U.S. Markets closed

Mednax Inc (MD) Q2 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Mednax Inc (NYSE: MD)
Q2 2019 Earnings Call
Aug 1, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the MEDNAX 2019 Second Quarter Earnings Conference Call. [Operator Instructions], later on we will have an opportunity for a question-and-answer session. [Operator Instructions]. At this time, I'd like to turn the conference over to our host, Charles Lynch, please go ahead.

Charles Lynch -- Vice President, Strategy and Investor Relations

Thank you, operator. Good morning, everyone. With me today are our CEO, Roger Medel and our Chief Financial Officer. Stephen Farber. I'll start off with a quick disclaimer and then we'll move into our comments. Certain statements in forward 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 MEDNAX's 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 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 as quarterly reports on Form 10-Q including the sections entitled Risk Factors .

In today's remarks by management, we will be discussing non-GAAP financial measures, 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 annual report on Form 10-K and in the Investors section of our website located at mednax.com . With that, I'll turn the call over to our CEO, Roger Medel.

Roger J. Medel -- Chief Executive Officer

Thank you, Charlie. Good morning and thanks for joining our call to discuss the results of the second quarter of 2019. Our adjusted EBITDA and EPS results were in line with our guidance ranges. At a high level same-unit revenue growth was toward the upper end of the range that we forecasted, led by neonatal volumes. We also continue to track toward our internal EBITDA improvements to offset the ongoing headwinds in our business .

During the quarter we also increased the scope of our transformational activities, which are focused both inside our core service lines and across our service organization, and I'll provide some detail on those activities this morning. Finally, as part of our transformational initiatives, we have made a number of organizational changes, which I will also discuss. Looking across our service lines for the quarter, volumes increased across almost all of our women and children specialties. In Neonatology, the underlying trend of births at the hospitals where we provide services was up slightly, which is an improvement from the first quarter and our volumes increased based on that slight growth, and the rate of admission into the neonatal intensive care units.

Additionally, our payer mix in women and children services was slightly positive, continuing the trend we have experienced for the past several quarters. Lastly, during the quarter, we announced the acquisition of two maternal fetal medicine practices, one in Southern California and one in Houston, Texas.

In Radiology, revenue growth remained solid and in line with our expectations. We have seen continued collaborative efforts, both across our practices and with vRad and I believe our Radiology organization is rapidly evolving into a true National Medical Group .

Lastly, in anesthesiology, volumes increased modestly while payer mix was slightly unfavorable. We continue to progress on several areas of focus within our Anesthesiology organization, including the rollout of clinical resource management Technology across our practices and discussions with practices about moving to a compensation model that provides them with a first-dollar incentive both to grow their practice and to operate more efficiently.

We also took a step toward portfolio management within our Anesthesiology organization, which was the active decision to exit a contract for services with a Health System in Minnesota .

This was not a profitable contract for us. Looking forward, we will continue to evaluate situations like this where portfolio management might be the most appropriate step and we're committed to making thoughtful and strategic decisions to exit contracts or individual facilities where there are specific challenges to sustain profitability.

What I'd also like to discuss today is our broader transformational efforts, which we have talked about at length over the past few quarters, but continues to expand in scope.

The focus of these efforts is addressing the margin headwinds we faced in our business and industry. This pressure largely reflects exogenous factors including constraints to revenue growth from volumes and mix and unit wage cost inflation that is at a historically high levels across the country and especially across our own clinical labor population.

This margin challenge is not unique to MEDNAX, we have spoken about these headwinds for some time now. But we also believe that a substantial amount of this headwind is directly addressable . For the past 18 months, we have been undertaking bottoms up focus action plans across all of our practices and in our corporate functions.

During 2018, we announced that these action plans had a goal of $120 million in annualized improvements by the end of 2019 and we remain on track toward that goal.

Besides these action plans, which I want to emphasize will continue beyond this year, we believe there are significant opportunities for greater efficiencies, both within our service lines and in all of the support functions we provide across our organization. With that in mind throughout this year we have undertaken a broad set of transformational initiatives and have committed to investing significant resources inside our organization in partnership with the best in class consulting resources that Stephen discussed in detail on our last conference call.

As of today, we are fully resourced to address these opportunities and our partnerships with Accenture of resin Marcel [Phonetic] And FTI Consulting bringing us world-class capabilities to move aggressively on multiple fronts and help us to meaningfully accelerate our efforts .

In general, our outlook is unchanged and we also believe that the plans we are acting on are the right path to take and as Stephen will discuss our outlook for the coming several quarters incorporates our expectation that we will continue to close the gap.

Another important update I'll provide relates to steps we've taken to flatten and enhance our organizational structure. As we disclosed last month, our former President Joe Colabro is no longer with the company after and nearly 25-year career with MEDNAX .

Today, the leaders of each of our three core medical groups report directly to me. MEDNAX is, before everything else, a clinical organization and I believe the steps we have taken to bolster physician leadership and enable world-class support of our practices will ensure that we remain committed to taking great care of our patients as we undertake the efforts that we're focused on as a company.

To that end, I'd like to recognize two of these leaders who we recently named as Medical Group presidents .

Dr Mack Hinson is now our President of women and children services. Mack is a neonatologist and joined MEDNAX alongside his Seattle-based Practice in 2003. He quickly took on increasing leadership roles for us from corporate Medical Director for his Practice to regional leadership and then President of our Mountain West region and most recently as Chief Operating Officer for our National Medical Group .

Mack receives his Medical Degree from George Washington University School of Medicine and Health Sciences. Completed his Pediatric Residency at Madigan Army Medical Center in Fort Lewis, Washington and then his Neonatal Perinatal Medicine Fellowship at Walter Reed Army Medical Center in Washington DC.

He also completed his scholarship post-doctoral research at the National Cancer Institute and the Food and Drug Administration.

