expense of $55.6 million, a $3.6 million loss on debt refinancing, and an increase in prior year professional liability loss reserves of $7.1 million.

During 2015, adjusted EBITDA grew 19.2% to $387.5 million, while the adjusted EBITDA margin was 10.8% compared to 11.5% for the same period in 2014. Excluding the impact of Medicaid parity in both years, adjusted EBITDA margin would have been 10.7% in both 2015 and 2014. During 2015, the company recognized $6 million of adjusted EBITDA from IPC, while total IPC adjusted EBITDA for fiscal 2015 was $68.4 million. Cash flow provided by operations for the year was $145.8 million, compared to $198.7 million in 2014. There were $12.7 million in contingent purchase payments in 2015 and $24.5 million in 2014.

Also impacting operating cash flow in 2015 was $33.2 million of cash transaction and integration costs associated with the IPC acquisition. Excluding the impact of the contingent purchase payments and IPC transaction cost, core operating cash flows were $191.7 million in 2015 and $223.2 million in 2014. The reduction in operating cash flows between years reflects an increased level of interest payments and working capital support.

For the year, capital expenditures were $40.7 million compared to $24.6 million in 2014. Net cash paid in 2015 for acquisitions was $1.63 billion, including $22.3 million of contingent purchase payments, of which $12.7 million was reported in operating cash flow and $9.6 million was reported in financing cash flows. In 2014, cash paid for acquisitions was $580.8 million, including the $24.5 million of contingent purchase payments in operating cash flow.

In reviewing our balance sheet categories at the end of the year, cash and cash equivalents were $28.6 million, and total outstanding debt was $2.46 billion, excluding the impact of $53.2 million of deferred financing cost. The outstanding debt includes borrowings under our revolving credit facility in the amount of $22 million, term loan A facility of $577.5 million, term loan B facility of $1.32 billion, and 7.25% senior notes at $545 million. We had $628 million of available borrowings under our revolver without giving effect to $6.4 million of undrawn letters of credit.

On a pro forma basis with a full year of IPC results, and incremental impact of $25 million in annual synergies, our net leverage ratio was 5.1 times at the end of the year. Net accounts receivable totaled $730.5 million compared to $500.6 million as of December 2014. And overall days in accounts receivable, excluding the effect of the acquired IPC accounts receivable, were 62.7 days compared to 59 days at December 2014.

I'll now turn the call back over to Mike for his concluding remarks.

Michael D. Snow - President, Chief Executive Officer & Director

Thanks, David. As we look ahead to 2016, we believe that we're well positioned to achieve revenue and earnings growth. We'll continue to focus on enhancing and integrating IPC's operations, implementing our acquisition strategy, executing on new contract sales, driving improvements in same contract performance and delivering strong operating cash flows.

Earlier I mentioned a weak flu season in the fourth quarter that had moderated ED volume growth. That is a trend that has persisted into the first quarter. We also face more difficult comps and are measured against stronger prior year volume metrics

In response, we're taking prompt action to operate successfully in an environment with the potential for a more moderate benefit from healthcare reform when compared to prior years. We're reducing infrastructure costs. We're implementing new productivity measures as we did in 2013 when we last experienced softer volumes in our ED business and rationalizing negative or low margin contracts. We expect to see the benefit of these actions in the second quarter.

Over the balance of 2016, we anticipate modest improvement in IPC and continued realization of targeted synergies. Our acquisition in sales pipelines are expected to provide additional opportunities for growth in 2016. For the full year of 2016, we expect to deliver annual net revenue of between $4.71 billion and $4.78 billion, reflecting an annual growth rate of 31% to 33%. We're also targeting an adjusted EBITDA margin of 10.5% to 11%. As a reminder, we realized historically strong volume growth in the first half of 2015 that contrasts with modest volume growth trends thus far in 2016. Our 2016 guidance assumes approximately 2% same contract volume growth in our core ED operations in a similar level of moderate pricing benefit.

Our ongoing work to enhance the financial performance of IPC, achieve our targeted IPC synergies and focus on cost reductions in our core operations are ongoing, and will continue over the remainder of the year. As a result of these efforts, we anticipate stronger financial performance and more normalized comps in the second half of 2016, when compared to the beginning of the year. While we've not included any financial benefit from the BPCI program in our guidance, we expect to obtain additional visibility on our initial performance under the BPCI program during 2016 and we'll provide updates on this program at the appropriate time.

