CRH Medical Corp
Q3 2017 Earnings Call Transcript

Published: 5 Nov 2017

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the CRH Third Quarter 2017 Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Ms. Kettina Cordero. Please go ahead.

[Kettina Cordero:]

Thank you, operator, and good morning, everyone. Today I'm joined here today by our CEO, Edward Wright; our CFO, Richard Bear; and Jay Kreger, President of CRH Anesthesia. Before we start, I would like to remind everyone 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 about forward-looking information and the risks inherent to our business, please refer to the cautionary notes in our financial report for the quarter ended September 30, 2017 and to the Risk Factors 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 quarter ended September 30, 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 gastroenterology. 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. And with that, I leave you with Edward Wright.

[Edward Wright:]

Thank you, Kettina. We had an active quarter on the business development front we announced a number of acquisitions, one in August, and three more in September, bringing our total to six acquisitions so far in 2017 and 15 since we entered the anesthesia space in December 2014. CRH Anesthesia now services 35 ambulatory surgical centers in seven states and performs approximately 235,000 patient cases annually. Acquisition spending in 2017 is in line with what we've spent in 2016. Year-to-date we've invested approximately $33.1 million. Jay will provide more detailed account on a recent business development activities and our acquisition pipeline. We're extremely disappointed that despite our recent acquisitions, we have not seen a change in market sentiment for CRH. We believe that our share price does not reflect his true value and therefore board and management are currently reviewing initiatives to address this situation. During the third quarter, we generated $23.3 million in total revenue. We generated $7.8 million in adjusted operating EBITDA attributable to shareholders and $6.4 million in free cash flow while maintaining strong margins. We completed the quarter in a strong financial position with $10.4 million in cash and $13.1 million in working capital. In addition, we have $35.8 million remaining on our $100 million credit facility at an interest rate of live reports 2.5%. This combined with our quarterly cash flow gives us ample flexibility to grow our business without issuing stock and diluting shareholders. With that, I'll leave you with Richard, who will discuss our financial performance during the recent quarter.

[Richard Bear:]

Thank you, Edward and good morning everyone. 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, which means that our financial statements include those have subsidiaries, in which we hold a controlling interest such as the anesthesia practices we own or in which we hold majority interest. This practice is in keeping with current accounting standards. We've reported total revenue of $23.3 for the three months ended September 30, 2017, compared to $22.1 million in same period in 2016. Year-to-date we reported $67.9 million in total revenues compared to $52.5 million for the same period in 2016. Anesthesia revenue for the quarter was $20.5 million compared to $19.4 million for the same period in 2016. Year-to-date anesthesia revenue was $58.5 million compared to $44.8 million for the same period in 2016. Anesthesia revenue was positively impacted by growth in acquisitions, organic growth and revenue from our MAC Development Program. Anesthesia revenue was negatively impacted by changes in payer mix and rates within our commercial payers, primarily at our GAA location and by temporary clinic closures related to Hurricane Irma. Our payer mix is predominately commercial, which was 61% of our patient cases in the third quarter. Annual patient cases, which include Medicare, Medicaid and other federally funded programs, represent 39% of our patient cases. For 2017, we have seen growth in both federal and commercial patient cases. Federal cases have grown at a faster pace than commercial patient cases resulting in a change our payer mix compared to prior periods. Average revenue per case of $417 for the third quarter is consistent with Q2 2017. Changes in the payer mix and rates of practices prior to 2017 have resulted in a decrease in average revenue per case of 10% when compared to the same period last year. Year-to-date average revenue per case has declined 7.5%. During a third quarter of 2017, we service 49,114 patient cases, year-to-date 2017 we've serviced 137,664 patient cases. Sales of our O'Regan System during the third quarter were $2.9 million, 5% greater than in the third quarter of 2016 year-to-date O'Regan sales were $8.4 million or 9% higher than last year. As of September 30, we have trained 2,620 GIs at 1,011 practices and then network of GIs in private practice is using our O'Regan System is still growing. We expect to continue expanding our product business at the same rate over the coming quarters. Total adjusted operating EBITDA for the third quarter of 2017, was $10.9 million. Total adjusted operating EBITDA attributable to shareholders was $7.8 million and total adjusted operating EBITDA for non-controlling interest was $3.1. Our total adjusted operating EBITDA margin for the quarter was 47%. As a result of the amendment to our credit facility at the end of June 2017 and the extinguishment of the crown debt we have significant reduced our quarterly interest expense. During the third quarter, we've recorded interest expense at $270,000 compared to $1.1 million in the third quarter of 2017. During the third quarter of 2017, we generated $6.4 million in free cash flow. We defined free cash flow as cash provided by operations, less payments made per interest and other financed expenses, less distributions per non-controlling interest. As of September 30, 2017, we had $10.4 million in cash and $13.1 million in working capital in addition we have $36 million available on our credit facility to fund future growth. With that, I will leave you with Jay for his update.

