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TOP CONTRIBUTORS
Pediatrix Medical Group (NYSE:PDX) specializes in intensive care for critically ill newborns and pregnant women through a network of physicians at hospitals and acquired practices. As of 2007, PDX had more than 1000 physicians in its affiliated network, focusing on neonatal care, neonatal cardiology, and maternal-fetal care. [1] PDX has expanded in the last 2 years into the field of anesthesiology and plans to continue its strategy of acquiring related physician practices to enlarge its network of affiliated physicians.

PDX earns revenue from the patients of its affiliated physicians. 26% of revenues come from reimbursement through government programs such as Medicare and Medicaid, 63% come from commercial insurance HMOs and PPOs, and around 10% from other third-party payors. PDX's revenues depend largely on its ability to collect reimbursement for medical services from these reimbursement programs. [2]

In July 2007, PDX made a comprehensive voluntary review of its stock option granting processes with the help of the SEC, and the results showed that PDX had incorrectly dated its stock option grants. The costs incurred by the review and equity compensation fees amounted to approximately $33 million. [3]

Business Financials

Pediatrix provides specialized intensive medical care for newborn babies, critically ill children, and expectant mothers through a network of affiliated hospitals and physician practices. As of December 2007, PDX's pediatric care network consisted of more than 1000 affiliated physicians based in the continental US and Puerto Rico. Most physician practices affiliated with PDX are based in hospitals in neonatal intensive care units (NICU) as well as clinics providing care for pregnancies, pediatric cardiology, and other pediatric specialties. [4]

In an effort to build upon its core competency as a specialty health care provider, PDX has expanded its neonatal and maternal-fetal care services to include anesthesia care. Pediatrix's affiliated anesthesiologists work with surgeons in hospitals, ambulatory emergency centers, and office practices by providing pain control and patient medical care throughout surgery. The firm plans to expand this division of its services in future years to diversify its specialty care services portfolio. [5]

The following chart shows a breakdown of the affiliated physicians in Pediatrix's network.

[6]

Breakdown by Area of Specialty in PDX's Affiliated Network
Physician Specialty Area Number of Physician in Network
Neonatal Clinical Care (NICU) 788
Maternal-Fetal Care 109
Pediatric Cardiology Care 69
Pediatric Intensive Care 37
Hospital-based Pediatric Care 16
Anesthesia Care 53
Advanced Practice Nurses 1315


The table below summarizes key operating metrics for PDX as well as its net patient service revenue in fiscal years 2005-2007.

[7]

Key Operating Data and Net Patient Revenue (in $millions, except operating data)
Operating Data Statistic in 2007 % Change (06-07) Statistic in 2006 % Change (05-06) Statistic in 2005**
Total Number of Physicians 1072 17.29% 914 9.59% 834
Number of Births 707,274 4.88% 674,336 7.046% 629,948
NICU Admissions 85,059 6.12% 80,151 9.98% 72,876
Net Patient Service Revenue $917.6 14.03% $804.7 18.20% $680.8


[8]

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A comparison of the revenue and net income growth of PDX in the past 3 fiscal years.


Third-Party Payors

PDX's revenues come from compensation of the professional services provided by the company's affiliated physicians and nurses. Compensation for health care services from PDX physicians are given by third-party payors rather than the patients themselves. These third-party payors include government-funded health care plans such as Medicaid and Medicare, managed care organizations, and other commercial health insurance plans including HMOs and PPOs . A breakdown of revenues received from each type of third-party payor is shown in the table below.

[9]

Error creating thumbnail
A breakdown of payor mix, as percentage of net patient service revenue, in FY 2007. The largest payor, which delivers 63% of PDX revenues, is managed healthcare programs (including HMOs and PPOs, followed by government reimbursement programs, which include Medicaid and Medicare.

Compensation rates for the services provided by PDX physicians are not negotiated for government-sponsored plans and state-sponsored managed care organizations. Anesthesia care services are paid by the Medicare plan, while neonatal and maternal-fetal care services are paid by the Medicaid plan.

Significant Business Transactions

Throughout its company history, PDX has expanded its specialty care services to newborns and expectant mothers by acquiring private physician practices. In 2008, PDX has acquired three major practices specializing in neonatal and maternal-fetal care, including:

  • a pediatric cardiology practice based in Pembroke Pines, Florida; [10]
  • Children's Heart Center, a pediatric cardiology practice based in El Paso, TX; [11]
  • Northside Women's Specialists, a physician group practice specializing in maternal-fetal care for expectant mothers and OB/GYN services based in Atlanta, GA; [12]

All three acquisitions were fully paid in cash, and all are expected to contribute to Pediatrix's earnings immediately. As a result of acquisitions, PDX's revenues increased by $42.2 million, $45.8 million, and $41.1 million respectively in fiscal years 2007, 2006, and 2005. [13]


In March 2008, Pediatrix completed the sale of its newborn metabolic screening division to PerkinElmer for a cash sum of $66 million. This newborn metabolic screening lab analyzes more than 50 genetic disorders in newborns through its StepOne newborn screening product, and generated revenues of around $15 million in 2007. [14] Pediatrix continues to operate a separate internal newborn hearing screening service based in hospitals. The two companies will also cooperate in future research to identify possible new mass spectrometry technologies in prenatal and neonatal testing. [15]

Trends and Forces

Rising Rates of Premature Births and Low-Weight Babies

From 1994 to 2007, the number of preterm births (babies born after less than 37 weeks of gestation) grew by a compound rate of 1.7%, from 434,804 to 525,000 births. In 2007, preterm births represented 12.7% of all births in the U.S. The March of Dimes predicts that preterm births will continue to increase in the next year, to 543,000 births, or around 12.8% of all births next year. Similarly, the number of low-weight births has been increasing at the compound rate of 1.45% from 1994 to 2007, consisting of approximately 8.1% of all births in the U.S. [16]

