Team Health Holdings (TMH) Michael D. Snow on Q2 2016 Results - Earnings Call Transcript

| About: Team Health (TMH)

Team Health Holdings, Inc. (NYSE:TMH)

Q2 2016 Earnings Call

August 03, 2016 8:30 am ET

Executives

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

David P. Jones - CFO, Executive VP & Head-Investor Relations

Analysts

A. J. Rice - UBS Securities LLC

Ana A. Gupte - Leerink Partners LLC

Joshua Raskin - Barclays Capital, Inc.

Gary P. Taylor - JPMorgan Securities LLC

Dana Hambly - Stephens, Inc.

David S. MacDonald - SunTrust Robinson Humphrey, Inc.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Operator

Good morning and welcome to TeamHealth's Second Quarter 2016 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 (0:21), TeamHealth Investor Relations. Please go ahead.

Unidentified Participant

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-Q, we have also prepared a financial supplement that presents financial highlights of the quarter. A reconciliation of adjusted EBITDA to net earnings calculated under GAAP can be found in our earnings release and in our financial supplement, both of which are posted on our website at www.teamhealth.com and in our most recent Form 10-Q. 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's second quarter 2016 earnings call. I am joined by David Jones, our Executive Vice President, Chief Financial Officer.

I'll kick off the call this morning with an overview of the primary drivers of our second quarter results, provide an update on our integration efforts and results for IPC, and then provide some commentary on the current market and our relative position.

David will review our quarterly financial performance in more detail, and I'll conclude with an update on our 2016 outlook before we open up the call for Q&A.

As always, let me thank the physicians, other clinicians and administrative employees in the organization for their dedication to excellence. TeamHealth continues to focus on making the provision of healthcare more efficient for our clinicians because we believe that will ultimately lead to better outcomes for patients and solidify our hospital relationships. We have a great team.

Our core emergency medicine and other operations delivered solid operating performance during the quarter despite a reduced contribution in the pricing element of same contract revenues. Volumes were in line at 2.5% same contract growth despite a challenging year-over-year comparison.

The results in our legacy operations combined with the positive contribution from the IPC transaction enabled us to report double-digit growth in net revenue of over 27%, adjusted EBITDA growth of over 19%. And we reported a significant improvement in operating cash flow on a year-over-year basis.

IPC contributed largest percentage of our growth in the quarter, although we are still working through some of the same near-term challenges on the core IPC operations as we've discussed in previous quarters. We are fully focused on integrating IPC into our operations, addressing physician attrition issues, capitalizing on our combined market position, and realizing our initial synergy targets. We continue to expect to generate $25 million of revenue and cost synergies in this year and $60 million over the three-year period.

Turning to the components of growth from the Legacy TeamHealth operations, M&A was the largest contributor to consolidated revenue growth during the quarter at 3.1%, but was impacted by the delay in closing certain active opportunities in our pipeline.

As you know, we include an assumption of future acquisitions when developing our guidance for the year. Timing delays will invariably happen, as it did in the second quarter, but our pipeline is strong and we are optimistic about our ability to close on these near-term opportunities.

We closed two emergency staffing transactions during the quarter, which were included in our results; Children's Emergency Services in Dayton, Ohio, and Tri-City Emergency Medical Group in Oceanside, California. A third transaction Lake County Anesthesia Associates, which closed soon after the quarter, was part of a Multi-Service Line Award at Central Florida Health whereby we also began providing emergency services. This is the kind of transaction for which we are ideally situated to respond to the dynamic needs of our hospital clients that are increasingly looking to us to provide multiple hospital-based and post-acute clinical services.

The second largest contributor to growth in the quarter was same-contract performance. As I mentioned earlier, same-contract volume was solid at 2.5% growth, but pricing was below expectations. We realized relatively flat estimated collections per visit due to a decline in unbilled revenue between periods and a reduction in prior-year revenue estimates.

The decline in prior-year revenue estimates was due in part to a higher level of write-off of accounts related to delays in timely filing and other adjudication issues on some older claims.

The unfavorable revision this quarter is inconsistent with our historical experience with prior-year revenue estimates that generally run slightly favorable. We believe the underlying increased level of claims processing write-offs is an anomaly in the current quarter.

Additionally, we realized slightly negative trends in our payer mix and a reduced contribution from managed care revenue offset by increased average patient acuity in the current quarter. We continue to actively engage with managed care plans, in particular with exchange plans in certain markets when we believe that rates are below an acceptable level and have seen some positive results in such instances.

Net new sales was our third largest contributor to growth at 1.2%. As we have noted in prior quarters, our sales team has done an outstanding job with new contract sales contributing 7.5% of revenue growth.

Unfortunately, we also had terminations of about 6.3%. It's important to note, however, that about half of the contracts terminated this year were initiated by us. The EBITDA contribution from these contracts were below our expectations and were terminated after unsuccessful attempts to renegotiate improved financial terms. While these terminations are negative to revenue growth, they were not a significant impact to EBITDA growth between quarters.

We were pleased with our strong operating cash flow performance which was partly driven by a reduced level of accounts receivable funding when compared to the first half of 2015.

Regarding BPCI, while we still believe this program can be a positive contributor for TeamHealth, we are frustrated that the position attribution reports from CMS have significant flaws and some of the pricing assumptions upon which we based our diagnosis selections have changed.

However, in an effort to keep provider organizations engaged in the program, CMS recently announced they will waive any downside risk associated with the program for 2015 performance. This policy change is likely to produce positive financial results potentially in the fourth quarter, although the timing and the amount are unclear.

