CRH Medical Corp
Q1 2017 Earnings Call Transcript

Published: 28 Apr 2017

[Kettina Cordero:]

Thank you, operator and good morning, ladies and gentlemen. I am joined here today by our CEO, Edward Wright and our CFO, Richard Bear, who will briefly review our financial and business results. Before we start, I would like to remind our listeners that certain statements you will hear today constitute forward-looking statements within the meaning of applicable securities laws. For important assumptions, definitions and cautionary statements regarding to forward-looking information and the risks inherent to our business, please refer to the cautionary notes in our financial reports for the quarter ended March 31, 2017 and to the Risk Factor section in our most recent annual information form. During this call, we will discuss non-IFRS measures as indicators of our performance. Please refer to our management’s disclosure and analysis for the year ended March 31, 2017 for reconciliations of non-IFRS measures to reported IFRS measures. These documents are available on SEDAR and on the Investors section of our website. Also please note that we use the abbreviation GI to refer to gastroenterologist and to services related to gastroenterology such as anesthesia for endoscopic procedures and the abbreviation of ASC to refer to Ambulatory Surgery Centers. Finally, please be advised that our reporting and functional currency is the U.S. dollar. All dollar figures referenced today are in U.S. dollars. Now, I leave you with Edward Wright. Edward Wright Thank you, Kettina. Before we get into the details of another strong operational and financial quarter, I would like to address our funds invested where that was widely distributed recently. We like most public companies normally avoid to comment on external reports. The problem with external reports is multifaceted. They often contain opinion on which reasonable people can differ or they also have incomplete information or misconceptions or they may be generated for undisclosed motives. Although, it is our practice not to comment on external reports, I would like to take this opportunity to clarify certain points raised in the document. The thesis of the reports is that CRH’s business risk have not been previously identified. The report identifies three principle themes; one, that anesthesia reimbursement rates will be reduced by CMS. Two, that our labor rates are understated due to the use of CRNA’s and that will lie substantially when the law change to disallow the use of CRNA’s in the administration of anesthesia. Three; that our billing practices are nonstandard within the industry. First, with respect anesthesia reimbursement rates, like other medical products or services offered in the United States, reimbursement rates can impact our business. With respect to GI anesthesia, although the centers for Medicare and Medicaid services known as CMS has stated that it is reexamining the relative use of the primary billing codes used for anesthesia, furnishing conjunction with more GI procedures is important to note that these rates did not change upon their initial review. CMS also stated that it will not propose any future changes to the valuation of these codes until it receives more input from its stakeholders. The reason for the review of the codes is that there has been an increase in the frequency of anesthesia services reported during various colonoscopy procedures, which is a direct result of changes in coverage and payment policies of CMS to encourage colonoscopy. Like many healthcare providers, the U.S. federal and state governments want to encourage people to get colonoscopies, to improve patient care and save costs through the early detection and treatment of colon cancer. We believe the re-examination of anesthesia codes is positive. Standard of care in colonoscopy is changing and the use of deep sedation is part of that change. We expect that the full CMS examination process will result in no change to the reimbursement rates. Part of our expectation is based upon the work of the RUC committee, one of the primary bodies involved in the billing codes review process. This important committee is on record suggesting that the typical patient vignettes, which is the description of the work required before, during and after the procedure used to value the billing codes are no longer representative of current medical practices for anesthesia. For this reason, it recommends that the codes are resurveyed based upon outdated patient vignettes. With respect to administration of anesthesia with Certified Registered Nurse and Anesthetist also known as CRNA’s, internal report written about our company assumes that our labor costs were up significantly with the federal or state governments amend the laws and mandate that only MDM anesthesiologist can administer anesthesia. We believe such a move would be highly consistent with the federal and state government goals of increasing access for the early diagnosis of colon cancer. CRNAs are highly educated, skilled and licensed professionals. CMS's medical claims processing manual provides for payment to CRNA’s under the physician fee schedule. This provision is being in effect since 1989. Going back to a time where only medical doctors could administer anesthesia would we believe, not only increase the overall course of faster colonoscopy, but also will reduce access to the current standard of care for colonoscopies. Finally with respect to our billing practices, we work very closely with our GI partners to identify key insurance companies to contract within their local markets. Other insurance companies are managed through the radiology, anesthesia and pathology benefits also known as RAP, which are provisions already contained in the individual insurance plans and policies. This is a standard practice in the industry and allowed by most insurance companies. The provision allows CRH’s patients claims to be processed as if they were contracted with the insurance carrier. While not requiring third-party provider with respect to CRH to contract with every insurance company at every entity it serves. Such a requirement would significantly increase transaction costs for insurance companies and healthcare providers. This is a standard, appropriate and we believe sustainable practice throughout the U.S. healthcare system. The standard procedure is widely accepted by insurance company. There is nothing at all unusual in our billing practices. Now let me review our achievements during what was a great first quarter of 2017. We invested $7.4 million to acquire two anesthesia practices each with one ASC under contract. We funded these acquisitions through our combination of internally generated cash and our existing credit facility. Today we serve 27 ASC's in seven states and our estimated number of annual patient cases has risen from approximately 185,000. We also announced our first monitored anesthesia care development program known as MAC or deep sedation development program in the State of Washington. This is a novel initiative where we are developing and managing a deep sedation program for our leading GI anesthesia practice in the greater Seattle area. The MAC program agreement gives CRH the option to acquire a 51% interest in new anesthesia practice after at least one year. Providing us with an excellent vehicle to develop future acquisition opportunities. Sales over our new system continued to meet our growth expectations. We've now trained almost 2,500 GIs in approximately 960 practices and expect that to continue. Our first quarter financial and operating results demonstrate that health of our business is solid and the fundamentals of our investment proposition is sound. Our goal is to become the preeminent provider of GI anesthesia and since 2014 we completed 11 transactions and have expanded our network to 27 GIACs in seven states. Through years of development of our O’Regan business, we’ve built strong relationships with the GI community, which we’re leveraging in the expansion of our GI anesthesia business. The two acquisitions we announced in the first quarter of 2017 were with existing O’Regan clients. The anesthesia partnerships we have built are based on trust that is predicated on our extending service and product excellence. This is an invaluable advantage that cannot be acquired overnight. The addition of the MAC development program will allow us to tap into a market of around 400 GI ASC’s that currently do not do deep sedation as a standard of care. Thereby expanding our entire acquisition pipeline. The dynamics of the GI anesthesia markets haven’t changed and we have a scalable growth strategy focused on consolidating a very fragmented market. In summary, we have solid relationships with the GI community that are feeding a strong acquisition pipeline. The operation and financial capacity to execute on our growth strategy and a capable management team with the business acumen to achieve our ambitious goals. With that, I’m going to turn you over to Richard to review our financial results and look forward to the Q&A after Richard speaks.