[Jay Kreger:]

Thank you, Richard. Last quarter I've spoken with the groundwork that we've laid a CRH Anesthesia to assemble professional team and create an efficient organization that's capable of supporting observing business. That groundwork became even more important in the third quarter as we saw increased activity in deal front. We completed four acquisitions to further expand our presence in Florida, Texas, North Carolina and Colorado respectively. As we've briefly discussed on last quarter's call on August 1, we announced the acquisition of a 55% acquisition in West Florida Anesthesia Associates for $5.8 million. West Florida serves one ASC and has estimated annual revenue of $3 million. On September 11, we announced the acquisition of 51% interest in Central Colorado Anesthesia Associates in Denver, Colorado for $7.9 million. Central Colorado serves three ASCs and has estimated annual revenue of $5.6 million. On September 20, we announced the acquisition of 51% interest in Raleigh Sedation Associates in North Carolina for %$7.2 million. Raleigh serves three ASCs and has estimated annual revenue of $5.3 million. And then finally on September 28, we announced the acquisition of 100% of Alamo Sedation Associates for $3.5 million. Alamo serves one AFC in San Antonia, Texas and has estimated annual revenue of $1.8 million. Consistent with recent past acquisitions, we finance with the acquisitions [Technical Difficulty] more in line past acquisitions which are also reflective of current industry developments. As Edward stated earlier, we've now invested $33.1 million in acquisitions year-to-date, which is comparable with what we've found in all of 2016. We further confirmed our capacity to leverage our relationships and have strong pipeline during a changing environment. Implementation of our MAC program with Puget Sound Gastroenterology in Washington State is progressing well. In anticipated exercising our option by mid 2018 again our people and processes here are working diligently to insure successful launch. As I said before, I'm confident that we will be able to expand programmed other practices in future quarters, as new groups of MAC is a standard of care. Time of [ph]these opportunities well in part depend payer adoption in various regions around the U.S. Our focus remains on efficiently managing our business and creating future growth opportunities through a robust pipeline. I look forward to providing you with the year-end update at our next conference call. So, I'll now leave you with Edward for his closing remarks.

[Edward Wright:]

Thanks Jay. As we evolve our business in a changing environment, we continue to post strong operational results and maintain a solid financial position. For the remainder of this year, we have focused on integrating our most recent acquisitions, leveraging our pipeline, and increasing value for shareholders. With that I'm going to turn it over to the operator to open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] The first question comes from Doug Miehm of RBC Capital Markets. Please go ahead.

[Doug Miehm:]

Thank you, and good morning everyone. Two questions. The first question maybe for you Richard or Jay. Just with respect to the changes that we sub-served in your split of business between commercial and government pay, it seems that the numbers have changed year-over-year. And maybe you could number one, explain that in part B to that question would be given that should we be using the Q1 and Q2 numbers that were provided or were they have to change in addition to last year's Q4?

[Richard Bear:]

Yes, good question Doug, and I'll take the question, good question. So, what we did during Q3, is we just took a hard look at how we're reporting commercial and federal, because of the focus on payer mix. And there's a couple - there's a classic federal plans Medicare, Medicaid, et cetera and then there's some kind of crossover plans such as Champus and Tricare that honestly were inconsistent recorded as commercial versus federal. They're federally funded plans and actually act very similarly to Medicare plan. So, the information that we provided in our financials are really based on the corrected reclassification of payer mix, and I can share with you and or anybody else who wants to it conjure send me an email the breakdown by quarter historically, which tie into the year-to-date historical numbers that we've provided.

[Doug Miehm:]

And you'll provide the same thing for Q4 last year as well if that has changed?

[Richard Bear:]

Yes sir.

[Doug Miehm:]

Okay great. And then the second question, just has to do with the outlook. No, I think we've all seen what's happened to, I wouldn't call them the competitors, but people are companies that are we used to benchmark your guess and we can commentary over the last day or two is that the seasonality effect that we might normally see, they're not seeing in their numbers in Q4 so far. Can you give us any indication of what you're seeing? And if you can't, I guess my other question would be, if you're not able to provide that information, what differences in systems do you have relative to what they have that were prevent you from doing that not and only with there. Thanks.

[Richard Bear:]

Okay. We're expecting we've always in seasonal growth, I looking at in looking - talking with our GI partner is in looking at the schedules. We will see growth in patient cases in Q4 vis-à-vis Q3. We get information on a weekly basis, it takes time for that. We get employee information on claims process, because that's the most accurate information for us. So, it's typically lags. And there's - we haven't seen anything that we tell us that we want to see an increase in Q4 vis-à-vis Q3.

[Doug Miehm:]

But will it be of the same amount that you've historically seen?