We interpret the policy change as a strong signal of CMS' commitment to the program. We strongly encourage CMS leadership to extend the downside protection through 2016 or until they can provide reliable, credible data.

Switching gears to the macro level, unlike our relative market position for physician services. Hospital interest in exploring new health-based provider alternatives is accelerating and what's even more evident, hospitals have a new found interest in adding a post-acute management component to their capabilities.

We are working with health systems to rationalize their discharge referral sites and we are working with payors to manage their post-acute patients across several markets. We are clearly preparing for the transition to value-based reimbursement.

Today this transition is spotty and the pace varies widely, but it's happening in nearly every urban market in which we operate. Also, with the recent announcement of new bundled payment models for cardiac care and hip fractures, CMS is clearly focusing on bundled payments as a means to reduce the cost of these services. Under these new payment arrangements, hospitals and post-acute providers will play an increasingly important role in the efficient management of care.

Finally, at a micro level, we know we have to be more efficient in how we deliver services to our partner hospitals and health systems. We are investing in standardized processing capabilities and best practices such that we can leverage the scale of our organization. In a recent pilot, our acute care service line reduced their cycle time that is the time between when we receive a physician's CV until their first work day, by 53 days. This was accomplished by standardizing processes, eliminating hand-offs, and system improvements. That's real value. That's 53 days we don't have to pay for premium labor in a location. We're rolling this program out to the rest of the organization, and we're excited about its future prospects.

And with that, I'll turn the call over to David to provide more additional detail on our financial results. David?

David P. Jones - CFO, Executive VP & Head-Investor Relations

Thank you, Mike. Following the market close yesterday, we issued a press release reporting our second quarter 2016 financial results and filed our Form 10-Q. My comments this morning will review our financial results and also highlight and expand on some of the key issues for the company.

In the second quarter of 2016, net revenue increased 27.9% to $1.12 billion. IPC contributed 21.1%. Non-IPC or legacy acquisitions contributed 3.1%. Same contract revenue contributed 2.4% and net sales growth contributed 1.2% of the increase in quarter-over-quarter revenue growth.

Same contract revenue increased $21 million or 2.6%, primarily due to volume growth of 2.5% which contributed 1.9% of same contract revenue growth. An increase in estimated collections on Fee-for-Service visits provided a 0.1% increase in same contract revenue growth.

As previously noted, the company recognized a decline in unbilled revenue between periods that reflects an estimate of the value of unprocessed claimed at the end of the reporting period. Also, a reduction in prior year revenue estimates in the second quarter of 2016 compared to a favorable change in prior year revenue estimates in the second quarter of 2015 impacted pricing.

The negative change in prior year revenue estimates recognized in 2016 was due in part to an elevated level of claims write-offs realized in the quarter associated with provider credentialing in claims adjudication on an increased level of in new and acquired contract relationships that commenced in 2014 and 2015. While we will always experience some level of account write-offs due to claims adjudication issues, the impact in the second quarter was larger than as typical and future amounts are expected to moderate to more normalized levels.

Same contract pricing growth was also modestly constrained by changes in payor mix and a reduced contribution from managed care revenue offset by an increase in average patient acuity between periods. Contract and other revenue also contributed to same contract revenue growth by 0.6%. IPC reported revenue of $185.7 million in the second quarter, while legacy acquisitions contributed $27.5 million of revenue growth and net new contract revenue increased by $10.4 million.

In reviewing payor mix changes in our legacy operations between the second quarter of each year, we realized modest declines in the percentage of Commercial, Self-Pay and Medicaid volumes and an increase in Medicare volumes. Commercial patients as a percentage of total visits decreased by 30 basis points between quarters to 25.7%. Self-Pay patients decreased 20 basis points to 14.7% and Medicaid patients decreased 20 basis points to 30.3%. Medicare patients increased 60 basis points to 27.9%.

Professional service expenses of $891.1 million increased 29.6%. As a percentage of net revenue, professional service expenses increased 110 basis points to 79.4%. On same contract basis, professional service expense increased by 3.3% and as a percentage of net revenue was 78.3% in 2016 and 77.7% in 2015. Professional liability costs were $33.5 million compared to $27.3 million. As a percentage of net revenue, professional liability costs declined to 3.0% in 2016 from 3.1% in 2015.

General and administrative costs were $95.5 million compared to $78.6 million in 2015. Included within general and administrative costs were contingent purchase expenses of $9.8 million in 2016 and $7.9 million in 2015. Excluding the contingent purchase expense, core general and administrative cost increased to $85.8 million from $70.7 million. The increase in core costs between periods was due primarily to the impact of the IPC acquisition partially offset by a decline of same contract cost of $6.7 million. As a percentage of net revenue, core general and administrative costs decreased to 7.6% from 8.1% in 2015.

Net interest expense increased to $30.4 million, primarily due to the issuance of the term loan B and bonds and an increase in the amortization of deferred financing cost partially offset by a reduction of revolver borrowings between periods. Included within net interest expense is $2.2 million related to the amortization of deferred financing costs that be will be recognized over the life of the underlying debt instruments.

Under GAAP, the second quarter 2016 reported net earnings were $18.8 million or $0.25 diluted net earnings per share compared to net earnings of $28.9 million or $0.39 diluted net earnings per share in 2015. Adjusted EPS, which excludes certain items, was $0.66 in 2016 compared to $0.70 in 2015. The 2016 adjusted EPS reflects adjustments for contingent purchase compensation expense of $9.8 million, amortization expense of $24.1 million and a loss on the refinancing of debt of $1.1 million.