[Richard Bear:]

Thank you, Edward. I’d like to start by reminding everyone that in accordance with International Financial Reporting Standards also known as IFRS, we report consolidated financial statements, this means that our financial statements include those necessary in which we own more than 51% and have controlling interest. This practice is keeping with the most current accounting and auditing standards. Yesterday we reviewed the total revenues of $22.5 million, a 63% increase compared to the first quarter of 2016. Total revenues included anesthesia revenue of $19.8 million, which was an increase of 73% year-over-year. Anesthesia revenue rose as a result of additional revenues contributed by the three transactions announced in June of 2016 and then two acquisitions completed in February and March of this year. There were no material changes to anesthesia reimbursement rates during the first quarter of 2017. However, there was a change in the payor mix at our GAA business. As a result, there was a change in the payor mix of our GI business as we totaled the usual annual health insurance renewal process. As result of this change, the average revenue per case at GAA declined 12% compared to Q1 2016, but it was offset by an 8% increase in patient cases. It is worth noting that the payor mix change of GAA relates to a single insurance provider and we don't expect material changes from this payor after this year. Total adjusted operating expenses were $11.5 million compared to $7.1 million during the same quarter of 2015. The increase was directly attributable to the growth of our anesthesia business, already discussed. Total adjusted operating EBITDA for the first quarter of 2017 was $11 million, 63% more than the first quarter of 2016. Total adjusted operating EBITDA attributable to our shareholders was $7.7 million and total adjusted operating EBITDA for non-controlling interest was $3.3 million. The adjusted operating EBITDA margin for the quarter was 49%. During the quarter ended March 31, 2017 we generated $3.2 million in free cash flow. We defined free cash flow as cash provided by operations, less payments made for interests and other expenses, less distributions for non-controlling interest. Free cash flow is impacted by seasonality, similar to our operating margins and income. Free cash flow is usually lower in Q1 and higher in Q4 of each year. As March 31, 2017, we had $9.2 million in cash and cash equivalents and $9.9 million in working capital. In addition, we had $22 million available on a revolving credit facility to fund future growth. With that, I would ask the operator to open the call for questions.

[Operator:]

[Operator Instructions] Our first question from Richard Close of Canaccord Genuity. Please go ahead.

[Richard Close:]

Great. Thank you for the questions. Just want to dig into the GAA a little bit deeper Richard, if I can. You had the 12% decline in price here in first quarter 2017, but you also had that in first quarter 2016. Obviously, partially offset by better procedure growth or year over procedure growth. But can you just walk us through the reason for those price changes. Explain to us why this is not a – maybe an example of contracts being adjusted and just so we can better feel there. Then why you're confident that won't happen again?