Finally, I would just like to update investors on the activities of our board over the last several months, which has been an extremely turbulent time in healthcare. In the fall of 2015, our board formed a Special Advisory Committee to review potential value creating alternatives. Both management and members of our board have solicited and listened very carefully to feedback from our shareholders, especially in light of the public overtures for TeamHealth. The special committee and full board of directors have held a significant number of meetings since the committee's creation to exercise its fiduciary duty. I can assure you that our board is focused on enhancing shareholder value and will always make decisions that are in the best interests of all our shareholders.

Before we turn to Q&A, I want to remind everyone that we are here to discuss our financial and operational results. We thank in advance for keeping your questions focused on those topics. And with that, operator, would you please open the line for questions?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Kevin Ellich with Piper Jaffray. Please proceed with your question.

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Good morning. Thanks for taking the question. Mike, I guess just starting off with IPC, wanted to see if you could give us a little bit more color as to what you're expecting for contribution in the 2016 guidance and outlook. Maybe you can give us an update as well on the Florida Medicaid issue that they bumped into, and then I have a follow up on BPCI.

Michael D. Snow - President, Chief Executive Officer & Director

Okay. That's a good first question, Kevin, one question. Well, first around IPC, as I said in my earlier comments, we expect modest improvement in IPC. We're not trying to be heroic here with forecasting the 2016 results. I'd characterize the post-acute part of the business, as I said, it's stable and growing and where we've had some challenges on the hospital medicine side of the house. But the post-acute side is doing well, it will continue to grow.

Overall, we're expecting, say, 6% to 8% growth in the IPC book. And I think most of that is through post-acute and some M&A we'll be doing there. We have pretty low expectations around organic on the hospital medicine side. That has kind of been there a history the last year or so and we don't want to build in something that may not materialize. So that's kind of the zone, if you will, for IPC. Overall, it represents about 20% of our overall revenue growth for this year.

On the Florida Medicaid issue, all I can tell you there is that we've been speaking with the representatives in Florida, the AHCA, and we are optimistic there that we can come to resolution. What we believe is that it is related to the larger qui tam issue and is not a new issue. So I hope we'll be able to give you some further definitive outcomes there on our next call.

Kevin K. Ellich - Piper Jaffray & Co (Broker)

No, that's helpful. And then on BPCI, wanted to see if you could give us color as to why you reduced your exposure to $1.6 billion and then consolidating to one convener makes a lot of sense to me. I think you guys have maybe about 30% of Remedy's exposure at this point, but in your 10-K you talked about some other state programs that have initiated similar programs to BPCI, like Tennessee's Health Care Innovation Initiative. What else are you seeing out there coming from the states and even the managed care payors?

Michael D. Snow - President, Chief Executive Officer & Director

Yes. So, Kevin, what we're seeing and I think where some real opportunities lie are particularly around managed populations in Medicaid and in Medicare, but particularly in states. We're seeing states come to market with RFPs around management of their post-acute populations. So I think that is a real opportunity. We're very well positioned in some of those states to participate. So, first off, we are seeing a lot of interest in a capability that we would not have otherwise had without IPC.

And then around BPCI, frankly, what we tried to convey in my comments there was that, our BPCI book, the reduction from $2.0 billion to $1.6 billion the fact that it doesn't diminish our upside ought to tell you that where we trimmed they just weren't that attractive. They felt more risky. What we did early on was grab as many as we could out there and then through further analysis, it just didn't look like the upside was material enough, and so we trimmed them back. And like the consolidation with convener, we're just trying to be very focused to have a single effort towards managing this important issue for us.

Kevin K. Ellich - Piper Jaffray & Co (Broker)

Got it. Thank you.

Operator

Our next question comes from the line of Josh Raskin with Barclays. Please proceed with your question.

Joshua Raskin - Barclays Capital, Inc.

Thanks. Good morning. I'm wondering if you could give us an update on labor cost, specifically around recruiting and retention for ED docs. And then one of your competitors made a comment around competition in hospital, so I'm just curious to get your perspectives I guess on both those lines?

