Envision Healthcare Holdings (EVHC) William A. Sanger on Q2 2016 Results - Earnings Call Transcript

| About: Envision Healthcare (EVHC)

Envision Healthcare Holdings, Inc. (NYSE:EVHC)

Q2 2016 Earnings Call

August 03, 2016 5:00 pm ET

Executives

Craig A. Wilson - Senior Vice President & General Counsel

William A. Sanger - Chairman, President & Chief Executive Officer

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Analysts

Nick M. Hiller - William Blair & Co. LLC

Kevin Mark Fischbeck - Bank of America Merrill Lynch

A. J. Rice - UBS Securities LLC

Brian Gil Tanquilut - Jefferies LLC

Tejus Ujjani - Goldman Sachs & Co.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Andrew Schenker - Morgan Stanley & Co. LLC

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Richard Close - Canaccord Genuity Group, Inc.

Gary P. Taylor - JPMorgan Securities LLC

Paula Torch - Avondale Partners LLC

Operator

Thank you for standing by and welcome to the Envision Healthcare Holdings Second Quarter of 2016 Conference Call. At this time, all participants are in listen-only mode. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

Now, I'll turn the meeting over to Craig Wilson, General Counsel. Thank you. Sir, you may now begin.

Craig A. Wilson - Senior Vice President & General Counsel

Thank you, operator. Welcome everyone to Envision Healthcare's earnings conference call for the quarter ended June 30, 2016. Our presenters today are Bill Sanger, Chairman, President and CEO; and Randy Owen, CFO and COO.

Before we begin, let me remind you that some information provided during this call may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties described in our SEC filings and actual results may vary materially. We encourage you to review the Risk Factors section in our most recent Annual Report on Form 10-K and our Quarterly Reports including the Form 10-Q to be filed today.

Forward-looking statements in the press release that we issued this afternoon along with our remarks today are made as of today, August 03, 2016, and we undertake no duty to update them as actual events unfold. Today's remarks also include certain non-GAAP financial measures including adjusted EBITDA, adjusted free cash flow, and adjusted EPS. You can find a reconciliation of these measures in the tables included with our press release issued this afternoon, which is also available in the Investor Relations section of our website. All comparisons included in our presentation today are for the 2016 period to the comparable period in 2015 unless otherwise noted.

I'll now turn the call over to our Chairman, President and CEO, Bill Sanger.

William A. Sanger - Chairman, President & Chief Executive Officer

Thank you, Craig. Good afternoon, everyone, and welcome to Envision's second quarter earnings call. For the quarter, adjusted earnings per share was $0.34, adjusted EBITDA was $172 million, and topline revenue of $1.64 billion grew by 21.2%. Envision's results for the quarter reflect the solid performance at EmCare and our legacy AMR operations. These were offset by challenges in certain Rural/Metro where we need to hire more staff and invest in more training than originally anticipated in order to meet service response time commitments to our customers.

We also experienced a lag in the recognition of cost savings at our Envision health plan contract in Florida. I'll walk through each of these issues and Randy will also discuss their impact on our second quarter results and outlook for the remainder of the year.

At EmCare, even with softer Q2 volumes, as experienced by the sector, we continue to see sequential improvements in our KPIs and overall operating performance. When excluding Evolution Health's results, EmCare's margins are consistent with last year's second quarter and continue to improve.

As we expected, the impact of contract terminations on revenue growth was lower than in the first quarter, and the impact of prior period terminations should continue to decline throughout the remainder of this year. Our organic and acquisition pipeline continues to remain at historical levels.

At our legacy AMR operations, we continue to generate good results with margins at about 13% for the second quarter. We were able to successfully flex our staffing at legacy AMR during the quarter in response to lower same-market volume growth. We were not able to achieve the same level of efficiency in all markets that were part of the Rural/Metro acquisition.

At Rural/Metro, similar to Q1, margins were lower as a result of investments we made in certain markets in order to meet service response time commitments. These investments included additional workforce deployments, training and capital upgrades. Although these investments had an impact on our quarter, our actions have established a solid footing with our communities and our contracting agencies that have been concerned with the operating performance levels under prior ownership.

At Rural/Metro, we have also accelerated mitigation efforts in underperforming markets, including renegotiations of contractual operating specifications. In addition, we are transitioning some markets, including selling certain assets and closing business units that don't meet our financial or strategic criteria.

While we had some initial delay in the integration of Rural/Metro, more recently, we have accelerated our timetable. To-date, we have stabilized certain markets, began standardizing many of our processes including conversion of the billing and revenue cycles to our system and combining operations in many of our overlapping markets.

We fully expect these efforts combined with our market integration activity will result in improved operating and financial performance for Rural/Metro during the second half of this year. It is important to remember that a few key markets account for the majority of Rural/Metro's revenue and EBITDA; most of these markets are performing to expectations.

Moving on to Evolution Health; we continue to generate strong revenue growth from several sources including health plan contracts and our relationship with Ascension Health which is performing to plan.

However, the EBITDA contribution from Florida health plan is below our expected financial performance through the first half of the year. This is largely a function of a lag between our demonstrated improvements in clinical utilization and outcomes and the actual utilization – actuary realization of those savings.

Through the first half 2016 we recorded medical claim cost based on historical experience with that population. At the same time, we are experiencing a reduction in medical reutilization and claims cost. As these claims fully mature over the next few months and we are able to validate them actuarially, we expect to realize the savings.

Lastly at Evolution, we are also in final negotiations with a large health plan in the western part of U.S. to manage high-risk patients. This agreement will be on a fee-for-service basis with gain sharing. We are also in discussions with several health systems to manage distinct post acute care population including transportation. Our experience with the Florida health plan has generated intense interest amongst numerous payers; we are excited about our ability to continue to grow this business.