Dr. Hinson also has a masters degree in Management with a focus in leadership from Nova Southeastern University. He is a fellow of the American Academy of Pediatrics and has held deployments that the Uniform Services University at Tulane University and at the University of Washington .

Dr. Katherine Grichnik is now our president of Anesthesiology. Dr. Grichnik has an extensive background in clinical, operational and executive medicine. She is a cardiothoracic anesthesiologist who practiced for 22 years at the Duke University Health System, where she was also appointed to multiple senior administrative leadership roles. In 2013, she joined MEDNAX and became our first Director of Quality, Research and Education for Anesthesiology and was promoted in 2015.

to be our first Vice President of quality and safety for the complete MEDNAX National Medical Group overseeing quality and safety metrics across more than 10 clinical specialties.

In 2016, Dr. Grichnik moved to be Senior Vice President and Chief Medical Officer for the Cleveland Clinics Indian River Medical Center, where as an executive team member she co-managed the overall hospital budget and staffing and specifically have five service lines reporting to her.

In 2018, we were happy to have Dr. Grichnik rejoin our organization as the Vice President for Clinical Development and Medical Director of Surgical Directions, where she work directly with hospitals executive teams, physicians and staff to achieve operational quality, safety and performance improvements

Kathy and Matt joined Matt Devine , who has been President of Radiology since 2017 and Leslie Basham, who has been President of Surgical Directions since early the same year. These Presidents together now joined me in leading an organization that totals more than 4,000 physicians and over 8,000 clinicians who care for patients across all 50 states and Puerto Rico every day.

We have made other organizational changes as well as part of our transformational activities and these changes have included a number of position eliminations. These were not easy decisions to make, and many of the people effected have been long-standing members of our organization and colleagues of mine, but we also continued to add key people in a number of leadership roles beyond our medical groups, including a Chief of Strategy and Growth, a National Vice President of Sales and Marketing and a National Vice President of Managed Care Contract. These additions follow significant organization and leadership changes we have made over the past year, including a new Chief Financial Officer and the new Chief Operating Officer.

All of these changes are an important part of the transformational activities that we are undertaking. I believe that in addition to flattening our organizational structure, the updates we have made to our leadership and operational management will enable an acceleration of these transformational initiatives while further enhancing execution and accountability across our organization.

Now before I turn the call over to Steven, I want to take this opportunity to thank Joe Calabro for all of his contributions to our organization. Since joining us in 1996, Joe took leadership roles that were critical to our growth and evolution from our Pediatrics Organization then to MEDNAX today.

More importantly, Joe has been a trusted colleague over the years and I personally thank him for all he has done and I wish him the best.

With that, I'll turn the call over to our Chief Financial Officer, Stephen Farber.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Thanks. Roger, and good morning and thanks for joining our call. I'd like to discuss a few items within our second quarter results, including our transformational and restructuring expenses and some updated views on how we're looking at that activity moving forward. Then, I'll touch on our outlook for the year as a whole. As Roger mentioned, our results were in line with our expectations with same-store revenue growth of 1.6% adjusted EBITDA of $131 million and adjusted EPS of $0.89. As was the case in the first quarter, there were some pushes and pulls, but in general our operating results were well within our expectations. For those of you maintaining models on the company, I'll remind you that as we previously disclosed our EBITDA for the second quarter of last year included a roughly $6 million contribution from an Anesthesiology Contract that did not recur this year .

This amount represents a meaningful portion of the year-over-year EBITDA comparison for the quarter. Moving onto our transformational and restructuring expenses, these totaled roughly $29 million in the second quarter and generally fell into three buckets. The first was consulting standard which totaled just over $12 million, somewhat higher than our forecast of $10 million as we accelerated our efforts. Second component was severance cost of roughly $10 million, about half of which was non-cash, related to the position eliminations Roger discussed

Last, we incurred a non-cash charge of just over $5 million related to the write-off of certain intangible items based on the expected termination of our Anesthesia Contract in Minnesota in 2020. In total, the cash component of this aggregate expense line was about $17 million, with the rest being non-cash. Moving specifically to our decision to exit our Anesthesia Contract in Minnesota will provide services to patients at that system through the remainder of the contract term, which extends through June of 2020. To give you some sizing, this practice represents roughly 4% of our anesthesia revenue, but it has been break even at best in terms of EBITDA contribution. As a result, this action should not have any effect on our dollar EBITDA, all else being equal. Moving onto our internal investments and consulting partnerships as Roger noted, we have quickly ramped up our activity to fully resource the actions we've targeted and moreover through the work we've done with our partners, we have been able to further define our scope of activities. We're now reaching full engagement to address the cost trends in our business, which remain our primary headwinds and our initiatives span all the areas Roger detailed at the practice level, as service line level and across our corporate and shared services. I want to emphasize that we remain in the early stages of this activity with much of our efforts over the past quarter focused on the finding that scope of work across the areas we're targeting making underwriting decisions and ensuring that any work streams that are interdependent with others are appropriately. As a result, we continue to anticipate a timeline of 8 to 10 quarters with the real bolus of activity occurring through the late this year and across 2020 with transformational activity tapering off over the course of 2021.

in terms of how we've been scoping and underwriting this activity, I'll reiterate some comments I made last quarter. The work streams were standing up have an early stage priority of supporting our existing activities to help ensure that we minimize implementation risks. This is particularly the case for any tech-enabled process change we're undertaking. As this relates to our 2019 outlook, our guidance for this year includes a fairly minimal yields from these projects and our viewpoint is really toward 2020 and beyond, since most of the returns we expect won't be immediate. That said, as we go through the decision making about where we're committing capital, our goal is that the anticipated returns on these investments will not only be a significant, but will also be recurring once they begin to yield.