Michael D. Snow - President, Chief Executive Officer & Director

I'll take the second one first. In my comments, some of the deterioration and attrition at the hospital medicine practices at IPC was because of higher compensation in hospital-owned practices in hospital medicine. When hospitals insource, the compensation that we're seeing out there in the market for hospitalists has definitely accelerated, and it has trimmed the premium compensation that a doc can make in our model. So that's some of the pressure that we've seen in that part of the business.

In other markets where the hospital insourcing is not so prevalent, we're not seeing that kind of pressure. But that is going on out there in the hospitalist space. And frankly, I think a cost that is unsustainable in hospitals. I think as hospitals and health systems come under continuing reimbursement pressure going forward, they're going to look at line items where they spend a lot of money. I really believe that the private practice model and/or a hybrid thereof will really help solve those problems.

On the ED side, we have recruited very well. We had a record year actually in recruiting. We recruited in nearly 20% of the emergency medicine residents in a given year. So other than just kind of normal wage pressure, we haven't seen anything out of the ordinary. David, any comments?

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

Well, I would say, Josh, I think I've mentioned, in the quarter one of the things we look at is what's our same contract professional service expense increase. Those costs mainly are clinical costs. It's not just specific to ED, but ED is the largest portion of that, but those were up about 4.7%. And I think that's sort of normal expectations. We've often talked about the ability to grow our same contract revenue at sort of a 4% to 6% clip. If we're able to do that, we're probably going to see the professional staffing costs at a similar level, reflecting both coverage increase requirements as well as rate increases on the clinicians.

Joshua Raskin - Barclays Capital, Inc.

Got you. That makes a lot of sense, David. And then just as a follow up. I know, Mike, you've spoken about in the past a strategy of trying to sell more than one line into the hospitals. And so I'm curious what percentage of your hospital customers are buying more than one service from you today? And where do you think that is five years from now?

Michael D. Snow - President, Chief Executive Officer & Director

You know, Josh, I probably should know that off the top of my head, but I don't, but I will. Now that with IPC we're up to touching somewhere around 650 hospitals, in our combined EMHM, we're in the low 100s there in number of facilities. And then we have a small number that have all three service lines. Then we have like 20% of our facilities where IPC is. I mean I throw all that together to say that it's probably in the 20%-ish range of our total portfolio, I will say that I expect that number to go up. I do see more and more multiple service line bids, RFPs coming out from health systems.

So I do think that that's a continuing trend and the ability to do that. I mean we had just in the last couple of months a large national Catholic healthcare organization put out RFPs separately for ED and HM. We won awards in both ED and HM. We won the HM because of IPC. IPC is inside that system, and we have some exposure to the system, but we're not overlapping. And so we're the only one awardee, if you will, who has the combined services, and I think that is going to give us a real opportunity because more and more we're going to be able to bundle these services for the health systems.

Joshua Raskin - Barclays Capital, Inc.

Okay. That's helpful. Thanks, guys.

Operator

Our next question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Brian Gil Tanquilut - Jefferies LLC

Hey, good morning, guys. David, just as we look at the guidance, how should we think about the implied margin or assumed margin improvement at IPC because, obviously, we're at trough levels right now, and also what level of acquisitions should we be thinking about in terms of what's embedded in the guide?

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

Let me just talk to the acquisitions. We do have some modest level of acquisition assumptions still yet to be executed upon. That's consistent with how we normally provide guidance. We've always got some view of M&A that's yet to occur as well as new sales opportunities. So it's a fairly modest percentage of the overall total.

In regard to IPC margin, setting aside the synergy opportunity, we have seen some margin deterioration at IPC. I think we've tried to be pretty conservative in our expectations there, and essentially assuming really not a lot of margin improvement in IPC over the balance of 2016, except for what we may gain just from some of the synergies running in.

Michael D. Snow - President, Chief Executive Officer & Director

Hey, Brian.

Brian Gil Tanquilut - Jefferies LLC

Hi, Mike.

Michael D. Snow - President, Chief Executive Officer & Director

So I think one other factor, we've seen a steady march upward in the percentage of post-acute, which comes with a little lower margin, but I think it's also the calling card to other opportunities we haven't quite realized yet. But I think that's a factor also. Where we're going to go spend some M&A dollars will be on the post-acute side, and we'll be pretty selective on the HM side and make sure we understand the market dynamics, what's going on with compensation, et cetera. But on the post-acute side, we're going to continue to make investments there, and so that's contributing to why we're not going to expect an improvement, in fact flat to maybe slightly down, and I'm okay with that, because I think it sets us up for other opportunities longer-term.