The adjustment also includes certain transaction integration reorganizational costs of $5.6 million. These expenses include ongoing IPC severance integration costs of $4.1 million and $1.4 million of severance and other costs associated with our ongoing operational restructuring during the quarter. By comparison, 2015 adjusted EPS reflects adjustments for contingent purchase compensation expense of $7.9 million and amortization expense of $21.2 million.

Fully diluted outstanding average shares increased 2.2% to 75.2 million shares in the second quarter of 2016. Adjusted EBITDA grew 19.9% to $119.2 million compared to $99.4 million in 2015 and the adjusted EBITDA margin was 10.6% in 2016 compared to 11.3% in 2015.

Of the consolidated adjusted EBITDA, $15.8 million was related to IPC and $103.4 million was related to company's legacy operations. The adjusted EBITDA margin was 8.5% for IPC and 11.0% for the company's legacy operations. The IPC operations benefited from costs and a modest level of revenue synergies of approximately $5.4 million in total during the second quarter.

Cash flow provided by operations during the quarter was $25.3 million compared to $15.6 million in 2015. Included within operating cash flows were contingent purchase payments of $1 million in 2016 and $5 million in 2015. Also impacting cash flow in 2016 was $5.9 million of cash transaction integration costs associated with the IPC transaction.

Excluding the contingent purchase payments in the IPC transaction and integration cost, operating cash flows increased by $11.5 million to $32.2 million in 2016 compared to $20.6 million in 2015. The increase in operating cash flows between quarters reflects a reduced level of accounts receivable funding and income tax payments, which was offset by an increased level of interest payments between periods.

Reviewing our results for the first six months of the year, net revenue increased 31.4% to $2.26 billion. IPC contributed 22%. Legacy acquisitions contributed 4.7%. Same contract revenue contributed 3.7% and net sales growth contributed 1.1% of the increase in net revenue.

Same contract revenue increased by 4.2% due to Fee-for-Service volume increases of 3.4% which increased same contract revenue growth by 2.6%. 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 0.7% increase in same contract revenue growth.

The company recognized net revenue of $378.4 million associated with IPC while legacy acquisitions contributed $79.9 million and net new contract revenue increased $18.7 million.

Reported net earnings under GAAP were $19.5 million or $0.26 diluted net earnings per share compared to $57 million or $0.78 diluted net earnings per share in 2015.

Adjusted EPS which excludes certain items in both periods as outlined in the reconciliation to EPS as calculated in our GAAP was $1.28 in 2016 compared with $1.38 in 2015. For 2016 adjusted EBITDA grew 23.5% to $233 million while the adjusted EBITDA margin was 10.3% compared to 11% for the same period in 2015.

After consolidated adjusted EBITDA $32.5 million was related to IPC, and $200.5 million was related to legacy operations. The adjusted EBITDA margin was 8.6% for IPC and 10.7% for the Company's legacy operations.

Cash flow provided by operations for the year was $54.4 million compared to $18.2 million in 2015. There were $2.6 million in contingent purchase payments in 2016 and $8.9 million in 2015. Also impacting operating cash flow in 2016 was $14 million of cash transaction and integration costs associated with the IPC transaction.

Excluding the impact of the contingent purchase payments and IPC transaction costs, core operating cash flows increased $44 million to $77.1 million in 2016, compared to $27.1 million in 0015.

For the year capital expenditures were $15.3 million compared to $17.4 million in 2015. Net cash paid in 2016 for acquisitions was $39.4 million including $9.5 million of contingent purchase payments of which $2.6 million was reported in operating cash flow and $6.9 million was reported in financing cash flows.

In 2015, cash paid for acquisitions was $93.7 million including the $8.9 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 $16.3 million and total outstanding debt was $2.42 billion; excluding the impact of $50.3 million of deferred financing costs.

In June 2016 we completed the repricing of our term loan B facility. The re-pricing amendment reduced the interest rate by 75 basis points to LIBOR plus 3% from LIBOR plus 3.7% previously. In each case subject to minimum LIBOR floor of 75 basis points.

The outstanding debt includes borrowings under the term loan A facility of $562.5 million, the term loan B facility of $1.31 billion and the senior notes of $545 million. There was also 7.5 million outstanding on revolving credit facility and we had $642.5 million of available borrowings under our revolver without giving effect to $6.8 million of undrawn letters of credit.

On a pro forma basis, giving credit for the full year of IPC results and the incremental impact of 25 million in annual synergies, our net leverage ratio was 5.1x at the quarter end.

Net accounts receivable totaled $787.2 million compared to $730.5 million as of December 15, and overall days in accounts receivable including the effect of IPC were 64.0 days compared to 69.6 days at December 2015.

Excluding the impact of the acquired IPC accounts receivables, overall days in accounts receivable or 64.2 days compared to 62.7 days at December 2015.

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

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

Okay. Thanks, David. As I stated earlier, while our second quarter results were positive, the reduced contribution from same contract pricing and timing delays on the M&A front are requiring us to make up some ground in the second half.

As we look ahead at the remainder of the year, there are challenges in the market, but we believe that we remain well positioned to achieve revenue and earnings growth and deliver strong operating cash flows.