At this point, I'm going to turn the call over to Randy for the specifics relative to our financial results for the quarter and our updated 2016 outlook. Randy?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Thank you, Bill, and good afternoon everyone. I'll quickly walk you through our financial results for the second quarter as well as our revised outlook for 2016. In the second quarter revenue of Envision was $1.64 billion which grew by 21.2% from the prior-year. Income from operations was $88.8 million or 5.4% of revenue. Income from operations declined from the prior year due to higher depreciation and amortization expense and transaction and restructuring costs primarily related to acquisitions in the last year.

Net income was $28.4 million in the quarter compared to $52.4 million in Q2 last year. It was impacted by changes in operating income as well as higher interest expense related to fourth quarter 2015 borrowings to fund acquisitions. Fully diluted GAAP EPS was $0.15 compared GAAP EPS of $0.27 for the second quarter of 2015. Adjusted EPS for the quarter was $0.34 compared to $0.37 for Q2 of 2015.

Adjusted EBITDA of $172 million was 5.7% higher year-over-year and adjusted EBITDA margin of 10.5% was 150 basis points lower than the prior-year period primarily due to the impact of Rural/Metro acquisition and Evolution's health plan contract in Florida. EmCare's total revenue was $1.05 billion, an increase of 13.1%, which is comprised of 7.2% growth related to our hospital-based physician services and 102.6% increase for our post acute services through Evolution Health. Acquisitions completed in the last 12 months contributed 8.5% to revenue growth while organic growth was 4.6%. Organic revenue growth in the quarter consisted entirely of same store growth. Revenue from net new contracts was flat year-over-year.

Same-store revenue growth was 5.3% when calculated on a comparable same contract base to last year. Rate grew by 4.4%, including a 2.3% increase from hospital-based services, a 2.1% impact from Evolution Health, and volume grew by 0.9%. Same-store volume growth at EmCare's largest service line, emergency services, was 1.4%, which was lower than our initial expectations but consistent with sector trends in the quarter.

Same-store volume growth was a little higher for hospitals and radiology service lines and a little lower on anesthesia services. When excluding the impact of Evolution Health, same-store revenue per visit on hospital-based services increased, as I mentioned, by 2.3%. This was driven by improvements in anesthesia yields from changes to the revenue cycle process that we've discussed on prior calls. The rate for emergency services was comparable to the rate in Q2 2015.

Payer mix on existing contracts has not changed significantly. Overall, Medicare and Medicaid mix has increased slightly and commercial has decreased slightly, but primarily due to the impact of contract mix changes and the impact of acquisitions on the overall mix. Net new business growth was flat in the quarter. Evolution Health added 4.6% in net new contract growth from the expansion of our Ascension joint venture and the new Florida health plan contract offset by a reduction in EmCare net new hospital-based contracts.

EmCare's revenue from net new hospital-based contracts declined by 3% from the conversion of the Baylor contract to an MSA agreement in Q1 of 2016 as we discussed in our first quarter call. Net new contracts declined by 1.6%, which consisted of new contracts adding 7.3% in growth offset by terminations of 8.9%. As we discussed last quarter, the higher level of terminations was driven by our focused effort to exit underperforming contracts in 2015.

The Q2 termination impact of 8.9% was lower than the 10.3% impact in Q1. And as we progress throughout the year, we expect negative revenue impact from terminations will be reduced, returning to positive net new sales growth by the end of this year. New contract adds will also enhance overall margins compared to contracts that we terminate. EmCare's income from operations was $66.3 million, or 6.3% of revenue, in comparison to $77.9 million or 8.4% of revenue. Income from operations was impacted by lower operating income contribution from Evolution Health and restructuring costs related to EmCare's Project Horizon program for process improvements initiated in late 2015.

Adjusted EBITDA for the segment was $103.8 million, or 9.9% of segment revenue, and includes an EBITDA loss of $1.3 million at our Evolution post-acute services business. When excluding Evolution Health, EmCare's adjusted EBITDA was $105.1 million, or 11.3% of revenue. Compensation as a percent of net revenue increased slightly over the prior year quarter, primarily due to coverage increases and higher volumes at hospitals contracts and revenue-based compensation plans at certain ED contracts. Insurance as a percent of net revenue was lower due to favorable trends in current year claims and a $4.1 million favorable prior year development impact, which compares to a $0.6 million unfavorable impact in Q2 of 2015.

Evolution Health generated second quarter revenue of $116.2 million, which is up 102.6% from the prior year. And as I noted, we had an adjusted EBITDA loss of $1.3 million for the quarter, driven by new health plan contract that we started in Florida late last year.

While we've seen increasingly positive clinical trends including lower readmission rates and lower ED visits from the population we manage, we've not had enough time from an actuarial perspective to record any changes to claim payment trends resulting from our clinical efforts. We anticipate being able to better reflect the impact of our clinical efforts later this year as we have more maturity on claim payments.

AMR's revenue grew by 38.9% to $590.4 million, and revenue growth was driven primarily by contributions from acquisitions completed in the last year, principally Rural/Metro, which was 34.7%. Organic revenue grew by 4.2%. Revenue growth from net new contracts was 1.6% for the quarter. Same-market growth was 2.6% and entirely attributable to volume increases, as the rate was unchanged from the prior year period.

AMR payer mix did not change significantly compared to Q2 of 2015. We saw a slight decrease in Medicare and a slight increase in Medicaid mix, primarily as a result of different payer mix for Rural/Metro markets. Income from operations was $22.5 million, or 3.8% of revenue and this compares with $36.4 million or 8.6% of revenue.

Operating margins were driven by lower adjusted EBITDA margins as well as higher depreciation and amortization expense and transaction costs, primarily attributable to the integration of Rural/Metro. AMR's adjusted EBITDA of $68.2 million grew by 18.4% and the margin was 11.5%.

A 200 basis point margin decline year-over-year is due to the impact of Rural/Metro, which had a 6.4% margin in the quarter. AMR's legacy business was solid at 13.1% when excluding the impact of Rural/Metro. AMR's results for the quarter were impacted by softer volumes and additional costs in certain Rural/Metro markets, which Bill discussed.