[Richard Bear:]

Last year we saw, as we look at - last year look at Q3 and Q4 we had the bucket of properties in each quarter was identical, because we didn't - we did acquisitions all of our acquisition closed in Q2. We saw 7% increase in cases between those two periods. I would say that we expected some other team tight in 7% this year.

[Doug Miehm:]

Okay, great. Thank you.

[Operator:]

Our next question comes from Lennox Gibbs of TD Securities. Please go ahead.

[Lennox Gibbs:]

Good morning, thank you. And the first question is for Edward. Just in the prepared comments you've alluded to initiatives that may be under consideration by the board and management with respect to market sentiment. Can you discuss the scope of those initiatives?

[Edward Wright:]

Not at the moment Lennox. We're evaluating possible - a number of possible options, and those are things that will inform the market or inform everyone when we make some decisions were there's a variety of things that are under consideration.

[Lennox Gibbs:]

Okay, all right. Second question. What's your working assumption with respect to the current macro environment and the likelihood that these headwinds continue into 2018 and then as a part of that can you discuss potential countermeasures that you might implement or that might help to improve important performance in this environment?

[Edward Wright:]

You're defining headwind as the…

[Lennox Gibbs:]

The payer mix, the high deductible, the shift towards high deductibles.

[Edward Wright:]

Yes. I mean, yeah, I mean, again we'll see what similar things go. I mean I don't - I haven't seen early diamonds and any data yet in terms of what the insurance premium market looks like for 2018 compared to 2017. I can actually - I can say for CRH and it's a positive for everyone. We saw less than a 1% increase in our healthcare cost. So, we did not change it. We did not change our plan construct going forward. I hope that - I hope that everybody has that same opportunities to we don't see plan constructs change. We're looking at a lot of different areas. We're looking at valuation techniques that we're using. We're you looking utilization at different centers. We're look at - what we're - how a payer contracts go up whether that - whether what we can do from market perspective to adjust those, so there's a lot of different things that we are looking at as we go forward and manage these trends.

[Lennox Gibbs:]

So, you can look at that them at the margin performance in the slide to be seen there, are there cost reduction measures that are - that might be a views that might do you lever to you going forward?

[Jay Kreger:]

Lennox, this is Jay. I think, we look at staffing optimization and staffing models that we can undertake to affect our cost levels. The cost side of the business is something we're trying to take a close look at, but it's also very much market driven. So, when you talk about macro level dynamics from a cost side it's - we're in a supply and demand issue with a limited number of CRNAs and anesthesia providers. But I think there is some things we can do - there are some things we can do going forward.

[Lennox Gibbs:]

Thanks Jay. Thanks very much.

[Jay Kreger:]

Thank you, Lennox.

[Operator:]

Our next question comes from Richard Close of Canaccord Genuity. Please go ahead.

[Richard Close:]

Great, it's Richard Close. I'm not sure what that was. But question with respect to the activity on the acquisition front, there's been several different states, I know you have Florida in there, and the demographics might be a little bit different. Can you talk a little bit about the payer mix associated win in the acquired properties so far, this year? And how should we think about maybe those acquired entities payer mix and how that blends into the existing company?

[Edward Wright:]

Yes, let me start with that, this from a numerical standpoint. So, if we look at our acquisition - if we just look a Q3 2017 as an example. And we look at all of our acquisitions prior to 2017 our commercial schedule split of our base acquisitions are 62.5% commercial and 37.5% federal. If we look at our payer mix of the 2017 acquisitions, it's around 53% commercial and 47% federal. We're going to do that. So, if we look at those acquisitions, we had West Florida and the acquisition in Ocala, those two are going to have a higher percentage of federal than what we acquired in Raleigh, St. Antonio, Colorado and Atlanta. But remember we are valuing those, although I mean those will have an impact on our revenue per case and our margins just because of the profile of those properties. Please keep in mind and this is critically important that we value the business based on what we see in those. So those if you look at a - those have lower EBITDA profiles going in so our costs on those would be lower. So, our valuations are all in mind with the value the business that we're acquiring regardless of the payer mix.

[Richard Close:]

Okay. And then so feathers into, I guess my question with respect to the revenue per case, I guess was relatively flat from second quarter to third quarter typically seasonality is greatest for the fourth quarter in terms of procedures and as we think about people meeting deductibles and whatnot, I would - I suspect that you would see a bump in the commercial procedures in the fourth quarter. So just so we manage expectations here what should we be thinking about in terms of our revenue per case for the fourth quarter as to not get too far ahead of you guys?

[Edward Wright:]

What we've seen is, we've seen fairly flat commercial quarter-over-quarter as we've stated. We've seen growth in both aspects of our business, commercial growth that was growing, but that was growing faster, which is resulted in this evening of our payer mix. Historically, you're right. We always see higher percentage of commercial cases in Q4 is compared to previous quarters. I didn't - as you know I'm assuming a slight uptick, and I look at our internal, forecast but I'm not forecasting any hockey stick like effect because, it's not responsible. So, you might consider a slight uptick applied to the case increases that will see, but I went go crazy, Richard.