Given our second-quarter results, we are revising our guidance down slightly to target full year 2016 net revenue of between $4.64 billion and $4.71 billion reflecting an annual growth rate of 29% to 31% with an adjusted EBITDA margin for the full year of 2016 of around 10.5%.

his guidance excludes any benefit from the BPCI program for the 2015 measurement period, which as previously noted offers only upside, which we believe could be recognized at some point during 2016.

We anticipate continued financial momentum over the remainder of the year due to the impact of ongoing cost initiatives, targeted revenue enhancements, a modest improvement in IPC performance, including achieving our synergy target, and additional sales in M&A growth during the second half of the year.

In closing, we are pleased with the strength of our strategic position and financial results to date and look forward to helping our providers and hospital partners for the balance of 2016 and beyond.

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

Question-and-Answer Session

Operator

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

A. J. Rice - UBS Securities LLC

Thanks. Hi, everybody. Just to try to drill down on a couple of things that were mentioned in the prepared remarks. The terminations at 6.3%, and I understand that that was driven largely by you guys, I'm trying to understand how does that compare to what it would if terminations had been running? Is that materially different or – because I don't remember you calling that out before like that? And is there a common theme on the guys you're walking away from? Does that suggest anything about the customer base at all that would be worth highlighting?

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

Yeah. Hey, A.J. It's Mike. Our terminate is that -- that's about the same level we had in the first quarter and, frankly, in the fourth quarter of last year. And as you recall, earlier in the year we called out that we were looking at our customer base. And where does it make sense? Where are we either losing money or where do we have such low margins on – accounts by the time we put a regional SG&A load and a corporate load.

You know, it's just not worth it. And so that's a process we have been undergoing. You know, as we terminate some of these contracts, they have a spill through effect. So they have to – as we terminate, you know, they continue to stay in the numbers on the year-over-year comparisons, you know, until we burn through that anniversary. So it has – in the case of these that we have terminated so far this year, it had a negative impact on revenue growth, but not on our earnings. So that's --

A. J. Rice - UBS Securities LLC

Okay.

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

Hopefully, that gives you a little more color.

A. J. Rice - UBS Securities LLC

And then just as a follow-up, maybe I'll ask about the payor mix dynamics that you alluded to. When you drill down on that, are you thinking it's just sort of normal ebb and flow that you get quarter-to-quarter, or do you see anything more fundamental that's going on there? I think you mentioned something about the exchange managed care contracts you were having some issues with?

David P. Jones - CFO, Executive VP & Head-Investor Relations

A.J. this is David. I would say the payor mix itself, you know, I would characterize is a little bit of a normal ebb and flow. You know, we have seen, if you go back to 2014, we obviously saw some nice trends in payor mix, particularly as it relates to declines and self-insured categories, significant declines over that period of time. Most of that going into, from our – from what we could tell, Medicaid category. Really we've seen a slowing of that trend. Really started in the second half of 2015 and we have seen some modest incremental declines still in the self-pay volumes. But where we saw a little bit of shift in payor mix that creates some pressure on revenue, it was more the – a modest adjustment down on the commercial side. And so we're going to see that every quarter.

Some of the – we sort of called out the pressure on same contract was the fact when we were looking at year-over-year, we were in an environment where we were getting what I would describe as sort of modest favorable payor mix changes in 2015, and for the couple of quarters now we have seen some modest declines in the current period. So that, that year-over-year sort of a positive versus negative cycling through on a comparison period has added just a little pressure going forward there.

A. J. Rice - UBS Securities LLC

Okay. All right. Thanks.

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

A follow-up on that, A.J. just or the actual contract discussions at the payor level by regions, nothing fundamentally has changed there. So as kind of David alluded, some of the – a 30 basis point change in this quarter does not concern me. I think that's -- I don't think there is something more fundamental going on there.

We called out the exchange plans a little bit. And so we have had some of the exchange plans paying us what we believed were not market rates, and we have seen some publicity where we've sought legal relief, and we have had some success there. That's the only place where we've seen maybe a little more pressure was around some of those exchange plans. But they are not very big.

A. J. Rice - UBS Securities LLC

Okay. All right. Thanks a lot.

Operator

Our next question comes from the line of Ana Gupte with Leerink Partners. Please proceed with your question.

Ana A. Gupte - Leerink Partners LLC

Yeah. Thanks. Good morning. I had a question on the new contract growth. You talked about the pressure in the last quarter from contract terminations but then you pointed to the potential for growth from bundling and you had been talking about cross-selling as an underappreciated potentially not in your guidance type of upside. So you know what type of timeframe should we be thinking about for your selling cycle and when might this new contract growth reaccelerate for you?

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

What we – frankly – hey, Ana, the contract growth that we have that we reported in this quarter is 7.5% is, right up there with what we have reported historically. We had a year ago, had a big sale that was augmented by a very large multi-system sale. So it got up to 9% in the quarter a year ago, and we have been in that 6% to 8% range since then. So this 7.5% is right there kind of in the zone, what we would have expected.

So as for cross-selling in particular, some of that – we have some of these sales do represent cross sales. We have places where we currently do emergency medicine and we have sold into hospital medicine. We had one transaction I talked about where we did a workforce in place on anesthesia and got the emergency department as a result of that sale. So we have crossed sales. And just – maybe I'm not clear exactly – what your concern or what your question is.

Ana A. Gupte - Leerink Partners LLC

well, I guess my question is more about net new growth, right? So I guess – are you saying the new terminations are just more one time and so your overall, your gross sales will at overtime, I guess, will it accelerate on a net basis? Maybe it's just that – either way, I think if your terminations are going to continue at this rate, then you kind need an even bigger bump on the other side.

