Pediatrix Medical Group, Inc. (NYSE:MD) Q3 2022 Earnings Conference Call November 3, 2022 9:00 AM ET
Corporate Participants
Charles Lynch – Investor Relations
Mark Ordan – Chief Executive Officer
Marc Richards – Chief Financial Officer
James Swift – Chief Operating Officer
Conference Call Participants
Pito Chickering – Deutsche Bank
Whit Mayo – SVB Securities
Tao Qiu – Stifel
Kevin Fischbeck – Bank of America
Brian Tanquilut – Jefferies
AJ Rice – Credit Suisse
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Pediatrix Medical Group Third Quarter 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, your call today is being recorded.
I would now turn the conference call over to your host, Senior Vice President of Strategy and Finance, Charles Lynch. Please go ahead.
Charles Lynch
Thank you, operator, and good morning, everyone. I will quickly read through our forward-looking statements and then turn the call over to our speakers.
Certain statements and information during this conference call may be 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 Pediatrix’ management in light of their experience and assessment 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 Pediatrix 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, its quarterly reports on Form 10-Q and its current reports on Form 8-K, including the sections entitled Risk Factors.
In today’s remarks by management, we will be discussing non-GAAP financial metrics. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in this morning’s earnings press release, our quarterly reports on Form 10-Q and our Annual Report on Form 10-K and on our website at www.pediatrix.com.
With that, I’ll turn the call over to our CEO, Mark Ordan.
Mark Ordan
Thanks, Charlie, and good morning, everyone. Also with me today are Dr. Jim Swift, our Chief Operating Officer and Marc Richards, our Chief Financial Officer. We’re of course disappointed by our third quarter results compared to our internal forecast revenue was off by approximately 22 million and adjusted EBITDA missed by approximately 19 million. Roughly half of this variance reflect muted operating results from a handful of factors primarily related to neonatology volume and payer mix. However, the largest component of the miss was directly from our outsource billing and collection processes, which unfavorably impacted revenue and adjusted EBITDA by approximately 11 million and 9 million respectively.
Our actual cash generation was strong in the quarter and allowed us to pay down $60 million in debt and reduce our already conservative leverage ratio to 2.9x. We are very pleased in this turbulent environment to have such a strong balance sheet, strong liquidity and very low borrowing costs.
As we discussed last quarter, the challenges we were experiencing with our revenue cycle transitioned to R1 were lessening, with collections activities accelerating particularly in June. And the unfavorable impact to our second quarter results was about half of what we experienced in the first quarter. We believed that performance and results would continue to improve in the second half of the year, and our previously updated outlook for 2022 reflected this expectation. However, during the third quarter of 2022, as compared to the same period, in the prior year, we saw an increased shortfall in billings and collections such that the impact to our top-line was more than twice the 5 million we reported for the second quarter. This impact comes in the form of increased allowances against our receivables, which flows through our income statement as lower reported revenue and which you can see in our earnings release, as part of our pricing discussion.
I want to be very clear that this negative impact is only about billing and collections, it has nothing to do with payer behavior from the No Surprises Act. In total, our revenue cycle management transition has proved to be much more costly than we anticipated. Through the first nine months of this year, we estimate that this transition has negatively impacted our revenue by 25 million to $30 million and our adjusted EBITDA by 15 million to $17 million versus our initial outlook on our February call. To be clear, of course, we’ve had offsetting savings in our G&A from our shift to a third-party provider as was contemplated in that initial outlook.
We have and are taking aggressive steps to address these revenue cycle challenges. We have undertaken a thorough review of our outsourced revenue cycle activities into indirect coordination with our practices to determine precisely where weaknesses exist in the current outsource function. Due to the unique nature of our business, we are meaningfully expanding our in-house team with subject matter expertise very specific to the services we provide. We’ve worked with R1 to identify priority areas but this expansion and with R1s financial support, we have already started adding a sizable regionally positioned dedicated team.
