Charles Lynch - Vice President, Strategy and Investor Relations Roger Medel - Chief Executive Officer Vivian Lopez-Blanco - Chief Financial Officer Dr. Richard Gilbert - Chief Medical Officer.

Ryan Daniels - William Blair Kevin Fischbeck - Bank of America Brooks O’Neil - Dougherty & Company Josh Kalenderian - Deutsche Bank Ralph Giacobbe - Credit Suisse Nicholas Jansen - Raymond James Brian Tanquilut - Jefferies Chad Vanacore - Stifel Ryan Halsted - Wells Fargo Kevin Ellich - Piper Jaffray Chris Rigg - Susquehanna Financial Group Whit Mayo - Robert Baird.

Ladies and gentlemen, thank you for standing by. Welcome to the MEDNAX 2015 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct question-and-answer session. [Operator Instructions] As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host, Mr. Charles Lynch. Please go ahead..

Thank you, Tricia. I want to read our forward-looking statements and then I will turn the call over to Roger and Vivian. Certain statements and information during this conference call maybe deemed to be forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995.

These forward-looking statements are based on assumptions and assessments made by MEDNAX’s management in light of their experience and their perception of historical trends, current conditions, expected future developments and other factors they believe to be appropriate.

Any forward-looking statements made during this call are made as of today and MEDNAX undertakes no duty to update or revise any such statements whether as a result of new information, future events or otherwise.

Important factors that could cause actual results, developments and business decisions to differ materially from forward-looking statements are described in the company’s most recent Annual Report on Form 10-K and its quarterly reports on Form 10-Q, including the sections entitled Risk Factors.

With that, I would like to turn the call over to our CEO, Roger Medel..

Thanks, Charlie. Good morning and thanks for joining our call today to discuss our results for the first quarter of 2015. We started the year 2015 on a strong note with good growth in our first quarter revenue, continued use of our capital for both acquisitions and share repurchases, and an M&A pipeline that continues to be very busy.

For the quarter itself, our revenue grew by 13% overall and excluding the impact of Medicaid parity payments being down year-over-year, our same unit revenue grew by 3.3%. We continue to see good same unit volume trends in both anesthesiology and the neonatology.

And as a result of our use of capital to buyback our stock, our EPS grew by 14% for the quarter. In terms of share buybacks, during the quarter, we essentially completed the $600 million program authorized by our board last fall. Looking forward, we will review our potential uses of capital.

And I want to emphasize that our first priority for the use of capital is for acquisitions, but we will continue to consider share repurchases as an additional use of our capital in the future.

On the acquisition side, we completed the purchases of three practices during the quarter, including two anesthesiology practices and a pediatric ear, nose and throat practice in Houston that further expands our relationship with The Woman’s Hospital of Texas and broadens our continuum of care in that Houston market.

Coming out of the quarter, we have a very active M&A pipeline. And I am optimistic that this year will again be a busy one for us on the acquisition side. In terms of the areas where we will be active, I certainly expect that, that will include both anesthesiology and our neonatology and pediatric subspecialties.

Anesthesia has obviously been an area where we have seen a high volume of deals and we have a good number of additional opportunities in our pipeline today.

But we have also seen a re-growth of interest in our neonatology and pediatric specialties giving us opportunities to build more continuum of care capabilities in a number of markets like we are doing in Houston. And I expect that we will continue to go in that direction.

And we will continue to actively consider opportunities to diversify further, particularly as we look at the value we can bring to hospitals through multiple service lines. Overall, I would portray us as casting a fairly wide net as we look at avenues both to continue growing and to expand and deepen our hospital relationships.

So, I am definitely optimistic about the growth potential for our acquisition efforts. One other area that I want to highlight today is our clinical research, education and quality efforts, which have had some important achievements as of late.

As I hope you have seen, last week, we issued a press release highlighting that our Quantum Clinical Navigation System, which was created at one of our first anesthesiology practices, has been certified by CMS as a qualified clinical data registry.

This is a great validation of Quantum’s capabilities and we continue to rollout this system across all of our anesthesiology practices as both a reporting tool and a quality measurement and improvement tool.

We also were very proud to report earlier this week that the New England Journal of Medicine has published a paper that we submitted focusing on neonatal abstinence syndrome, or NAS.

In this paper, we highlighted the results of a study that we did in collaboration with Baylor University on the growth of NAS-related admissions to the neonatal intensive care unit over a 10-year period of time. This was a sovereign research project as we were able to show that such admissions increased roughly fourfold over that time period.