[Richard Close:]

Okay. You had mentioned organic, when you were making your comments earlier growth through acquisitions, growth organically. Can you provide any details on what the organic or same-store growth was in the third quarter?

[Edward Wright:]

Yes, generally we've guided that we see 3% to 5% organic patient growth that we sight, we serve both for a year-to-date, September 30, 2017 in quarterly date, when I look at it, it is right there in that 3% to 5% range.

[Richard Close:]

Okay. And my final question would be you've done a handful of transactions here over the last couple of months. Can you talk a little bit about the pipeline and where that stands and maybe how potential targets have changed in terms of thinking about, are they more eager to sell or they less eager to sell popped in and around that?

[Jay Kreger:]

Sure Richard, it's Jay. I'll answer that. So as far as the acquisitions we did this year it's always interesting, because these things are not timed. Ideally, we always talk about how would be nice to do it couple of acquisitions each quarter. And just like 2018 when we closed three acquisitions in one month we had a very busy third quarter of this year. And I would suspect that that will always be the case, not necessarily three in one month, but where we - where we don't time them. We may go three months without and then two real quick we may be one of months we guess don't ever know. Doctors who are partnering with us or you know incented or make their decisions on their own personal factors, age of the practice, age of the individuals, where they are. I don't see the macro developments as we've talked about being that thing that makes a doctor. Want to do a joint venture with us or not. They do it, because they feel value in the proposition that we are showing them. Whether or not that change is next year after these expected cuts come through will see. That said, I don't see any difference next year in the amount of activity that we have for the year, we should be at a comparable level of activity or higher and that's how we're looking at 2018 we're very bullish on our pipeline as we go forward especially now that we've gone through our pilot if you will on the MAC development program.

[Richard Close:]

Okay. Thank you.

[Operator:]

Our next question comes from Noel Atkinson of Clarus Securities. Please go ahead.

[Noel Atkinson:]

Hi good morning. Thanks for taking my question. Just to follow-up the last question. Do you see an opportunity, however to hold off on additional acquisitions until the CMS rate changes do take effect and maybe there is a little bit more pain felt in some of those smaller practices?

[Jay Kreger:]

I think that there is an opportunities there. However, we've not held off our level of activity. We've taken into account. What we believe will happen from CMS into our modeling and as Richard mentioned earlier, our return on investment regardless of the payer mix, regardless of the cuts should remain consistent with past acquisitions. And so that is already taking into account and the valuations that we're currently using. As I mentioned once they feel the pain of those cuts within their own anesthesia practices that may lead some to want to partner with us. But what I'm hearing is most of them do understand and believe that the cuts are going to happen, and so it's not that they're holding out waiting to see.

[Edward Wright:]

And Noel, this is Edward. Just to add a little bit to that. Keeping in mind that what we're bringing forth as an opportunity is a new proposition to GI. So, Jay would tell you that he is assemble to his team and they've gone out and work the leads that are primarily still within the rating customers that we have. This is still a new idea. So, of all of the acquisitions that we've done to date 15 of them, I believe 13 if I'm not mistaken are rigging customers, and 14 of the 15 have been a result of us going out in educating people. So, what I'm excited about is some of the deals that happened in this last quarter is, what people that we talked about quite some time ago, and the sales cycle some time is a little bit slower than what we might like. But that's because there's a long-time education process involved with many of the practices, I don't know keep that anything to add to that Jay?

[Jay Kreger:]

No, I think what we've seen is the typical sales cycle from the time we first proposed our value proposition is close to a year. And so that is why we can say with some level of confidence that next year looks good because of how many conversations we've started in 2017.

[Noel Atkinson:]

Okay. And so, the St. Antonio acquisition being a 100% acquisition, do you see there being that being a bit of an outlier that you still intend to continue to primarily due to joint ventures?

[Edward Wright:]

I think that's the primary is to go joint venture still that was a particular case for that's what they felt comfortable with, and we did as well, because it was in line with everything else we include in our transactions.

[Noel Atkinson:]

Okay. Can you talk a little bit about the hiring environment and this is for the cost environment for the CRNA's, its availability changing, and is daily rate that you have to pay changing and are you expecting any meaningful cost increase to your existing portfolio of CRNA's in 2018?

[Edward Wright:]

So good question. In general, salaries have been and remain to be flat, but that is market by market. For the most part we are contracting people and can 99's and those contracts are renewed automatically where there is not an adjustment. And let the market dynamics would dictate otherwise. We don't adjust those. But again, it's market driven by supply and demand. As we go forward more and more often hospitals are now starting to utilize CRNA's instead of anesthesiologist in order to drive their cost down. But what it also does is it reduces the amount of supply that's have in the marketplace. Just like nursing there is a shortage, and so we're subject to that same shortage on the CRNA front, which makes the salary somewhat inelastic. So, as we go forward the pay per CRNA will be driven by the market more so then by increasing or decreasing payments.

