Pediatrix Medical Group, Inc. History

Address:

1301 Concord Terrace
Fort Lauderdale, Florida 33323
U.S.A.

Telephone: (954) 384-0175
Toll Free: 800-243-0175
Fax: (954) 233-3202

Public Company
Incorporated: 1979 as South Florida Neonatology Associates
Employees: 2,291
Sales: $465.5 million (2002)
Stock Exchanges: New York
Ticker Symbol: PDX
NAIC: 621111 Offices of Physicians (Except Mental Health Specialists)

Company Perspectives:

Pediatrix Medical Group provides quality, cost-effective care to all of our patients through a team approach to health care delivery and management, and a total commitment to honesty, quality, professionalism and the highest level of moral and ethical responsiveness to our patients, clients, shareholders and the community at large.

Key Dates:

1979:: South Florida Neonatology Associates is founded; operations commence through contracts with two hospitals in Broward County, Florida.
1991:: First out-of-state contract provides impetus for growth in other states.
1995:: Company initiates acquisition strategy, takes the name Pediatrix, and goes public.
1996:: Pediatrix completes ten acquisitions.
1998:: Obstetrix Medical Group is formed as company expands in perinatology.
2000:: Pediatrix launches NATAL U online university for the continuing education of neonatal physicians.
2003:: Pediatrix acquires Neo Gen Screening, including proprietary processes for genetic screening of newborns.

Company History:

Pediatrix Medical Group, Inc. is the largest national practice group of neonatal physicians, providing hospital-based care for ill newborns, including premature babies with low birth weight or medical complications. Pediatrix employs over 630 neonatologists, including sub-specialists in maternal-fetal (perinatal) medicine for women with high-risk pregnancies and pediatric cardiology. Through direct ownership or contract Pediatrix manages more than 200 neonatal intensive care units (NICUs) in 30 states and Puerto Rico. Regional networks operate in Phoenix-Tucson, Denver-Colorado Springs, Seattle-Tacoma, southern California, Las Vegas, Kansas City, Des Moines, San Antonio, and Dallas/Ft. Worth. Also, Pediatrix manages newborn nurseries for healthy babies during their stay in the hospital after birth. Pediatrix operates as a physician practice management group, handling the billing, collections, and other daily administrative responsibilities of NICUs so that doctors can direct their energies to caring for babies. Pediatrix provides physicians with several means of learning and improving medical skills, such as the Research Data System which collects and organizes the outcomes of patient care to ascertain the best approaches to treatment.

Slow Start Yielding to Rapid Growth in Early 1990s

Founded in 1979, South Florida Neonatology Associates preceded Pediatrix Medical Group. Neonatologists Roger Medel and Greg Melnick created the company to manage and staff hospital-based neonatal intensive care units, offering hospitals a means of cost containment. Medel and Melnick took responsibility for hiring physician specialists for the critical care unit itself, and for administration of the unit, including billing and collections. Such outsourcing contracts were unusual at that time, so the company handled few contracts in its early years.

The organization's first contracts served Memorial Hospital and Broward General Medical Center, both in the Fort Lauderdale area. The contracts renewed every three years. Broward General expanded to 63 beds at the time of the first contract renewal in 1983. Seven doctors and three nurse practitioners staffed the NICU, providing 24-hour care. A lower bid from another practice group resulted in a loss of the contract when it expired in 1986, but South Florida Neonatology returned to Broward General in 1992 when the North Broward Hospital District awarded a five-year, $9 million contract to the company without a formal bid process. The contract involved care for premature babies as well as for ill newborns.

As the potential benefits of professional management became accepted during the 1980s, Medel found hospital administrators more receptive to the idea of an outside contractor managing a sector of hospital operations. Also, demand for neonatology increased as new technology helped doctors to save more lives of ill newborns. After several years of marketing Medel obtained contracts with Coral Springs Medical Center, Boca Raton Community Hospital, Westside Regional Medical Center in Plantation, and Bethesda Memorial Hospital in Boynton Beach. The company's first contract outside of Florida involved a hospital in Charleston, West Virginia, initiated in 1991. The company grew quickly in the early 1990s and, by the end of 1994, managed 22 NICUs, five pediatric intensive care units (PICUs), and one pediatric department in 12 states and Puerto Rico. That year the company generated $32.8 million in net patient service revenue and earned $5.4 million in net income.