Separate to the RCM steps I just detailed, we have completed a reduction in our overhead expenses at the corporate level, which we estimate will reduce our annual G&A expense by approximately $12 million to $14 million beginning here in the fourth quarter. Based on our results to September 30 and our expectation for the fourth quarter, we have updated our outlook of adjusted EBITDA for 2022 to a range of $240 million to $245 million. You’ll see that at the midpoint this implies a significant sequential improvement in adjusted EBITDA versus the third quarter, which reflects our current expectations of both revenue and costs based on the steps we have taken and are taking, including the support provided by R1, and their impact on our fourth quarter results.
Turning to the No Surprises Act, there has not been any significant activity on the part of the various administrative departments. Since they published their final rule in August. On payer behavior, we continue to be overwhelmingly in network. We have heard more references to the final rule. And we’ve had payers discuss qualifying payment amounts, which by their own admission, compare specialists with generalists who don’t even provide the same services. Since this miscalculation of the QPA was specifically pointed to in the August ruling, we will vigorously protect Pediatrix from any intentional under calculating of this number.
My conversations with payers informed me that they are aware that the government is on to this mistake. And the instances we are out of network, we have completed a number of arbitrations over the past month. And so far, our results have been in our favor over 75% of the time.
I’ll now turn the call over to Dr. Jim Swift to discuss our core operating measures.
James Swift
Thanks, Mark, and good morning, everyone.
I’ll focus my comments today on our underlying operating results in terms of volume, mix and costs. As Mark noted, volume and mix represented about half of the variance from our internal expectations in roughly equal magnitude. As we reported this morning, our same-store volume growth was modest. All of our office-based service lines generated same-store growth in the quarter, but hospital-based volumes declined by 60 basis points. The primary driver here was neonatology, with NICU days declining by 1.4% based largely on modestly lower same-store [indiscernible].
On mix, our breakdown of government versus non-government volumes remains within our historically normal range. But the 120 basis points shift towards government payers this quarter, which is comparable to the shift we reported in the second quarter. This nonetheless represented a headwind to revenue and EBITDA.
On clinical labor, our salary costs were roughly $3 million above our forecast, which is similar to the upside variance we experienced in the second quarter. To give some more detail on this, I’ll point out a couple of items. First, this overrun related largely to certain geographies and in sub-specialty services, where we have experienced a fair amount of demand driven organic growth with our hospital partners. In these cases, the costs are related to open positions, that we are actively working to fill and stand-up new practices, as opposed to any underlying salary trends at our existing practices in our core services.
This modest variance in clinical costs was offset by similarly modest positive variances elsewhere, resulting in no corresponding impact to adjusted EBITDA in the quarter. Lastly, as Mark mentioned, the additional non-clinical cost reduction that we have do not impact the delivery of patient care, or our focus on research and quality at the bedside.
I also want to briefly address the concerns that many of you have probably seen in the press about the concurrence of influenza, COVID and RSC cases as we move into the winter months. Related to our third quarter results, we did experience an uptick in volumes with our pediatric ICUs and Pete’s hospital programs late in the quarter, but not with any materiality to our overall results.
Our attention and focus entering the winter, we’ll be working with our hospital partners to ensure that our clinicians have the support to handle any expected rise in volumes as best as possible. Given what could likely be constraints on both bed availability, and potential hospital labor capacity in the inpatient setting. Related to our pediatric primary and urgent care clinic strategy, all highlighted last month, we officially opened our first de novo fully branded Pediatrix clinic in the Houston market. This primary and urgent care clinic is off to a great early start. Thanks to an amazing team.
We remain on track toward goals we detailed last quarter, which include a total of 40 to 50, clinics across eight to 10 markets, and half a dozen states by the end of 2023.
I’ll conclude by acknowledging the very challenging environment our clinicians must work through. After two years of the ravages of COVID and the consequences that have unfolded, their dedication is amazing, and saves lives every day of the year.
With that, I’ll turn it over to Marc Richards.
Marc Richards
Thanks, Jim, and good morning, everyone. I’ll comment briefly today on two selected financial items in the third quarter. First, related to our balance sheet, you’ll see in our 10-Q filed this morning that our net accounts receivable and DSOs declined sequentially versus the second quarter to $294 million and 55 days respectively. This is predominantly related to an increase in our allowance for contractual adjustments, and uncollectables based on RCM activity during the quarter, which in turn flowed through our P&L in the form of lower revenue, and accordingly net AR.