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

Yeah. I hear you, Ana. So what I was trying to communicate, I guess, on with A.J.'s question was that there is a certain amount of anniversarying that goes on. So by the time you terminate revenue net revenue is gone through the comparable periods for a while. So we're going to see an elevated amount of terminations through the third quarter.

I think it drops back, we start to anniversary some of these things we did late last year in the fourth quarter and we expect that to normalize back to our typical more 2% to 4% going forward. But I think certainly for third quarter, and I don't have real good visibility yet into fourth quarter, but we believe it's going to drop back some in the fourth quarter. But that's what we expect when you do those kind of terminations. Like I said, not a big impact on EBITDA, but certainly it drags revenue growth.

Ana A. Gupte - Leerink Partners LLC

Got it. Okay. On the same contract side, just to follow up on A.J.'s question again then, you don't see this as a systemic issue and it seems like this adjudication issue is one time and it's related likely to exchanges and commercial but nothing that we should be projecting on a forward basis?

David P. Jones - CFO, Executive VP & Head-Investor Relations

Well, we talked about a little bit of an adjustment we took to take down a valuation assessment of prior year revenue. And to put it in context, it had about a 90 basis point impact on our growth rate on same contract and it obviously flowed through pricing to frame it up.

To provide some context, we are always updating every month through our billing process, our revenue recognition process, revalidating the prior year revenue estimates. We have a very long history of working off this revenue recognition model. It's been in place for 16 years or more and we have a fairly consistent track record of the subsequent views against that original estimate in a given period coming out favorable.

And when you take the long view and you look at where do we end up over generally an 18-month to 24-month period, we've seen favorable adjustments over the last several years ranging from 30 basis points to as high as 1 basis point on just a look-back analysis. So the point there is our revenue model has traditionally been built with some conservative biases that then as you adjudicate those claims and see some collections come in, you are able to modestly see some improvement.

So the second quarter was a little bit of an outlier where we actually saw a very modest change to the negative in that process that we do believe is a bit of an anomaly related to a catch-up of some A/R that came onto the system in late 2014 and 2015 as we were integrating some acquisitions and new sales during that period of time.

So I can't say that it's done. We're always going to have some element of write-off. What's different about this quarter is it seemed like it was more elevated than we would expect to see. And, again, it felt like it ties back to this claims adjudication process where we had seen a little bit of a build-up in A/R. You may recall we talked about the first half of 2015 we saw some really weaker operating cash flows tied to building up and getting some A/R held up in the transitional cycle. That has come through. And as that's come through, there has been a little bit more elevated level to those write-offs.

So we do feel it's generally encapsulated, but also I just have to say we do have these elements always, but that's a focus of the business and we're trying to make sure we manage that down to get back to our more normal expectation of very modest favorable adjustments on these prior year revenue estimates.

Ana A. Gupte - Leerink Partners LLC

Thanks for the color. Appreciate it.

David P. Jones - CFO, Executive VP & Head-Investor Relations

Okay.

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. First question is just on the M&A environment. So I think guess first is, are there any changes in the valuations from sellers? Is that potentially having a slow down? Does this change your approach at all in terms of looking at M&A? And then what do you have embedded in the second half from a revenue perspective for new M&A?

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

Well, I'll speak to the valuation. I think we've seen a slight down-tick on the ED side, probably not a full turn. And it of course depends on the size of the asset. But certainly versus a year ago, a softer multiple than was out there a year ago.

I don't sense that there is material downtick or even an immaterial downtick on the anesthesia side. And we've got a few things cooking on that side. It just doesn't feel like anesthesia has responded to the market changes from a year ago. But on the ED side, yeah, I do feel like it's about a half a turn perhaps more attractive to a buyer.

David P. Jones - CFO, Executive VP & Head-Investor Relations

Well, there's obviously some pipeline opportunities that we have considered in thinking about our guidance here. If you look at where the guidance breaks out, just to give the component, this 29% to 31%, there is an element there of the full-year impact of IPC is probably going to be on the full year somewhere between 18% to 19% contribution. And then you have a core business at TeamHealth of somewhere around 12%.

So where do those components come from for the full year? We would still expect to see same contract in that generally sort of 3% to 5%. It's been a little light this particular quarter. But if you look s year-to-date, we've seen contribution for the six-month period about 3.7%. And, again, that's with a softer 2Q embedded in there. We think that the new contracts, while they have been a little bit light, somewhere probably in that 1% to 3% depending on how things may come out over time.

And then in the remainder is filling in with some M&A. And, again, if you look at where we are on a year-to-date basis in what we call the legacy acquisition contribution, they've contributed 4.7% thus far. We think that with some opportunities out there, you could fill that in and get up to by the end of the year maybe somewhere between 5% to 7%, depending on again timing and how some of these things come in. Obviously, timing is important. I mean, if you get an extra quarter, that makes a big deal in getting these things closed. And we feel pretty good about some of these opportunities.

But we have a pretty thorough diligence process, and we do sort of dot all the I's and cross all the T's and work very closely with the hospital customer to make sure that they have a great comfort with what's being proposed and just going through that process sometimes creates some delays.

Joshua Raskin - Barclays Capital, Inc.

Got you, David. So just on that M&A component that 5% to 7%, I know you guys are running a little bit under 5% year-to-date. We shouldn't think of that as just, 1% to 3% more – you know, sort of 0% to 2% more coming in the second half, because there is some anniversarying, right? I guess, I am just trying to isolate the M&A that has not yet been completed. What – how much is – it sounds like its only a couple percent if anything, is that fair?