I'll wrap my comments for the quarter with cash flow from continuing operations, which was strong. On a reported basis, operating cash flow from continuing operations was of $115 million. But taking into account the cash component in the quarter of our transformational and restructuring expenses, a better way to look at our true operating cash flow for the quarter is more in the range of roughly $125 million or so. This aligns well with our general expectation for the year, operating cash flow from continuing operations will be in the range of 60% to two- thirds of adjusted EBITDA. In terms of our primary uses of cash during the quarter, we repurchased $55 million of our own stock, bringing our year-to-date repurchase activity to $144 million.

We also completed two modest practice acquisitions during Q2. As I will discuss related to our guidance for the year, the bulk of our capital deployment thus far in 2019 has been toward transformational activities and shrinking our share rates. Turning to our full year outlook, in our press release this morning, we narrowed our expectations of adjusted EBITDA to a range bracketing $505 million at the midpoint, which is the low end of our previous range. I'll point to two key factors that we've taken into account and incorporated in that outlook.

First, our same-store growth in the second quarter was in line with our guidance of 0% to 2% that nonetheless is somewhat muted level from a historical standpoint. As we look into the second half, we're retaining that general outlook, which is modestly below what we contemplated in formulating our guidance at the beginning of the year.

As always, the key component of our revenue outlook is Neonatology volume and birth did improve in the second quarter to a slight increase compared to declines of between 1% and 2% over the prior couple of years, but we believe it Preliminary to view that as any true change in underlying trend. From a technical standpoint, we do expect a somewhat higher range of same-unit revenue growth in the third quarter of 1% to 3% based on having an additional week day versus prior year. But in general, we're now anticipating a similar underlying same-unit revenue trend in the second half of this year to what we observed during the first half.

The second factor we've taken into account is our use of cash. For the year-to-date, we primarily invested in shrinking our share base in our internal transformational activities and our M&A activity thus far has been quite low .

As that relates to our full-year adjusted EBITDA outlook, I'll remind you that as part of our original forecast range we specifically assumed $100 million of deployment toward acquisitions. We now anticipate that our total deployment for the year will be in the range of $40 to $50 million. All else being equal, this lower level of acquisition activity brings down our full year outlook by several million dollars. As we also provided this morning, we expect adjusted EBITDA for the third quarter to be between $130 million and $140 million which brackets the current analyst consensus .

In terms of a year-over-year view, this compares to reported adjusted EBITDA in Q3 of 2018 of $130 million. Please keep in mind that Q3 of last year was burdened with roughly $10 million of salary expense related to the physicians at that practice which won't recur in the third rd quarter of this year. Based on this Q3 outlook and our updated full-year view, you'll see that we expect adjusted EBITDA in the second half of this year to be fairly ratable between the third and fourth quarters. Finally, we expect that our uses of operating cash flow from continuing operations for the remainder of this year, will continue to be a mix of transformational investments, share repurchases, acquisitions and debt repayment.

I'll wrap up with a couple of comments about margins. As we said in our press release this morning, our narrowed expectation range of adjusted EBITDA for 2019 equates to a margin for the full year of roughly 14% to 15%.

As an administrative note and for modeling purposes, this morning, we posted quarterly financial information for all of 2018, including reconciliations for EBITDA and adjusted EPS on our website. There were certainly some distortions in 2018 to take into account when measuring our margin outlook for this year versus last year. But these historical financials should help to give you a good basis for comparison, we clearly continue to face margin headwinds and we've discuss those in detail. That said, a common focus of all of our transformational activities alongside the in-flight action plans we've been executing on is addressing this gap over the course of our transformation and today we are fully resourced in tandem with our consulting partners to move forward across the whole scope of our initiatives and as this relates to our views on 2019, we do anticipate a narrowing of that gap as we move through the second half of this year. With that, I'll now turn the call back over to Roger.

Roger J. Medel -- Chief Executive Officer

Thanks, Stephen. I'd like to make one last comment before we open up the call for questions. Another item we disclosed in early July was my decision to lower my own salary to $1 per year. With this change, my compensation will be almost entirely variable and tied to our company's performance. This decision demonstrates my full commitment to what we're doing and reinforces that my interests are wholly aligned with all of our stakeholders and particularly with our shareholders in ensuring our success. With that, operator, let's open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today will come from the line of A. J. Rice with Credit Suisse. Please go ahead.

AJ Rice -- Credit Suisse -- Analyst

Hi everybody. A couple -- well, just a couple of parts to this in terms of guidance for the back half of the year and any early thoughts on next year, you're saying that one of the reasons to be a little more modest in the back half is less M&A activity. I would like to understand is that you proactively stepping back from the market, it almost sounds like it is or and what do you see it in the marketplace and then given the trajectory of your cost savings and cost initiatives mostly in growing costs this year, but next year, hopefully seeing some positive benefits. Do you think it's reasonable to expect you to see EBITDA growth in 2020 as you set up and come out of '19 even if we're not ready to make a specific forecast.

Roger J. Medel -- Chief Executive Officer

Yeah, good morning.3 Yes, we have set the back from acquisitions specifically we decided to utilize. As we said earlier, our cash during the first half of the year, we have, as I stated hire some new people, new sales and marketing and growth and strategy, people that are focused on where we spend our money best as far as acquisitions are concerned. And having said that, I would expect to see a couple of Maternal Fetal and Pediatric acquisitions shortly within this third quarter as a result of that. Now, as you know, it takes a little bit of time to ramp up for that and so the contributions of the acquisitions that we you will see during the remainder of the year won't completely that much to the earnings for the year, but you can expect, of course, that they -- that roll into next year. So, it was a decision for us to step back, we have geared up to revamp, not only our M&A activity, but our organic growth activity as well and you can expect to see -- start to see some of the early returns from that before the end of the year.

AJ Rice -- Credit Suisse -- Analyst

Go ahead Steve.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

A.J in terms of your questions around guidance I want to I try and give some color and go from there. In our comments, A. J., we tried to give some sense over the balance of the year and really this concept of a gap between our headwinds and our tailwinds and there was a range of activities that results in our ultimate momentum. We do have a gap and standard in our numbers for a while now and everything we're doing is trying to narrow that gap. I think it's a bit premature for us to make any commentary around 2020. I think we have been very purposeful in speaking about this transformation period as we continue to try and close that gap. So hopefully that gives you a bit of a sense. We do expect it to narrow, but I think it's premature for us to begin to indicate when we expected to close .