Funding from 1995 IPO Accelerating Growth

In 1995 South Florida Neonatology shifted to a strategy of growth through acquisition in response to consolidation in the healthcare industry as physician practice management (PPM) groups proliferated. Allowing a national practice group to acquire their small practices became an attractive option to doctors because South Florida Neonatology relieved them of increasingly complex coding and billing issues and improved their negotiation power with payers, allowing doctors to focus on patient care. In August the company completed its first acquisition of a physician practice group, located in Orange County, California. The company added 16 units through acquisition or contract in 1995, primarily in California and Ohio.

South Florida Neonatology Associates adopted the name Pediatrix Medical Group in preparation for an initial public offering (IPO) of stock which took place in September 1995. At the time of the IPO, Pediatrix provided physician management services to 37 NICUs and five PICUs, as well as two pediatric departments, employing or contracting 116 physicians in 12 states and Puerto Rico. Proceeds of $88 million funded acquisitions and expansion through internal growth. A secondary offering of stock in August 1996 raised an additional $59 million for acquisitions.

In 1996 Pediatrix acquired ten neonatal physician practice groups. Pediatrix entered the Colorado market with three acquisitions, Pediatric and Newborn Consultants PC, Colorado Neonatal Associates PC, and Rocky Mountain Neonatology PC for a total of $12.2 million cash. The company expanded its Phoenix network with the acquisition of Neonatal Specialists, Ltd. for $6 million. In El Paso Pediatrix acquired the West Texas Neonatal Associates for $5.25 million cash. For $6 million Pediatrix acquired certain assets of Infant Care Specialists Medical Group, the largest neonatology practice in southern California, and one of the largest in the country, with ten NICUs. Other acquisitions included locations in West Palm Beach, for a total of 29 practices in Florida, as well as Reno and Houston.

In 1996 Pediatrix bought 36 NICUs, four PICUs, and two pediatric departments under its management, including three obtained by hospital contract, adding a total of 78,000 NICU patient days. By the end of 1996 Pediatrix managed 68 NICUs, eight PICUs, and three hospital pediatric departments in 17 states and Puerto Rico. The company employed 195 physicians and handled 185,702 NICU patient days in 1996. Net patient service revenue reached $80.8 million and net income reached $13.1 million.

Pediatrix's strategy involved developing regional and statewide networks, then obtaining exclusive contracts with managed care companies, serving all of the customers in need of neonatology pediatric physicians for a capitated rate. At the end of 1996 Pediatrix operated under four contracts with independent practice associations, three in California and one in Texas, and under one contract with a health management organization (HMO), Cigna HealthCare in Phoenix. Acquisitions in Denver provided the network for a possible managed care contract in that area.

During 1997 Pediatrix acquired ten physician group practices, bringing 28 NICUs under management. The company entered new markets with acquisitions in Dallas and Albuquerque. Other acquisition locations involved practices in San Jose and Pasadena, California; Columbia, South Carolina; Fort Worth; Pensacola, Florida; and Colorado Springs. Pediatrix obtained new contracts for NICUs in Las Vegas, Nevada; Harrisburg, Pennsylvania; and Roanoke, Virginia, covering an aggregate of 10,000 patient days.

In March 1998 Pediatrix formed a new subsidiary, Obstetrix Medical Group, to manage the company's growing portfolio of perinatology group practices handling high-risk pregnancies. Through expansion in perinatology Pediatrix hoped to gain referrals to neonatologists and hospitals where the company's practices were located. At this time perinatologists charged on a fee-for-service basis, but Pediatrix considered providing a single rate for a high-risk pregnancy and care of the infant through the release from the hospital.

During 1998 Pediatrix completed several acquisitions of perinatal practices, including Perinatal Consultants in Kansas City; Rocky Mountain Perinatal Associates in Denver; Texas Maternal Fetal Medicine in Fort Worth; and an undisclosed practice in Las Vegas. Also, in 1997 the company formed a perinatology practice for an existing client, Intracoastal Health Care Systems in West Palm Beach. Perinatal practice acquisitions in late 1998 were located in San Jose, California, and Reno, Nevada.

Pediatrix continued to acquire neonatal practices, including locations in Augusta, Little Rock, El Paso, West Palm Beach, Oklahoma City, and Wichita. The company completed eight acquisitions in 1998, adding 18 NICUs. Internal growth occurred through several new contracts, two in Cheverly and Baltimore, Maryland, another in Las Vegas, two in San Cristobal and Ponce, Puerto Rico, and one in Overland Park, Kansas.