David P. Jones - CFO, Executive VP & Head-Investor Relations

I think that fair. I think I mean we are already – for the second half of the year, so anything we do obviously gets diluted a little bit in the 2016 contribution. And there is a mixed bag that's out there. Some -- the traditional tuck-in acquisitions and what we refer to as the hybrid acquisitions. So they individually don't contribute a ton, but there are a few when you aggravate those. And there are some other larger opportunities out there beyond just the tuck-ins that we're looking at as well.

So I think you are right. It's sort of the incremental is probably 200 to 300 basis points of improvement going forward, impacting the 2016 results here above where we are right now.

Joshua Raskin - Barclays Capital, Inc.

Got you. And then just on the legacy business, it sounds like, you are guiding sort of okay, we should be looking at sort of 12ish percent year for core TeamHealth revenue, doesn't sound like it's a margin issue. I mean, I am calculating your team ex-IPC margins are 11.0%. But the 12%, I guess, I am struggling with just because the second quarter it seems like it was sort of a 7% growth number, and I understand same contract was a little bit lower. You have got some terminations et cetera. But you know as you think about 2017 and beyond, so longer term, is 12%, is that where we should be focused? Or what do you think the top line ex-IPC looks like for legacy team?

David P. Jones - CFO, Executive VP & Head-Investor Relations

For specifically 2016 or which (43:40)?

Joshua Raskin - Barclays Capital, Inc.

No. Just long-term. What's normal growth in the business?

David P. Jones - CFO, Executive VP & Head-Investor Relations

Yeah, I think it's -- I think, I don't think we've seen anything that changes what's been sort of our traditional view of the core business growth characteristics, which -- you know, we do speak to sort of a 10% to 12% opportunity. And again, it starts with same contract. And – there will be volatility quarter-to-quarter depending on flu season or lack of flu season or some of the issues that may pop-up like we saw this quarter.

But historically, you can look back, there is a pretty solid track record of being able to put up somewhere between 4% to 6% same contract growth. Some of that's going to come from you know, modest pricing all in. And some of that's going to come from some support for volume growth.

And then the other question is just, you know, we are -- it feels like an -- a little bit of a trough right now as we have done some things with Portfolio Management on the net new, but we would generally call out sort of 2% to 4% for net new sales. And then the really fill-in that in some years as you have seen in the past has really been an outlier in terms of the over performance has been M&A, but even in a more what I call scaled down, more targeted M&A opportunity environment we still think that you're going to see 2% to 4% revenue growth coming from just a steady pace of M&A, tuck-ins, hybrid deals, things like that.

Joshua Raskin - Barclays Capital, Inc.

Okay. Last quick one just on the accounts receivable. All that aged stuff that came in a little bit lower on the collections. Are you guys through that full analysis? Have you gone through all of the aged accounts receivable?

David P. Jones - CFO, Executive VP & Head-Investor Relations

Yeah. I mean, we do that monthly. So there is not sort of a one-time process. I mean, again, our revenue recognition is something that is designed that really is -- much more data driven from what happens in our billing system when we close the books in a month and we recognize changes in payor mix, we recognize changes in acuity and we look back and see we have gotten adjudication of older A/R and how is that payment versus the underlying value affected things.

To answer your question, that is part of the process as we meet collectively each month with our various teams. We do want to take a look at are there situations out there where you have got some older A/R that's in the process of appeal, or it could be at risk for timely filing. We do try to get in front of those with sort of a manual adjustment and we feel like it's getting a lot of scrutiny.

Again, I think we're there. I just have to sort of qualify it to say the claims adjudication process, when you are dealing with thousands of payors, some are more sophisticated than others. Sometimes you do get surprised by something. I think there is a lot of diligence in this area. And we have really not -- even though we have -- you are always to have some level of write-off just through the process, even with that, as I said earlier, we have a history here of generally creating some modestly favorable prior-year adjustments. And I think we have a quarter that feels a bit like on an outlier where we didn't actually see that happen.

So our expectation is we sort of revert back to what we would expect to see, which is modest favorable adjustments as we look back only some of these older years and true things up.

Joshua Raskin - Barclays Capital, Inc.

Got you. All right. Thanks David.

Operator

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

Gary P. Taylor - JPMorgan Securities LLC

Hey, good morning. A couple questions; first, I just wanted to go back to the comments around the exchange plans and some of the mix shift there or decline in the commercial revenue, some of that being associated with the exchange plans. And I guess two things. One, could you maybe help us just understand what mechanism they were using to pay you and what they're using now? Or maybe you can't even ascertain that and, thus, the lawsuits. But I just wanted to make sure this isn't related to some of the out of network concerns that the markets had in the earlier part in the year that you are not seeing plans take advantage of some of the new legislation or etcetera and really trying to arbitrarily reduce what you have been paid on out of network. And I recognize that's a small part of your business, but I think we are talking about small changes here.

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

Yeah. That's right Gary. This is Mike. So, what I was referring to -- as David talks about how we continually look AR. We had some commercial, some accounts that had been showing as commercial and valued as commercial and we kept seeing these EOBs come in at significantly – paid significantly less than what we would have expected.

As we dug into it, it turned out these were exchange products and the plans were using their own methodology to determine how to pay us, irrespective of the greater of three or whatever.

So we took issue with that and we've had with more than one payor and have had some success in getting resolutions. But in some cases we had to file suit, which, as you know, we have got issues out there in the public now.