AJ Rice -- Credit Suisse -- Analyst

Okay, thanks a lot.

Operator

Next, we have a question from the line of Ralph Giacobbe with Citi.

Ralph Giacobbe -- Citigroup -- Analyst

Thanks, good morning. I just want to ask on guidance as well. You have a full year, I think the commentary was bracket, the $505 and that being the midpoints or are you keeping that $30 million range, so is the new range $490 to $520 or if you can clarify sort of that one and then two, I guess, as I look at it year-to-date EBITDA $236 midpoint of guide $135 for the third quarter. Again, it would suggest something sort of flat or lower in the fourth quarter and historically back half is typically stronger than first half and considering what I'd expect to be kind of a ramp, at least on the cost savings. It just seems to be a disconnect, certainly relative to stable 2Q results, so if you could just flush that out and maybe highlight if anything is getting worse. Thanks.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Sure, Ralph. Good morning, it's Stephen. We have not publicly stated a range around the $505, just simply that's the midpoint. Yeah, I think typically companies tend to narrow their range a bit over the course of the year. So, I'm not really sure that I would maintain the idea of a $30 million range, but obviously a point estimate is in Really intended to be the precise landing target either. So, that's how we've calculated it, we've tried to be constructive and hopefully that helps you out a little bit. In terms of the back half of the year, one of the comments that I made a few minutes ago was that we do expect Q3 and Q4 to have someone ratable performance. You did mention that we've sort of done $236 in the first half and a midpoint of $505 would sort of imply roughly to $270 in the back half. So it's obviously if you break that ratably it is about $135 a quarter at the midpoint. The way that I think about that is our Q1 for us as you know is always a distorted quarter because of a bunch of front-loaded expenses in the year related to employment taxes and all sorts of other things. So, Q1 for us was that kind of $105 type number and then coming up to $131 in Q2.

Typically for us, you see Q3 being a little stronger than Q2 or Q4 for seasonal factors and a number of other minor items. For this year, we feel comfortable thinking of Q4 is being ratable with Q3 rather than a bit softer because of all of the transformational activities that we now have under way and ones that we expect to begin where while we don't expect significant contribution this year, we do expect some nominal amounts of contribution on some of those efforts before they ramp up or meaningfully into 2020. Hopefully that answers your question.

Ralph Giacobbe -- Citigroup -- Analyst

Okay. Thank you.

Operator

Next question will come from the line of Kevin Fischbeck with Bank of America. Please go ahead.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

All right, great, thanks. Yeah, I guess -- I just wanted to go back to the guidance for a little bit. The number that you guys are talking about during here for Q4 I guess is a bit lower than what you thought, it's a little lower than what the Street was looking for. So you're saying, I understand the deals being slowed down, but I guess it's unclear to me exactly why with Q2 volume being basically what you thought it would be while the sudden like what you're seeing that makes you feel less comfortable that you're going to see the ramp that you saw in the back half of the year and then maybe in line with that, I guess last quarter you kind of hinted you might be countering some contracts. So I just wanted to see if there's something structural in that as far as the profitability of contracts in general, more of them are getting underwater that might cause you to do that and whether this back half of the year guidance implies anything around additional contract terminations

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Sure. Sure. Good morning,Kevin. Stephen. I want to sort of think those in reverse. Look, in terms of contracts cancellations, we have, as you know, a very large book of contracts and across all of our specialties and as we started to talk about over the last couple of quarters and I think this morning we are being more explicit about it probably than we had -- than we were last quarter where we're looking at our portfolio and I think it's evidenced through the commentary we've had around Minnesota.

If we have contracts that are not profitable or contracts where we don't have a favorable longer-term outlook, we are digging in and we are over time going to reach our conclusions and take active portfolio management actions. So, yeah, I'm not sure quite how to say it more clear than that. In terms of how it affects Q4 guidance. I don't, -- I would not expect that to be a [Indecipherable] stable factor in Q4, simply because we don't really have any interest in eliminating contracts that are profitable and that are contributing, maybe on occasion, if it's marginal, and we have some reason to view as not having the opportunity to improve from wherever it stands.

So I would not expect that to be a meaningful impact on Q4. In terms of the other factors with Q4, Kevin, I mean you followed us closely for a very long time and there really are a multitude of factors that impact our performance quarter-to-quarter, some of them were flat trends, some of them reflect noise and I think -- I don't really think there was anything particular in Q2 other than a little more muted of a unit revenue kind of trend that we spoke about during our prepared remarks. That element is a bit of muted as to what we had expected six months ago when we have formulated our guidance for the year.

So to some extent I think Q4 kind of little bit of a ramp into it, has people models came together over the course of the last couple of quarters and realistically a ratable Q4 to Q3 for us is a level of performance then we've, for the most part, previously experienced. So I think hopefully that gives you a little more color on how the numbers come together.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Thanks.

Operator

Next question will come from the line Jason Plagman with Jefferies. Please go ahead.

Jason Plagman -- Jefferies -- Analyst

Just a question on SG&A and those were up 3% year-over-year and 2% sequentially, so when should we expect to see that flatten out or even Decline on either dollar basis or the percentage of revenue at some point in the next year or two as you as your transformation initiatives begin to produce dividends.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Sure. Jason. Good morning. It's Stephen. Yeah, you know, I mean, I guess the way I think about SG&A is if you look at it kind of sequentially. I think it was really like $2.5 million, $3 million on a few hundred million dollar kind of base. It's really hard with that aggregate to point anything specific that drove that. I mean we have a lot of efforts in play around SG&A take out, but we also have a number of capabilities that we are enhancing, for example, we are spending more money on IT.