[Edward Wright:]

Okay. Good question. First I would just kind of correct, if you don’t mind, I’ll just kind of correct the question because we’ve not seen price changes, we’re seeing payor mix changes. So, let's just assume for simplicity that we only have two payors in GAA; payor A and payor B and last payor A and payor B each equaled 50% of the commercial business. Payor A paid 25%, 30% more than payor B. In simple words, what’s happening is, payor A is losing market share to payor B. we still have the patient volumes, but what volume is being paid at a rate that’s lower than we have paid in the previous year. So taking that to what we’re seeing in GAA, there are large number of payors and we have patients disputed amongst all those. There is difference in how those payors reimburse us. What we’ve seen happen at GAA is we had a payor that was one of our stronger payors from our reimbursement standpoint, who appears that we continue to lose market share, shifting those patients to payors who are more in the average range, which has lowered our revenue per case. But the individual revenue, the payment we get from each payor per case has not changed. We believe that 2017 will be the end of these payor mix changes because this payor who is a dominant reimburse in that market is now been reduced to a very minimal player.

[Richard Close:]

Okay. Thanks for that. With respect to non-controlling interest that increases percentage in the first quarter, that’s obviously bouncing around quite a bit based on the acquisition that you’re completing. But can you give us a little bit more I guess, guidance or directionally where you expect non-controlling interest to be, maybe in the second quarter and through the second half of this year?

[Edward Wright:]

Our first, more on our base of business that we are managing today and the relationship between adjusted operating EBITDA and non-controlling interest to total adjusted operating EBITDA was something I would that relationship we see in Q1 is the relationship that I would expect to see going forward this year on the base business. Keep in mind that just to remind you that our business model is to partner with GIs in their anesthesia. So, all of our transactions going forward will be partnerships, which will increase just based on the accounting that non-controlling interest is. And the non-controlling interest is a smaller number than the interest associated with shareholders, you will see that that non-controlling interest is going to grow faster. But again, it’s how we value, we only value these businesses based on the income distributable to our shareholders. It’s the accounting that drives the non-controlling interest.

[Richard Close:]

Okay. My final question would be as we think about the second quarter, adjusted EBITDA; I think the street is looking for a nice sequential increase in adjusted EBITDA, the comment. If you could just comment, do you have any – can you sort of give us a range in terms of where you expected the adjusted EBITDA to be in the second quarter?

[Richard Bear:]

I think if you ran your models and looked at seasonality, you know that our seasonality in Q1 is low in terms of patients and also low in terms of revenue per case because we – although our government cases don’t vary much quarter-over-quarter, the commercial case is due with most with the highest percentage of commercial cases coming in the fourth quarter. So, commercial increases quarter-over-quarter, so will our revenue per case and which is driven by seasonality. So I think if you run out your models and you come up with your revenue, you come with your EBITDA expenses are pretty fixed because it’s primarily people. And you use the ratio of non-controlling interest to total EBITDA for Q1; you’ll get to your Q2 numbers. Sorry for non-financial people on the call.

[Richard Close:]

So, you’re saying, use 30.1% in terms of non-controlling interest as the number for second quarter.

[Richard Bear:]

Assuming that, yeah, with the base business and then whatever assumptions you had made for strategic planning.

[Operator:]

The next question is from Lennox Gibbs of TD Securities. Please go ahead.

[Lennox Gibbs:]

So your GAA business appears have been pretty heavily weighted to the payor in question. Are there payors in other state markets to which you have similar revenue exposure and if so where?

[Richard Bear:]

No. I would say that GAA scenario was a - what is a one-time situation.

[Lennox Gibbs:]

Okay. And then secondly with respect to CRNA's, have you ever experienced pushback from payors regarding your use when you’re leading to CRNA's pushback either by way of rejected claims or pushback in the context of contract negotiations?

[Richard Bear:]

Categorically no.

[Lennox Gibbs:]

Are you aware of any sort of, any recent bump in terms of noise on the policy front with respect to reimbursement of CRNA's on equal basis anesthesiologist?

[Richard Bear:]

No.

[Lennox Gibbs:]

Okay. And then finally, just with perspective to Kissimmee and [indiscernible], the recent acquisitions. Can you tell us what the staffing compliment was at those two facilities at the time that you acquired? What if any changes you’ve made to the staffing compliment or what does any changes you intend to make to the staffing compliment?