[Noel Atkinson:]

Okay, great. Two more quick ones here. In terms of procedure volumes, in the imaging Medical Imaging side there is a push by the federal government in the U.S. to - I'm sorry by insurers in the United States such as anthem to push volumes of patient procedures for medical imaging from the hospital into free standing centers. Are you seeing anything like that where they're starting to be any sort of initiatives by the insurers by hospitals, anything that to kind of to push things out?

[Edward Wright:]

You're speaking specifically of GI. My stands is most of the GI has already been pushed out of the hospitals other than those who are employed by the hospitals. If you go by the stand offs and then hospitals are generally not very busy. And those doctors are not owners of ASVs that would be able to drive that business outside. So, I don't think we'll have the same type of movement going forward, because I think they've already been migrated out.

[Noel Atkinson:]

Okay. And then finally, it looks like O'Regan, the number of O'Regan trained docs went down sequentially in Q3. Can you talk to that?

[Edward Wright:]

Yes, I'll speak to that. That was - unfortunately in our Q2 MD&A that was not caught. We reported that there was 2653 trained docs and there was a trans-physician error it should have been 2,563 we didn't think it was material enough to issue of restated financials.

[Noel Atkinson:]

That's great. Thanks very much.

[Operator:]

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

[David Novak:]

Good morning, thanks for taking the questions. Just of the first time, I've heard you guys talk about commercial rate pressures and providers acquired prior to 2017. Could you elaborate a little bit on this would this be changes to a contracted commercial rates or just changes in UCR rates anything you can disclose about that would be great?

[Edward Wright:]

Yes, I mean what we're seeing - hey David, how are you? We're seeing - most of the changes that we're seeing so relates to the payer mix issues at GI that we've previously disclosed, but as we kind of around the corner from the 2016 acquisitions meaning that we've had those for full year. As we acquired those businesses we are running out of contract graph on everyone, and it takes a little bit of time to get those key payers that we bring in under contract - in contract. So, when we have the comparable periods we're just seeing differences in some of those net realize per rates just because of the timing of those contracts.

[David Novak:]

Gotcha, great. And I guess just looking at GAA specifically again and drilling down a little bit on the same contract per patient encounter revenue. Back in 2014 you know GAA took a bit of ahead as a contracted with United. So, since that time as GAA contracted with any other major commercial carriers and would that be a material event that you would press release?

[Richard Bear:]

Yes. I mean the contract with United in 2014 would have been prior to our acquisition that was May of 2014, our acquisition date was December 2014 and we would have assumed - we assume that contract rate at our valuation for GAA. There has been no other changes in our payer relationships MAC GAA, and if we contracted in GAA and it was - it had a material impact on our financials we would need to consider how that information was disclosed and the timeliness of that disclosure.

[David Novak:]

Okay great. And then just looking at like your commercial volume for the nine months year-over-year, there is a slight uptick of about call at 0.8% I think in the MD&A yet same contract revenue decreased about 9%. So, I just really want to make sure, I understand this by the commercial payer mix explanation are we to assume that this is really entirely the result of patient volume shifting between various commercial carriers and not the result of a change in contract status between any of your providers and the commercial carriers?

[Richard Bear:]

Yes, it's primarily the result of changes within the commercial payer matrix.

[David Novak:]

Okay. And just one final question on commercial patient volumes. Looking at that patient volume segment specifically what percentage of cases have you successfully collected the co-pay element of the bill from?

[Richard Bear:]

I don't have that data in front of me. I mean we - these are all processed even contractor are - their process if they're in network, so we build the insurance companies. We get back in next place and it benefits, it shows what they allow. They give us - they sent us to check for what they pay, the patient porches and build to the patient that we send a parts by six statements out to the patient, and then followed up with letters and then working with our partners, who it's really their patients that GI is we determine what level of those claims would go to a third-party collection agency.

[David Novak:]

Okay, great. And just one final two part on the CMS proposed rule changes, just so I can kind of think about my forward estimates. When you press release your analysis of the changes, does your analysis assume code 8X2 is associated with four base units or three base unit?

[Richard Bear:]

Four base units.

[David Novak:]

Four base units. Okay. And finally, in our discussion with investors, we've noticed that there seems to be a little bit of inconsistent information out there on the street with respect to what your assumed code utilization rate as a percentage of your total annual patient volume would be? So, I was wondering if you have that information would it be possible to clear that up here by providing your assumed utilization rates for 7X1, X2 and 8X1, X2 and X3?