And so – and we're continuing to have those discussions with other payers and some are saying, yeah, you're right, we'll get it fixed. And some are digging in. So I would just say overall this exchange – and this is probably mostly in Florida. It's not really related to that outer network issue. This is a right around the exchange products and their methodology of paying. David, any?

David P. Jones - CFO, Executive VP & Head-Investor Relations

No. I agree. I think it's again, we have not really seen any of sort of movement, what I would describe as sort of a pure out of network moving in network. There will be situations that happens all the time, but nothing that really sort of stands out.

I think again what Mike's alluded to is just some of the sort of newer payers coming into the market, particularly in certain markets, that we're just seeing lower rates. I mean we are not alone. We have seen some peers on the hospital side have announced that they were filing some suit against certain plans. All specific to the same issue, which is underpayment of ER visits. And we have sort of followed that same track in some cases.

Gary P. Taylor - JPMorgan Securities LLC

Thank you. Two quick questions on IPC. One, are you in – in the 2Q did you realize a full annualized cost save benefits of $25 million divided by 4? $6 million bucks roughly, is that realized in this quarter or does that – regardless does that realized number pick up in the next couple quarters or stay the same?

I would also add that there -- as we sort of have tracking some of these synergies, there are some things where the synergies will be recognized at the TeamHealth level as we sort of transfer some things. And so there is probably another million dollar of synergies that Team help but specifically within IPC it's about $5 million-$4 million.

Our expectation is that we should see some continued uptick in the benefit from those synergies. The idea is – as we continue to get more integrated with the revenue cycle between our core and at IPC that the costs will you know continue to be really the baseline provider but we start to see stepping into some benefits from revenue at this point.

Even if we haven't necessarily fully integrated to our system, and I would say though probably the single largest category at least is starting to get some traction on some managed care plans the second half of the year with new rates or some other opportunities that, as our managed care team has come in and helped identify situations where we could take advantage of some re-contracting in the market and things like that.

Gary P. Taylor - JPMorgan Securities LLC

Okay. That's helpful. Thank you.

Operator

Our next question comes from the line of Dana Hambly with Stephens. Please proceed with your question.

Dana Hambly - Stephens, Inc.

Thanks for taking the questions. I appreciate all the nuances in the accruals, David. Have you tried to tease out if you -- if it were more normalized on the unbilled and some of the issues from a couple years ago, what pricing would have been in the quarter?

David P. Jones - CFO, Executive VP & Head-Investor Relations

Yeah. Dana, good question. I did comment on -- there are sort of two again at the risk of sort of getting too in depth here, what I would refer as accounting related issues, but they had some impact on the quarter. And so we -- because of -- we recognize is there is some angst in the market about what is happening with managed care pricing, we didn't want that to be seen as driving some softness in pricing when there are sort of two discrete issues going on, albeit again a little more accounting related.

So the first one I mentioned earlier was just the normal revenue recognition process where we true up every month prior year. And we saw some elements that came through that put a little pressure on that this quarter. Again we do feel it's more specific to the quarter. And that was about again 90 basis points of impact on pricing.

And the second one again is a normal part of our accounting where we have to close our billing system a couple days before month end just so we can get all of our charts in from the hospital, get them coded and drop them. So we always at every month end have what we describe as an unbilled accrual. And it's accrued and reversed and accrued and reversed.

So every month there is going to be some change that comes through, some positive, some negative, and it really is dependent on what was the ending value of those unprocessed charts at one point compared to the other.

If you think back to our first quarter, we started off first quarter with some pretty slow volume and saw a really nice acceleration towards the end of the quarter, particularly in March with flu season. And so if we look back to where we were in March, we had a fairly robust value on these unprocessed charts. June is a much more normalized view of the unprocessed charts. And so the shift from that period at the end of the first quarter into the second quarter created a negative revenue item that got captured in the quarter. And that, too, was about 90 basis points of impact.

So if you think about the combination of those two things, it had about a 1.8% impact. We're calling out 0.1%. So absent those things, our pricing would have been closer to the 1.9% contribution, which is a little bit below where we maybe would like to be, but I would say generally is still in line with what a normal 2% to 3% pricing dynamic would look like.

Dana Hambly - Stephens, Inc.

Perfect. Thanks very much.

Operator

Our next question comes from the line of David MacDonald with SunTrust. Please proceed with your question.

David S. MacDonald - SunTrust Robinson Humphrey, Inc.

Hey, guys. Good morning. Just two quick questions left. Mike, just on the terminations, I know this is an ongoing process, but is the bulk of the heavy lifting done on that front? And would you expect those terminations to start to back off a little bit over the next couple of quarters?

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

Yeah, I would, David. We really undertook that earlier in the year. Obviously, it's something you always do. But we accelerated that and that's why I brought it out on our first quarter call in comments because it does have the lasting effect, if you will, on these revenue growth items. So, yes, most of that work is done and I would consider us more of a return to routine.

David S. MacDonald - SunTrust Robinson Humphrey, Inc.

Okay. And then, guys, just last question. Can you just give us a quick update in terms of on the IPCM side on churn, what it did sequentially year-over-year? Whatever metrics you are willing to give. And I know you guys were toying with maybe some tweaks to either compensation or how the physicians are treated. Just any update there in terms of successes or what's going on.

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

Yeah, you bet. So first off, we have not yet made an impact on churn. In fact, in the quarter based on their historical methodology, it actually deteriorated year-over-year. In the second quarter of 2015, it's 22% and the second quarter this year is 27%.