[Edward Wright:]

Osceola, Kissimmee is what’s called the MD supervisory model, where the rooms are staffed by CRNAs and those are the MD anesthesiologist that would be doing pre and post op. That was the model that we acquired. That was the model that is comfortable to the doctors in that ASC, that's how we valued it that model will continue. At DDAB a slightly different model where the MD actually participate in the room with the CRNA during procedures is actually the only - ASC that we served that has that specific model. It’s a model that doctor in that side are comfortable with. It’s how we value the business; it is how that business will continue to be staffed.

[Operator:]

The next question is from David Novak of Cormark Securities. Please go ahead.

[David Novak:]

A couple from me. I’ll try to get through them relatively quick. First off, so, it looks like within your Q1 payor mix, you’re seeing an uptick in commercial versus federal pay, this makes sense in terms of the increased EBITDA margin, attributable to non-controlling interest. However, can you help me understand why if we’re getting more commercial pay is overall anesthesia EBITDA margin down both quarter-over-quarter and year-over-year?

[Richard Bear:]

So, year-over-year is let’s go over that one. Year-over-year its down primarily as a result of the payor rate, the payor mix change at GAA. Quarter if you compare Q1 to Q4, Q4 is always going to be our highest revenue per case because the commercial mix, which I believe if you look at our Q4 reports was closer to 75% is higher and commercial pays on average three times more than federal. So, you’re going to see much better margins in Q4 than you’d see in Q1?

[David Novak:]

Perfect. That’s great. Thank you. And then next, if you look at your payor landscape now, it’s specifically as it relates to some of your larger service providers like GAA or AGA. What would be typical delta between the payor that reimburses at the highest revenue per case and versus the [indiscernible]?

[Richard Bear:]

The typical delta, if there’s such a thing, there’s typical delta is it could be $100 to $150 per case.

[David Novak:]

That’s the difference between the mean and the top payor?

[Richard Bear:]

That’s the spread between – yeah.

[David Novak:]

Great. And then looking specifically at your commercial patient volume and I know we talked about this in past, so you might not be able to answer. But what proportion of the volume would be covered by contracted or in-network payors versus those that are out of network or those that are reimbursing you at a preferred rate through their RAPs division?

[Richard Bear:]

Yeah, I mean, so let’s just, RAP being reimbursed, be a RAP, doesn’t mean you’re getting reimbursed at preferred rate; it is really just that administrative designations. If you think about all the entities that we serve and all the insurance companies related to those entities. We would have to be a payor like a 1,000, contracts which is just not administrative feasible. So RAP does not necessarily mean we’re getting more or getting less. We’re getting what the insurance companies pay us, which sometimes is more or sometimes it’s less, sometimes equal. We’re not build at that level of disclosure is necessary to understand our financial, so can’t answer that question.

[David Novak:]

Fair enough. And let me just kind of assume there’s a different way as well because I know I’ll get asked this. But of your total anesthesia service revenue then. Could you kind of guide to what proportion of that would be paid via contracted rates versus non-contracted rates?

[Richard Bear:]

I will tell you that if you look at our revenue, if you look at the source of our revenue, greater than 90% of our revenue comes directly from insurance companies and the remainder that smaller is coming directly from patients, that's how you answer that question.

[David Novak:]

And last question, just turning to the cash flow for a moment. Looking at the distribution to the non-controlling interest as a percentage of operating cash flow? We’ve seen this has grown from above 30% in Q4 to above 50% in Q1. So, I think actual free cash flow if you want to call it in this quarter was about $4 million. I don’t think this is a result in DDAB or own GAA as the revenues of the non-controlling interest was in line with my estimates personally. So, my gut tells me it’s likely a result of AGA continuing to succeed in getting relatively high levels of reimbursement. You touch on this a little bit …

[Richard Bear:]

All things being equal, distributions in Q1 that we report in our statement of changes, relative to activities in Q4 because we pay Q4 in Q1. So if you look at the EBITDA attributable to non-controlling interest in Q4, it was roughly $4.2 million. If you look at the payout that we did in Q1, it’s around $4 million. So you got a bit of a timing difference that’s why in the market prepared remarks, I referred to seasonality impacts seasonality impacts us because we’re seeing that fourth quarter which is the strongest income attributable to NCI being distributed in the first quarter.

[David Novak:]

Okay. So I mean, if AGA, specifically is bit of an outlier in terms of average reimbursement per procedure. Do you anticipate or do you believe there could be any payor pushback in the future at that specific service provider?

[Richard Bear:]

No.

[David Novak:]

Okay. That’s it for me. Thanks so much Richard.

[Operator:]

The next question is from Noel Atkinson of Clarus Securities. Please go ahead.