Brian Gil Tanquilut - Jefferies LLC

Got it. And then just as a follow-up...

Michael D. Snow - President, Chief Executive Officer & Director

I'm sorry, one other comment, let me just say, in that business, I think we're going to have to figure out a less expensive way of delivering that. Our job will be to put compensation in the pockets of our physicians and other clinicians there, and we're going to have to do it either by stronger managed care pricing and some of the synergies we've got built-in to our model here, or we've got to do it through a lower cost structure delivering that service. So we've got to get compensation right for our providers.

Brian Gil Tanquilut - Jefferies LLC

And, Mike, so to that point, one of the things that we remember with IPC is that they have a unique or a proprietary compensation structure that they've developed over the years with their clinicians. So as you shift that or tweak the cost structure, is that a risk that we would see clinician turnover increase at least near term?

Michael D. Snow - President, Chief Executive Officer & Director

Hey, look, I understand when those terms get used it sends shudders throughout. We're not talking about anything wholesale here. We're talking about some fairly modest changes. If you notice, the recruiting team at IPC has done a terrific job. Recruiting has not been the issue. It's been retention. And so how some of the practices operate inside that model, that's what we're tweaking, and I believe it'll help us on the retention side. It may not be first quarter or second quarter, because we're going to roll this out pretty modestly because we don't want to do anything broad and risk some sea change inside the organization.

Brian Gil Tanquilut - Jefferies LLC

Got it. All right. Thank you.

Michael D. Snow - President, Chief Executive Officer & Director

Thank you.

Operator

Our next question comes from the line of Gary Taylor with JPMorgan. Please proceed with your questions.

Gary P. Taylor - JPMorgan Securities LLC

Hi, good morning, guys. A couple related questions. Maybe, Dave, just going back to trying to think about the revenue bridge to your revenue guidance from a pro forma disclosure you'd given in the debt documents where you included the benefit – over $300 million of benefit from all the trailing acquisitions that hadn't yet annualized into the model. And so you've talked about having a modest level of acquisition activity in the 2016 revenue guidance. What about net new contract contribution to growth? There was a pretty solid 4.3% for the full year of 2015, but the back-half was weaker and the 4Q with less than 1%. So is the expectation there back into kind of a typical 2% to 3%, 2% to 4% sort of number on net new contract for 2016?

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

Yes, that's right, Gary. So that's our view of that 2% to 4%. I mean this thing does fluctuate up and down each quarter depending on the timing of starts or when contracts term off. We had a little bit weaker fourth quarter number. We think we'll have a little bit of some weakness similar in the first quarter, but for the full year, we're still on that 2% to 4% zone we would think.

Gary P. Taylor - JPMorgan Securities LLC

And then my last question. IPC when they would report would typically give us the same market revenue growth, same market encounter growth, percent of post-acute encounters, percent of post-acute revenue. I'll admit I did kind of a quick read through the 10-K, but it doesn't look like that segment level disclosure is in there, unless I just haven't gotten to it yet. Do you intend to disclose the same way IPC had disclosed? And are there any of those 4Q numbers you could provide?

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

Well, I think that we had IPC in here for five weeks in the actual realized. So I think it's one of the things that we'll continue to do is refine how we present and one of the things we do need to try to take a look at is some of the historical stuff as you've alluded to. For the full year, the revenue between sort of post-acute and acute is about 30% post-acute for the full year and a little over, almost 70%, on the acute. And that has trended up. The post-acute as we've talked about has continued to be a growth area for IPC, and that's trended up and I expect we'll continue to see those numbers tick up over 2016 as well.

Gary P. Taylor - JPMorgan Securities LLC

Okay. Thank you.

Operator

Our next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch. Please proceed with your question.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Great, thanks. A question on BPCI, you mentioned that it's early but you've got a little bit data to look at and that it's going well. Is there any differential between Team's BPCI results and IPCM's BPCI results?

Michael D. Snow - President, Chief Executive Officer & Director

Well, I'm not sure that we can give you a level of certainty. We were able to go back and look at second quarter on our book, second quarter of 2015 kind of the undisturbed, if you will, quarter to look at pure pricing. We haven't had quite the look back on the IPC side, but what we have been able to see is that they are very similar in their early results.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. And then just the margin guidance, I mean, you guys have been guiding to 10.5% to 11% margin for a while now, but you're bringing an IPC, which you're talking about having a lower margin and coming in and potentially being flat to down, so how do you maintain the 10.5% to 11%, what's kind of the offset to keep it there as you're bringing on this lower margin business?