[Richard Bear:]

Yes, so about currently 25% of our coding goes to 740, 75% of our coding goes to 810. 740 is being put into two codes 7X1, 7X2. 7X1 has the base unit value of 5, 7X2 is base unit value of 6. 7X2 is actually for ERCP, which has done in hospital. So, for that 25% currently coded to 740, there is no change. 75% of our coding goes to 840, of that 75% of our coding that goes to 840; 15% of that for quote doubles where it's both an upper and lower down at the same time. So, 15% of the 75% will see no change in base rate changes. Of the remaining 85% of the 75% which is 63.75% we see that equally split between 8X1s and 8X2s.

[David Novak:]

Excellent. Thanks, so much Richard, that's been really, really helpful. Appreciate it.

[Richard Bear:]

Great questions, David. Thank you.

[Operator:]

Our next question comes from David Martin of Bloom Burton. Please go ahead.

[David Martin:]

Couple of questions following on some of the others. The government cases going faster than commercial is that because of the new acquisitions or on a same-store front basis, is that also happening, and why is that happening?

[Edward Wright:]

The first question is easy. It is on the same-store basis. We go back and look at 2015 and prior acquisitions, and we look at our 2016 acquisitions, because that's where we have year-over-year comparisons in both cases federal - in both cases, commercial and federal growing, but in both cases federal is growing faster. Why that's happening? That's the more difficult question. We've been monitoring what envision is that? What Mednaxis [ph] has been talking about another hospital group to - there is seem similar things and they're talking about changes in the exchanges, and as we've talked about before, we have very little exposure to Affordable Care Act patients because of the GI's in private practice just in primarily don't participate on those plans, that's also been discussions about other comments that Trump has made in comments on and how that impacts this. Very few questions that I don't think we have the answers for and this one, we're pleased to see growth. And our business is strong, why one is growing faster than the other will be something that will be able to address once so ever four years data at the end of Q4.

[David Martin:]

Okay, second question. Can you just - you mentioned that this model you can extent that others depending on payer adoption. How has payer adoption been going in your experience of Puget Sound and is that what you're waiting for two more payers to come on board before you exercise your option there?

[Jay Kreger:]

No, so Dave, it's Jay. With Puget Sound the payers for most part in that market had already adopted deep sedation as a standard of care, and in fact that's one of the reasons why we were able to go into that market. It's other markets that we're talking about where the payers either have not adopted or not all of the payers have adopted yet. So, for instance you may be at a center in certain parts of California where half of the payers are paying for deep sedation and half are not. And so, we are talking with those GIs looking at the market and deciding if and when it makes sense to go in to those markets, and it's worth it for everyone involved. With regard to Puget Sound the reason why we have not transacted yet as we laid out at the beginning when we first announced the MAC development was we always waited a year. Not only to ramp up the business, but also for the physicians to take advantage of long term capital gains.

[David Martin:]

Okay. And Jay, this one is for you too. In response to one of the questions about the targets that you are approaching and what their expectation as far as the cuts - the Medicare cuts. You've said they're all generally expecting the cuts are going to happen, are you referring only to the 2018 cuts or people building in expectation that there will be that extra cuts to the streaming call in hospital even 2019?

[Jay Kreger:]

Generally speaking, no one is of the opinion that additional cuts will happen beyond the one unit cut down to four base units as Richard laid out earlier.

[David Martin:]

So, they don't have an opinion yet or they do have an opinion, and they see lot more to happen?

[Jay Kreger:]

They do have an opinion and like our opinion they don't believe it will happen.

[David Martin:]

And what's the basis for a feeling that won't happen?

[Jay Kreger:]

I think the general feeling is that the amount of the cost if they were to lower it anymore it would be basically at cost. And so, the idea from a reasonable in a standard is that they would only lower it to the point where there is a reasonable margin, and going below that it would in fact not be reasonable.

[David Martin:]

Okay, great. Thanks.

[Operator:]

Our next question comes from Alan Ridgeway of Scotiabank. Please go ahead.

[Alan Ridgeway:]

Hey, good morning guys. Thanks for taking the questions. I just wanted to circle back on the CRNA, because we have heard from some other companies that they're facing pressure there on the employment. I just wanted to circle back with Jay on the contracting with them, how long are the contracts that you guys signed with the CRNA's and sort of what percentage of CRNA in your business are sort upper renewal on a yearly basis?

[Jay Kreger:]

I think that, and we have over 200 anesthesia providers that are either employed or under 1099 employment contract or non-employment contracts, but independent contractors. Roughly 75% of those maybe 80% are 1099s and those contracts are usually only one or two years in length with auto MAC renewals. As the market may dictate will review those contracts only upon renewal to determine whether or not there should be an adjustment up or down otherwise they just auto renew, and we just keep on going.

