4Q19 | United Healthcare's long shadow
MD reported an inline 4Q19 and offered guidance that would have been received more favorably absent the announcement that UNH had kicked Mednax out of network across 4 states affecting $70M in revenue. Making matters worse was management's replies to clarifying question such as does the $70M drop to the bottom line, what are there offsets or multipliers went unanswered. We think the decline in the stock was a combination of below consensus EBITDA guidance for 2020 (5%) and the incremental UNH headwind (15%).
In our view there is a credible path to reversing 500 bps of EBITDA margin headwind, or an effective increase of $175M at their current revenue run rate of $3,500M and EBITDA guidance of $450M-$490M for 2020.
ANESTHESIA | Shrink to grow
The UNH announcement largely overshadowed the disclosure during the call that MD had divested anesthesia practices totalling $60M in revenue that carries a break even EBITDA margin. Key among our thesis points is the margin benefits of shrinking Anesthesia as a percentage of total company revenue. In addition to the $60M, management commented that they expect to continue to shed additional practices throughout 2020. According to data from CMS, American Anesthesiology has seen headcount drop over the course of 2019, but $60M is a significant step up.
The arithmetic on a breakeven EBITDA and $60M in revenue implies 50 bps in margin improvement for Anesthesiology in 1Q20. With additional divestitures that could shrink Anesthesia to 25% of total revenue from 30%, the cumulative impact to margins is significant. Anticipating payor mix and labor cost headwinds to continue, modest positive impacts from "transformational" projects, we see a path for Practice Salary and Benefits to rise modestly in the 1H20 and decline in the 2H20.
Other efforts include "variabilizing" costs and moving physicians to a revenue share model versus a salaried employee. From speaking to Anesthesiologists formerly with Mednax, the problem was doctors working less after being acquired, inadequate incentive plans, and additional but ineffective management layers from corporate sent to address the productivity problem.
In our view there is a credible path to reversing 500 bps of EBITDA margin headwind, or an effective increase of $175M at their current revenue run rate of $3,500M and EBITDA guidance of
Surprise Billing
UNH’s announcement that it was terminating contracts ahead of their renewal date for all practice areas strikes us as more politics than economics. We have seen these fights before and they generally get resolved to the mutual benefit of all, largely because hospitals, especially those recognized for the care of women and their babies, don’t want to get caught in the middle and apply pressure to the payers. So, what UNH seems more interested in doing is raising the profile of the out-of-network issue in the context of the current federal debate over surprise billing and perhaps move the discussion in favor of payers.
Currently, federal legislation to resolve balance billing disputes is at an impasse with payers wanting to price services for radiologists, anesthesiologists, pathologist, neonatologists and emergency room physicians using a median in-network rate. The providers want to resolve these billing disputes through arbitration, an approach being adopted in the states. Within Congress itself, a similar divide persists. The Ways and Means Committee is taking the side of the providers while Energy and Commerce supports the payers preferred approach. The Senate HELP Committee more or less supports the Energy and Commerce position but there remains a lot of dissent among Republicans. Conservative groups like Heritage Action have piled on calling the benchmark approach “price-fixing.”
While a risk, the probability of a surprise bill compromise that makes a significant impact on Mednax remains low in our view. One the one hand, the median rate solutions would mean there is no reason for networks to exist, and arbitration solutions likely end in impossibly long delays. Absent legislation, its he-said-she-said, although UNH appears to have the upper hand.
"Mednax's charges are more than 60% higher than the average cost of the other doctors that provide similar services in these states," a UnitedHealth spokesperson said - Axios
The UnitedHealthcare statements are highly misleading. MEDNAX has engaged in numerous discussions with United regarding this matter, including as recently as February 13, 2020, and at United’s offices in Atlanta on January 21. At no time were these discussions presented to MEDNAX as negotiations. Rather, United reinforced its unacceptable payment terms on a ‘take it or leave it’ basis. It is important to note that MEDNAX has requested on multiple occasions a 60-day extension to avoid the out of network disruption to patients and allow more time for negotiations, each time United has rejected these requests. As MEDNAX stated this morning, it remains our hope that we can achieve an outcome that is acceptable to all parties, including the patients receiving critical healthcare services.
In the short term, we expect MD and UNH to work it out but the issue does bring into sharp relief Congress' dilemma. Picking sides will not be easy.
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Thomas Tobin
Managing Director
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Emily Evans
Managing Director – Health Policy
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