It has a great number of the initiatives that we have in place, both initiatives we've talked about for a while and a number of the transformational initiatives are tech enabled process change and other sorts of change. So our SG&A number, it includes IT, it includes revenue cycle, where we're making a tremendous number of investment. There really are -- it even includes elements of rent and real estate.

So it's very hard to look at relatively small movements in that number and discern anything directionally that's of importance with respect to the evolution and improvement of the enterprise.

Jason Plagman -- Jefferies -- Analyst

Okay, thanks.

Operator

Thank you. Our next question will come from the line of Pito Chickering with Deutsche Bank.

Pito Chickering -- Deutsche Bank -- Analyst

Good morning, guys. On MedData, can you give us some color on the Silver Asset. It looks like you took another charge in this quarter, $50 million after the $25 million charge last quarter, just through updates in light of the charge and how that sales going?

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Pito good morning. I am Stephen. Yeah, that process is continuing and because it's continuing, there really is nothing specific that I can say about it. And for sure, when we have something specific to say about it, we will be sure to say it. In terms of the accounting charge, I think that the initial charge was from the move to discontinued operations and it was driven largely by this accounting considerations and all of the rules around how exactly you're required to do that. The move this quarter again, what we are required under the accounting rule to look at where we stand in the process, where the transaction seems to be heading and record that That impact on our books and I think what you saw this quarter is nothing more than that.

Pito Chickering -- Deutsche Bank -- Analyst

Great, thanks a lot.

Operator

Our next question will come from the line of Gary Taylor with JP Morgan.

Gary Taylor -- J.P. Morgan -- Analyst

Hi, good morning. I did actually have two questions if you want to ignore the second one, you can. The first one, I'll just go with just in terms of Minnesota, can you give us a little more about that contract, it sounds like it's maybe $45 million -- $50 million of annual revenue, is that right. I heard you say break-even EBITDA, but how long have you had that contract. Is it still possible there could be resolution, you could end up staying there and just why has it proven to be unprofitable, has the subsidy changed in there.

If it was a subsidy contract or has the mix change or just never really developed as you had anticipated, would like a little more color around Minnesota. And then my second one for Roger if you have time, some of the arbitration provisions and some of the balance billing legislation we're seeing in the House and Senate, just wondering if what's being proposed around arbitration would satisfy you and mitigate any possible concerns you might have about that legislation.

Roger J. Medel -- Chief Executive Officer

Can I just ignore both of those?

Gary Taylor -- J.P. Morgan -- Analyst

Then I'll call you later.

Roger J. Medel -- Chief Executive Officer

No, hey listen Taylor. I'll start with circle of the Minnesota was a disappointment to us because we've had that group for a number of years. I don't know exactly why, but it's been a number of years and we -- the hospital had requested a number of additional physicians to cover and a number of additional nurse anesthetists and so we continue to provide additional services and recruited a top-notch cardiovascular anesthesia team there, etc. As we continue to increase the services, the hospital requested more activity, we kind of talked about our need for additional help from the hospital and hospital decided that they really weren't able to grant us that request and so we decided it makes sense for us to -- to not continue there.

So it's a friendly situation and we're going to be there for a whole another year yet, so who knows whether at some point the hospital

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

You may decide to talk to us again about that, in the meantime we know the hospital is making other arrangements with some local groups, etc. to try to provide that coverage. So that's really the situation there. On the balance billing, let me just say again that our out of network stuff is just insignificant. We have never made our business being out of network, in fact it often happens that we acquire groups that are out of network and our first action and is to get it network and that just happened recently this year. So it just isn't anything we're terribly worried about. We're looking at it. We like the idea of being able to have a conversation and there are many proposals as you know, but we just -- we think for us it's really not a very important issue. The resolution processes that are being proposed appear fair to us and it's just not anything we're losing any sleepover.

Pito Chickering -- Deutsche Bank -- Analyst

Thank you very much.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

Next, we have a question from Chad Vanacore with Stifel .

Chad Vanacore -- Stifel -- Analyst

Hi, good morning. This is Stifel Chad. I have a quick question and then one clarification, you spent $27 million on transformational and restructuring spending this quarter and it looks like 3Q will be half of that. So, how should we model the cadence of that $75 million to $100 million total capital deployment with the bulk of it being in this year, it was a little bit dragging into 2020

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Good morning. Some of your -- some of the facts are actually slightly different. The amount of $15 million that we put in the Q3 look forward for that spend only relates to consulting expense. The only part that we really give an outlook on is the consulting element to that cost. So of the $27 million in Q2, $12 million was consulting, the other $15 million, as I said during my remarks, $5 million was a write-off of some intangibles on Minnesota contract and $10 was severance. So, we do it that way specifically because from a quarter-to-quarter basis we continue to find opportunities, whether it's to manage our portfolio or make other decisions over the course of the quarter, which will impact that transformational number. The one that we tend to have more visibility on is Consulting piece in terms of the $75 million to $100 million, I think it's important to clarify that is the anticipated -- a range of anticipated consulting spend over the course of the balance of this year and next year, not the total transformational expense including these other items that we've been discussing .

Chad Vanacore -- Stifel -- Analyst

Got it. So it will be more evenly spread out .So, just a clarification, what's the revenue and EBITDA contribution from that data as this quarter ?

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

We've moved that to discontinued ops, so I think there are...

Chad Vanacore -- Stifel -- Analyst

$6 million.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

That's not a number that I have in front of me, but it will be in disc ops.

Chad Vanacore -- Stifel -- Analyst

Okay, thanks.

Operator

We have a question from Matthew Gillmor with Baird. Please go ahead.

Matthew Gillmor -- Robert W. Baird -- Analyst

Hey, thanks. I just had a general question on the labor inflation and Roger had mentioned unit costs are running at elevated levels in his remarks, and our thoughts whether there would be some sort of equilibrium ratio at some point with labor costs where other groups that employ similar physicians would MEDNAX would also be under marginal pressure and that would eventually help reduce inflationary pressures the entire market. If that's a reasonable view, how far do you think we are away from heading toward that equilibrium or is there some other dynamic in the market that continues to drive labor inflation?