This is a societal problem, and while there have been studies highlighting the incidence of opioid and other drug use by pregnant mothers, until now, no one had definitely shown the resulting impact on their babies. We will do everything we can to highlight our findings as part of our effort to educate the physician population about this problem.

Towards that end, last month, the House of Representatives introduced the Protecting Our Infants Act, which directs HHS to make recommendations for the diagnosis and treatment of NAS. As part of this introduction, our own Dr.

Stefan Maxwell was invited to testify before Congress about what he has seen in his state of West Virginia and as Chair of the West Virginia Perinatal Partnership. Our work on NAS is a demonstration of the power of our clinical data warehouse and the research capabilities that it gives us.

As the healthcare world starts to embrace IHI’s Triple Aim, which includes improving the health of populations, I think the work we have done on such a widespread issue as this one proves the value of the investments that we have made in clinical research.

As I am sure you are all aware, the healthcare industry continues to evolve towards new payment structures and towards population health management. When we held our last conference call, CMS had just announced its goal of moving more of its payment into value-based structures.

And as we report today, the Bill repealing the sustainable growth rate and replacing it with quality-based payments for physicians has just been signed into law. As I have said to our physicians, the business of medicine, that is how we are paid for providing care, is changing.

It’s converging with the way that we have always viewed our practice of medicine, which is to innovate in the way we provide care through the use of data, analytics and quality improvement initiatives. So long as we focus on the practice of medicine the way we have in the past, we will be well positioned to succeed in the future marketplace.

And I think these achievements we have been able to report over the last two weeks are just a couple of recent examples of how we can support our own physicians as they face more challenges under these value-based payment structures and also of how we can have a voice in addressing issues faced by broad parts of our population.

We have always invested in clinical research, education and quality to support our physicians and help them take great care of their patients, but I think the value of this investment will only continue to grow into the future.

So, I wanted to take some time on this call to talk about how proud I am of the achievements that we have been able to announce so far this year. And with that, I want to turn the call over to our CFO, Vivian Lopez-Blanco for our review of the results and then we will go into Q&A.

Vivian?.

Thanks, Roger. Good morning and thanks for joining our call. I want to add some brief details to Roger’s comments on our first quarter results. At the top line, our net revenue for the quarter increased by 12.9% to $639 million.

11% of this growth came from recent acquisitions with anesthesiology practices contributing roughly 60% of that growth and the remainder coming from non-practice acquisitions and pediatric specialty-related acquisitions.

Same unit revenue grew by 1.8%, with volume increasing by 2.2% partially offset by a 40 basis points decline attributable to net reimbursement related factors. This reduction reflects the reduction in Medicaid parity revenue versus the first quarter of 2014.

Excluding the impact of parity from both periods, same unit revenue would have increased by 3.3%, reflecting an increase attributable to net reimbursement related factors of 1.1%. On the volume side, we saw good growth across most of our services. Our NICU days were up 1.5% and anesthesia volumes were up a similar amount.

Volume growth in our other pediatric services and maternal fetal medicine was positive as well partially offset by a decline in pediatric cardiology. In terms of payer mix, our percentage of patient revenue reimbursed by government programs was unchanged compared to last year’s quarter.

We recorded roughly $6 million in parity revenue or about $0.02 per share after the impact from incentive compensation expense and income taxes in the first quarter. This compares to $14 million or $0.04 per share last year. Our profit after practice expense for the first quarter was $196 million, up 13.6% year-over-year.

Profit after practice expense margin improved by 19 basis points, which primarily reflects favorable practice operation expenses compared to last year’s first quarter. Our general and administrative expenses grew by 15% over the prior year, which reflects increases due to the mix of acquisitions, primarily those of non-practice businesses.

Our depreciation and amortization expense also increased by $3.2 million year-over-year related to acquisitions. Overall, our operating income grew by 10.3% to $150 million and our operating income margin of 18% decreased slightly by 42 basis points versus the prior year period.

Finally, our first quarter net income grew by 7.9% to $68.7 million and diluted earnings per share of $0.72 grew by 14.3% as compared to the prior year period.

For the quarter, weighted average diluted shares were 95.3 million, down about 5 million shares from the prior year due primarily to the repurchase activity we undertook during the 2014 and the first quarter of 2015.

Looking at our balance sheet, we had cash and cash equivalents of $50 million at March 31 and accounts receivable were $361 million, an increase of approximately $9 million compared to December 31. Days sales outstanding were 51 at the end of the quarter, up about 1 day from the end of 2014.

Our total outstanding debt under our credit facility was $896 million at March 31, up from about $568 million at the end of 2014. We finished the quarter with roughly $600 million available under our credit facility. Lastly, during the first quarter, we used operating cash of $54 million compared to $50 million last year.