Michael D. Snow - President, Chief Executive Officer & Director

Well, we also said in our remarks that we're going to be taking down some SG&A, so that's going to be a contributor to us overall also.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

And so what area is that coming from? Is that going to have any impact on sales or quality or I mean where do you see the opportunity?

Michael D. Snow - President, Chief Executive Officer & Director

Hey, look, we always have to be very mindful of when we take on these kind of initiatives. First off, there is a cross point – for years forever this organization has invested in a paired leadership model that has been very effective. For the longest we've had terrific contract retention. And the last thing you want to do is imperil that result and somehow lose the service levels to our hospital clients and have attrition rise. So we're very mindful of that. All that said is, we believe that there's an opportunity for us to reduce costs and how we deliver our level of service to our hospital clients. And so that's what we're undertaking as we speak.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

And this is mostly on the core Team side or is this improving IPC's core margin as well?

Michael D. Snow - President, Chief Executive Officer & Director

Both.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Both. Okay, great. Thanks.

Operator

Our next question comes from the line of A.J. Rice with UBS. Please proceed with your question.

A.J. Rice - UBS Securities LLC

Hi, everybody. A couple of just quick things here. Just to understand the comments about first half versus second half, it sounds like you're making the point that in the core Team legacy you've got a tough first half comps, but they get easier in the back half. So that's sort part of it. Sounds like with IPC legacy you're not really assuming much margin performance over the course of the year. And I'm assuming the synergies sort of buildup. I know you guys don't give quarterly guidance but obviously there is more moving parts than usual this year. Any way to get you to talk about a stake in the ground for Q1 or split for first half versus second half? Or any more color on exactly how to calibrate that what's going on quarter-to-quarter?

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

A.J., this is David. First, let me just sort of tell you the moving parts here that we see. We obviously are in this very weak flu season right now, and as you alluded to, we saw very strong volume growth, not only in the first quarter of last year with what we think to be not only flu support but also healthcare expansion support, and that continued really into the second quarter. It wasn't really into the third quarter and fourth quarter of this year that we've seen more of sort of moderation on volume.

So some of that growth just gets back to the fact that we do feel like the volume growth opportunities first half of the year is going to be weaker as Mike alluded to. In reaction to that, we are looking at our staffing levels. I mean, that's something, we first – we're sort of forced to look at in 2013 when we experienced the sort of unprecedented element of actually declines in volume year-over-year, and it really forced us to be much more proactive in looking at the clinical staffing levels, and trying to match our productivity up.

So, that will happen over the course of the year, and as we've said, in the short term, this is sort of a fixed cost business because you have to commit to certain staffing levels, and to make those changes require some notice and adjustment on a forward basis. So, that element, as Mike alluded to, we're continuing to look at our SG&A levels. Those benefits will come throughout the course of the year as well some of the original synergies that we've looked at with the IPC transaction. So I think it's hard to handicap sort of how that shakes out, but I think, clearly, our first quarter we're anticipating sort of moderate expectations, but that as we continue to grow across the next couple of quarters, we do expect to see more normalized growth levels coming out here.

A.J. Rice - UBS Securities LLC

Okay. All right. And then, just real quick on the cash flow and balance sheet comments, is it right to think your cash flow for the year should be something north of $300 million or any sense of guidance there? And the DSO, it's 62.7 days, that was a drag on cash flow in the fourth quarter, I'm assuming that will stabilize into some lower level, any commentary there, a debt target for year-end if you have it or debt-to-capital target rather I'm sorry?

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

Yeah. Well just, so on a couple of those, we did see a little bit of an uptick in our days than they're at year-end, frankly we see our days and they bounce around between sort of 59 to 63, I mean, we always sort of see this ebb and flow. So, we're sort of where we are. I would obviously put a lot of focus on managing working capital, and AR, and cash flow. So I think that we haven't quoted any sort of numbers here, but I think what you sort of alluded to is in line. We'd love to see some modest improvement on days in AR.