We believe this is a timing issue and that our mitigation and integration efforts will lead to improved financial performance in the latter part of 2016 and we expect to achieve ultimate realization of target contributions from Rural/Metro during 2017.

For the second quarter of 2016, cash flow from operations was $69.6 million. We had two non-recurring payments in this year's period, and those totaled about $26 million, related to a one-time payment for restructuring charges and payment of an acquisition-related accrual. When excluding those payments, cash flow from operations was $95.6 million. The DSOs for Envision declined by one day sequentially and by four days year-to-date.

Adjusted free cash flow was $62.9 million in the second quarter and free cash flow was impacted by an increase in CapEx of $22.1 million. The increase in CapEx was from anticipated investments in Rural/Metro markets and other new AMR contracts, including several new contracts with start dates in the third quarter. At June 30 we had cash on hand of $212.7 million, total debt was $3.1 billion and net debt was $2.9 billion.

In our press release this afternoon we updated our outlook for 2016. At this time, we expect to earn adjusted EBITDA of $715 million to $730 million for the year. Our previous outlook for adjusted EBITDA was $725 million to $750 million. This adjustment incorporates our expectations for the timing of operating improvements at Rural/Metro and the realization of claims expense for Evolution Health.

Given these factors, we assume that adjusted EBITDA for the third quarter will be in a range of approximately 25% to 26% of our adjusted 2016 outlook. We do anticipate sequential improvement in our adjusted EBITDA from Q3 to Q4 2016. We've historically seen significant improvement between Q3 and Q4 each year, but expect a larger improvement in 2016 as a significant part of the Rural/Metro mitigation and integration efforts started in Q2 and occur in Q3, and we also anticipate having more mature claims data later in the year on the Florida health plan contract.

On a per share basis, we now expect 2016 adjusted EPS to be $1.42 to $1.47, from $1.46 to $1.54. Bill?

William A. Sanger - Chairman, President & Chief Executive Officer

Thank you, Randy. Before we open the call for questions, I want to provide a brief update on the merger of Envision Healthcare and AMSURG Corporation, which was announced in mid-June. We expect to file the preliminary joint proxy statement and prospectus related to the merger with the SEC tomorrow. This will be filed on a new registrant named New Amethyst Corporation for the purposes of the merger. Upon the completion of the merger of New Amethyst, it will be renamed to Envision Healthcare Corporation.

The filing will be available on the investor page of our website investor.evhc.net after it is file. Our enthusiasm for the potential of this proposed deal continues to grow. We feel more certain than ever that the strategic rationale for this transaction is unparalleled. As a combined company, we will be better positioned to deliver comprehensive facility-based healthcare services across multitude of physician service lines.

In addition, medical transportation, ambulatory surgery, and post-acute offerings will provide us with the ability to manage care across a broad continuum creating value for patients, health systems, payers and communities. We've structured this merger in a way that creates a large growth company within the health service sector, one that is expected to have balance sheet flexibility and strong cash flow to execute a growth strategy that would generate value for patients and shareholders of both organizations.

As important, the expected cross-selling opportunities for Sheridan and EmCare are aligned with a growing interest among health systems to develop true partnerships with physician service organizations that can help them more effectively beat the clinical and financial measures that drive outcomes in reimbursement. This is becoming more relevant with the inevitable implementation of MACRA and other value-based reimbursement models.

We believe this opportunity alone creates an organic growth profile for the combined organization that is incrementally higher than the current growth profile of the standalone organizations. We will continue to provide updates during the next several months as this transaction is presented to our shareholders.

In closing, in the past, I've made a point on these calls to acknowledge the efforts of our 50,000-plus members on the Envision team for their contributions to patient care in the communities across this country. Therefore, as (20:19) we have an ambitious strategy that we believe will shape the new healthcare delivery system of the future. I continue to be grateful to the valued and talented workforce for their pursuit of quality patient care.

And with that, operator, I'd like to open it for questions.

Question-and-Answer Session

Operator

Thank you, sir. At this time, we will begin the question-and-answer session of the conference. One moment please for the first question. Our first question is from Ryan Daniels with William Blair. Your line is now open.

Nick M. Hiller - William Blair & Co. LLC

Hi. Good afternoon. This is Nick Hiller in for Ryan Daniels. We were just wondering, is there any change in your M&A philosophy heading into the AMSURG merger? And also what has your clients' initial reaction been to the deal?

William A. Sanger - Chairman, President & Chief Executive Officer

Well, we do have a pipeline that is in normal course of business that we believe we'll continue to execute. We don't anticipate a lot of acquisition between now and the end of the year. We do have a strong organic pipeline that we'll be executing on. We have had preliminary discussions and we have not heard any negative comments from any of our customers. Frankly, they've been quite positive.

Nick M. Hiller - William Blair & Co. LLC

Okay. Thanks. And then has there been any BPCI reconciliation yet or any key indicators there you can share? And what does the timing look like there?

William A. Sanger - Chairman, President & Chief Executive Officer

Yeah. It's really quite early. And, Nick, we actually walked into this program very cautiously and did not take a lot of the opportunity that could have been out there. As such, we are pretty comfortable that we won't see any negative results of participating. We may see some positive results by the end of this year, but they won't be very large. Yes. Operator?

Operator

Thank you, sir. Our next question is from Kevin Fischbeck with Bank of Montreal Merrill Lynch (sic) [Bank of America Merrill Lynch] (22:48). Your line is now open.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Great. Thanks. Just wanted to – the EmCare results in the quarter, it sounds – I mean, obviously, you had some nice improvements sequentially from a margin perspective, but just want to make sure that as far as the guidance adjustments, there really was no, I guess, EmCare – so EmCare came in, (23:08) in line with how you were thinking about the progression off of kind of the rebuild of Q3.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Yeah. No. Well, Kevin, it's Randy. No, look, EmCare has been performing well and on track and we expect that to continue to be on track. The changes we made on the outlook were really related to, again, sort of the timing impact on Rural/Metro. And on the Florida Blue contract for Evolution. So it really was limited to those two items.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay. And then, as far as AMR goes, I guess it wasn't 100% clear to me. You seem to have, I guess, two issues, one, was a little bit soft volume and difficulty staffing to that. I guess is there something structurally different about your ability to flex with your own medical (23:56) contracts versus EmCare, why was it more difficult to do it there (24:01)?