We typically have negative operating cash flow in the first quarter of every year as we pay incentive compensation primarily to our physicians and employee benefit plan matching contributions that have accrued during the prior year.

As we announced in March, through open market purchases and a second accelerated share repurchase program, we essentially completed the $600 million program we announced in October of 2014. We do however have a remaining outstanding authorization to repurchase shares to offset the dilutive impact of our equity programs.

As of March 31, we had 93 million shares outstanding compared to 96 million shares at December. Moving on to our outlook for the 2015 second quarter, as we announced in this morning’s press release, we expect that our diluted earnings per share for the three months ending June 30, 2015 will be in the range of $0.85 to $0.89.

The range for our second quarter outlook assumes anticipated same unit revenue growth that will be flat to 2% higher year-over-year, including an approximately 2% unfavorable impact on pricing from the decrease in parity revenue from the 2014 second quarter.

Excluding parity revenue from both periods a non-GAAP measure, our second quarter outlook assumes same unit revenue growth of 2% to 4% year-over-year. Included in our second quarter is approximately $0.01 of Medicaid parity, net of the impacts from incentive compensation expense and income taxes compared to $0.05 in last year’s second quarter.

Now, I will turn the call back over to Roger..

Thanks, Vivian. I am very pleased with how we have started 2015 in terms of our strategic growth, use of our capital and investment in clinical research, education and quality.

I am optimistic about the growth opportunities we would see for the year ahead through our acquisition pipeline, opportunities to build new hospital relationships and deepen our relationships with our existing hospital partners, and most importantly, our ability to provide high-quality, cost effective care to our patients.

And with that, let’s open up the call for your questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Ryan Daniels with William Blair. Please go ahead..

Yes, good morning. Thanks for taking the questions. Dr. Medel, a quick one for you. In your prepared comments, you were talking a little bit more about more interest in neonatal and pediatric care.

And I am curious if you mean that on the M&A front, if you are seeing more openings there or is that specific to your kind of market-driven versus specialty silo-driven growth initiatives you have talked about?.

Hi, good morning. Yes. I mean, yes, we are seeing both, but I was directly talking about more acquisition opportunities. We think that there has been just a renewed interest in – I mean, not great, but we do see more than we have seen over the last couple of years, interest in neonatologists having conversations..

Is there anything you would attribute that to that kind of spiked recently?.

My gut is that it’s just a reflection of what’s going on in healthcare, in general, the fact that some of these original neonatologists are now getting a little older plus that there is very much of a feeling within healthcare that multiples are going up and people are buying practices. And that clearly in my opinion is the driving effect..

Okay, that’s helpful. And as my follow-up, any more thoughts on your movement into a novel specialty or doing a platform type deal? And I guess the reason I ask you have talked a lot about the ability to compete for these broader hospital partnerships or grow in markets like Houston.

Do you think you actually need a third specialty in order to compete for those or is that just more of a strategic opportunity?.

Yes. Well, to answer your question, yes, we definitely are looking at a third specialty. We continue going down that path.

You know the history of our company, we have to take forever to [indiscernible], but that’s historically kind of a good thing, but we are definitely moving and I do – I mean my goal is to have something to tell you about, hopefully, by the summer.

But having said that, we do get a number of really requests from our hospital clients to help them with different specialties and so as you saw this quarter, we acquired a group of pediatric ENT specialists that was strictly at the request of the hospital that needed help maintaining a number of specialists whom they felt were important for their hospitals.

We have had other requests from other hospitals to help them with their pediatric surgery needs or other similar specialties. So, for us, it’s an opportunity to do both.

I don’t think that it is necessary for us to enter into a third specialty in order to continue to provide these kinds of services for our hospitals, but on the other hand, having a third specialty, we think will help us with our growth, because we do get requests from the hospitals to help them with other areas of their hospitals..

Okay, perfect. Thanks so much for the color..

And we will open the line of Kevin Fischbeck with Bank of America. Please go ahead..

Great, thanks. I just maybe want to follow up on that last comment.

So, are you looking at this as kind of an offensive move to potentially offer more services to existing clients or are you seeing it just as much as a defensive move? Do you feel like – I guess in other words, are you feeling like you lose some contracts, because others can offer ER or some other service that you don’t have?.

Hey, Kevin. Good morning. Well, ER is your comment, not mine. We see it as an offensive move. I have to say it as much as we hear about the possibility of others doing other things with hospital-based services. We have not suffered any even conversations from our hospital partners.