In terms of leverage, I think that we'll probably be in sort of the targeting the mid-4 times in terms of leverage ratio at year-end, that's a little bit, obviously going to be subject to how well we manage our working capital and cash flow. A little bit of a wildcard out there is, are we going to see any sort of slowdown from ICD-10. I don't think we see anything yet at this point. But anytime you have a change in how claims adjudication processes work, there's always at risk, but I think we've got a team in our AR area, in our billing area that's very focused on that and pretty aggressive in terms of managing the claims adjudication process.

A.J. Rice - UBS Securities LLC

Okay. Thanks a lot.

Operator

Our next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed with your question.

Gary Lieberman - Wells Fargo Securities LLC

Good morning. Thanks for taking the question. Are most of the synergies that you expect to get this year revenue synergies?

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

No, Gary, this is David. Those are actually – year one most of what we're looking at is cost. We really are looking at some of the revenue synergies and few other cost synergies specific to IPC more in the second year and third year. So there is a small amount of revenue we think we can pick-up towards the end of the year. And a lot of that gets into just the process of enrollment with physicians and enrollment in managed care plans.

And we're in the middle of doing work right now to sort of merge the billing systems between IPC and TeamHealth. So all of those factors cause us to have a little bit of a delayed view on the revenue synergies with a earlier view on achieving the cost synergies.

Gary Lieberman - Wells Fargo Securities LLC

Okay...

Michael D. Snow - President, Chief Executive Officer & Director

Hey, Gary.

Gary Lieberman - Wells Fargo Securities LLC

I'm sorry.

Michael D. Snow - President, Chief Executive Officer & Director

This is Mike. So I think I probably spooked some of you guys around my comments out of JPMorgan when I was talking about the tax ID in the Rubik's cube of BPCI and trying to align those things up. And what I was trying to convey, they obviously didn't do very well, what I was trying to convey is that what we really hope to do was to get a lot of that year two revenue into 2016. And that because of the nuances they're involved with, those two moving parts, we weren't going to be able to accelerate. We're still going to get the revenue. It's going to materialize. We've got a plan. It's very noble to us. It's just that some of the nuance of how to get there change. So I just wanted to clarify that for everybody.

Gary Lieberman - Wells Fargo Securities LLC

So, is the way to think about it that as some IPC's physicians move into networks for you guys with contracts that then going forward, they're able to bill under those contracts, is that how to think about the revenue synergies?

Michael D. Snow - President, Chief Executive Officer & Director

Yeah, that's part of it. I would say that it is – there is every – I'm sorry we've got a little incoming call here, sorry, for the background noise. Any and all of those things, it is them moving into our tax ID numbers, it is us aggressively going after new contracted rates, and then frankly and there's a couple locations where their rates are better and we move on to their platform. So, it is all the above, Gary, but we've got that all laid out and have a plan of attack.

Gary Lieberman - Wells Fargo Securities LLC

Okay. Great. And then is it possible for you to give us any more color on some of the DRGs or the classes of DRGs where you decided to discontinue in the BPCI?

Michael D. Snow - President, Chief Executive Officer & Director

No, what I can tell you, as you go through the analysis you see where the CMS baseline numbers are and we kind of know where those DRGs are performing by geography. It's one of the beauties of the BPCI program is you get that optionality of, does this work for us or not and is there enough upside and it depends on where the variability is, if there's a high variability in the use of skilled nursing, that's a real opportunity. And if there's not a high variability in skilled nursing then there's probably not as much opportunity in that post-BPCI world. So that's just that assessment, so it doesn't come down to, is it all COPD or all CHF or – it is very, very specific by geography.

Gary Lieberman - Wells Fargo Securities LLC

Okay, great. That's helpful. Thanks very much.

Operator

Our next question comes from the line of Matthew Borsch with Goldman Sachs. Please proceed with your question.

Matthew Borsch - Goldman Sachs & Co.

Hi, thanks. Maybe just a little more granular view on how you're looking at volumes so far this year. One of your peer companies also remarked of course on the mild flu season, but made the comment that volumes seemed to be improving more recently I gather in February, that must be – you don't seem to be seeing that right now nor expecting that for really the balance of the first half. I'm just wondering if you can give us any more thoughts on that?

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

No, I would echo the comments we heard from our friends at Envision yesterday. I think we've had a similar result in January and as they spoke to some moderation, in February, we've had some of that also. Just as a reminder, we're going up against like a 9% plus comp from last year. So it's not terribly surprising. It is made a little worse, I guess by the fact that we have not had a flu season to speak of. But that's pretty significant and I think we were like 6% in the second quarter last year. And so...