[Edward Wright:]

Yes. I'll add one thing. I mean there is a big difference between for CRNA and working for a hospital, and I don't know what you're referring to in terms of what you're hearing than working for an ASC. And that there are significant advantages like balance - slightly work-life balance primarily and work in an ASC versus a hospital. So, I'm not sure that there's going to be direct correlation between increase in hospital side and increases on the ASD side just because of the work-life balance opportunity as we provided vis-à-vis the hospital.

[Alan Ridgeway:]

Right. And so, if you look at your business across sort of you're not here your footprint. Are the CRNA's in the different sort of geographic regions are they making similar salaries or is there a geographic difference across the board?

[Edward Wright:]

I would say there's probably a 20% range, but it's not necessarily in line with what you might think of as a standard typical cost of living increase. So, there is a much smaller range than the cost of living range.

[Alan Ridgeway:]

Okay. And then just on the payer side will stick with contracts for my questions. Richard, you mentioned that when you first start billing, your billing under wrap and it takes some time to sort of comment as to which ones are contracted and what the ultimate payments you guys are able to move forward within your estimates. How long does that period usually take and then how long are these contracts typically for these typically two to three-year contracts, and so you've got sort of a 30% renewing on an annual basis or how should we think about contract rest on the payer side?

[Edward Wright:]

So typically, 60, 90 days it takes to get projects in place with the major players that we do in each market could be up to 120. It really depends on the payer in terms of what we're trying to do is we're trying to achieve contact rates that are in the best interest of our partners and to the best interest of our shareholders or sometimes that takes longer, because we want to get those - we want to get those strong rates. When we do sign contracts which typical light of the contract is three years and with automatic escalators in each year and those escalators are probably range in 3% to 7% each year. As contracts come up they - we either choose depending on the rates to automatically let those evergreen or if we believe the rates are don't or not at market we will then open up negotiations and in throughout data we have about the value of these services and what we see these services being paid that usually results in a better rate for us and our partners.

[Alan Ridgeway:]

Right. And just in order for us to get a good feel us to sort of help. How much of volume or how many contracts are in place - how much your business would be specifically contracted with sort of a higher volume payers at you ASGs versus those where your billing under wrap to this just not - that's just not worth the time and effort on your side and probably also on the payer side to sit down and negotiate every little tiny contract.

[Edward Wright:]

As we've previously stated, I mean we - we're - our primary strategy is to can't check with the major payers and then remain and utilize wrap for non-major payers. Just please keep in mind that from a wrap perspective the patient has treated if they're in network the payments are process that they're as if they're in a network as represented by our days outstanding, which is 39 this quarter, 38 last quarter ticked up because the new entities that came on that we haven't collected money on yet. We don't report specifically on that breakdown, so that would be the answer to that question.

[Alan Ridgeway:]

Okay. And then maybe I'll ask that slightly different way. Are the contracts under wrap do they have escalators to or no?

[Edward Wright:]

Under wrap were being paid for being paid, we're not putting a price on a contracted price to the payers, the payers are paying us based on their internal payment schedules.

[Alan Ridgeway:]

Okay. So, it doesn't necessarily have an escalator on it?

[Edward Wright:]

Doesn't necessarily have an escalator on it. Think about it this way. I mean, when we - when we want to go in network or when that if we get approached by one of those wrap relationships to come in network. Our goal is to - our goal is to utilize the data that we have and what they've been pay us to maximize the value of that contract, and we've been successful doing that.

[Alan Ridgeway:]

Right. Okay, that's it from me. Thanks guys.

[Edward Wright:]

Thanks Al.

[Operator:]

Our next question comes from Endri Leno of National Bank Financial. Please go ahead.

[Endri Leno:]

Hi, thank you for taking my questions. I just have a couple quick questions. First, are you seeing any of the cases that were canceled because of Hurricane Irma, are you seeing any pickup in Q4 or do you expect any of those to be rescheduled in next year?

[Edward Wright:]

I think it's the time if they were canceled within a very short time they were all rescheduled. And we believe all of them will be rescheduled by the end of first quarter of 2018.

[Endri Leno:]

Okay, thank you. And the next question I have is on the acquisition pipeline, I think in the prepared comments Edward you've mentioned that one of the goals for the rest of the year is to integrate the existing acquisitions, are we do interpret that there are potentially not as many or fewer or none at all perhaps acquisitions in Q4?

[Edward Wright:]

That will remain to be seen in terms of integrating the acquisitions. Although if it is one could say that it seamless after having completed 12 before the three last month, there's still a fair bit of work to be done in term with Jay and the operational team, in terms of getting all of the providers up to speed with. What we're trying to do in terms of best practices and integrating the relationship between CRH in that practice. So that will take a fair bit of time. But we'll still be active on the business development front and as Jay alluded to earlier, there's a pipeline here which is robust. And Jay and his group are very much active in the field talking to people whether those get across the finish line before the end of the year that will remain to be seen.