Last time or the time before I said – when I was asked about emergency services, I have said that we had spoken with some emergency service providers, local, regional practices as a defensive measure in case we needed – we felt like we needed to move into those specialties, but we haven’t had any experiences like that and we are not currently speaking with any emergency service providers..

Okay, that’s helpful. And then I guess how do we think about the opportunity for new contract growth in the business, because your peers generally kind of breakdown same contract growth and then new contract growth and then acquisitions.

I mean, how do you think about the opportunity for you? Is it just kind of all rolled into your organic growth number or is it that really new contracts hasn’t been a part of the story, but you think that it could be as you expand into different service lines?.

I will say a combination of both, but Vivian…..

Yes, good morning Kevin. So, basically, yes, it is included in our organic growth, so I want to expand a little bit. First of all, we have pediatric subspecialties. We have several developmental peds program. We have ER – PBR practices, peds surgery. We have been doing that for a while.

But as it relates to the contracts, we are constantly in this quarter – and it’s really been consistent over the last year. This quarter, again, we have seen a lot of our other NICU services volumes increasing.

And so we don’t specifically look at these as other contracts, it’s just other services that we provide a lot of them in our existing hospitals. So, I think we have talked a little bit before about well baby care and newborn nurseries and all of that. And so that continues to be very positive for us.

We typically don’t talk about contract wins, because we don’t have many contract losses either. So, basically, it’s just included – it’s included in our NICU services..

And one other area of growth that I will talk about a little bit is OB hospitals. There is a significant interest across our OB hospital partners in establishing OB hospitals programs. And as it stands today, we may be if not the first, definitely the second largest group of OB hospitalists in the country..

We also have a lot of PICU business too. So, I mean, it’s just all rolled up into the pediatric subspecialties, etcetera..

Great, that’s helpful. Thanks..

Thank you..

And our next question is from the line of Kevin Ellich with Piper Jaffray. Please go ahead..

Kevin?.

Kevin Ellich, your line is open. You might have us muted..

Alright.

Is there another one?.

Okay. We will go to the line of Brooks O’Neil with Dougherty & Company..

Good morning. I am here. So, I am always here exactly, at least I think I am.

So, could you just talk a little bit about progress with some of the non-practice acquisitions that you made last year and how you are seeing that begin to roll up into your overall business operations?.

Yes. We are – I will say we are very happy with that. And I will couch that by telling you that we just had a board meeting for one of them and they beat their budget. So, we are very happy with that. They are – both are doing well, our surgical partners, in helping the hospitals improve the efficiencies of their operating room – operating rooms.

That’s going well. We felt that we would be able to develop a number of leads for them with our existing hospitals because of the relationships that we have and that in fact has turned out to be the case.

And then on the revenue cycle management side as well, not only are they getting new and more contracts on their own, but as I have said on the last call, one of the reasons we acquired them is because we thought they would be able to help us internally as we grew with our own revenue cycle management business and more and more.

We are turning over part of our own business to them. So, I would say, it’s all working either as planned or better than planned..

Great. The other thing I just want to ask you, Roger, is you mentioned specifically some of what you are doing in Houston and maybe you could just elaborate on that a little bit and talk about specifically what you are doing and why your hospital partners find that attractive and how you see that potentially expanding into other markets..

Yes. Well, we have a good hospital partner, like there are some of the HCA systems. And we have neonatal ICU services that we provided. The hospital had access to help them with their maternal-fetal medicine program. And so we help them with that.

And through the years, that has just become a big service area for us with pediatric hospital services and PICU and now the pediatric ENT, pediatric general surgery. So we like that we will be seeing as the go to group for our hospital clients and it’s just an opportunity.

It’s a women’s hospital and so it’s an opportunity for us to demonstrate our capabilities within those different specialties. And we are doing something similar in Tennessee and there are other opportunities here in Florida.

So it’s just – I think it’s a niche where we can offer our hospital partners this opportunity to help them with their women and children’s needs as the marketplace develops.

And similar things happen on the anesthesiology side, where you are providing anesthesia and they ask you for anesthesia subspecialty care, whether it’s pediatrics or neuroanesthesia. But then in addition to that, there is this trend that the hospitals are seeing towards – moving towards critical care services.

And so we are seeing more and more requests from our hospital clients to provide adult critical care services within the critical care divisions. And that’s another area that we think we will see – continue to see some growth into the future..

That’s great.

I am just curious, as one last follow-on is have you seen any places where you had a strong NICU presence or baby presence where you have been able to leverage that into anesthesia or vice versa or are those right now at least relatively separate sort of growth drivers as you see it?.