Second, we remain in a strong financial position. During the third quarter, we generated $88 million of operating cash flow. We utilized the majority of this cash to repay borrowings on a revolving credit facility. As of September 30, our total borrowings were 739 million, down from 800 million at June 30 and leverage based on trailing adjusted EBITDA was just 2.9x.
With that, now I’ll turn the call back over to Mark.
Mark Ordan
Great, thanks, Marc, and Jim. We will now take questions.
Question-and-Answer Session
Operator
[Operator Instructions] We’ll first go to the line of Ryan Daniels with William Blair & Company. Go ahead, please.
Unidentified Analyst
Yes. Hey, guys, this is [indiscernible] for Ryan Daniels. I just have a quick question on the R1 transition. So I know that you previously mentioned that the ambulatory piece of the R1 transition wouldn’t be completed until the back half of this year in 2022. So just kind of curious if the full R1 transition is behind you at this point where you’re kind of full steam ahead with normal operations or are there still components left to transition?
Marc Richards
Hey, good morning. This is Marc Richards. The ambulatory component on the front-end that was slated to be integrated towards the second half of this year has been put on hold at this point. So no, the easy answer is no, we haven’t transitioned that remaining components out of our in-house shop.
Unidentified Analyst
Okay, understood. And then, so just given the losses that were incurred at the beginning of this year in the first half, and then you guys were kind of expecting to try and recoup some of those losses. And I believe it was just less than about 15 million or so. So just kind of curious, have you made any headway with this? Or do you have any color on this?
Marc Richards
We’ve made some progress during the course of the year. Obviously, it’s not to the level that we had either hoped or expected. And that’s what’s led us to, as we understand R1s processes, what they can do and what they can’t do. That’s what’s prompted us to put together a very strong and large in-house team to augment the work that they do. And we think that that’s going to help materially and move things in a much better direction.
Unidentified Analyst
Great, thanks. And then, just one final question that I have. So I know and you guys kind of touched on this too, but that you previously suggested that the DSO figure should return to normal levels, which, I mean, historically little like higher 40s to 50 range. So, just kind of curious if you’re on track to reach us historical levels by year-end should this be kind of a gradual decline into 2023?
Marc Richards
Well, I’d say that remains unknown at this point. As you noted, our DSO did clip down from the second to the third quarter, primarily as a function of additional reserves associated with those receivables.
Mark Ordan
Well, we’ll have to see how things proceed in the fourth quarter, to be able to update you on that.
Unidentified Analyst
Awesome. Thanks, guys.
Operator
We’ll go next to the line of Pito Chickering with Deutsche Bank. Go ahead.
Pito Chickering
Hey, good morning guys. Thanks for taking my questions. On the billing side, to simplify this, and I apologize for this question. But is R1 does not sending up the bills for services you completed? Or is it more of a collection issue for those bills, I guess, to understand where this complexity it’s making this so challenging having implemented RCM 12 months ago?
MarkOrdan
Well, the answer to that is around the word complexity. And, obviously, the billing, questions about the bills, making sure that the bills are right, and then following up with the payers to make sure that you’re aggressively pursuing it, which is not again, No Surprise Act, it’s just the nature of how that works. So there’s the initial billing, there’s the persistence in the second half, and then making sure that if we don’t get the bills paid on time that we’re working that to make sure that it happens. And I would say that there have been choke points with R1 on in each of those areas. And that’s why we’re specifically targeting where the weak points are to have, as I said, in my comments, people with real expertise on these practices, these types of bills, to get it right the first time to pursue them aggressively, and to get them paid.
So we think that we’re heading is more of a hybrid model than we thought we would need but we think that given the complexity and seeing the limitations in — with our outsource partner, we’re working together to correct that. And I think that we’re also doing very close consultation with our practices, so we can hit the nail on the head.
Pito Chickering
Okay. So because this has been an issue throughout the year, there’s no way that you can increase your disclosures and breakout the AR days by payer mix by aging bucket and give us your color and sort of how the managed care I guess how that AR mix has changed from 4Q of ’21 to sort of 3Q of ’22 in terms of in [A to Z] [ph] buckets?
MarkOrdan
That something we’ll consider and come back on.