Pediatrix sought an integration of neonatal and perinatal specialization at its facilities. In March 1999 the company acquired Perinatal-Neonatal Associates in Seattle, involving 12 neonatologists and six perinatalogists serving ten area hospitals; the practice group recorded 20,000 NICU patient days in 1998. Obstetrix purchased a perinatal physician group in Tacoma, near Seattle, further developing a network of company services in that area. Obstetrix acquired a perinatal practice in Phoenix, with ten physicians serving seven hospitals, including many where Pediatrix operated, and one in Harrisburg, Pennsylvania, with two physicians at two hospitals where Pediatrix managed NICUs.

Billing Investigations Hinder Earnings, Not Growth: Late 1990s to Early 2000s

In April 1999 attorneys general in Arizona, Colorado, and Florida began investigations into billing practices at Pediatrix managed centers, questioning whether their states paid too much for services for Medicaid patients. While Medel expressed confidence that the company's billing guidelines met legal requirements, announcement of the investigations resulted in a 36 percent decline in the company's stock value, to slightly over $17 per share. The company's share value had already suffered after the Securities and Exchange Commission (SEC) demanded an audit of 1998 financial statements which were deemed fairly stated. The investigations impacted earnings as physicians began to "downcode," applying lower-paying hospital care codes, in fear of overcharging. Though revenues continued to rise, from $185.4 million in 1998 to $243.1 million in 2000, net income declined from $29.1 million to $11 million in those same years, respectively. Pediatrix stock value declined to a low of $8 per share in March 2000, compared to $64 per share in January 1999, before the SEC audit.

The investigations into Pediatrix's billing practices did not sway physicians from joining the company. Pediatrix acquired neonatologist practice groups in Greenville, South Carolina; Topeka, Kansas; Yakima, Washington; and Colorado Springs in the summer of 1999. During 1999 Pediatrix added 29 NICUs and Obstetrix added 25 perinatal physicians through acquisition and internal growth. In early 2000 Pediatrix acquired practices in Melbourne and Sarasota, Florida. The company also acquired Mercy Neonatology in St. Louis which provided 18,000 NICU patient days annually.

The attorneys general in Florida and Arizona concluded their investigations of Pediatrix during the summer of 2000, citing a lack of clarity in the relevant billing codes, but no fraud. In June Pediatrix settled with the State of Florida for $40,000 for possible Medicaid overpayments since January 1, 1997. The company reached a $220,000 settlement with the State of Arizona in August for possible overpayments since January 1, 1990. Pediatrix installed a new electronic billing and coding system to assist doctors with questionable situations. The software reviewed physician case notes, then automatically recommended a billing code.

Pediatrix developed a range of activities to improve neonatal care. In July 2000 the company signed a clinical trial agreement with Forest Laboratories to direct research in the effectiveness of two surfactant drugs to treat Respiratory Distress Syndrome, a common condition among premature babies. Pediatrix received $2.5 million to direct the two-year project involving enrollment of 4,000 patients.

In August Pediatrix launched NATAL U, an online university, or forum, for neonatal and perinatal physicians to share information about treatments and medical discoveries. The virtual campus provided several places where physicians could learn and interact. These included a library of links to medical literature and other informative sites. The Differential Diagnosis (DDx) Lounge provided a chat room for discussion of unique cases and the Grand Rounds Amphitheater provided a place for physicians to present material on a specific, evidence-based topic and allowed for discussion of the topic. In addition to other rooms, NATAL U provided opportunities for physicians to earn Continuing Medical Education credits.

Pediatrix attained its first university-based NICU in January 2001, through a contract with Texas Tech University Health Sciences Center. Located at University Medical Center Hospital in Lubbock, Pediatrix physicians performed as faculty to residents and students while attending to ill newborns.

In February 2001 Pediatrix announced an agreement to merge with Magella Healthcare Corporation, the company's only large competitor. Magella reported $79.4 million in net patient revenue and $9 million in net income in 2000, compared to $243.1 million revenue and $11 million net income at Pediatrix. Together Pediatrix and Magella held a 17 percent share of the hospital neonatology market, managing 185 hospital-based NICUs in 27 states and carrying a staff of 90 perinatologists. The $173.6 million acquisition involved payment of $25 million in bank debt, the assumption of $23.5 million in subordinated notes convertible to common stock, and a stock exchange. The board of directors expanded to nine to accommodate Magella's CEO, chief medical officer, and a board director.