Yes. They have historically been separate. I will say that we are now in conversations along those lines right now with more than one hospital system, but nothing that to report as of this point in time..

Okay, cool. Thanks a lot, congratulations on a great start to the year..

Thanks..

Next question is from the line of Darren Lehrich with Deutsche Bank. Please go ahead..

Good morning everybody. This is Josh Kalenderian in for Darren.

Just my question is on – NICU days were up about 1.5 points, are you seeing any movement in NICU length of stay, and I know it’s hard to predict, but do you think you are seeing a more pronounced recovery in birth that could take shape in 2015?.

No. Length of stay is well within historical parameters. I wouldn’t – and I don’t expect to see any difference in that and throughout, all of the changes in movements that we have seen over the last 7 years or 8 years, we didn’t really see any movement along those lines..

Okay.

And then just on your outlook for birth, so are you seeing an uptick there or births have been kind of flat, so just trying to get a feel for how things might be shaping up this year?.

Yes. No, I mean, we have been very happy with our NICU volume over the last – as you guys probably remember, the last 3 quarters or so as it relates to I think the last reports on that was that we had basically started to flatten as it relates to the United States birthrate.

And hopefully, it will start ticking up, but our NICU volumes have been – we have been very happy with them, and they have been very positive over the last 3 quarters or so. Especially, this quarter, we had a 2-year year-over-year, which is really good because we had NICU volume in 2014 and the first quarter was also about 1.6%.

And so we are happy with the growth that we are seeing..

Okay, great. Thanks a lot..

And our next question is from the line of Ralph Giacobbe with Credit Suisse. Please go ahead..

Thanks. Good morning. I wanted to jump to pricing, just understand that a little bit better.

When we think of annual rate increases in the managed care book versus the Medicaid book, what are those average increases on an annual basis?.

So basically, when we talk about those, we have said that on our commercial pricing, we negotiate contracts are in the mid single-digits and those are typically multi-year contracts that have some escalators in them. So again, from a pricing perspective – now what I have said before too Ralph is that those kind of fluctuate from quarter-to-quarter.

We have a work plan that we establish and about a third or so of our contracts come up for renewal every year. But we are still seeing that, obviously the payer environment is challenging and we are keeping up with it..

And from a Medicaid standpoint, there is no increase. I mean, Medicaid is a flat fee payer. Unless something like parity or something like that happens, we don’t include any increase in reimbursement from Medicaid..

Okay, no, that’s fair. So I guess what I am trying to do is just reconcile it, right. So you are pricing even ex-parity in the quarter was up 1.1%. And I guess if 70% of your book is getting kind of, call it mid single-digit increase and 30s getting flat, it would sort of drive a higher pricing.

So is there something in acuity mix, am I not thinking about that right, is it what you mentioned, Vivian in terms of the – maybe a 30-year book and those escalators aren’t at mid single-digits or on a blended basis, the average rate is actually lower than mid-single, just trying to reconcile that?.

Yes, so it’s a combination thereof. So you are thinking about it right, Ralph. And you have to consider acuity, which was a little bit on the negative side this quarter, but not much, honestly. That fluctuates from quarter-to-quarter. And the other big one there that you did not mention is p-mix, although that was relatively stable this quarter as well.

And then you have some impact there from contract revenue, etcetera. So those are all the things that we would look at when we look at that. So yes, there are some fluctuations, so any quarter it’s not going to be an indication of a year necessarily..

Okay, that’s fair and that’s helpful.

And I guess just how do we think about organic growth going forward, I mean is it the 2% to 4% level, a level that you would be – you would sort of be happy with and that’s the way we should think about the business going forward and then sort of the acquisitions come above – over and above that to just grow the business or do you see and would you expect acceleration of that organic growth beyond that kind of call is 3-ish percent level?.

Well, we are working towards accelerating. I am not promising that we will accelerate, but it’s something we look at and think about every single day. I think that the guidance that we are giving you is fair and I think that – looking to continue that throughout the year, obviously we will try to be hit.

But that’s what we are comfortable guiding you towards right now..

That makes sense. And then just last one.

Any update on legislative actions around parity or is this basically something that either is going to be picked up by the state or just expire versus any more hope of federal funding?.

Yes, we think that most states have in one form or another, tried to move a little bit towards parity. I mean, I have a list. I can go down the whole list.

But basically, if you look at Alabama and Colorado and Maryland, New Mexico, Nevada, I mean, those are all – they are all either talking about it or considering it or have done something or moved in that direction..

So it’s a handful of states, Ralph. It’s really – we get updates every couple of weeks with what we are doing at the state level, our GR folks are very focused on that. So as Roger says there are some of them have them in their budgets. We will see how it pans out.