Pito Chickering
All right. Then can you refresh us on when you automatically write off of the AR accounts receivable?
Marc Richards
Hi, Pito. It’s Marc Richards. Our accounting model and related estimates is an experience-based model that’s driven by aging buckets. So as receivables age, call it the same dollar day one versus day two, our allowance continues to accrue on that receivable. So it’s both time and experience based.
Pito Chickering
Okay. So two topics, as you think about your managed care out of overexposure, you had some pretty stable for a period of time, are you seeing payers shift in 2023 to more at a network or dealing with the network revenues in 2023, will be the same as are in 2022.
MarkOrdan
Well, as I said, while we have payers more did talking more about the No Surprises Act as we would have expected, and talking about the qualified payment amount, which again, has been addressed by the government and then August ruling as having been thwarted in the way they had first defined it. But we’re not seeing any kind of pattern of being pushed out of network, I would say it’s still, as of now, largely just the normal back and forth about where we are in network. I would say that that payers clearly want us to be in network.
Pito Chickering
Okay, great. Thanks so much, guys.
Operator
We’ll go next to Whit Mayo with SVB Securities. Go ahead.
Whit Mayo
Thanks. Maybe just a follow up maybe a different way on some of Pito’s questions. Have you guys been able to collect any of this fully reserved AR from the first half the 15 million, the 10 and 5 from Q1 and Q2?
Mark Ordan
Yes. We have been able to collect some obviously not as much as we had hoped or expected. And that’s why the numbers are where they are. But yes, the things that we’re doing are to make what we do much better. So we don’t continue to have the problems that we had from earlier in the year. But it’s not like it was a wipeout and people were asleep at the switch.
Whit Mayo
So I guess what I’m trying to get to is, let’s say that there has been — let’s just start with the first half, there was 15 million of reserves. I mean, how much of that, did you — I’m just trying to circle a number to think about what the headwinds or tailwinds will be kind of going into 2023.
Mark Ordan
I don’t have that number handy for what it was. What I’d say, going into 2023, what I would say is that given what we experienced in the third quarter, and we came into the fourth quarter, in about in the same position that we left the third quarter, this is a process that we think will improve things in the fourth quarter and into the first quarter of the year. I would not expect that we will be at a proper operating level on December 31. So I think it’s going to move into that there’ll be still improvement to be made in the first quarter.
Whit Mayo
So what are the assumptions you’re making for the fourth quarter? What are you assuming in terms of additional reserves or maybe said differently, the pricing metric that we should be anticipating. It just seems that the fourth quarter definitely implies a pretty large sequential increase normally, relative to the normal flat to down numbers that we’re accustomed to seeing.
Mark Ordan
Right. And that’s absolutely tied to the support that we’re getting from R1. And the team that we’re putting in place, we’re getting support from R1 in a variety of areas, but we see that the team that’s in place, and what R1 is prepared to do about it gives us confidence that we can do that in the fourth quarter. So yes, the reason it’s sequentially different than what normal we’ve seen in the past is, frankly, because the third quarter was also so weak.
Whit Mayo
Okay. So sorry to hit this one more time. But there was 10 million in the third quarter. What is your plan have for the fourth quarter?
Marc Richards
Hey, Whit. Its Marc Richards. Real quick. I just I want to expand on Mark’s comment. We also, as noted earlier, had overhead reduction rate towards the tail end of the third quarter of which the impact will be felt in the fourth quarter. So that’s a component of your delta there.
Whit Mayo
Okay. And just last one there, Marc, just, it looks like you’re tracking really well relative to the $13 million, $14 million, $15 million of G&A savings partially attributed to what you just said further corporate adjustments. What’s the right number that you have year-over-year in terms of G&A in your new internal plan?
MarcRichards
Well, I would say a component of our G&A rate now is our cost associated with our outsource revenue cycle function, which is variable. So to the extent as we’ve seen in the third quarter, the second quarter cash collections are down, that will also impact our overheads. So I would say they’re somewhat tied together there with in terms of our forecast going forward, the relative stabilization of our billing functions and how that equates to overhead.
Whit Mayo
Okay. I’ll follow up with you after the call in that. Thanks.