[Noel Atkinson:]

I was wondering if you could talk about the proportion of your anesthesia revenue that you’re getting out of Medicare and Medicaid. Like you break it out in the filings in terms of percentage of patient cases. But can you give us a sense of what it is in terms of percentage of revenue? 2016 is fine, if you have …?

[Richard Bear:]

Yeah I mean, I wouldn’t give you some data points, because it’s something that we have currently disclosed, so I can’t disclose it on this call. But I think we’ve commonly said that payor that commercially can be 3x or more than that of government. Government represents call it roughly 30% of our business, so that 30% of cases would translate into something around 10% of revenue. If you did the math, if I did my X’s and Y's correctly.

[Noel Atkinson:]

Okay, great. Can you talk a little bit more about the acquisition pipeline activity? It's been pretty quiet across the industry so far in 2017 for acquisitions?

[Richard Bear:]

Yeah, I’ll let Edward address that one.

[Edward Wright:]

So, what I would say there is that, when I look at on a daily basis where we are with this process, I'm excited for what 2017 holds. I’ll remind everyone that when we hired Jay Kreger as the President of CRH Anesthesia with oversight for our operations and for business development teams. There was - his initial stages were spent more on existing operations, getting to know our customers and building his team. As we’re out today educating GI practices about our offering, I believe that 2017 will turn out to be a very good year for CRH. I remind you again that one of the nice advantageous positions that we’re in is that most of these businesses we acquire in fact, all but one to date have not been not for sale. So, there's an education processes that’s involved in terms of what we’re doing. Obviously, as time goes on word-of-mouth with the doctors and the practices that we've already transacted is very popular. So at this point in time, knowing where we are in the process. You saw last year in June where it was very lumpy and three of them came together all of a sudden. We would prefer that it didn't happen that way, but at the same time you know where we are in discussions and what I see for the year ahead in the pipeline, it looks very good.

[Noel Atkinson:]

Great. Just a couple more quick ones. You talk about the 8% year-over-year at GAA per patient volumes. Can you talk a little bit about the patient volume trends that you’re seeing across the rest of your portfolio?

[Richard Bear:]

They would be consistent to what we've discussed previously in that expectation based on historicals of around 3% to 5%.

[Noel Atkinson:]

And then finally, have you seen any – did you see any daily rate increases for the contracts for your CRNA's or MD anesthesiologist at the start of 2017 that would be more than normal?

[Richard Bear:]

We did not.

[Noel Atkinson:]

Okay. Great. Thanks very much.

[Operator:]

The next question is from David Martin of Bloom Burton. Please go ahead.

[David Martin:]

Good morning. I’m wondering the payors of lost market share in GAA. Is this the same one that lost market share last year and cause the sale dip in the revenue per procedure and they just took another step down in market share or was this is the different one?

[Richard Bear:]

It would be the same payor, David.

[David Martin:]

Okay. And so before this happened, what percent of total revenues for your anesthesia services businesses did they represent? And then what’s the next largest payor in your network as a percent of revenues?

[Richard Bear:]

Yeah, appreciate the question, David. But you know we don’t get to answer that level of detail. They represent a much smaller percentage than they did two years ago, I’ll answer it that way.

[David Martin:]

Is the largest payor, anywhere near closer to their size or much smaller?

[Richard Bear:]

From a revenue contribution standpoint there is no dominant player in that market anymore.

[David Martin:]

Okay. The GAA procedure increase of 8% is that sustainable, will that generally be higher than the 3% to 5% across the rest of the network or should it cover in line with the 3% to 5%.

[Richard Bear:]

We would suggest that, using a smaller percentage growth rate going forward would probably be more reasonable and more.

[David Martin:]

Okay. And then future sound, have you finish developing the MCGA [ph] program there now. Are you managing it? Have you made that transition? What kind of we revenue should we expect from the relationship as you go from developing to managing the business to potential 51% ownership.

[Richard Bear:]

Yeah, so I would just remind everyday to just on gastro was our first mass [ph] development program whereby we are assisting Puget Sound Gastro and converting from a conscious sedation standard of care to a deep sedation standard of care. Puget Sound Gastro has four ambulatory surgical centers in the greater Seattle area. Our agreement is that we will help them develop the business then we’ll help them manage the business and in return, we receive the option to purchase 51% of that business a year later. The development fees and the management fees are just not material enough to discuss we’re not in it for the development and management fees. We’re in it for the opportunity to acquire 51%. Our operations there they have four centers, our operations began at the first center in April this month. They're going very well and every 45 days to 60 days that we will be adding additional centers up to the max of four and would expect a transaction in and around May of 2018.

[David Martin:]

And will they convert everything to deep sedation or will the patients be given a choice?