But so far, we are seeing a handful of them that we know for a fact will extend it and some of them have just increased some of their pricing overall..

Okay.

And is there a hope on the federal side or is that sort of gone by the way side at this point?.

Yes. On the federal side, I really haven’t seen much movement in that at all..

Yes. Okay, alright. Thanks very much..

Thank you..

And we will open the line of Nicholas Jansen with Raymond James. Please go ahead..

Yes.

First one Vivian, for the guidance for 2Q, just wanted to get your sense on just the share count that you are using there considering that you did the ASR late in 1Q?.

Yes. So, basically, it will be in the $93 million range..

Okay, that’s helpful. And then Roger speaking about kind of the pipeline on anesthesia, where are multiples today relative to kind of two years ago just in terms of not absolute numbers, but percentages higher? And are we starting to see that level out some or is that getting incrementally worse? Thank you..

Yes. I would say multiples are definitely higher. There have been apparently some larger multiples that have been tossed around and talked about. We are still able to acquire practices on a more – on a less crazy level.

So, we are happy with where we are, but there are definitely practices that will go for higher multiples that we are not going to participate in, so....

Thank you..

Yes..

We will open the line of Brian Tanquilut with Jefferies. Please go ahead..

Hey, good morning guys..

Good morning..

Roger, just a follow up on that last question on anesthesiology.

So, clearly, you have a pretty healthy pipeline in anesthesiology deals and obviously now in NICU as well, but as we think about anesthesiology, if you don’t mind just giving us a color – some color on the sizes of transactions that you are seeing in the market and how you view large platform type deals.

I know you don’t need a platform, but at this point, there seems to be some larger deal flows or larger assets coming to market.

So, what’s your appetite for those?.

Well, we are always looking. I mean, we – look, if you start all the way up at the top, there is talk about NAPA, North American Partners in Anesthesia and they are about 1,000 or so anesthesiologists. There are rumors back and forth about their coming to market. They are not coming to market.

We have heard earlier in the year that they were coming to market. And so we are – NAPA thought we would be interested in spending time with and seeing whether it made sense for us to get our groups together.

Then there are – a) the private equity backed groups that again there are rumors about whether they may or may not be coming to market and again people that we would be interested in having conversations with should they come to market. I don’t think there is any of that at least that I am aware of that’s in the market right now.

Individual practices, there are some larger practices that are in the market, some out west and some down south. And so we are looking at them and having conversations with them.

And then beyond that, there are the more our size groups that are out there, which are the majority of what’s in our pipeline, 20, 30, 40 anesthesiologists and they are spread out across the country.

And those are ones that maybe we are better able to have our own kinds of conversations, not all of just focused on multiple or a purchase amount, but a lot of – some of the other stuff that we can talk about. So, I mean, that’s really as honest a look I can give you at what’s going on in the anesthesia market right now..

No, I really appreciate that. Next question for you, so as we think about the third specialty and obviously when you guys do deals it’s ROIC has always been a consideration.

But how do you weigh margin dilution to the consolidated number versus the strategic rationale for the entry into a new specialty? So, how should we think about those two sides?.

That’s an important consideration for us. We recognized that we have been blessed over the years because of our neonatology business and got spoiled with the kind of margins that, that represented to us.

But clearly, the potential dilution to our margins is an important factor and one that we think about seriously before jumping into a specific specialty..

Got it. Thanks, guys..

Thank you..

Thanks, Brian..

We will open the line of Chad Vanacore with Stifel. Please go ahead..

Good morning, all..

Good morning, Chad..

So, you received about $0.02 EPS benefit in the first quarter from parity payments.

Was that from states continuing their payments or is that from collections from prior billing periods? And then a follow-up to that is, should we expect the $0.01 benefit in 2Q to continue throughout the year?.

So, it’s a combination thereof. I actually don’t have it broken out like that, but I would tell you that most of it is related to states expanding – continuing it. As it relates to the $0.01 in Q2, hopefully, we can raise that if we get some of these other states.

Remember, it’s kind of early in their legislative process, so some of them will make the decision here in the summer. And so hopefully it will be better, but we just have to look at what we have currently. So, that’s kind of why it’s $0.01 versus $0.02, because the runoff from last year will start going away..

Okay.

So, Vivian, it’s fair to assume that $0.01 is the state benefit?.

Yes..

Okay. And then what were some of the variable factors in organic rate growth or you had – I believe you gave guidance of down 1%, you were down 40 bps.

Is there anything to point to you there?.