But I'm going to introduce something here. I am always a little bit worried about doing this thinking we are trying to hide the ball, but I think it's really important to bring out. As we have now settled in with these guys and now have a more full understanding of what's the definition, how do they define turnover and how TeamHealth historically defined turnover.

In TeamHealth, we don't hold ourselves responsible for the turnover of physicians or APCs that leave us because a contract is terminated or because we lost business. IPC does. And so as we started parsing this number and scratching our heads going, there's no way we turned over 100% of our providers in the last year, the number becomes a lot more reasonable when you normalize for contract losses, et cetera.

So to give you a better feel for what that looks like, for full-time physicians within IPC, so full-time IPC physicians both in acute and post-acute, their turnover rate is about 15%. Well, that's about where we are. We are a little less than that. And I think we're around 12% or so in our traditional hospital medicine. So it's not out of bounds. As compared to a year ago, they were approaching 14%.

So that's the – we're not talking about a fall off the cliff, oh my God moment, but it is a problem. And we know that we have this problem. And so the gap between those two numbers, David, really represents business losses that we all knew was going on. Some of it we've done ourselves and some of it has been done to us. But that's the gap. And so I wanted to give the market a little more comfort around what the real number is, what the real turnover is and where we really have to go address, just like we do in our own hospital medicine business. So I hope that's helpful. We actually think we're making some progress there.

The other thing we have done is some work around when is this turnover happening? And I guess what I'd consider good news here is that the folks who have been with us, if they have been with us at least five years, chances are they're staying with us. They don't turnover over, hardly at all. The turnover happens early. So that tells me we've got a model that works well for the more senior physicians and APCs and less so for the new ones.

And that's where the work we've done – we're right in the middle of it now. We've brought in a third party helping us doing deep dives, interviews and what is that model going to look like. And we are not there yet. This is heavy lifting. But at least wanted to give you some sense of this is not a totally broken off the rails deal here. So I hope that's helpful.

David S. MacDonald - SunTrust Robinson Humphrey, Inc.

That's very helpful. Thanks, Mike.

Operator

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

Unknown Speaker

Hi. This is (1:01:15) joining for Matt. Thanks for taking the question. To go back to the same contract pricing, I think you mentioned it would have been 1.9% after adjusting for these write-offs. Can you give a sense of the impact of payor mix versus higher acuity? I think across the provider space especially this quarter we saw a rise in acuity. And just trying to get a sense of was it plus 4 acuity minus 2 payor mix? Anything directional would be helpful. Thanks.

David P. Jones - CFO, Executive VP & Head-Investor Relations

Let me try to give a general sense. I would say the payor mix year-over-year, it probably is 40 basis points of I would say a negative. And I would say that the acuity is slightly offsetting that. So really the year-over-year change between payor mix and acuity tend to offset each other with a slightly higher level of acuity, if that helps.

Unknown Speaker

Thanks.

David P. Jones - CFO, Executive VP & Head-Investor Relations

Okay.

Operator

Thank you. Ladies and gentlemen, due to time constraints, our final question will come 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

Hi. Great. Thanks for squeezing me in. I guess a few clarifications. So the – the 90 basis points that you mentioned I guess for each of the two kind of more accounting issues on the pricing side. I guess we are working off like -- that equates like a $6 million impact for each one. Is that the way to think about it?

David P. Jones - CFO, Executive VP & Head-Investor Relations

It's really about $7.1 million and $7.7 million on those.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. And I think Mike said that the rate negotiation dynamic was 30 basis points? Was that – is that right?

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

No. What you heard me say was the change in the commercial as a percent of the overall payor mix was 30 basis points different.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Oh, oh, that was 30 basis – okay. That goes back to the 40 basis point pricing is the way to think about payor mix. And I guess the – I still struggle a little bit with the guidance being reduced and I guess how would you characterize the reduction? Is the reduction due to core team expectations, or IPC expectations, or are there different answers for the revenue versus the margin change?

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

Well, as we looked at what we put up here in the first half and where guidance was for the rest, I mean, really we felt like we were priced for perfection from that second half. And while we like our plans, we like where we're headed and things we're working on and we're optimistic. We believe, looking out, that we just felt like it was going to be too aggressive and that we believed we just needed to give ourselves and give the market some better sense for where we think we could head again excluding any impact on BPCI. So that was the rationale behind it, Kevin, it was just kind of looking at the squeeze on the second half and trying to say if everything hits perfectly, could we do better? Yeah. But this is probably a range that makes sense for us to guide the market.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

But there isn't one part of the business that you would say was more --

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

No. That's correct.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. And then I guess maybe last question. David, I appreciate you are going through the kind of long-term growth outlook by bucket on the core team. Do you have a similar kind of way to think about IPC over the long term, what kind of growth we should be expecting from that side of the business?

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

Yeah, I will be able to give you a better answer when I can use the word, you know, stabilize here and we think we are getting close. And the things that we're working on there in the modeling that we're doing at the practice level to help our young physicians in APCs, you know, stick. When I have a better sense of that we will be able to talk about it. Hopefully, I will have a good view on that for 2017. But a lot of really good work is going in to that group. So, yeah, I am optimistic we will be able to give you a good view on that for 2017 going forward.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. Great. Thanks.

Operator

We have reached the end of the question-and-answer session. I would like to turn the floor back over to management for closing comments.

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

Okay. Thank you, everyone, for joining us today for the call. 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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