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Sure. Good morning. This is Steve. I want to make a comment or two and I'll pass to Charlie for some more.

Charles Lynch -- Vice President, Strategy and Investor Relations

I do think it falls into that too early to call by category. As we said in the past in prior quarters, labor inflation is a real issue for pretty much any employer in this country, no matter what business you are in and I think the labor inflation in healthcare and the more specialized you get, the harder that inflation seems to be. I think that really is one of the main drivers of the SKU that we ourselves are seeing, yet when you look at our, kind of, $2.5 billion year book of labor, I think it's fair to say three quarters of 80% of it, some sort of disproportionate amount of of it is highly specialized clinicians and in some cases those clinicians also have the added factor of which you've got some distribution where some places where we do business there are shortages. So you have a combination of a hot labor market ,highly specialized people within that labor market and geographic shortages of those people. Those are the same comments we've made over time about what's driving this for us. This is a meaningfully higher level than we have historically experienced and I think our

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Our feeling is as we before, this is our single largest headwind and it is somewhat we believe in extremes by calling when it's going to mean revert is probably a bit premature for that. Charlie, you have comments you like to add?

Charles Lynch -- Vice President, Strategy and Investor Relations

Yeah, hi Matthew. Just a couple of things around what we're trying to achieve through the activities we are undertaking. There are some thinking about just pure unit labor cost inflation that are somewhat unavoidable here and there, whether it's scarcity of clinicians' volume growth and the life across different of our service lines, but keep in mind that as part of our activities, we're also looking at the structure of compensation for a number of our service lines as we have deployed in Radiology and are moving to deploy across Anesthesiology. We're looking at more of a Rev Share model that more directly aligns the aggregate comp available within a practice for the revenue that practice and some of variabilize that and alongside that we're investing pretty significantly in clinical resource management capabilities to better cover all the sites and locations that practice might need to be covering and eliminate leakage of clinicians' time and at the same time eliminate any kind of leakage related to premium costs.

So there's a number of angles we're taking at it and when they all come together, we do believe that we've got the path in place to enhance the productivity of the clinicians at our practices, while at the same time having a more direct linkage to their own individual comp and the success of the practice and alongside with that incentivizing for as Roger mentioned in his comments, a first dollar impact to their own pay and steps that they can take alongside with our support to be either more productive and efficient or grow their practices.

Matthew Gillmor -- Robert W. Baird -- Analyst

Got it. Thanks very much.

Operator

We have a question now from Whit Mayo with UBS. Please go ahead.

Whit Mayo -- UBS -- Analyst

Hey, thanks. Yeah, I just wanted to follow up on that question just a little bit. It seems like you guys are seeing really encouraged with the receptivity from your anesthesia partners to engage on this new comp model. Is there any way to give us a sense of how many practices are interested, what percent of the groups are you targeting. I'm just trying to visualize what the -- what the addressable market is and can you give us maybe a little bit more color on exactly what is different about this compensation model versus what you have in place today. Thanks.

Roger J. Medel -- Chief Executive Officer

Yeah, hi, this is a model that we have salaries for our radiology practices and all of our Radiology practices are on this model and I can tell you unequivocally that this model is working very well and is having exactly the purpose that we intended for it to have with our radiology practices, then it basically says we will give our physician a percentage of the revenue and so instead of a guaranteed salary which is what our physicians on the anesthesia side have, they get a pool depending upon what percentage they get 60% of revenue.

They get that pool and from there they manage all of their direct expenses, salaries, etc. The advantage to that is that they then become responsible for any additional expenses. So if they decide they would like to have an additional clinical resource and additional physician or an additional nurse etc, then that becomes their responsibility. The flip side of that is they get the first whatever $0.60 -- $0.70 out of any additional dollar that comes in the door. So they're are very incentivized to go out and bring additional dollars in the door. But just as importantly of any additional physicians or nurses that they -- that are no longer a member of their team, they get 100% of those savings.

So there, it really aligns our incentives with the services that we provide for them and the expenses and the growth opportunities that they see, that's the, -- that's the model. It works very well for all of our radiology practices. Our goal -- our plan, what we're going to do is we're going to change our anesthesia practices to that model. Now our anesthesia practices, just so you understand when we acquired these practices, they all got between 5 and 7 years of contracts and so every year there are a few of these practices, a number of them that come up for renewal. At that point is when we are converting our practices for renewal. There are some that we are attempting an early conversion on, but realistically that takes a longer time and incentives to get them to change from their current model into the new model, but the plan is to convert all That, to that model. Currently, we have practices that are already on that model. It is not a majority of the practices, there are two or three more to be converted before the end of this year and there'll be another 4 or 5 to be converted next year, I would say probably around 10% of our practices --of our anesthesia practices or maybe a little more than that are currently on that plan.

Whit Mayo -- UBS -- Analyst

Yeah. So this isn't really an uncommon model in anesthesia, but there are plenty of groups out there that paid a dock space off of some percentage of revenue with some bonus structure around the EBITDA, if you will. Would you say that your prior model was like, not the norm and this is the norm and so this should be an easier transition?

Roger J. Medel -- Chief Executive Officer

I don't really, look we, our prior model -- current model. Yeah, current model is really just a reflection of what our neonatology model was and is and it continues to work very well in neonatology for other reasons. And so what we did with anesthesia was institute the model that had worked very well for us and continues to for neonatology. I don't really know what the comp model is for other groups, although my understanding is that they're just on those basically a similar kind of base salaries with some guarantee bonuses, etc, but I really I'm not an expert on the other's compensation plan.