[Richard Bear:]

The standard of care for anesthesia is driven by the doctor and the ASC. So, all the ASCs that we serve today, they either do deep sedation, I mean they all do deep sedations. Obviously, there are very small percentages that may not tolerate deep sedation, but it’s less than 1%. So, when we talked about converting the sites, it’s converting all their sites and all their patients.

[David Martin:]

So again during this period of they will be locked in the four centers and potentially buying the 51%, we shouldn’t expect material revenues, although, there will be a bit.

[Richard Bear:]

Exactly.

[David Martin:]

Okay. And then the last question I have is, on Medicare and Medicaid patients, do you profit on those patients. Like as far as looking at the exposure to the reimbursement possibly coming down, zero in argument that those patients aren’t profitable already.

[Richard Bear:]

Yes. Medicaid, we won’t even, I mean, Medicaid we won’t talk about, because no one makes money off of Medicaid that one of the challenges was our healthcare system. In terms of Medicare, when I look at our data and I can see ourselves fairly productive compared to most because we’re single specialty focused on providing anesthesia services to highly productive ASCs doing 8 to 10 cases per day for CRNA. When I look at our cost and I look at our revenue, its best, a couple of percentage points profitable in some cases, it’s a more raw, as it may not be profitable. So, that's one of the things that gives us comfort that this won't change because it won’t have accessibility to do services, which will impact the number of people getting colonoscopies which is completely counter to the direction of CMS, Medicaid and all the commercial providers.

[Operator:]

The next question is from Alan Ridgeway of Scotiabank. Please go ahead.

[Alan Ridgeway:]

Most of my questions have been asked already, but I did want to just circle back on the GAA volumes. So, they’re up 8% in Q1 and then you have already answered a question about the sustainability. I just want to understand a little bit how they did - why they were up so much and why it may not be as sustainable going forward? Did these guys doctors or expand their facilities at all during 2016, which ended up with maybe higher volumes in the back half of last year on a comparable basis that we won't see repeatable?

[Richard Bear:]

The group that we serve in with GAA is a very sophisticated large practice in Atlanta that is constantly adding doctors and as needed adding facility. There's always plans on the board for as they grow. They’re a very business minded organization and they will continue to grow maybe not at these levels, but we would see continued growth because they will continue to expand.

[Alan Ridgeway:]

That’s interesting. As they expand facilities, do you guys automatically get those contracts or are they up for potential competition, I guess, or is it just sort of like an auto renew or an auto add on to your deal?

[Richard Bear:]

Not yet. Today, we updated and added on to our existing agreements.

[Alan Ridgeway:]

Okay. on Puget Sound, how much volume would those four centers do?

[Richard Bear:]

We haven’t disclosed the volume, but I think that if you took the 27 centers we had to date, divided, took case counts at the 27 centers and multiply it by four, for the four centers of PSG. It probably be pretty close.

[Alan Ridgeway:]

Okay, so sort of, average versus what you guys already have?

[Richard Bear:]

Yeah.

[Alan Ridgeway:]

And just to clarify, during the year while you're administrating, is it doctors that are making the reimbursement then?

[Richard Bear:]

Yeah, so the practice owns the entity that was created, like [indiscernible] anesthesia, they benefit from that and then we acquire, our officers acquired 51% [indiscernible] anesthesia. And it’s our option and all the documents related to and also purchase agreements, all the supporting documents were negotiated on a front-end, not on the back-end.

[Alan Ridgeway:]

So, basically the price is set based on …?

[Richard Bear:]

The multiple is set.

[Alan Ridgeway:]

Okay. And its flowing through your billing group or the billing group you guys use?

[Richard Bear:]

Yeah.

[Alan Ridgeway:]

Okay. All right. That’s all for me. Thanks guys.

[Operator:]

The next question is from Prakash Gowd of CIBC. Please go ahead.

[Prakash Gowd:]

Thanks and good morning everyone. Most of the questions have been asked, I just have a couple of small one. First on the acquisition front, you’ve previously talked about expectations of allocating equivalent capital to acquisitions this year as you did last year. Is that still love valid this year? Any comments on that?

[Edward Wright:]

Yeah, exactly Prakash, we feel very strongly that that is still something that we’re going to do, yes.