William A. Sanger - Chairman, President & Chief Executive Officer

Yeah. Kevin, let me give it a shot and clear that up for you. So, look, volumes were softer in the quarter really at both EmCare and AMR. And again, like, we've seen, I think, in a number of other companies that have reported here.

So if you look at the AMR, what we call, legacy sort of operations, we were able to handle that effectively and were able to adjust our staffing, flex with the changes in volumes. And again, as I mentioned, the margins for AMR in the quarter, exclude Rural/Metro, were 13.1%. So a very solid margin story there on AMR.

The issue, again, as we pointed to was really Rural/Metro which, as we got into that we had to – there were more pressures in certain markets than we initially anticipated, more staffing pressures and pressures around response time, and so we needed to increase the cost. You saw some of that in Q1, the margins were around 7%. And so, we still had to – so while volumes were softer, because of the pressures we had on response times, we did not flex as much as we did on AMR in some of those markets to ensure that we met sort of the customer commitment.

So – but we still think, long-term, obviously, as we integrate the market, get them on to our systems, and a lot of that is happening this year, in the next few months, we will be able to get more efficiencies out of that and still meet the full commitments to the customers. So did that help Kevin?

Kevin Mark Fischbeck - Bank of America Merrill Lynch

I guess, the question is, is it contractual or is it operational is the issue?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Well – no, it's some of both. So one is contractual, right? There were some other contractual arrangements that we had to deal with as we got into that. But also there was a shortage of staffing. So we spent a lot of time and effort hiring new medics. We had a lot of training costs, some in the first quarter and in the second quarter. So we did have additional costs to ensure that we have that.

Now, that we have more of a stable workforce and as we get them on to sort of our deployment platforms, we can get some of the efficiencies that we anticipated in those markets. And again, it wasn't across the whole book of business, right? It was really concentrated in probably half dozen markets that were the most challenging for us.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Right. So you can fix this without contractual changes or is this going to be fixed by rolling out your infrastructure?

William A. Sanger - Chairman, President & Chief Executive Officer

Well, there are some, there are some that we're trying to work with communities to make some adjustments to the way some of the contractual accounts are (26:44) so that we can meet their needs and also operate more effectively. So there is some of that, but a lot of that we can do ourselves.

Kevin Mark Fischbeck - Bank of America Merrill Lynch

Okay, great. Thanks.

Operator

Thank you. Our next question is from A. J. Rice with UBS. You may ask your question.

A. J. Rice - UBS Securities LLC

Yes, thanks. Hi, everybody. Just to make sure I understand the aspect on Rural/Metro. So it sounds like they have committed to response times that at least the way they were configured it was hard for them to meet. Are those response times that they've committed to generally similar to the response times that you guys do in legacy AMR contracts. And I think you said maybe that you are looking at a couple of markets or some markets that you might actually exit or maybe it's just the restructuring you're talking about. I'm just trying to understand how easy that is to address and how significant part of the problem that was?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Sure. A. J., this is Randy again. So, look, the response times in the communities are consistent with response times at AMR and the industry. They're not dramatically – there may be nuances that are different but they – but they were in a difficult spot in terms of not always being compliant and there were concerns in the communities about compliance from the prior operations. And so we made sure that when we went in that we stabilize that. And that took some additional cost and effort and we had to recruit quite a few medics that they were short on and took a period of time to do that and training and over time etcetera.

So it did impact that. That's why A. J. we think primarily this is a timing difference. As we stabilize that, and as we integrate those markets, we can then be more efficient. But the requirements are, I would say, sort of industry comparable measures.

We are, as a part of this mitigation effort and integration effort, looking at certain markets that we may exit, and some of those we have done. So there are probably seven or eight smaller markets that we have looked at and some we've taken action on and may take action on and we're still looking at that.

But, as Bill noted, the important part of Rural – at least from our confidence in the long-term contribution of Rural is that, a majority of their revenue stream and earnings were from really key markets in States and those were not ones that were the big part of the challenge.

William A. Sanger - Chairman, President & Chief Executive Officer

A. J., one of the things to keep in mind is that, when we talk about exiting markets, the exit will generally be accretive to EBITDA, and these are markets that are not really strategic to us as it relates to the overall Envision market-centric strategy.

I think another factor that's important to note is that, many of their 911s are just on the very edge of non-compliance, and one of our initiatives was to ensure that we met compliance at the standards at which the contract entity (29:54) was looking for. And so we did make an initial investment. That will pay off over time.

A. J. Rice - UBS Securities LLC

Okay.

William A. Sanger - Chairman, President & Chief Executive Officer

We believe that this will come back to us; and more importantly, allows us an opportunity to go back and negotiate some operating standards and specifications that will result in better profitability of those contracts.

A. J. Rice - UBS Securities LLC

Okay. As my follow-up, I want to just ask you about the situation with Florida Blue. It sounds like there is an actuarial review and you have to be able to demonstrate to the actuary or through the actuarial process that you've realized certain savings threshold. Is that a third-party actuary or is it their actuary? And how often do they look at it? And is this sort of the first time they've looked at it? And that's taking some time or is it just – as you ramp up, it just hasn't hit yet what your savings are?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Yeah. A.J., again, this is Randy. So, look, we use – we have an internal actuary and we also use a third party. It's not Florida Blue's actuary, it's our own external actuary that we also use to help us with that. So, one, that's really done monthly. So every month we look at that and we look at what the claims trend has been.

Look, the reality is, is that when you look at claim payments and how long it takes to get those through – it takes several months maybe to get sort of the majority of that, and then you have others that will trail for several months further.