Operator
We’ll go next to line of Tao Qiu with Stifel. Go ahead.
Tao Qiu
Hey, good morning. So I think last quarter, you mentioned that one of the problems with the RCM transition is that you cut your internal team earlier than you’d like to and now this quarter, I think you’re saying you’re adding back on some of the staff in-house. We’re just thinking about that $12 million to $14 million G&A savings, you called out, how much of impact should we expect from this additional hiring activity?
Mark Ordan
We don’t think it’ll be a big impact, because R1 is providing financial support to help us do that. So we’re not doing that on our own and not just providing financial support. They’re diverting a lot of their own resources to meet this problem. So we think that overhead savings will be largely intact.
Tao Qiu
Okay. Got you. So I know that we’re still in the early phases of income limitation of the NSA. And we saw higher backlog of cases in the system. I know that you don’t have a lot of out of network revenue today to the extent you may have disputes with payer today, and you’re the early indication you may have on the rate settle to the IDR process?
Mark Ordan
No, not really, because it’s baseball style arbitration, it varies state-by-state. And what I would say is the IDR process, while as you said, is backlogged. It certainly seems to be working. By that I mean, that our arbitrators are looking not just at the qualified payment amount, but as they are required to they’re looking at the other factors that that are built into the bipartisan legislation to determine what a proper payment is. And they have, as I said, 75% of the time, sided with us because of the metrics besides the QPA that are obviously so compelling about Pediatrix.
Tao Qiu
And then on the guidance, I saw that the tax guidance your guiding $20.7 million to $30.2 million. I think that’s just $4 million higher taxing in the fourth quarter. What is driving that higher rate in the fourth quarter?
Mark Ordan
I’m sorry, could you repeat that question?
Tao Qiu
So based on the guidance, on the tax line, I think you’re guiding a $4 million higher taxes in the next quarter. So what is driving that higher rate?
Mark Ordan
Yes, I’m sorry. Taxes. Just historical income taxes. That’s right.
Tao Qiu
Okay. One last question. We saw in the new set group care, laid out 1/3 of your staff in September, does that have any impact on the speed of go out in your clinics with them?
Mark Ordan
No, it doesn’t. I think what they did was a sound move to, they just overstaffed given the size of their operation. So we very much applauded what they did, and we think it strengthens brave as a company.
Tao Qiu
Okay. Got you. Thank you.
Operator
We’ll go to Kevin Fischbeck with Bank of America. Go ahead.
Kevin Fischbeck
Great, thanks. First, really to think about, how you guys think about this year? Obviously, we’re all trying to think about what 2023 looks like. I mean last quarter, you were thinking that, that 270 was potentially achievable? Like, should we be thinking about this guidance? And adding back, the RCM drag is kind of the starting point for next year? Because in theory, even if you had the right office stuff going forward, you’ll be at the right run rate? Or is that not the right kind of starting point to think about is where the base business is operating right now?
Mark Ordan
Yes. I would say largely, that’s correct. What I would say, if you look at the start of the year, if we had a crystal ball and knew what we’ve learned, we would have said that — it’s going to be an expensive transition, but we will transition and we wouldn’t be better off at the end of it, because we will have a far more automated process, we will be able to benefit from the system that we couldn’t possibly have internally. And we’ll have an in-house team to augment the work that our partner does, so that we can, hit the nail on the head. So we are confident that at the end of this tunnel, which has been a longer tunnel than we hoped and expected that we will be back on track. What back on track means is the other trends that we’ve seen in the business are what we would have experienced for 2022 so we feel that going into next year, there will be a point where we will say we have finally reached the end of that tunnel. And we are operating as a normal business with a fully functioning RCM process.
Kevin Fischbeck
Okay. So like the half of the miss being rates and mix volume and mix this quarter. That’s the other thing to think about going forward. You really wouldn’t expect RCM to be a similar drag next year.