Births at facilities where PDX affiliated physicians practice consist around 16% of all births in the U.S., and PDX physicians treat around 11% of all babies born at these facilities. The rise in premature births and low-weight babies will increase the number of NICU admissions, which increases potential patients for PDX affiliated physicians. [17]

Stock Option Reviews Have Been Costly for PDX

In July 2006, PDX completed a voluntary internal review of its stock options granting processes with help from the SEC . The company disclosed that it had reviewed all stock option grants from PDX's IPO in 1995 and discovered deficiencies in the stock option granting procedure, including backdating option grants and mis-dating option grants. Effects of this audit include equity compensation charges and related tax issues, which have incurred costs estimated at around $33 million. [18] Depending upon the integrity of its financial procedures, PDX could be subjected to further reviews of its financial practices, which will result in the dismissal of management personnel and further costs. [19]

89% of PDX Revenues Come from Healthcare Reimbursement Programs

In 2007, 89% of PDX revenues came from reimbursement from managed care programs and government healthcare reimbursement programs such as Medicare and Medicaid (see chart above, in Business Financials section). Therefore, reductions in coverage and reimbursement practices from third-party payors including Medicaid, Medicare, and commercial managed care programs will adversely affect PDX's revenue. According to estimates by PDX, there has been a general decline in insurance coverage and reimbursement practices for most private employers; reduced insurance coverage by governmental and commercial programs would shift PDX's third-party payor mix and result in potential decrease in net patient service revenue. [20]

Furthermore, in September 2006, PDX paid $25.1 million to the federal government and state Medicaid programs to settle a complaint initiated from the Department of Justice in relation to PDX's billing practices for Medicaid reimbursement. [21] Any future settlements like the one mentioned above will also incur costs for the company.

PDX's Acquisition-Based Business Strategy May Backfire

PDX's business strategy is completely based on successful expansion of its physician base through acquisition of private physician practices in neonatal health services. As a result, it is completely dependent on the successful and efficient integration of the newly-acquired practices into its corporate structure to expand patient base. PDX plans to continue this business strategy in the anesthesiology sector. Due to differences in the nature of regulation and compensation for anesthesiology services from neonatal health services, PDX may meet potential obstacles in successfully implementing its acquisition-based business strategy to expand its market base in the anesthesiology sector. One important difference is that anesthesiologists typically do not operate their own private practices but circulate in various medical practices where their services are needed. This would prohibit PDX to extend its acquisition-based business strategy to the anesthesiology sector. [22]

Competition and Market Share

Since PDX is focused on specialized segments of medical care, its pure play competitors are not publicly traded companies. We therefore compare PDX to other specialized healthcare service providers who operate and make money through similar business models. The comparison is useful not only because the companies are similar, but also because these specialized healthcare providers could also, theoretically, expand to the neonatal and anesthesiological areas that PDX focuses on, much like how PDX has expanded from purely neonatal and maternal-fetal services to include general anesthesiology as well.


FY2007 Comparison of PDX Competitors (in $millions)
Company "Specialization Sales Revenue Market Share
Publicly Traded
Pediatrix (PDX) Neontal, maternal-fetal health services, anesthesiology $917.6 52.5%[23]
LifePoint Hospitals (LPNT) general acute care, medical and surgical services $267 15.3% [24]
Universal Health Services (UHS) acute care hospitals, ambulatory surgery centers $485 27.8% [25]
Privately Held
Sheridan Healthcare obstetrics, anesthesiology, neonatologists, pediatrics $11.5 0.66%[26]
Sterling Healthcare critical care units, ICU, NICU care $66.3 3.79% [27]




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Notes

  1. PDX 2007 SEC Filing 10-K, Item 1, Pg. 3
  2. PDX 2007 SEC Filing 10-K, Item 7, Pg. 40
  3. PDX Incurs Costs in Stock Option Review
  4. PDX 2007 SEC Filing 10-K, Item 1, Pg. 3
  5. PDX 2007 SEC Filing 10-K, Item 1, Pg. 8
  6. PDX 2007 SEC Filing 10-K, Item 1, Pg. 21
  7. PDX 2007 SEC Filing 10-K, Item 7, Pg. 37
  8. PDX 2007 SEC Filing 10-K, Item 7, Pg. 36
  9. PDX 2007 SEC Filing 10-K, Item 7, Pg. 40
  10. PDX Acquires South Florida Pediatric Cardiology Practice
  11. PDX Buys Texas Practice
  12. PDX Acquires Atlanta Maternal-Fetal, OB Physician Group
  13. PDX 2007 SEC Filing 10-K, Item 6, Pg. 37
  14. PerkinElmer Closes Acquisition of PDX's Newborn Screening Business
  15. $66M for PDX Screening, Inc.
  16. Premature Birth and Low-weight Birth trends
  17. PDX 2007 SEC Filing 10-K, Item 1, Pg. 18
  18. PDX Incurs Costs in Stock Option Review
  19. PDX 2007 SEC Filing 10-K, Item 1, Pg. 19
  20. PDX 2007 SEC Filing 10-K, Item 1a, Pg. 25
  21. PDX 2007 SEC Filing 10-K, Item 1, Pg. 19
  22. PDX 2007 SEC Filing 10-K, Item 1a, Pg. 27
  23. PDX 2007 SEC Filing 10-K, Item 6, Pg. 36
  24. Agilent 2007 SEC Filing 10-K, Item 7, Pg. 55
  25. BDX 2007 SEC Filing 10-K, Item 7, Pg. 38
  26. Yahoo Finance, Sheridan Healthcare
  27. Yahoo Finance, Sterling Healthcare
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