And so when you look at historical trends, you have – actuaries will have an IBNR that they have to maintain until you have enough maturity in claim lag to be able to – for sure, actuarially, be able to show those reductions. And so, a lot of the effort in the first two months or three months of the contract was really engaging patients and really getting them to contact us and to use us to affect some of that treatment.

And so, when we look at metrics, every month we have key metrics that we look at, we see improvements; and as I mentioned, readmissions, ER, other metrics around the population that we're managing. And it's just – it's taking a longer time actuarially to be able to show that and that's why we – unfortunately, it's not been as soon as we originally had hoped. But we think the metrics will prove themselves out. And as we go through the next few months you'll get more of that maturity that will allow us to make hopefully appropriate adjustments to reflect those improvements.

William A. Sanger - Chairman, President & Chief Executive Officer

Yeah. A. J., keep in mind that when we started latter part of 2015, the first step in achieving the utilization patterns that we see today was go through a process of patient engagement. And that in itself took a couple months, three months to get up and running, to engage these patients and put together those plans for those patients.

So, even though we saw pretty quick results in terms of improving utilization and increasing overall outcomes, it's going to take several months for that to flow through the claims process. But we're confident about the plan, and more importantly, as I mentioned in my presentation, we believe there are other opportunities here yet to come forward.

A. J. Rice - UBS Securities LLC

Okay. Thanks a lot.

Operator

Thank you. Our next question is from Brian Tanquilut with Jefferies. Your line is now open.

Brian Gil Tanquilut - Jefferies LLC

Hey. Good morning, guys. Just a follow-up on A.J.'s question, Randy. As we think about guidance, I mean, you kind of alluded to the fact that volumes were soft. So how should we think about your expectations, in terms of organic growth for both EmCare and AMR that you baked into the numbers? And should we think that you've fully taken out any assumptions for Evolution, revenue recognition related to Florida Blue, as we think about your guidance?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Yeah. Brian, we have – if you look at the – at our guidance, how we approach that is that we did not assume significant changes in volumes, okay? I mean, you do have seasonal changes, so you do see that sometimes between Q3 and Q4, that's a normal part of this business. So we will have adjusted that accordingly, but not assume that sort of same-store volumes all of a sudden would increase.

So that they would stay a little softer is, I think, what we're seeing in the current trends. We do have – what is baked into our guidance. And I mentioned – so Q4, you see more of a – a little more of a jump in the Q3 to Q4, because we do assume that – and based on the timing of the Rural efforts that are underway and that we're doing, that we'll see some improvement in the Rural profitability, probably more of that in Q4 than even in Q3. And on the Florida Blue contract, we do assume some improvement in that in Q4, okay? But not sort of a dramatic change that we think would be a big risk item.

Brian Gil Tanquilut - Jefferies LLC

Got it. And then, Bill, as we think about contract wins, we're still lapping obviously the EmCare exits, but where are we in terms of resuming new contract wins on the EmCare side? And also, if you don't mind giving us an update on your previous guidance in term of Evolution's outlook and how much business they can win? Do you still feel good saying that we can double Evolution pretty much every year, given the Florida Blue experience and what you're seeing in your pipeline?

William A. Sanger - Chairman, President & Chief Executive Officer

I'll take those two questions. We're very confident that we will replicate, in this 2016, the number of new contracts that we sign that are very similar to our historical, we had anywhere between 80 contracts and 110 contracts. I think we'll come in around that 100 range this year of new contracts signed. We're about halfway through that. Keep in mind that many of the contracts that we have scheduled to sign, which are numerous in the latter part of this year, really don't have any real benefit until they get up and running in 2017. But we're very confident about hitting that 100 mark, 100 new contracts signed, with about half of them yet to come forward.

I'm still very confident and very bullish about the topline growth opportunities for Evolution Health. As we start these new contracts, because they're large and they take time to get patient engagement, it's going to take time to hit profitability targets, but I'm very bullish about topline growth. And as I said in the past, I think there is substantial double-digit growth for the next several years as it relates to Evolution.

Brian Gil Tanquilut - Jefferies LLC

Got it. Thanks guys.

William A. Sanger - Chairman, President & Chief Executive Officer

Thanks, Brian.

Operator

Thank you. Our next question is from Matthew Borsch with Goldman Sachs. You may ask your question.

Tejus Ujjani - Goldman Sachs & Co.

Hi. This is Tejus Ujjani on for Matt. On the EmCare side, can you comment on what type of multiples you're seeing in this space there, in terms of valuation multiples for targets? And then also, across emergency medicine physician practices, I guess how many targets, or what do you say – what do you think the real runway is there for growth, given you're not going to be buying small practices?

William A. Sanger - Chairman, President & Chief Executive Officer

Yeah. Look, there continues to be quite a few opportunities as it relates to M&A on all hospital-based services. We are seeing in that nine to 11 range, I think it's more in that mid-part 10 today. Our focus has always been to larger groups at 1 to 300 (37:45). I would say there is at least half a dozen that I am aware of that are out there that are looking for partnerships. I think this will accelerate as the Feds (37:58) come out the latter part of this week, but the rules relative to MACRA, when these physicians actually read what they have to do relative to integrating of data systems, being able to identify utilization and matches the quality, they're going to find themselves looking for partners that are positioned to do that.

And not unlike those who had the opportunity to listen to Chris Holden's call at AMSURG yesterday, they are moving very aggressively on systems necessary to be successful and value-based and we are also in that arena. And we moved quite a bit because we had to be prepared in order to participate with the Blue Cross contract and also with BCPI.

So we probably are far ahead of a lot of our folks that are in the industry. But we're very confident about our ability to identify and execute not only in the latter part of year, particularly in 2017 on hospital-based physician services.

Tejus Ujjani - Goldman Sachs & Co.

Great. Thanks very much.

Operator

Thank you. Our next question is form Ralph Giacobbe with Citi. You may ask your question.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Great. Thanks. Can you help maybe individually quantify the impact of the two issues, Rural and Evolution, on maybe the quarter end guidance just to help sort of quantify for each of those segments?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Ralph, it's Randy. Look, if you look at – I'll start with Evolution Health. So, look, we won't get into specific contract numbers on this. But, look, I think, if you look at it from a guidance perspective and you look at it before, I think, we've talked about that, we believe that Evolution Health would be closer to a mid-single-digit sort of EBITDA margin business.