Mark Ordan
Correct. Right. I am confident that working with R1 with the support they’re providing that we will at some point be able to say that problem was painful, but in the past. And then we’ll be looking at the normal trends in the business. Which gang ups the trends in the business, what we saw in this quarter was a decrease in NICU volume actually aren’t ambulatory side volumes were stronger. we discussed this before we don’t know what the payer mix is a trend. But we have had a couple of quarters of negative payer mix. It’s not the misery loves company, our labor costs are higher. And some of that’s a function of inflation and the fact that people moving around a lot more and healthcare and the issues of healthcare, we’re not immune to it, affecting that less than it affects others. But certainly in an inflationary environment with a difficult the healthcare environment, we would assume that’s going to be a factor also going into 2023.
Kevin Fischbeck
Okay. That’s all very helpful. When you talk about the RCM issue, is it related to commercial or Medicaid or Medicaid managed care? Is there a certain part of the payer where the struggle is larger?
Mark Ordan
No, it’s overall.
Kevin Fischbeck
Okay. And then, I guess, when you think about the labor backdrop, I understand in the quarter, you mentioned there was pressure from growth, which is the best way to have it, but I guess how are you thinking about that labor environment for next year? And how are you thinking about, the outlook for pricing relative to that labor cost growth?
Mark Ordan
Well, I think that like what you see in the rest of healthcare, although our staffing component is different than others, we don’t have as many nurses as other organizations do. I would say that, that we look at inflation and regional inflation, and what’s happening in healthcare, and somewhat affected by it. The fact that we seem to be less affected by it than others, I would assume we’ll continue to be less affected for the reasons I said, but I think we’ll see how the nation goes and how healthcare goes. It is something we watch, obviously, very closely, a lot of the issues that have plagued hospitals affect us. And if hospitals cut staff, it makes it much more difficult for our staff, it makes operating more difficult, it can have a negative effect on volume.
So all these dynamics, which are swirling around in healthcare right now, are things that we’re watching very closely. I would say overall, we’re pleased by where we are in a difficult environment, but it’s a difficult environment.
Kevin Fischbeck
Okay. And then, one last I guess, quick clarification, I think in the prior line of questioning. I think you said that, although you’re putting more resources in here, R1 is financing basically most of that, if not all of that. So in a day, the savings you expect to get are still the savings you expect to get that number has not changed. Just want to make sure I have it, right?
Mark Ordan
Yes.
Kevin Fischbeck
Okay. Perfect. Thank you.
Operator
[Operator Instructions] We’ll go into the line of Brian Tanquilut with Jefferies. Go ahead, please.
Brian Tanquilut
Hey, good morning. Maybe I’ll shift the questions a little bit. So since you called that payer mix is one of the issues for the quarter. Can you remind us where the disparity between your average commercial rate is and average Medicaid rate is today?
Charles Lynch
Hey, Brian. It’s Charlie. We don’t break that out specifically, but you can look in our 10-Q filings and get to a good estimation related to the breakdown of our patient volumes by mix and then a breakdown of our net revenue by payer source. So that’s where you can derive some estimation of that.
Brian Tanquilut
All right. Got it. That’s fine. I guess it’s I think about the No Surprises Act and how that’s impacting your negotiations or discussions with payers. And you call that out in your prepared remarks. I mean, how are you thinking about your negotiating leverage at this point? And what are those rate discussions like?
Mark Ordan
We don’t think about it as leverage, we provide a vital service in major markets. It’s a service, that’s an enormous need. And in a challenging time like this that’s particularly the case. And one of the reasons that we’ve done well in the IDR process, I believe, is because people recognize that our quality standards lead the sector of care. So our discussions are with payers who have to provide benefits to individuals and to corporations. And they know that those individuals, their members want to be in our network. It’s not just because of our size, it’s really because of our quality. I mean, we’re the leader and maternal fetal medicine. And in neonatology, our expertise saves lives, as Jim said, every day, many times a day. So payers want to, I think, rightly brag, and I’m not a doctor, but I think they want to rightly brag that Pediatrix is in their network. So that I think that for the most part sets up, presumably fair negotiations.
Brian Tanquilut
Mark, just to the point maybe this is my last question, do you have to shore up your litigation or your legal budget or your legal team as we think about just the process there?
Mark Ordan
I wouldn’t say so far. Our general counsel is sitting down the table from me, she works 24/7 days a week. So I think we’re okay, now we’re not — we don’t see right now a reason to materially increase our legal staff.