Whit Mayo -- UBS -- Analyst

Yeah, one follow-up on the topic, just a comparison between anesthesia and radiology. I'm just trying to sort this out of my head, I sort of things anesthesia different than Radiology in the sense that they are sort of like catchers not pitchers radiologists, they don't drive the volume or radiologist do drive the volume, anesthesia they value visibility in the compensation above all things like these are all the things I've heard you say in the past. So can you maybe help reconcile and help me understand, like how the anesthesiologist incentivizes them to bring more money in the door. I guess I'm kind of stuck on that one point and I'll hop off. Thanks.

Roger J. Medel -- Chief Executive Officer

Yeah, well, you know, with this new model again, if they're getting a 70% of the revenue, the first dollar that walks in the door, they get $0.70 of it and so they're incentivized now rather than having a guaranteed base salary, which is what we're talking about today. Whether they see, obviously there are we expecting to see a number of cases, etc, but the point is that independently of There payer mix drops or whether other things happen, they have a guaranteed salary. Here, what we're talking about is incentivizing them to go out and maybe pick up an ASC where they can start to provide services or to run their services more efficiently right. Maybe they have one to many nurse anesthetists. So, maybe they have one to many anesthesiologists.

So the idea is to incentivize them A, to grow because they are going to get a significant percentage of the additional dollar that comes in the door or B, to run or both to run their practices more efficient.

Whit Mayo -- UBS -- Analyst

Super helpful, thanks.

Operator

Next we have a question from the line of Ryan Daniels with William Blair.

Unidentified Participant

Hey guys, this is [Indecipherable] speak out in for Ryan. Most of mine have been answered, but I was just wondering if you could talk, but I know you're moving a little bit away from acquisitions and I was wondering if any of that or how much of that is valuation based. And I guess if you can comment on any trends you're seeing in that front.

Unidentified Speaker

Yeah, I would say that we did slow down and take a breath on the acquisitions clearly when we saw the issues that we had with anesthesia. That specialty acquisitions there you what we're saw pretty dramatically. We still continue to do some small acquisitions on the women and children side. So if you go back, this year we did a couple of, women and children's type acquisitions and we expect to ramp that up. The multiples for our women and children's practices really did not increase and so valuation has remained centered in the four times multiple range that we've talked about in the past.

We also have taken a step back on Radiology acquisitions and that is related to valuation. We have seen that there are a number of private equity firms that have jumped into the Radiology field and those multiples are higher than double-digit multiples and so that's not a field that we're going to be joining in for the foreseeable future at those kind of multiples.

Unidentified Participant

Okay, great, thanks. That was helpful. I'll hop back then.

Unidentified Speaker

We've got a couple of follow-up questions that we can take as well.

Operator

We'll go to Ralph Giacobbe with Citi.

Ralph Giacobbe -- Citigroup -- Analyst

Thanks. Just a quick one, wanted to revisit the Minnesota contract. Did you say it's -- your contracted through June of 2020 and if that's the case, I guess I just wondering sort of why highlight it at this point and then more broadly, can you just give us a sense of what percentage of total revenue has contracts that are at zero or negative margin at this point. Thank you.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Yeah, hi, Ralph, I didn't highlight it -- that was highlighted by somebody else. I don't know that somehow made the news one day and I don't know who highlighted. We are just addressing the concern that was brought to us because of that. our percentage of nonperforming contracts at this point, very small, maybe a couple, two or three , but no more than that and we are actively in those. We are not yet at the stage where we are prepared to walk away from them. We will, if we have to, but we're still working with the practices and with the hospitals in renegotiating some subsidies, etc, but it's not a high percentage like I say, it maybe two or three .

Ralph Giacobbe -- Citigroup -- Analyst

Okay. All right, thanks

Operator

we have a question from Gary Taylor, JPMorgan.

Gary Taylor -- JPMorgan -- Analyst

Hi, just following up just a little bit more. Sorry to come back to the same issue, but when we talked about some of the balance billing legislation. I appreciate your comments on how the network you've been very conservative and consistent on that for a number of years and I appreciate that. The A.J at least I know is really actively lobbying against this concept of a benchmark median inpatient rate being calculated. So, maybe more specifically just kind of your thoughts on that. Is there a concern that the managed care companies could manipulate that or that there might be markets where an inpatient median rate might disadvantage MEDNAX, do you -- what do you think about the concept of moving to some sort of pricing metric like that.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Yeah, well, there is always a concern of people abusing all that stuff and so this idea of having -- being able to go to mediation or an arbitration makes a lot of sense for us. I don't know what else to say, I think that the question has been brought up about -- I'll lay it out for you. The question has been brought up, what is the -- what if you have a high contract, a high reimbursement contract and the managed care company decides to cancel your contract now you're out of network and now you got to go back and renegotiate for a lower rate than you were getting before because immediate rate is lower than the higher rate that you had, that's you know That's what we are hoping doesn't happen. And if it does, you're kind of avoiding that situation by being able to have a mediation but to me that's the biggest concern is those kinds of abuses I'll say to a system.

Gary Taylor -- JPMorgan -- Analyst

Understood. And then just one follow. The physician fee schedule for 2020 looks relatively OK for your specialties, but there were some or view proposals for 2021 that looked fairly onerous for Anesthesia and Radiology, and I know there's plenty of things to get propose that don't quite happen by the time they get there. So, any thoughts on that. And then just maybe specifically, do you have commercial contracts that are explicitly tied to the Medicare or views that if some of those cuts did come to pass. We'd have to contemplate modeling.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Yeah. it's such a long way -- let me just tell you, our system is once the proposed rule is published, our team of reimbursement analysts runs the CPT level analysis across our specialties and therefore in clinical leadership that provides context and helps to steer the model. At the same time, our VPO coatings [Indecipherable] though the rules for anything that presents risks and then links that to the financial impact of the analyst team produces. Our review coating then -- that summary is shared with the operations leadership, the clinical thought leaders and it includes our specialty Advisory Council. All of that drive stores a recommended response to CMS led again by our VPO coating and as you know, CMS access comments for a few weeks. Like I have to tell you, our team has definitely been successful steering key impact. Certainly we don't get everything we want, but there is a return of this big time resource investments.