[Prakash Gowd:]

Okay. Then lastly, exact sciences reported some strong numbers and they seem very bullish on Cologuard going forward this year. And that we still see a lot of confusion with investors about that product and where it fits in terms of the diagnostic and treatment paradigm for colorectal cancer. Clearly, you're out on the ground discussing with GIs on a daily basis and in those discussions I'm just wondering if you maybe highlight what the specialists think about the product and the basically where they might position it vis-a-vis colonoscopy. They see it as increase to access the colonoscopy, so I'll take you back to a prior life of [indiscernible] medical we are developing a nazal flu vaccine, all of our models, we were not going to taking away from the injectable market because there are that just would freak by a needle and nasal flu vaccine expanded the market. This is a very similar situation, where you capsule endoscopy and Cologuard that expand the market. There are some people that believe d or not, don’t want, a device inserted into their body and so they want to go to an alternative method. Good news actually for us because a capsule or Cologaurd cannot and cannot clip, it a polyp and in a lot of cases, colonoscopy results in a clipping of a polyp and the [indiscernible] of that polyp. So more people are getting tested either via capsule endoscopy or Cologuard is positive because if they a positive result, they have to come in for a colonoscopy.

[Prakash Gowd:]

Great. Thanks for clarifying.

[Operator:]

The next question is from Endri Leno of National Bank. Please go ahead.

[Endri Leno:]

Good morning guys. Thanks for taking my question. The first one is on the distribution channel control interest on the cash flow statement. Does that include any earn out or is it purely distributions?

[Richard Bear:]

Purely distributions. Earn out would be, you can see earn out handled a different way on the cash flow. There is – as we have earn-out obligations, one, being with AGAA obviously in gastro and one being with GAA. There would be a scheduled $800,000 dollar payment in June of this year, related to AGAA and then the earn out related to GAA. We expect to be paid out during the fourth quarter of 2018.

[Endri Leno:]

Great. Thank you. The other question that I have its primarily relating cost first in the individual segments. The cost per case for anesthesia was, I mean, the highest in the last five quarters. I was wondering if that is related at all. I mean, is it seasonal or is it related at all to employee costs, which were also significantly higher in Q1 versus, I mean, for as long as, this has been in your company?

[Richard Bear:]

Just to clarification, are you looking at adjusted operating expenses or total operating expenses?

[Endri Leno:]

I am looking at adjusted, anesthesia services the cost, I’m just stripping out depreciating …?

[Richard Bear:]

Yeah, I mean, the comp for case you think about going back to the seasonality comments before. We have the lowest level of anesthesia cases in Q1 in the highest level in the case in Q4. We serviced 27 ambulatory surgical centers, each averaging, call it three rooms. Each of those rooms has to be staffed each day. We have the highest productivity of CRNAs in Q4, the lowest productivity in Q1, just by nature of the patient cases. Our people cost are relatively fixed. We can’t help – the model is to pay people, if their salaried, the get paid a salary, if their contracted, they get paid a per day rate and that’s just how the works. So, they’re only working six hours in a day versus nine, and still get paid the same. So employ past remains steady. I mean, if you look at our anesthesia cost between Q4 and Q1. Q4 the anesthesia cost is 9.5 and Q1 there is 9.5. So, cases increase, those costs don’t increase going and you'll see that improve.

[Endri Leno:]

Great. Thank you. And the other questions I have, on the flipside the product and support for the product segment was lower then, I mean, we have seen since you had that product. I mean, does that indicate revenue stage and to focus less on to that statement or is it just a one quarter kind of thing?

[Richard Bear:]

Yeah, I mean, product cost in Q1 was $1 million and its right around $1 million every quarter. I mean, sometimes in varies depending on the conferences that we’re attending and the size of those conferences. The group that we have servicing that business, has remained fairly statistic for the last six, quarters. Al though we continue look for ways to invest in that business to increase adoption and then get more doctors trained. The cost are not going to go to substantially.

[Endri Leno:]

Okay. Great. That’s all question I had. Thank you.

[Operator:]

The next question is from Doug Miehm, RBC Capital Markets. Please go ahead.

[Doug Miehm:]

Just a couple of housekeeping, Richard. Medical supplies year-over-year were basically flat, even though we had a dramatic increase in the number of procedures that were done. Why is that?

[Richard Bear:]

Because in the early days, in our early agreements we pay some of the medical supply cost in all of our later agreements we’ve basically that debt just its not natural for us to buy the supplies because we don't control the ASC. So, in later agreements we put that responsibility into where is should be, which is the ASC, so we don’t have that expense in all of our later agreements.

[Doug Miehm:]

And then as we look at let’s say, I guess, we call it same-store sales or organic growth or those sorts of things. It was hard to tease out exactly what that number was this quarter. But I guess in the language of the quarter, you indicated that all the growth was associated with acquisitions year-over-year. So, if we take into account the sort of losses in revenue that we saw associated with GAA, would be the growth of the rest of the business. Would it be in line with the 3% to 5%?

[Richard Bear:]

Yeah, it would be, I guess that answers it, I guess, that’s drafting we would – when we look at quarter-over-quarter, the primary driver to our increase in revenue is going to be the acquisitions that we did post March 31, 2016 that weren’t be in that comparable quarters.