[Richard Bear:]

I'll also just add that we have proposals out all the time, at all times of the year. Our activity does not slow down because of integration going on. However, the activity on the doctor's behalf and how much attention they can put forth towards a possible transaction is always going to be a little bit slower during the holidays and as we've noted the fourth quarter is always the busiest month or the busiest quarter of the year for those physicians, so their attention to any proposals we may have about is usually less during this time of year. So, I think that's in line with what our expectations are.

[Endri Leno:]

Okay. Thank you. That's all the questions I had.

[Operator:]

Our next question comes from Prakash Gowd of CIBC. Please go ahead.

[Prakash Gowd:]

Thank you, very much and good morning gentlemen. Just a few questions. First is probably for maybe Jay. I'm wondering if you could talk a little bit about the macro environment for GI ASCs and looking over the last say 12 months or so. Have you seen new ASCs specialize in GI emerge as new competition in the relevant areas of your current business, and if so is that a potential avenue for loss of private pay cases in your existing business?

[Jay Kreger:]

Yes, I think we've estimated that there is roughly 800 to 1000 ASC GI specific ASCs in the United States, that number has been flat for some time. What we're seeing on a macro level is a consolidation within the GI specialty and that continues to go on. I think how that affects our opportunities it doesn't necessarily changes other than the fact that there may be larger groups in, which we could transact with as opposed to more that are smaller. At the same time sometimes, the largest value we can provide is for a smaller group of GI's and, so I think those opportunities remain. But I think the overall market remains the same in terms of the number of ASC's that we could transact with.

[Prakash Gowd:]

Okay. So new GI ASCs in the relevant business areas?

[Jay Kreger:]

I don't believe. I mean we seem we've seen for example, since the GAA acquisition was announced in December 1, the practices that we serve under that first acquisition and it originally was nine ASCs at it's currently 13 ASCs due to growth are not still acquisition, the new sign they probably increase the capacity by 50% to 75% in terms of total rooms. We had we know other practices are considering new ASCs are expanded ASCs. So, we are seeing growth. In that from that standpoint and the growth that's a growth that we see and those partners that we choose to do deal with that's the organic growth that we've seen year-over-year.

[Prakash Gowd:]

Okay, I just more curious about whether or not there's a new GI ASCs that are coming up that are not part of your system?

[Jay Kreger:]

There seems to be more of a replace and in large type of motivation on behalf of doctors those screen insert become more commonplace, the existing physician groups that are out there are just expanding their own opportunities in their own capacities, which certainly is as Richard pointed out that where drugs organic growth, but doesn't necessarily create a new ASC that we can contract with.

[Richard Bear:]

Not to beat a dead horse on this one, but just keep in mind for the GI's - so the GI is creating a demand that the ASC companies and anesthesia company serves, so you're not seeing new GI groups come up that would then drive new independent ASCs. It seem GI groups actually get larger and more powerful within those markets and expanding their ASC facilities to meet their needs.

[Prakash Gowd:]

Question is on reimbursement rates. Since CMS approved the lower reimbursement rates for 2018 back in July, what discussions have you had with private payers as they're reviewing their current reimbursement rates, and into 2018? Are you involved in any negotiations what's the nature of those discussions anything you could share on that front?

[Richard Bear:]

With the insurance companies, we don't - it's not a code based discussion we're not negotiating for reimbursements for code 740, code 810, what we're negotiating for the reimbursement per unit, so our contracts are not impacted by any changes in the billing code used because, it's just that our per unit rate will be applied to those you know new building codes as we as contract as we begin the process or as we continue the process of negotiating contracts or contacts for renewal our goal is going to work as hard as we can to mitigate any changes with the CMS co changes by increases and rates, but we can't guarantee that will be able to achieve that on historically anesthesia contracting is rate is code independent. And it's always on the rate, so just because the code change doesn't necessarily mean that we're going to be able to use that as a means of increasing our contract rates, but we will use all of our efforts to make sure that we're getting very value for the services that we're offering.

[Prakash Gowd:]

Okay, thanks Richard. And then lastly, and I'm sorry if you might have addressed this earlier on a later. It seems you remain optimistic on future acquisition opportunities looks like your feasibility as well and. Can you provide any intentions or expectations for acquisitions in 2018 perhaps in terms of dollars invested much as you did for 2017?

[Richard Bear:]

Yes, as we noted we've spent $33.1 million in 2017, and we expect that that number should be comparable better next year, now that our Denovo our MAC development program is on line. We should start to see some proof from that in 2018 and beyond.

[Prakash Gowd:]

Great, thank you very much.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Edward Wright for any closing remarks.

[Edward Wright:]

Thank you everyone for joining us. We appreciate you taking the time and we look forward to talking to you as we progress through Q4. So, thanks very much.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating. And have a pleasant day.