I'll just say it is just a long common period on this, many medical associations are already in an uproar, activating their campaigns. It's just hard to say if such a significant revaluation of our views will actually hold. We do have a number of contracts. I don't know what percentage they are, that are tied to Medicaid and some of them are specifically tied to specific years so whatever the Medicaid reimbursement might be for, one year as opposed to another etc, etc. We do have some. The RVUs, just to make sure don't change, we're only talking about how much each RVU is valued at and so that's really the thing to focus on is because a number of RVUs isn't going to change.

Gary Taylor -- JPMorgan -- Analyst

That's helpful. Thank you.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Yeah.

Operator

We have a follow up from Pito Chickering with Deutsche Bank.

Pito Chickering -- Deutsche Bank -- Analyst

Hey guys, thanks. Realizing that leverage looks out of whack due to the MedData sale, but if you look at the 2Q net debt versus midpoint 2018 guidance, that looks to be about 3.9 times versus 3.7 times like midpoint in the guidance last quarter, you talked about M&A, share repo and debt repayment on the call today. Could you rank those for us and is there a leverage ratio were you would shift from stock repurchases into debt reductions. Thanks.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Sure Pito. This is Stephen. Good morning again. [Indecipherable] data all of that. The leverage ratio does look out of whack, your description, because we have removed the EBITDA or MedData, but we haven't taken any pro forma impact of whatever proceeds we would expect from it. So you can pretty easily calculate that if 100% of the proceeds from that deal were applied to debt repayments it can kind of get -- you end up in more of a mid threes kind of number rather then a high threes kind of number.

In terms of prioritizing our use of capital, I think that is something, and we've sort of described this similarly for some time now. I think we will continue to look at that and we are somewhat opportunistic. While we have not been very active in M&A, we have continually said if there was something that was very interesting and would add overall value to the enterprise or have particular strategic impact, of course, we would consider it regardless of what our posture was predicting a little lot more or a little down.

Nothing has changed in terms of our overall outlook from a capital structure percentage or from a capital structure perspective and I think each quarter we just make a decision about where we are and where we're trading and what opportunities we see and I think the one area in particular that we are completely committed to is the transformational activities that we have under way, and I'm really not sure that there is much more to say about that.

Roger J. Medel -- Chief Executive Officer

I would just add that, on the M&A question. We continue to see opportunities in the women's and children's field and those multiples continue to be very favorable in the four times range and so I think you can expect to see increased activity in the Women and children sealed at those lower multiples .

Gary Taylor -- JPMorgan -- Analyst

Great, thanks so much.

Operator

We have a question from Kevin Fischbeck of Bank of America.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Great. Just wanted to go follow up the surprise billing commentary, because I guess it still wasn't exactly clear to me. When you guys say that you look pretty comfortable about the legislation, is that with their view that there will be an arbitration kind of backstop in addition to the median, or even if the number is simply just the million you don't, it's not that, you really, I guess, you lose a lot of sleepover .

Charles Lynch -- Vice President, Strategy and Investor Relations

Hey Kevin. It's Charlie. I think our view on this process that is still unfolding, there's not clarity on what the ultimate outcome will be if there is an ultimate outcome when it gets implemented and the like. I think we're starting from the standpoint that on the face of it the predominance of our revenue is driven from free and open negotiations with payers and or from the government. It's only the tiny slice just out of network, and that's just really just a frictional turnover.

Our interest is, I think a lot of our peers and partners is that the -- that vast majority of payments for healthcare services remains in a frame of negotiation. So it's fair on both sides and that's were our interest lies. I think it's preliminary to make the call at this or that small slice of whatever post legislation will have this or that impact because they are all likely going to change. So we look on the [Indecipherable] to the extent that there is opening for continuation of discussions and some kind of resolution that's favorable for us, but beyond that I think we're still looking at it as what may come and not some finality on what's being discussed either today, tomorrow or next week.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

And I guess one of the alternatives was that anything under 1250 would just be median and anything over 1250 would have potentially an arbitration back. So I guess, do you know what percentage of your volume is the below 1250 . My guess is that most of the radiology and anesthesia might be below that number whereas that you might be above of that, directly correct or how should we think about that.

Charles Lynch -- Vice President, Strategy and Investor Relations

I think we have a fine slice of that of exactly what it might be and there is plenty of other ways to look at another double to [Indecipherable] a lot to come out regarding what gets classified under this kind of legislation as well. So I don't think we're looking at it with such an extreme fine point Right now, and so we get some better clarity on what might ultimately come out.

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Great, thanks.

Operator

At this time speakers, there are no further questions in queue.

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Okay. If there aren't any further questions, thank you operator and thanks everyone for participating this morning. We look forward to speaking with you next quarter.

Operator

[Operator Closing Remarks]

Duration: 71 minutes

Call participants:

Charles Lynch -- Vice President, Strategy and Investor Relations

Roger J. Medel -- Chief Executive Officer

Stephen D. Farber -- Executive Vice President and Chief Financial Officer

Unidentified Speaker

AJ Rice -- Credit Suisse -- Analyst

Ralph Giacobbe -- Citigroup -- Analyst

Kevin Fischbeck -- Bank of America Merrill Lynch -- Analyst

Jason Plagman -- Jefferies -- Analyst

Pito Chickering -- Deutsche Bank -- Analyst

Gary Taylor -- J.P. Morgan -- Analyst

Chad Vanacore -- Stifel -- Analyst

Matthew Gillmor -- Robert W. Baird -- Analyst

Whit Mayo -- UBS -- Analyst

Unidentified Participant

Gary Taylor -- JPMorgan -- Analyst


More MD analysis

All earnings call transcripts

AlphaStreet Logo

More From The Motley Fool

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com