Brian Tanquilut
Okay, got it. Thank you.
Operator
We have a question in queue from the line of AJ Rice with Credit Suisse. Go ahead.
AJ Rice
Hi, everybody. Maybe a couple quick ones here. I know a lot of the focus is on R1, I just add the relationship there once this transition on revenue cycle, is there any change that’s happening with the underlying customer base? I know you’ve added, away from the NICU, other service lines? Or is that in any way adding to the complication here? I would think on the other hand, frankly, the government business picking up, you might get paid more quickly from them than you do from the commercial side. So that would — I think be a positive, but can you maybe just comment on that a little bit?
Mark Ordan
Yes, that doesn’t. I could see why it could, but it doesn’t affect the experience we’ve had, the experience that we’ve had is really precisely for the reasons we described. Where we see chinks in the in the system and addressing those chinks will — we think will get us back to the kind of billing and collection cycles that we should have. And the good news is, we’re able to see where we’re falling short pretty precisely.
AJ Rice
Okay. When you’re talking about the payer mix shift, I guess, your volume trends are bouncing around a little bit here. Is it that commercial, is pay paid cases is running below historic levels, or is it, that there’s been more growth on the Medicaid side? I’m just trying to figure out how do you characterize that variance that’s pushing your payer mix toward government away from commercial?
Mark Ordan
It’s probably — it’s a little bit of both that comes into the calculation. We still don’t have reason to see anything as a trend. So it’s one of those difficult things in forecasting in our businesses and is where payer mix will come out, but it certainly is on both sides.
AJ Rice
Okay. Interesting. In the pediatric urgent care I know that continues to develop, at what point do you have any better sense of where you’ll end up on margins as some of these earlier clinics, really mature at this point? And when do you think that could be a driver that impacts the overall performance of the company in terms of profit contribution that’s meaningful enough to move the needle for the entire entity?
Mark Ordan
We’re not separately disclosing our margins in primary and urgent care, yet, we think that as we get through ’23 into ’24, this will become a factor in our operations and in our growth.
AJ Rice
Okay. And maybe just the last one, I guess I’m taking advantage of this. It looks like on the comments about labor, you’re saying that is not really — we’ve got to increase wages across the board in an inordinate amount, but you’re doing things either attract staff or retain staff? Is that — am I hearing that right? And you just think about base level of increases, is it pretty consistent where you’re going into ‘23? With where you are coming into ’22 or is it a step up?
Mark Ordan
Well, no, I mean, it’s clearly higher than — these trends are higher than they were earlier in the year for us and for everybody else. So I would say going into ’24, we’ll have to see, we’re looking at just like I would think any employer, anywhere is, and certainly in healthcare, there are a lot of people who have less healthcare, because they were burned out. There’s a lot of factors that have affected the workforce. The effects of that are not fully baked in. We do everything we can to be the employer of choice and spend as much time as we can with our leaders out in the field. So that people want to be here and stay here. But I would say where labor rates go over the course of ’23 is going to be something we’ll have to see. We can only report on current trends and see what else is out there to give us a sense of where we’re going. We think we’re controlling relatively well. And as Jim said, some of this is also pressure in specific geographies.
AJ Rice
I’m just trying to think do you guys tend to give a base rate increase one time a year or is that each market sort of does what it needs to do? And if you looked at what it was historically, maybe 2% to 3% increases and now running 5% or the history effectively?
Mark Ordan
Now it’s not one set number, it is regionally based, its demand based. So there isn’t a factor that we can just enter in. When I think about — what I think about ’23. I say that’s why I answered the way I did. It wasn’t to be evasive, as to say that we have to look regionally at supply and demand and what other factors are on the market, but also in what seems to be for at least a while an inflationary environment that’s going to affect us.
In healthcare, there are many more locums, temporary is much more than many more locums in healthcare today than there were before. And that hasn’t factor also, when you have a higher locum rate. It’s hitting up less than others, but it’s hitting us more than it used to. That also pushes up labor costs.
AJ Rice
Okay. All right. Thanks a lot.
Operator
We have no further questions in queue at this time.
Mark Ordan
Well, thank you, everybody. Enjoy your day and your upcoming holidays.
Operator
Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.
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