I think that this year you're probably going to be more in the low-single digits, okay, just because of the timing issue and challenges around that recognition of what we're starting to see here. So I think that is delayed a bit on that.

So on the Rural/Metro business, if you look at initially – I think we talked before in our initial guidance for the year, we thought Rural/Metro run rate was close to probably the upper 50%s from an EBITDA standpoint and we did about half of the synergies, probably could put us closer to, say, $70 million from a contribution perspective, maybe closer to, a little over $80 million in total.

This year, I would say, we're probably on pace for probably more of mid-50%s run rate. Maybe upper 50%s run rate including synergies. So we are – given challenges we had in the first half of the year with some improvement, I think we're on that run rate.

Now, again, we've done a lot of analysis and our operating teams have done a lot of work around the mitigation and integration efforts. And so we do think long-term. Again, Rural/Metro will be what we originally thought it would be, but it's taking longer. So there – it's the timing and it's probably at least six months, probably longer in terms of seeing some of that than we probably first thought.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Okay. And then just trying to again understand and flush out the Evolution Health delay, because it sounds like – you're saying you generated the savings and you have sort of a third-party actuary that, I guess, has already conveyed that you've generated the savings or are you waiting for Florida Blue to have their actuary? And I'm just trying to understand the economics of how it all works.

William A. Sanger - Chairman, President & Chief Executive Officer

(41:40) want to make sure I confused it. So what we are seeing – so, one, again, we're doing it based on our internal and our external actuarial estimates based on claim payments and as we see it. What we're seeing and we are seeing metrics. So we are clearly seeing metrics, especially in the last few months and we've seen some reduction in claim payments, on improved utilization, more effective utilization, lowering costs, okay? So these are clear metrics and we're starting to see some of that from a claim payment standpoint.

From an actuarial perspective, okay, until you have a much higher maturity and a much higher percentage of claim payments that have come in, you have to retain an IBNR for obviously total expected claims. And at this point, there hasn't been enough time where that number is still – there's still an INBR and it's still based on more historical claims and historical costs.

And so it's just – look, it's taking us longer. We did not probably anticipate how long it would take to really have that enough of a lag to see that change from an actuarial perspective. So that's what we're – that's where we're right now.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Okay. But just wanted to be clear, is this third-party actuary somebody that's sort of Florida Blue and you guys have brought on to basically run the numbers and ultimately when there is enough clarity or visibility, they're going to determine sort of the payment back to you?

William A. Sanger - Chairman, President & Chief Executive Officer

Well, look, it goes through. It's our external actuary, sure we have an internal actuary. And it's our external actuary that we use for our accounting purposes to determine what – obviously what the claims expense trend is and what the IBNR is. So, look, Florida Blue will have their own actuary, I'm sure as well, but it's really our actuary that is doing it and looking at claim payments and when those – when the IBNR sort of can be reduced based on those trends.

Again, we're starting to see that; we're seeing it from a metric; we're starting to see it from a payment standpoint. And that's why we believe as we get to later in the year, we'll see that.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Yeah. Keep in mind that as it relates, there are three actuarial eyes on this project if you will. Blue Cross has their own actuary that they – obviously their whole department looks at utilization; we have our own. And then we choose a third-party to validate the information that the Blues give to us. The Blues provide us what actual claims they're paying and then we determine the IBNR based on what information they provide us. And that is validated by our internal actuaries and a third-party actuary that we use that has done this for decades.

So even though, we are all agreeing that we're seeing decreases in utilization and improved outcomes, there is going to be a lag period before we can recognize that, because that's when IBNR will be – will start to come down and a bit closer to what's actually occurring in the actual month activities.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker)

Okay. All right. That's helpful. Thank you.

Operator

Thank you. Our next question is from Andrew Schenker with Morgan Stanley. You may ask your question.

Andrew Schenker - Morgan Stanley & Co. LLC

Hey. Thanks. So Florida (45:09) kicked off I guess on July 1, if I'm not mistaken. So just curious what your original – initial experiences with that have been. I think you guys in the past have said it might even be, let's say, positive but are you seeing anything come from that in the first month or two months here?

William A. Sanger - Chairman, President & Chief Executive Officer

Well, look, it's good for providers, it's good for physicians. We're seeing some benefit. Mostly the benefit is the discussions we're having with health plans are much more collegial and much more determined on coming to resolution versus sitting on the opposite sides of the table and arguing about rates; there is a process now to get to the end game. And this is something that we feel very good about we think ultimately will benefit our providers.

Andrew Schenker - Morgan Stanley & Co. LLC

Okay. And then just thinking about your revenue and payer breakdown of (46:05) commercial continues to be trending down modestly both year-over-year and sequentially. Maybe just talk about some of the factors playing out there. Thank you.

William A. Sanger - Chairman, President & Chief Executive Officer

Yes. Look, some of it – I mean, again, we see some small changes. Again, some of that, if you look at the last year or so was really – acquisitions do affect that in terms of mix differences. For example, AMR, you have a mix difference on the Rural markets; they're very big in Arizona and they have a higher Medicaid mix. And, of course, Medicaid is a pretty good payer in Arizona. And so it does affect the overall metrics, just as EmCare has in some of the acquisitions.

So when we've looked at it, when you look at individual contracts, you don't see a tremendous amount of change in the mix. Some of that, again, when you look at those overall metrics, is affected by – so when you add a Florida Blue now to the overall revenue which comes through in fees or higher subsidies, it affects sort of the overall percentages in some of the other payers. So – but I would say we don't see anything material in terms of a change in sort of that mix that gives us any concern.

Andrew Schenker - Morgan Stanley & Co. LLC

Okay. Thank you.

