One lesser-known provision of the Patient Protection and Affordable Care Act will have profit-friendly implications in 2014, offering earnings upside for medical practices serving Medicaid patients. The provision to bump up Medicaid payments to match existing Medicare payments, referred to as parity, is expected to ramp through year's end. That suggests primary care service providers like Mednax (NYSE:MD) will see higher earnings in the coming year as state payments climb.
According to the Centers for Medicaid and Medicare Services, or CMS, a quarter of states have implemented the provision as of July. Parity affects certain primary care evaluation and management services provided by family medicine, internal medicine, and pediatric physicians. Previously, Medicaid payment for those services trailed payments made for the same services through Medicare.
A multimillion-dollar impact
Initially, the provision was geared to boost payments just to primary care physicians and pediatricians. But, thanks to effective lobbying from the industry -- including Mednax's political action committee, or PAC -- the provision was expanded to include pediatric subspecialties such as neonatologists.
According to Mednax's 2013 Government Relations update, the company successfully lobbied CMS to expand the provision in the final rule issued last November. The PAC is funded by donations of up to $5,000 per year from Mednax employees who work in its pediatric subspecialty practices and anesthesiology practices.
"Our goal was to convince health care policy makers that pediatric subspecialists should be included in his payment increase because they serve in a primary care role for their patients," according to Darren Patz, Esq., vice president of government affairs for Mednax.
The importance of the legislation on Mednax practices is significant. The PAC spent $697,000 lobbying last year and nearly $1 million during the 2012 election cycle.
The successful lobbying to include the subspecialty services performed by Mednax's pediatric services group is already benefiting the bottom line, contributing $2.5 million in revenue and $0.02 in earnings per share in the second quarter, despite only a few states having implemented it.
Medicare parity will also already benefiting other players, including Team Health Holdings (NYSE:TMH), a company providing outsourced physicians -- such as pediatric doctors -- to providers like hospitals. Team Health sales increased 14.5% to $579.7 million in the second quarter, and Team Health estimates Medicaid parity will add $10 million to $15 million in revenue in 2013.
Mednax scaling growth
Mednax operates two segments, Pediatrix Medical Group and American Anesthesiology, and is actively acquiring practices, which will offer upside as Medicaid payments climb. In the quarter ending June, Mednax had bought five group practices, three in anesthesiology and two in pediatrics. And the company announced four additional acquisitions during the third quarter.
As a result of its acquisitions, Mednax employs nearly 2,200 physicians in 34 states. The company's acquisition targets are small physician groups with neonatal care specialties that have high administration costs tied to legal and regulatory pressures. Currently, the company's physicians serve at more than 330 NICUs in the United States. Additionally, Mednax employs more than 1,650 anesthesiologists and advanced practioners.
Combined, those physicians produced total revenue of $529.2 million, up 17.7% in the second quarter. Revenue generated from practices owned more than a year grew 2% thanks in part to higher payments from commercial insurers, which offset a slight 0.3% drop in patient volume. In the first six months of calendar 2013, revenue is up 18.3%.
Including acquisitions, operating income in the quarter grew 13.7%. Mednax's general and administrative expenses were up 13.3%, less than revenue growth, and dipped to 10.3% of patient revenue from 10.7% last year.
Total net income worked out to $69.2 million in the second quarter, or $1.37 per share. Cash from operations improved $10 million to $127.2 million.
Foolish final take
Thanks to successful lobbying, Mednax is forecasting third-quarter earnings per share of $1.46-$1.51, which reflects growth at units owned more than one year of 1.5%-3.5% year over year. Mednax expects parity will conservatively add $0.05 to third-quarter earnings as more states' programs ramp up.
Heading into next year, the company should see even greater earnings per share impact as remaining states, such as Texas, come on line. Mednax will also see retroactive payments back to January 2013 from these states begin in earnest.
"As I mentioned, we have started to receive parity moneys from a few states. As a result, we're including approximately $0.05 from parity in our outlook for the 2013 third quarter for payments we expect to receive from those states that are currently paying," according to Mednax CFO Vivian Lopez-Blanco.
Both Mednax and Team Health are expected to report third-quarter earnings on Thursday, which means you should pay particular attention to the results and management's comments regarding revenue generated by parity in the third quarter and parity's expected impact on the fourth quarter and 2014. If the companies reiterate their bullish stance, it could mean millions in additional shareholder-friendly revenue.
Todd Campbell has no position in any stocks mentioned. Todd owns institutional research firm, E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC, a high net worth advisory. Gundalow's clients do not own shares in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.