In 2001 Pediatrix continued to expand in existing markets. Acquisitions included Maternal Fetal Medicine at Seattle hospitals served by Pediatrix neonatologists. Another new neonatal contract in southern California further solidified Pediatrix's presence in that market. Acquisition of three central Florida practice groups included an eight-physician practice in Orlando which covered 30,000 NICU patient days in 2000. Also, Pediatrix entered the Atlanta market.

Federal Investigations Accompanying Continued Growth: Early 2000s

Through the merger with Magella Healthcare and improvements to its billing collection, Pediatrix reported a 43 percent increase in profit to $30.4 million in 2001, while net patient revenues increased 68 percent to $354.6 million. Acquisitions and new contracts accounted for $86.5 million in revenues. Pediatrix employed a staff of 250 bill collectors, an unusually large number; however, the staff effectively lowered the time payers took to remit invoices. Pediatrix received payments within 60 days in 2001, compared to 125 days during the previous two years. Regional organization of managed care coding facilitated billing and collections as well. Contracted managed care providers accounted for 49 percent of revenues, government programs accounted for 23 percent, other third party payers for 27 percent, and private pay patients for 1 percent.

Pediatrix settled billing investigations in late 2001 and early 2002. In April 2001 the State of Nevada began to investigate Pediatrix billing practices. Two separate billing investigations were resolved in the late fall of 2001, with Pediatrix paying $145,000 for possible overpayments; however, no violations of regulations were found. The investigation in Colorado was resolved in April 2002, with Pediatrix paying $1.3 million. Pediatrix agreed to retain an independent third party to review billing on an annual basis.

Just as Pediatrix concluded billing investigations, the Federal Trade Commission (FTC) began an investigation into the merger with Magella Healthcare. The FTC examined the structure of the company, particularly in three markets where facilities operated by the two companies overlapped, in Dallas, Austin, and Las Vegas. Announcement of the investigation in June 2002 troubled investors and the stock price dropped nearly $12 per share to $26.20, down from a high of $48.60 on May 1.

Pediatrix continued to expand through acquisition and internal growth. Group practices acquired were located in Memphis; Fort Worth; Lexington, Kentucky; Charlotte, North Carolina; and Florence and Columbia, South Carolina. The Columbia acquisition involved an eight-physician practice serving two hospital NICUs and covering 19,000 patient days annually. The company obtained NICU contracts for hospitals in San Angelo, Texas, to operate in conjunction with a Pediatrix site in San Antonio, as well as at Driscoll Children's Hospital in Corpus Christi.

Acquisitions in 2003 involved a large neonatal practice in Knoxville, with six physicians serving ill and well babies at five hospitals, as well as a large perinatal practice in Chicago, with seven physicians serving three hospitals. Pediatrix entered the Tampa market with the acquisition of a seven-physician practice serving two hospitals. Pediatrix obtained a contract with HCA, Inc. to manage NICUs at two hospitals in Kansas City. The company also acquired a neonatal practice in West Palm Beach specializing in pediatric cardiology.

In an effort to continue improving the care Pediatrix provided, in May 2003 the company acquired Neo Gen Screening, Inc. of Pittsburgh for $34 million. The largest independent laboratory specializing in screening newborn metabolic health in the United States, Neo Gen utilized patented proprietary processes for determining if an infant had any genetic disorders. Using blood samples taken from an infant within days of birth, the company screened for more than 50 genetic conditions that early detection could make manageable throughout the infant's life. Pediatrix already operated the country's largest newborn hearing screening program, developed internally. The company formed a subsidiary, Pediatrix Screening, to combine Neo Gen Screening with Newborn Hearing Screening.

In June 2003 the U.S. Attorney's Office began an investigation into Pediatrix's Medicaid billing practices nationwide. A shareholder lawsuit followed.

Principal Subsidiaries: Magella Healthcare Corporation; Newborn Hearing Screening, Inc.; Obstetrix Medical Group, Inc.

Principal Competitors: Per-se Technologies, Inc.; PhyAmerica Physician Group, Inc.; Sheridan Healthcare, Inc.

Pediatrix Medical Group, Inc. History

Company Perspectives:

Key Dates:

Company History:

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