Operator

Thank you. Our next question is from Whit Mayo from Robert Baird. You may ask your question.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Hey. Thanks. Good afternoon. Can you spare a minute just talking about the improvement in anesthesia yield in the quarter? I think you said that this relates to last year's contract issue. Maybe, I'm mistaken. But was this something that's more one-time or recurring in nature?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Last year if you recall we had – and it was really in the early -started in the early part of 2015 where we had some outsourced billing and had some challenges around that. And so we had changed – throughout the year we were changing our billing process to other parties. And so we had reduced our revenue rate for anesthesia because of the challenges from that third-party billing company.

And so – as we said, last year, we always thought that once we got to an appropriate billing provider – the reimbursement rates were still solid, there hadn't been any change in the macro and we expected to see better yields. And that's what that reference is. So we are seeing improved yields and back to levels that we expected to see last year. So it's really not a one-time, it's more of a run rate. We expect to see better yield on anesthesia because we've addressed that issue that happened back in the early 2015.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Okay. So just to be clear this wasn't doing a look back against your collection rates and what you were accruing and saying we were actually collecting X more than we were accruing, we need to...

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

No, no, no. Yeah. No, not at all. No it's actually seeing higher cash, right? An improved cash, improved yield on trips (49:09).

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Okay. So really just like your experience now matches (49:15).

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Yeah. That's right. That's exactly right.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Okay, okay. That's helpful. And then maybe just one other question around the contract termination rate. What was that in the quarter and how do you think that tracks for the second half?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

So if you look at contract terminations, they were 10.3% in the first quarter. Okay? And 8 – what I'd say, 8. – I'll find it here. It was just about 8.9% in Q2. So it declined 8.9%. We do think this will continue to go down – and actually will go down more in the latter part of the year as we lap some of those terminations that really started in Q3 of last year.

So we really do expect to see, one, with Bill's point about the pipeline. Probably if you look at the contract starts that Bill referenced, which we think should be around 100 starts. Again, more than half of that, almost 60% of that's probably in the second half of the year. So when you see that acceleration of contract starts and lapping those others, we actually think, by the end of the year, we would get to sort of a positive net new contract contribution, probably later in the year.

And then, 2017, we should go back to a more normal historical positive contribution from net new sales. It also affects our margins, as you might expect. Once contracts mature – so a lot of the new contracts will be lower margins initially, so won't be a big contribution to earnings, but obviously a bigger impact to 2017. And new contract margins are always higher than obviously contracts that have been terminated, typically.

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Got it. Thanks.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Is that what you needed?

Whit Mayo - Robert W. Baird & Co., Inc. (Broker)

Yeah, yeah, yeah. That's helpful. Thanks.

Operator

Thank you. Our next question is from Richard Close with Canaccord Genuity. Sir, you may ask your question.

Richard Close - Canaccord Genuity Group, Inc.

Great. Thanks for the question. Considering your experience now with the Florida contract, Bill you talked about negotiations with a West Coast payer. How is that contract going to be different? And has your experiences in Florida changed the way you look at new contract opportunities for Evolution?

William A. Sanger - Chairman, President & Chief Executive Officer

Yes. The Florida contract was our first contract where we basically carved out a set of services that we manage, included the ED, medical transportation, inpatient care and post-acute care; the inpatient care being limited to medical.

What we found is that we were – we probably too quickly decided to take some risk that would now – basically we'll be seeing the benefit in the future. Going into the new contracts, now we've got experience and we've learned quite a bit actually, quite a bit. We are going to initially start off as a fee-for-service arrangement and move into gain sharing. Once the population is large enough and we have the experience with that particular plan, then we'll consider some type of carve outs, some type of bundled payment. But we're going to begin all new contracts with a fee-for-service gain sharing approach.

Richard Close - Canaccord Genuity Group, Inc.

And how would that change in terms of the drag on margins associated, as those contracts ramp up?

William A. Sanger - Chairman, President & Chief Executive Officer

Well, what would happen is, unlike what we've seen in Florida where we did have that drag, where it took us a while to begin to experience the changes in claims, and we're at risk of some degree for that; we would get fee-for-service, we'd be paid for the activity that we are doing as we began to see changes in utilization.

So they would pass fee-for-service for our services, and any changes in utilization, changes in contract or claims cost, we would share that with the health plan. Ultimately, what would happen is, part of our fee-for-service would be taken out of that, and what would be left over, based on the reduction of overall medical claims, would be shared.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

And Richard, there would be – so you wouldn't have a lag from the fee-for-service standpoint, you'd have positive margins from a fee-for-service perspective. If you looked at then upside from a gain sharing, you would have a lag, right, just in terms of, once you saw the effects and all that stuff. So it would be different, in that I think you would have better initial margins and then, obviously, we would expect upside. But there would be a lag on that.

Richard Close - Canaccord Genuity Group, Inc.

Okay. Thank you guys.

Operator

Thank you. Our next question is from Gary Taylor from JPMorgan. Your line is now open.

Gary P. Taylor - JPMorgan Securities LLC

Hi. Good evening.

William A. Sanger - Chairman, President & Chief Executive Officer

Hi, Gary.

Gary P. Taylor - JPMorgan Securities LLC

A couple of questions. Just going back to Rural/Metro for a moment, I'm not sure I totally understood, just on the volumes being a little lower than expected. Is that in the IFT volumes, or would there be some reason why that'd be on the 911 volumes?

William A. Sanger - Chairman, President & Chief Executive Officer

Gary, it was a little bit – there was some in both, but it was more on the IFT side, okay, of that, in those markets. And I think, look, some of that was in terms of their expectations and looking at history and looking at those markets, and we've just seen where that was a little softer.

We saw some of that in Q1, but some of that was offset by a more intense sort of flu season in the last couple months of Q1. So that sort of offset some of that. So there was some 911 less than we thought, and whether that was a planning issue, more of that was in the IFT.

And so what we've done is, we've worked – part of this is working very hard to make sure that the communities – we're responsive to the communities' needs and that we are providing a better service level and better response. Obviously, we believe that also then helps us with gaining additional business and being able to attract other non-emergency business in those communities.

Gary P. Taylor - JPMorgan Securities LLC

Okay. A couple of your competitors have mentioned some of the exchange plans in Florida lately rather arbitrarily paying some lower rates on ER professional fees. Have you guys seen anything measurable to that effect?

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Nothing. Gary, it's Randy. Look, nothing big that's sort of been brought to our attention. Look, from time to time, we do have plans that will change payments and lower payments, and then that typically then starts a process here of negotiation. But exchanges are pretty small percentage of our mix, and nothing really came to our attention on that. I'll do some checking on that, but there's nothing that's significant. Otherwise it would have come to our attention.

Gary P. Taylor - JPMorgan Securities LLC

Total Evolution, I think, you said was $1.3 million EBITDA loss. Did you give us total Evolution revenue? Maybe I missed that.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Yeah. I did. It was – hold on, Gary, it was $116 million.

Gary P. Taylor - JPMorgan Securities LLC

Okay.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

For the quarter.

Gary P. Taylor - JPMorgan Securities LLC

And you don't want to give us on the Florida contract, even just the revenue number on that at this point?

William A. Sanger - Chairman, President & Chief Executive Officer

I'm trying to think that through (57:25) It was roughly...

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

Generally, we don't give out specifics of our contracts.

William A. Sanger - Chairman, President & Chief Executive Officer

Yeah, yeah.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

But for this first...

William A. Sanger - Chairman, President & Chief Executive Officer

Well, revenue we talk about, that we thought Florida Blue was going to be about 100 – a little over $100 million of revenue a year. So it's probably – it's roughly $30 million of revenue out of that. The bigger part is really the Ascension joint venture which has really continued to grow and increase.

Gary P. Taylor - JPMorgan Securities LLC

Last question. When you talk about some of the services on the Florida Blue contract, and obviously, this is the first one where you're taking risk in this sort of fashion. You talked about some of the services. I guess, to the extent you've been in the market, it would seem like you'd have a really good line of sight on per capita, emergency department, medical transport, utilization, if you've got hospitalists in the market. It seems like you'd have a really good line of sight on where inpatient medical and post-acute trends are.

I think there's a lot of logic around hospitalists having a role in abating the costs on the post-acute side. But could you talk about those other services: ED, medical transport, inpatient medical. Outside of being in a good position to know where the underlying per capita costs are, what are some of the strategies on those services to do some trend-bending, if you will?

William A. Sanger - Chairman, President & Chief Executive Officer

Sure. This is Bill, Gary. It's all about patient engagement, the higher engagement you have particularly with the high utilizers. This population is no different than the rest of Managed Care population or health plan population. And that they all appreciate (59:07) the 20% of the population consumes 80% of resources. Our focus of the 60,000 patients is really on about 2,700 patients that consume 70-some-odd-percent of the resources.

First thing we do is we entertain patient engagements, where we'll actually visit the patient and explain to them their condition and how they best can manage their condition with our help. There – the cliché of just telling the patient they have to do better doesn't work. We actually engage these patients several times a week. We are – before they go to the ER, before they call an ambulance, before they go to the hospital, they call us first and runs through our medical command center of which we utilize telehealth, telemedicine, and we have physicians, pharmacists, nurses interact with the patient.

The majority of the time we're able to manage that patient via the medical command center. Where we feel the patient needs an intervention we have boots on the ground that will basically visit that patient. So actually a trip to the ED, a trip to urgent care center, or a trip to the hospital is the last resort if we don't believe we can manage that patient in a home environment. That's how we're really able to engage and lower the utilization.

Gary P. Taylor - JPMorgan Securities LLC

That's really helpful. I appreciate it. Thank you.

Operator

Thank you. In the interest of time, this will be our last question and it's from Paula Torch with Avondale Partners. Your line is now open.

Paula Torch - Avondale Partners LLC

Great. Thank you. I just wanted to ask a quick question on volumes and maybe some of the challenges in the market specifically on the EmCare side. So you talked about softer volumes and not really expecting a dramatic change in the current trends in the second half, so just wondering what some of the specific drivers of that softness are in your view, and maybe as it compares to historical trends? And then, maybe as a follow-up to that, as it relates to rate, it was certainly pretty strong in the second quarter. I wonder if you expect that to continue through the back half and maybe into 2017. Thanks.

Randel G. Owen - Executive VP, Chief Financial & Operating Officer

This is Randy. Well, first (01:01:16) look, I do think some of that will continue. As I mentioned earlier, anesthesia improvement was a driver there and then that's a recurring improvement, will lap the bigger change from 2015 obviously at some point here.

But we've said before that we think we're sort of in more of a low single-digit sort of rate environment, if you look at it from that perspective. And so that's kind of how we think about, at least in the near term rate.

I do think – obviously Q3 there was a significant change in the industry not just for us in terms of volumes when you look at Q3 last year. So volumes may look more comparable in terms of quarter-over-quarter when you get to Q3, because there were a lot of change in the same-store volumes compared to the first two quarters of 2015 when you got into the last half of the year. But our volumes were about 1%, same-store volumes were about 1%. Again, it's against a higher comp, but – look, I don't have anything specific. We've just generally seen a little softer volume. We see that from time to time. Some years it's a little heavier and sometimes it's a little lower. It's clearly on the low end of what we have seen historically.

So it wouldn't surprise me to see a higher number in Q3 only because last year there was a bigger change. But we sort of assume that when you look at volumes per day in our contracts that a lot of that will sort of continue at the current pace. You'll see some seasonality change as you get to the end of the year as we typically do, but I don't have anything specific around volume changes.

Paula Torch - Avondale Partners LLC

Okay. Fair enough. Thank you.

Operator

Thank you, speaker. You may proceed.

William A. Sanger - Chairman, President & Chief Executive Officer

Okay. Thank you, operator, and thank you, everyone, for your time this afternoon.

Operator

Thank you for participating on today's conference. The call has now ended. You may disconnect at this time.

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