Matthew Borsch - Goldman Sachs & Co.

Yeah.

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

...these are pretty big numbers coming off of.

Matthew Borsch - Goldman Sachs & Co.

Yeah.

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

So, it wouldn't surprise me if we find ourselves flat to down in January, and modest from there on.

Matthew Borsch - Goldman Sachs & Co.

Yeah. That makes sense, and just one more on a different topic, if I could. When you think about the post-acute opportunity going forward, do you think most of that will come through contracting directly with the states for Medicaid populations or how much versus subcontracting with Managed Care?

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

Well, ask me in a few months. I mean...

Matthew Borsch - Goldman Sachs & Co.

Okay.

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

Right now, I think it's all of the above.

Matthew Borsch - Goldman Sachs & Co.

Yeah.

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

And then, frankly, some of our contracts, we have a large contract out West to manage post-acute for a system that has taken their post-acute profile....

Matthew Borsch - Goldman Sachs & Co.

Right.

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

...profile down to like 100 something skilled facilities to 30, and we're managing that for them. So, I do think that that is going to happen.

Matthew Borsch - Goldman Sachs & Co.

Okay. Thank you.

Operator

Thank you. Due to time constraints, our final question will come from the line of Ana Gupte with Leerink Partners. Please proceed with your question. Ana Gupte, your line is live.

Ana A. Gupte - Leerink Partners LLC

I wanted to get some color – good morning – on your – on the underlying trends of the net new contract growth and also on the pricing trends. I think you mentioned something about exiting from lower margin contracts and focusing on the higher margin ones, just broadly across your book of business and outside, what are the trends that you're seeing on that? And is it a trend toward compressing margins from a pricing perspective?

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

Well, that was – say which one do I want to get to first. First, we always have a process trying to assess margin integrity and pricing integrity in our portfolio. There is obviously times when we'll take negative contracts if it's part of a larger system. So really what I'm highlighting are those contracts that are standalone contracts, that are underperforming, where we have an opportunity to go back and ask for additional support. So that's just part of what we do and I will tell you that we probably have escalated that more recently, but it is a part of our ongoing process here in operations.

I think you asked me then – I was trying to write my notes down about pricing, and you wanted to know the components of the net new build up. And I'll tell you that one of things we don't give ourselves a lot of credit for and we report net new, we only report our pure sales and just to remind you that there is a good component of our M&A that gets reported out in these hybrids that are really the result of sales. So even though our net new is a little under 1%, we had little bit of a contract churn in the fourth quarter at about our normal long-term rate of 5%, but our sales team has done a fabulous job. We got a great team that they don't always get credit on the external reporting because we put those hybrids into M&A, but they're doing very well. And on pricing, we've not seen – I mean we've got, as I've said in my comments, modest pricing expectations into 2016. So I'm not sure if I hit everything, Ana, or not.

Ana A. Gupte - Leerink Partners LLC

Yeah, I think you did. I think one follow-up on that. So one of the publically-traded hospital executive made a comment that, this is sort of related to all of this that some of these, the anesthesia, outsourcing ED and all of that is beginning to get a bit commoditized, and I'm just wondering is that likely to be because of a shake out between certain health systems versus publicly traded players and how does that play out for you in terms of the trends toward net new contract growth?

Michael D. Snow - President, Chief Executive Officer & Director

Well, I'll tell you that they must be writing checks if they believe it's commoditized, and so, there will always be pressure on the amount of support and where we have to differentiate ourselves is in the level of service, the quality provided, support provided to those client hospitals. It doesn't feel commoditized to me and the sales pipeline is very attractive, so. And we've got, as David earlier said, 2% to 4% net new built into 2016. So, we feel good about our opportunities ahead of us.

Ana A. Gupte - Leerink Partners LLC

Sounds great. Thanks.

Michael D. Snow - President, Chief Executive Officer & Director

Thank you. Okay.

Operator

We have reached the end of the question-and-answer session. Mr. Snow, I now would like to turn the floor back over to you for closing comments.

Michael D. Snow - President, Chief Executive Officer & Director

Sure. Thank you, operator. Once again, thank you for joining us this morning and for your continued interest in TeamHealth. Have a good day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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