[Doug Miehm:]

Okay. Then I guess, the final question is just with respect to margins. It looks like no surprise overtime GAA's lost margins from around 60% to, I don’t know something perhaps in the range of 45% to 50%. And today outside of GAA it looks like on average the rest of the business is doing probably 55% or even better. What gives you the confidence that you’re going to be able to maintain the margins in that other part of the business outside of GAA?

[Richard Bear:]

Margin is driven by two functions. Margin is driven by; one, the reimbursement rates that we’re receiving from each payer and again we haven’t seen any material changes in those rates. Two, the payor mix. If you look at our MD&A, page 9, it talked about, it has a table that shows the payor mix and it compares the payor mix in March 31, 2016, those properties that we own at that point to March 31 2017. So it shows, basically the difference between those two would be the 2016 acquisitions and you can see that other is 6.5 to 7 points higher and higher the commercial, the higher the revenue. Costs are not any different. So, therefore higher the margins.

[Doug Miehm:]

So I guess over time you're still very confident, you’re going to be able to maintain those …?

[Richard Bear:]

In those, yeah, I mean, every acquisition is different. I mean, the profile of the 2017 acquisitions could be 60% commercial, 40% federal. We value we based on that way and as we sit here, if that’s the case we’re going to sit here a year from now and you’re going to say, why has it gone down and my answer is going to be the same because of this nature of the acquisitions that we’re adding on. Each one is individually assessed and valued and each one is going to have a different profile.

[Doug Miehm:]

Perfect. Thank you.

[Richard Bear:]

You’re welcome.

[Operator:]

The final question is from Richard Close of Canaccord Genuity. Please go ahead.

[Richard Close:]

Thanks. Just curious Edward, if you could comment or elaborate on your comment earlier on the RUC committee and the vignettes you were talking about previously are no longer relevant. How do relevants occur at current procedures, but how do those get changed, do you know? Or will that be looked at going forward? Just any insight there?

[Richard Bear:]

Yeah, I’ve done some research on this Richard, so if you don’t mind, I’ll answer that one. Those vignettes as they’re defined. So, the RUC would be looking at the American Society of Anesthesiologists, the RUC will talk to the ASA, to determine what to update those vignettes and then the RUC will use those updated vignettes to make recommendations to CMS.

[Richard Close:]

Okay. But you don't know whether that's occurring now or not?

[Richard Bear:]

It’s not. To the best of our knowledge, there has been no work done on those updated vignettes.

[Richard Close:]

Okay. And then if you just could help us out. I know, so in Canada, obviously, deep sedation is not necessarily a practice that’s employed up there. It’s clearly growing in the U.S. and can you just talk a little bit why it's been adopted or it continues to be adopted in the U.S. Obviously, you're playing off this increased adoption with your MAC program or de novo program. Just talk a little bit how those conversations go with GIs that you're looking at in terms of developing this program? Just may be the difference in terms of reception between the Canadian healthcare market and the U.S. healthcare market?

[Richard Bear:]

Okay. First off, one is for profit and one is not. So, that’s always going to be the biggest, that’s going to be a difference in the markets. We're not driving, we’re not driving the change in the standard of care and the adoption of deep sedation, that’s really being driven by the two factors. One the GIs. Remember the GIs, create demand, we serve demand, so GIs want to be on the cutting edge of providing the best care to their patients. They see that anesthesia assisted endoscopy or deep sedation is best care. So they decide to put it – bring that into their ASC and then they decide how to do and hopefully they decide to do that with us. This is also driven by going back to the CMS issue. CMS back in 2015 eliminated the co-pay for deep sedation as it relates to colonoscopies. So, this frequency change is a result of them wanting to increase access to colonoscopies because again colonoscopies is still the gold standard to detect and prevent colorectal cancer and it drives costs out of the future system. So, we’re not driving these changes, we’re facilitating these changes and that's how we – so when we’re talking to GI practices that are currently doing deep sedation, not doing deep sedation excuse me. If they want to know how to do, they don’t really have an idea. They'll want to do it right and then they wanted, they want to partner no different than they partnered with their ASC’s with Amsurg and HCA and others.

[Richard Close:]

Okay. Thanks.

[Operator:]

This concludes the question-and-answer session. I’ll now turn the call back over to Edward Wright for closing remarks.

[Edward Wright:]

Yeah, just again, thank you for joining us and look forward to continuing to update you. Thanks very much.

[Operator:]

Ladies and gentlemen, this concludes today’s conference call. You may disconnect your line. Thank you for participating and have a pleasant day.