Well, no, I mean, you have to then parity affect that, right? So, parity affected then. For pricing, it’s up slightly over 1%..

Okay.

And then – and as far as the pipeline goes, can you give us a more granularity in terms of size and mix of anesthesia versus physician practices?.

Well, I mean, I think I just went through that. There are larger ones that might come to market this year. There are I think of the platform ones that might come to market this year. There is the larger ones that are both out west and down south.

And then there is the typical smaller groups of 30, 40, 50 anesthesiologists that are really spread out throughout the country, all the way from California down to Florida.

So, I am not sure how else to answer that?.

Okay. But I mean in this year I think you had assumed that about two-thirds of your acquisitions were going to be in anesthesia side.

Is that still the case?.

Yes, we think so..

Alright, thanks for your time..

Thank you..

Thanks, Chad..

We will open the line of Gary Lieberman with Wells Fargo. Please go ahead..

Good morning. This is Ryan Halsted on for Gary. Just one question, it looked like your margins held in pretty well considering the loss of parity as well as the investments you are making in MedData.

I guess, is there any investment – any initiatives you are putting into place to sort of try to manage margins? And how should we think about margins over the rest of the year?.

Yes. So, good morning, it’s Vivian. So, we had favorability in some of the operating expenses as we talked about. And basically obviously last year, we had higher bonuses due to higher parity, money coming in.

And it’s just in the normal operating, but honestly, as I have said before, when we have pretty good growth here as we had this quarter that certainly impacts that. So, overall, there is a slight benefit on the gross profit line and those – all of those things contribute to that.

And so if all those stars align – continue to align that can be consistent, but there is fluctuations in that in any given quarter, it was about 20 bps or so..

Okay, great. Thank you..

And we open the line of Kevin Ellich with Piper Jaffray..

Hey, guys. Sorry, I hopped on a little late and I guess I missed my spot in the queue, but Roger, you have talked a lot about acquisitions in the pipeline and whatnot. I just kind of wanted to approach the potential for another specialty a different way.

Would you look at something that’s more complementary or something that is more similar to the structure of the neonatal and anesthesia businesses?.

Well, the complementary stuff, I tend to think of as tuck-ins, right? So, maternal fetal medicine, general pediatrics, pediatric ICU, hearing screens, all that – I mean, if that’s what you mean by complementary, all of that we just sort of lump, if you will, under the pediatric surgery, pediatric ENT.

It’s all lumped under the same Pediatrix, with an X division. So what we are looking at is not anything that you would call a tuck-in..

Okay, okay. And then with -- you mentioned in your prepared remarks about the continued shift by the government to more value based reimbursement programs or at least that’s how the system is shaping up.

At this point, I don’t think you have much exposure with your current lines of businesses – business, but is that something that you would consider getting into or want exposure to?.

Well, definitely we think that as we move – I agree with you. Right now, we have very little exposure to anything like that. But as you talk about bundling, putting services together, whether it’s obstetricians with neonatologists or surgeons with anesthesiologists or whatever, we are preparing for that.

And we think that our data gathering capability, our quality numbers, our research efforts, all of that, we think statistically gives us a competitive advantage..

Great.

And then just lastly, maybe Vivian, on your capital allocation strategy, I guess you guys have an ongoing authorization to offset your equity programs, but can you prioritize uses of capital allocation, is it really deals and is it possible we could see another big buyback?.

Yes. I mean definitely, we would always rather put the money to work, right by acquiring practices because they not only bring earnings with them, relationships, opportunities to grow, but also a lot of cash, right. And so you are buying all of these things. So we would much rather do that.

We do think that given where the market is today and our capital costs, etcetera, that it does make sense. If we are not able to reach our goals of capital spend and acquisitions for the year, we do think that it makes sense and we would consider additional share repurchases.

As we used to do in the past, by the way, if you recall, back when we were just in the neonatology business, even at that point in time, we had – over the years, we had bought back over $0.5 billion of our own stock at the end of the year, as we had extra capital around and we will buy our shares.

And then when we got into the anesthesia business, we decided to stop doing that because we thought we would need the money to acquire the anesthesiology practices. At this point in time, there wouldn’t be anything unusual at the end of the year if our Board decided that we had extra access to capital and to authorize additional share repurchases..

Great. Thanks..

Thank you..

And our next question is from the line of Chris Rigg with Susquehanna Financial Group. Please go ahead..

Thanks for taking my questions.

Just a couple of follow-ups on the bundling concept, just to make sure I understand how that would sort of logistically work, and I guess it’s still potentially, but is that sort of a capitation arrangement directly with the payer or is the hospital that you are – where your physicians reside sort of the spearhead to that meaning can you do this directly on your own or do you have to wait for your hospitals to sort of get onboard?.

Yes. I think there are different opportunities. And I think they work both ways. We have seen situations in our network across the country where you go directly to the employer and you do direct contracting with the employer. And there are others where you participate in the network that the hospital puts together.

But the important point for me is that if you have access to this data and if you know what your length of stays are, if you know what your complication rates are, if you know what your average costs are and most of these things depend upon narrow networks, right. I mean, that’s basically, at the end of the day, what you are talking about.

You are talking about trading choice for dollars and you are looking to put someone in your network. In my opinion, you are more likely to put someone who has access to all of this data, to all of these outcomes and complications and lengths of stay and costs. And we have that and we have had it for a very long time.

So I think that our competitive advantage, whether you are talking about direct contracting with the employers or dealing with your own hospital, I think the competitive advantage that we have is that we have the data..

Okay. And then just with regard to the balance sheet and sort of a follow-up to the last question on share repurchases.

I mean, if there is a lull in sort of some M&A for various reasons, are you actually going to use your excess cash to pay down debt over the short-term or you just sort of hold that cash in the assumption that deals will come? Thanks..

What we typically do is throughout the year, we pay back – pay down the line of credit. And then if there are decisions to be made along those lines, those typically get done at the end of the year.

So I would say, we would continue to -- with our strategy of just paying the revolver down and taking out more money as you need from the revolver, etcetera. But if you are talking about a larger capital spend for a larger unannounced share repurchase program that would come at the end of the year..

Great. Thank you..

Alright..

The next question is from the line of Whit Mayo with Robert Baird. Please go ahead..

Hi, thanks. Good morning.

First question for Vivian, just can you give us your outstanding revolver debt at 3/31?.

Yes, we had that in the prepared comments. We have available about $600 million. So we had about $900 million outstanding..

Sorry about that.

Roger, just if we go back to Quantum and the certification as a data registry, I am just – what does that mean for us, I apologize a little bit for my ignorance, but I feel like this is a pretty important milestone, and I am just not so sure I understand exactly what this means?.

Yes, I have Dr. Richard Gilbert here with us who is our Chief Medical Officer for anesthesia and who is the author of Quantum and why don’t I let him sort of address that question.

Richard?.

Thank you, Roger. Good morning. So it is a milestone and we are very proud that Medicare has approved Quantum to be a QCDR. What that means is that we now have the ability to report directly to the government PQRS measures. And so we can determine what those metrics are, those definitions, collect them and report them for pay-for-performance.

It also validates our system and our metrics in terms of being a quality data registry. And so we are very proud of that and that is something we are rolling out to all of our practices across MEDNAX, our anesthesiology practices..

That’s helpful.

I guess are there any financial implications with being a registered data partner with CMS?.

Well, as you probably know, Medicare is tying a lot of payments and more payments towards value-based pricing. And so by having Quantum as our data registry, we hope and expect to be successful in the new value-based pricing and payment paradigm..

That makes sense. And my last question, just for Vivian. Where are we in terms of the trend for malpractice, I am looking at 2014, the prior period development was maybe a little bit more favorable than normal and I know it’s been a tailwind for most healthcare providers for a number of years now.

But just wanted to get a sense of where we are in the malpractice cycle, if you will?.

So, I am happy to say that it continues to be favorable and we did have some favorability again in the first quarter.

We looked at our actuarial reports really quarterly because the trends over the last couple of years has been favorable, but as you guys know, I have talked about it with some of you, specifically we feel we have a very good claims processing system that we basically involve our physicians in reviewing each and every one of our claims.

And I do think that, that helps us to manage them. And so we have had very good development as it relates to favorability..

So this is a – just remind me, you true your malpractice accrual up, is it each quarter based off the claims experience or is it something that you adjust more on an annual basis?.

Well, it’s not as simple as that. I don’t want to bore the people on this call, but yes we look at the trending to basically take a look at where we are at with the accrual. But as it relates to the metrics that the actuaries use, whether it’s how much trending is based on the industry, how much is based on the company and all of that.

We obviously sit with them once a year to look at that and make sure that we are in the right place for the history that we have had, etcetera. So, obviously, on the anesthesia side, we have had less history than on pediatrics and that relates to the IBNR accrual..

Okay, that’s all I got. Thanks..

Thank you..

And there are no other questions in queue. Please continue..

Alright. Well, thank you operator. If there are no more questions, let me thank everyone for participating this morning and we will look forward to speaking with you again next quarter..

Okay. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect..