Surgery Partners, Inc.

Greetings and welcome to Surgery Partners, Inc. second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your cell phone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom Cowie, CFO.

Good morning. And welcome to Surgery Partners' second quarter 2021 earnings call. This is Tom Cowie, Chief Financial Officer. Joining me today are Wayne Devite, Surgery Partners Executive Chairman, and Eric Evans, Surgery Partners Chief Executive Officer. As a reminder, during this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss certain non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in our earnings release and our most recent quarterly report when filed, which will be available on our website at surgerypartners.com. With that, I'll turn the call over to Wayne. Wayne?

Thank you, Tom. Good morning, and thank you all for joining us today. With the first six months of the year on the books, 2021 promises to be another strong year of growth. Second quarter EBITDA grew to 76 million, representing 30% growth over the prior year quarter, and same-store volumes achieved approximately 104% of the second quarter of 2019 baseline. Strong progress, especially when coupled with our increasing acuity mix. Although the persistent pressures of COVID-19 affected our operations, the demand for our services and the value proposition we offer to payers, physicians, and patients has resulted in record-breaking revenues in excess of $2.1 billion over the last 12 months. While we continue to closely watch the Delta variant impact in key geographies, we remain confident in our prospects for growth in the back half of the year and are increasing our full-year outlook to at least $325 million of projected adjusted EBITDA. Our growth has been driven by a relentless focus on and an execution of our key strategic drivers, which our team continued to make excellent progress during the second quarter. Some highlights. Our physician recruiting efforts continue to outpace last year's strong results, recruiting 24% more new physicians year to date as compared to the prior year period, with cases from new physicians up 55% year to date as compared to 2020. Total joint replacement, which approximately doubled in 2020 compared to 2019, continued to grow in 2021, increasing over 144% on a year-to-date basis, as compared to the prior year period. Our total joint replacement growth is buoyed by our surging robotics case volume, with cases associated with our investments up 72% year-to-date versus the prior year. And finally, all of this comes together with strong 45% same facility revenue growth, with volumes up nearly 68% over the prior year quarter. Partially offsetting this strong volume growth was reduced net revenue per case of approximately 14%, as lower acuity cases represented a higher portion of our mix than they did in the highly COVID impacted second quarter 2020 baseline. But more importantly, year to date same facility revenues are up nearly 17% as compared to the 2019 baseline with nearly four points of volume growth. On the capital deployment front, we've spent much of the year identifying and negotiating with potential targets while maintaining a disciplined approach. We are pleased to announce that we have closed over $100 million in transactions so far this year at an average adjusted EBITDA multiple of less than 7.5 times, the vast majority of which was deployed in three transactions that closed in the last week. Our pipeline remains robust with over $200 million of additional acquisitions under letter of intent at attractive multiples. We continue to target deploying at least $200 million in proceeds this year, and we remain confident that we will meet or exceed the capital deployment goal. In summary, we're executing well on our growth plans. We remain a leader in an industry with significant tailwinds and a total addressable market of $150 billion, with high-acuity musculoskeletal and cardiosurgical cases continuing to transition to our purpose-built surgical facilities. We are executing on our organic and inorganic strategies, and plan to be a consolidator in this highly fragmented industry. With the benefit of capital deployment and a continued strong pipeline of both organic and inorganic opportunities, we believe our business is capable of mid-teens adjusted EBITDA growth. With that, let me turn the call over to Eric to walk you through some of our recent accomplishments in greater detail. Eric?

Thank you, Wayne, and good morning. Today I will focus my comments on the following areas. First, I will provide a few additional highlights of our second quarter results and some of our key strategic initiatives. I'll then spend a moment on our expectations for the rest of 2021. And finally, I will spend a few minutes on some of the specifics around the preliminary 2022 OPPS ASC Medicare payment system update. We were very pleased with our second quarter results highlighted by Adjusted EBITDA that exceeded our expectations and grew over 30% as compared to the prior year quarter. Total company revenue growth of approximately 45%, led by strong year-over-year revenue growth at our new hospital in Idaho Falls, which achieved revenues over $20 million in the quarter. And same facility revenue growth of nearly 45% as compared to our COVID-impacted second quarter 2020 baseline, and approximately 17% when compared to a more normalized 2019 baseline. We remain encouraged by our same facility growth and believe it demonstrates the strength of our business model and execution. Margin performance was also solid in the second quarter, with adjusted EBITDA margins of approximately 14%. Looking more closely at our underlying performance, when you exclude CARES grants recognition, second quarter adjusted EBITDA margins were 13.4%, generally consistent with our second quarter 2019 margin. Margins, which reflect our continued investment in our near and long-term organic growth initiatives, are projected to increase in the back half of 2021, consistent with historical performance as seasonal commercial mix intensifies. Our ability to drive industry-leading same-facility growth is a direct result of our investments in physician recruiting, targeted facility level and service line expansions, and our relentless data-driven focus on managed care contracting. We continue to see increased demand from new physicians for our short-stay surgical facilities, and our targeted physician recruitment approach has focused its efforts on the highest quality physicians. As Wayne noted, we continue to execute well in this area and have added 24% more new physicians in the first two quarters of 2021 as compared to a year ago. Another key component of our industry-leading SANE facility growth has been the investments we've made in robotics across our ASC footprint. Robotic cases are up 72% year to date on an installed base that has reached 14 of our ASCs and 34 of our total facilities and continues to expand where we believe we can achieve an appropriate return on investment. On the consolidation front, we are pleased to have closed the acquisition of four facilities since our last earnings call, deploying over $100 million of capital year to date. Three of these facilities were in Northern California, a geography we know well And the final facility was in New York, which represents a new market for surgery partners and one in which we expect and are excited to grow with this new partnership. These acquisitions also added depth across our major specialties, musculoskeletal, gastrointestinal, and ophthalmology. We are excited to welcome our new physician partners and employees to the surgery partner family, and we look forward to working with them to enhance these facilities' performance as we bring our capabilities to bear. As Wayne mentioned, our current pipeline remains robust with over $200 million of additional opportunities under letter of intent. These acquisitions remain in our core specialties, in very appealing geographies, and at attractive multiples. A new and increasing area of focus for our company is emerging as we explore partnership opportunities in the value-based arena. Our business model was purpose-built to benefit payers, providers, and patients. enabling all parties to benefit from the high-quality, lower-cost environment our facilities provide, while also enjoying an exceptional patient and physician experience. As a company, we are confident that we provide our high-quality services at meaningful site-of-service discounts when compared to our peers across the spectrum of healthcare facilities. As such, we believe we are an ideal partner to help to better manage risk-based populations across payer and provider types. We are aware that many organizations are pursuing various value-based care strategies with different approaches to balancing revenue growth and profitability. Our focus is on achieving both in a way that is, very importantly, both predictable and profitable. While our traditional approach has resided in same-day bundles, we are exploring opportunities to expand risk-taking and partner with like-minded, experienced risk-bearing entities across key geographies. We believe we can be a trusted leader for value-based care arrangements aligned with payers, providers, and patients on some of the highest security procedures impacting our healthcare system. Our current business model is fully aligned with the goals of value-based payment arrangements, and partnership opportunities should be a further accelerant to our growth. We look forward to updating you on our progress in the coming quarters. Moving on to outlook for the remainder of 2021. We continue to be optimistic about the trends as we enter the second half of 2021, And we're starting to hear anecdotes from our physician partners of backlogs starting to materialize in office visits. As a reminder, physician office visits are a leading indicator that we evaluate when considering forward-looking trends and for surgical procedures in our facilities. With strong support from our year-to-date results, improving physician office visits, and recent acquisitions, we have raised our outlook to at least $325 million of adjusted EBITDA and hope that our continued momentum in the back half will help us to exceed this new projected floor for performance this year. Before I turn the call over to Tom, I'd like to spend a moment talking about the 2022 Preliminary Medicare OPPS ASC Payment System Update recently released by CMS. We remain encouraged by the rate increase in the proposal, which will increase aggregate rates across both hospital outpatient departments and ASCs by approximately 2.3% in 2022. Of greater angst to investors was CMS' decision to rescind the planned elimination of the inpatient-only list, and to remove 258 procedures from the ASD covered procedures list or the ASD CPL, originally added for the 2021 payment year. In essence, CMS reverted to the 2020 baseline for these important guidelines. Based upon our initial review of these procedures performed at our facilities year to date in 2021, we believe that these procedures represent less than one half of 1% of our revenues across our book of business. Further, we remind investors that CMS plan changes do not impact total joint procedures in the ASCs, such as hips and knees, does not change the 19 cardiac codes that moved on to the ASC CPL in 2019, and the six cardiac procedures that moved in calendar year 2020. Fundamentally, we believe the key takeaway from the CMS guidance is that after an extensive study under a new administration, This is in effect an affirmation of the outpatient setting being the right setting for total joint and various cardiac procedures. Further, in CMS' own words, we expect that we would continue to expand the ASC CPL in future years under our proposed revised criteria as the practice of medicine and medical technology continue to evolve. CMS has been a proponent and supporter of our business model, and we do not expect that trend is changing or has changed. and we look forward to continuing to partner with them to enhance quality and cost for Medicare beneficiaries. To summarize, we are excited by our progress so far this year, and we remain confident that we can continue to build on this momentum. With that, I will turn the call over to Tom, who will provide additional color on our financial results and outlook. Tom?

Thanks, Eric. First, I'll spend a few minutes on our second quarter financial performance before moving on to liquidity and some considerations we have as we move into the second half of 2021. Starting with the top line, surgical cases increased 69% in the second quarter to nearly 140,000 cases. Revenues for the quarter were $543 million, nearly 45% higher than the prior year period. As Eric mentioned, reported results included approximately $20 million of contribution from our new community hospital in Idaho Falls. nearly a 76% increase as compared to the prior year quarter. On a same facility basis, total revenue increased approximately 45% in the second quarter. Looking at the components of this increase, our case volume was approximately 68% higher than the prior year period, and net revenue per case decreased 14%, driven by a return of lower acuity cases to pre-pandemic mixed levels, partially offset by higher underlying rates. Turning to operating earnings, our second quarter 2021 adjusted EBITDA was $75.9 million, 30% higher than the comparable period in 2020. In the quarter, we received approximately $1 million of new grant funds, and using guidance from HHS, we recognized an additional $4.9 million of CARES Act grants in the second quarter as grant income, increasing adjusted EBITDA by $2.9 million after accounting for non-controlling interest. At June 30, we have less than $1 million of grants deferred liability on our balance sheet. During the quarter, we recorded $11.4 million of transaction integration and acquisition costs. Of note, second quarter 2021 transaction integration and acquisition costs included $2.2 million of losses associated with our DeNovo Hospital in Idaho Falls, as that facility continues to make progress towards achieving profitability. We expect to report results from this facility separately throughout 2021, until the facility becomes profitable, which we continue to project will occur later this year. Moving on to cash flow and liquidity, we ended the quarter with a strong cash position of $465 million, which includes approximately $100 million of Medicare advance payments, down approximately $20 million from the first quarter. We have held these advance payments as deferred revenue in our financial statements. Recoupment of these funds from future Medicare revenue commenced in the second quarter and is expected to continue into early 2022. Moving back to the second quarter, Surgery Partners had an operating cash net inflows of approximately $2 million, which included the final payment of $32 million to the Department of Justice relating to Logan Labs, a delayed payment that was agreed to as part of our 2019 settlement agreement. As a reminder, Logan Labs ceased operations in the third quarter of 2020. And the CMS recruitment of approximately $20 million related to the Medicare Advanced Payment Program. In the quarter, we deployed $27 million on acquisition, syndication activity, and CapEx investments. Looking forward to the remainder of 2021, some of the other material uses of cash include the tax receivable payment of $21 million in the fourth quarter, continued funding for the Idaho Falls Community Hospital until it becomes profitable, and over $50 million of projected additional repayments for the Medicare Advanced Payment Program this calendar year. The company's ratio of total net debt to EBITDA at the end of the second quarter, as calculated under the company's credit agreement, was 6.1 times, consistent with our first quarter leverage. Normalizing to the impact of Medicare Advanced Payment funds, the ratio of total net debt to EBITDA would have been 6.3 times. Finally, as we disclosed on our last call, we converted Bain Capital's preferred stock into approximately 22.6 million shares of common stock on May 17, 2021, bringing total common shares outstanding to approximately 82.5 million. Throughout the second quarter, continued emphasis on expanding key service lines such as musculoskeletal and cardiology, targeting high-value position recruits and engaging in strategic rate negotiations have all continued to fuel our growth trajectory. This core growth, coupled with capital we have available to deploy, has enabled us the opportunity to go on the offensive this year. We remain competent in our growth model and our second quarter performance. CARES Act grant recognition and capital deployed has provided us the opportunity to increase our 2021 adjusted EBITDA guidance today to at least $325 million. Our revenue outlook for 2021 remains unchanged at 18% to 20% revenue growth over our 2020 actual results, with it biased towards the middle to upper end of the range based on capital deployed to date. Implied adjusted EBITDA margins at the midpoint of our revenue guidance will be approximately 14.7%, which anticipates our typical seasonal increase in margins as commercial mix intensifies later in the calendar year. As we evaluate the progression of earnings over the balance of the year, we would remind investors that the fourth quarter is typically our highest earnings quarter as commercial mix and acuity intensifies. When we consider this seasonal trend, combined with expected contribution of profits from our Idaho Falls Community Hospital and a full quarterly benefit from our recently completed transactions, we think the fourth quarter of 2021 will represent over 30% of our annual adjusted EBITDA projections. consistent with relative fourth quarter performance over the 2018 through 2020 period. We believe our revised outlook remains prudent at this stage, and we are encouraged by the prospect that backlog volumes could enhance our growth trajectory this year. Further, we are excited by the prospects to further accelerate growth through additional capital deployment this year. In short, we are executing well, and our team is focused on continuing that momentum throughout the remainder of the year and beyond. With that, I'd like to turn the call back over to the operator for questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the queue. You may remove your question from the queue by pressing star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Brian Tanquillit with Jeff Rees. Please proceed.

Hey, good morning, guys. Congrats on a solid quarter. I guess my first question, just on COVID, right? I mean, you guys talked about how your physicians are saying that there's a backlog out there or some of them are already building backlogs. So as we've seen, you know, kind of like an uptick with a Delta variant, are you seeing any impact or any anecdotal evidence of any potential changes to some of the scheduling that's already in place or some of the backlog that's already out there? Just curious. Hey, Brian. This is Eric. Great question and obviously one that's on all of our minds. And we have a fair amount of humility on this variant just because, you know, this has been a little bit unpredictable. To date, we really haven't seen an impact. Clearly, there are certain markets. I'll point out Florida and Louisiana that we're watching extremely closely where Delta is having a big impact on the acute care facilities. Again, I would remind you, there's a lot that's different, even if something does change this time. We've got full PPE. We have really good processes at our purpose-built facilities, and we feel like we're well-prepared to continue to serve what appears to be a growing backlog need for cases. We're monitoring it closely. It's different by market so far. We have not seen that impact. We see some continuing good trends, but we have to watch it closely. I'm going to be relatively humble here because I have no idea where it could go. But so far, we think we're pretty well positioned to deal with what it looks like it will be thus far. I appreciate that. And then shifting gears, Tom, on the margins, you said 14.7% midpoint of guidance. You did 14% this past quarter, I guess, seasonality. But on an apples-to-apples basis, as we think about the opportunity going forward, where do you think you guys can take the margin up to and what would be needed to drive the margin up from here, from current levels?

Yeah, that's a great question, Brian. You know, as we think about where we are over the course of the next couple of years, our goal is to drive 150 to 200 basis points of improvement in the annual margins. And I think there's two countervailing forces that you need to be aware of as you think about that equation. The first is that we're growing in higher acuity cases where we're passing through or paying for the cost of the implant. And so if we were to take the implant costs out of our total company financials right now, our margins would actually go up by over 10 points, right? And so that's an important point to realize as you think about what's growing the fastest, which is those implant cases, that it actually is one of our lower percentage margin businesses. but from a dollars per minute of contribution of profit per minute of operating room time, it is one of the highest things, highest contributions that we have in the portfolio. So we know that that's a great business, but from a percentage margin, it has a little bit of a dampening effect. And so what's really helping them to lift those margins is just The economies of scale that we continue to get by looking across our portfolio, whether that's in our procurement operations, what we're doing on managed care to improve our rates, what we're doing on volumes just to leverage our scale by bringing in new physicians, what we do on revenue cycle to enhance our realization of revenues, and what we're doing quite simply on G&A, whether that's at corporate or at the field, to try to improve and be more efficient in and how we deliver our services. And so the combination of those two we hope will net 150 to 200 basis points of improvement over the course of the next several years.

That makes sense. And then last question for me. As I think about revenue or same-store revenue per case in that sort of 3763 level, is that the right baseline to be thinking about as we try to model this going forward?

Yeah, that's not bad for where we are. Just recognize that even as you look at where we are right now, Medicare is a slightly higher, or government is a slightly higher mix than what we would have even seen a couple of years ago. We think that some of that will normalize as we go through the back half. We think some of that is a little bit of a function of kind of the wonkiness of 2021, just as we think about who got vaccinated first and who was going back to get procedures done first. But so I would anticipate that that number might even tick up a little bit as we get into the back half of the year as commercial mix intensifies and as acuity intensifies. But that's a good starting point.

Yeah, I would just reemphasize that acuity point. You know, clearly where we're growing and focusing both in our current portfolio and what we're buying is pushing that acuity up, which will also have an impact on that over time. But good starting point.

Awesome. Thanks, guys. Thanks, Brian.

Our next question is from Frank Morgan with RBC Capital Markets. Please proceed.

Good morning. Two questions here. I wanted to talk about use of capital. Obviously, you referenced as much as $100 million of remaining backlog over the course of this year, and I know you do have some continuation of the scheduled repayments of Medicare advance payments and payroll taxes. I guess the first part would be can you talk a little bit about more about that backlog that's out there today and anything unique or any particular service lines or markets that's associated with and the odds of perhaps getting more than that $100 million and then just like what is the schedule of repayments? That would be my first question.

Hey, Frank. It's Wayne. Good morning. I'm going to try to unbundle the question a little bit because I know you used the phrase backlog a few minutes and I want to make sure that we answer this adequately. And then I'm going to flip it to Tom to maybe talk big picture, just kind of cash flow as we see it. Let me start by saying we have closed over 100 million of transactions, of which the majority of that was in the last week. So that's already been funded. So you have to think about that coming out of our cash flow as of June 30th. We have 200 million under LOI currently, over 200 million under LOI currently. And we are very optimistic to get at least $100 million of that done. I would be surprised if we did not exceed that between now and the end of the year. And then I would also tell you we have a number of other transactions that we have LOIs submitted on that we did not speak to in our prepared remarks. So we're very bullish on the pipeline and the opportunity to continue to be a consolidator in the industry. With that being said, I'm going to let Tom give you kind of a big picture overview, though, of what we think is an incredibly strong cash position to fund all of these, as well as the CMS repayments that are occurring in the back half of the year and how we're viewing future transactions.

Hey, Frank. If you look at the cash balance at June 30th, it's about $465 million on a consolidated basis. So you got to think about what we've deployed. I would tell you that's probably in the last week, that's about $90 million right there. So just round numbers, that would get you to $375. Of that $375 remaining that needs to be quote unquote repaid on the advanced payment program is $100 million. So you can think about that as being you know, $275 million worth of consolidated cash equivalents. Now, some of that we would keep for, you know, for working capital purposes, but, you know, that's obviously, we're very liquid. We have a lot of cash on the balance sheet as we think about our pipeline. We also have the revolver, which is undrawn at this stage. So, $170 million, $10 million-ish letters of credit, so $160 million available there. And we have excellent access to the capital markets beyond that. So, we feel quite good about our ability to continue to execute on both our existing pipeline and also on future M&A past that pipeline.

Thanks. That's great. Second question, I'll hop. Just wanted to get an update on labor. It seems like that's the question that keeps getting repeated in all the calls. So I'm just curious, you know, from a staffing perspective with nursing and, you know, surgical age, just kind of, any difference between your business model and what we're hearing from other people across the delivery spectrum? Thanks.

Yeah, Frank, hey, this is Eric. Labor is obviously a hot topic in, I think, every industry right now across the country, particularly in healthcare. I would say that we are not immune to that, but we've been able to manage through that quite well. When I think about our clinical labor staff and kind of the job world that's out there for them, Our facilities tend to be preferred for lots of reasons, including it's more 9 to 5, less call, less weekends. We're a good place to work. We have high satisfaction scores. Patients like coming there. Doctors like coming there. It's predictable. So we feel like we're well positioned within the world of healthcare. We're not going to have a ton of COVID exposure, etc., etc., With that said, there clearly are pockets and markets where we have some pressure. Our HR team has done a fantastic job of sourcing candidates and filling positions even in this tough environment, and we feel like it's something that we're going to be able to manage through, assuming there's nothing more drastic that happens later in the year.

Thank you very much. Sure. Our next question is from Tal Q with Stiefel.

Please proceed.

Hey, good morning. My first question is really on the guidance. I mean, you reached your EBITDA guidance for the year, but kept the revenue outlook unchanged. As we look at the revenue per case, it is pretty much close to the 1Q20 level. But it sounds like you guys are expecting continuing normalization of the equity mix and maybe a lower mix on newly acquired facilities. Is that why you decided to keep the revenue outlook unchanged? Or is there anything else that we need to consider here?

No, I think, Tal, this is Tom. You know, as you think about the revenue guidance one, you know, what we did say is that we have a bias towards the upper end of the range. As we see the year continue to progress, I do think particularly as we think about our M&A, you know, could we pierce the upper end of that range? Yeah, I think it's possible. So I wouldn't want you to read too much into that other than just, you know, it's still a little bit early. We want to see how all that shakes out.

Got you. That's helpful. Really appreciate the comment around the, you know, the changes in the OPPS ASC rule. And you mentioned that it has very little impact, maybe half a percent on your current earnings. But how does that affect your investment, particularly when you look at the pipeline and the pace you want to make those investments?

Yeah, so this is Eric. I'll answer that. I mean, clearly we see the impact of the change as being de minimis and actually quite pleased that another administration has again confirmed that the higher acuity procedures, joints, cardiac, are, you know, safe and appropriate for ASCs. And honestly, it has no impact on our pipeline. I mean, you look at our pipeline and we have tremendous opportunities to grow. You know, we're just in the early innings of what's happening on joints. And we think that, you know, between that and the fact that, you know, the guidance they've talked about with the inpatient only list coming back Very similar to what the industry's had in the past. We expect more of that will come off that list as technology continues to improve. And maybe, Tom, you know, it might be good just to give them a little bit of a data set on where we are with joints and the opportunity in front of us.

Yeah, absolutely. You know, as you look at the second quarter, you know, it's just important to reiterate that we grew 144% on total joints in just the ASCs. So just, you know, we continue to see very rapid growth there. And that's one of the areas that we and I think most investors have really been focused on. And CMS, if anything, reaffirmed that they continue to see that those procedures will transition to both outpatient and ASC departments. You know, by the best math we have, there's over a million total joint procedures that are done in the United States today. And I've seen estimates that suggest that that could more than double by 2030. As we think about what we know about those procedures today, I think roughly half of them are probably in Medicare. And we think that that could approach two thirds of that number by 2030. Inside our numbers inside the second quarter, I'd say just about a third of our volume in the ASCs is Medicare total joints, and that's up 3x over where it was last year. So we continue to think that that trend will continue and potentially even improve, and we've been building out our facilities and investing capital to ensure that we're capable of capturing that trend.

Got you. Appreciate the color there. Last question for me. I think the number of surgical facilities fell by four in the quarter, and I think the consolidated facilities fell by one. Did you guys sell any facilities during the quarter?

There's always some portfolio reshuffling that happens. That which we've either closed or sold is really immaterial to the overall operations.

Okay. Thanks. That's it for me. Thank you. Our next question is from Kevin Fishbeck with Bank of America.

Please proceed.

Great, thanks. I just wanted to dig in a little bit to your comment about the fact that you're seeing physician backlogs start to reaccelerate. I guess it seems like surgeries, broadly speaking, have been coming back faster than other types of healthcare utilization. So you're already 4% above where you were in 2019. I guess, where do you think that utilization is versus where you would normally expect it to be? I guess comparing it to 2019 is one thing, but I guess you've been recruiting doctors. In theory, demand grows every year. I mean, how far short are we versus kind of that trend line of where it should be still?

Yeah, so great question, Kevin. This is Eric. I'll start with saying that surgery volumes certainly have responded faster than other areas of healthcare. We've seen that kind of throughout the pandemic. Although there's a period of time there where you're below baseline that we still believe that there's backlog out there, right? And when we talk about backlog, we're giving you the front end of the funnel, which is physician visits. So what we're starting to hear is the offices are getting busier, which is obviously kind of where the flow starts for us. We look at our by-service line numbers, and we're typically looking for 2% to 3% case growth a year CAGR. We're seeing that versus 2019, kind of across 2021. We're seeing that in a lot of our important service lines. I mean, whether that's ophthalmology is actually a little stronger than that, ortho is right in that range. And so we've seen that hold up, although we do believe that there's several service lines where there's that period of time where delayed cases are out there and they're going to have to get caught up at some point. So what we were talking about specifically on the backlog is we're hearing for the first time from physicians that they're seeing the backlog build in their office, which again, you know, bodes well for what comes down the pike for us. So that That's really the first time in the last month or two that we've started to hear that a bit. And so hopefully, you know, the plan, unless Delta changes something there, that should be a nice flow through for us in the second half of the year.

Yeah, I guess, I mean, I guess we think about surges as being something that is, you know, deferable. So, you know, the fact that you're kind of back towards that, projecting some of these things, do you have a sense whether it's, you know, deferred procedures that are getting you there and that the core volume still isn't back to normal or... Is it that the deferred volume really is still deferred and it's still uncertain as to when or how big that bolus will be?

Yeah, so it's always hard to mix and match who shows up and who doesn't. I think we are getting back to our core volume with some deferred beginning to show up, right? So if you think about it, some of the delay is based on timing of vaccination, what's going in a given market. We saw what you've seen in the first half of the year is the government business come back faster, largely vaccinated sooner. And so, you know, we think some of that backlog is likely in the commercial when you think about what you're seeing. And clearly, we feel like we're back to our core run rates in a lot of our core services. But we are hopeful, and we'll see how this plays out, that there's some deferred cases there across that 18-month period that will begin to show up as people feel more comfortable and get vaccinated, if that answers your question.

Yeah, no, that's helpful. I guess that comment about the payer mix and who's coming back first, it's a little bit – different than what the managed care companies are saying. They seem to be indicating that commercial volume is coming back faster, broadly speaking, and that the government programs are a little bit less. I mean, when you make that comment, is that adjusted for the services? Because you're obviously pushing things like joints and things that are more Medicare focused. So is that why government is growing faster for you or on an adjusted case basis, it's still coming back more government and it's commercial that's lagging?

Yeah, it's certainly part of it. But I do think in our particular world in surgeries where people are, you know, people have delayed things, the ones that got vaccinated soonest are coming back the fastest. So I would say it is a Medicare kind of focused business. Our mix is higher government than I would say on a normalized frame we would expect. And I do expect that to normalize. Okay, great. Thanks.

Yep.

Our next question is from Bill Sutherland with the Benchmark Company.

Please proceed.

Hey, and good morning, everybody. Eric, I guess for you, just thinking about the changes that CMS put out, you know, basically rescinding the last year's update, what is their intent in your mind with these changes? I see it doesn't really impact your book of business. I'm just curious what you think on that.

Yeah. So Bill, I'd say a couple of things. You know, first of all, clearly going back to what has been the traditional approach and having an inpatient only list to, you know, to verify these procedures in a little more detail. I'm not totally surprised by them. It's a little bit surprising that they made the full leap in and came back. I would say, Bill, that my expectation is we're going to get back to the same kind of approach we had when back when I was in the acute care world, And I waited every year to see what technology was going to take out of my facilities. I mean, it's going to be that every year they're going to be looking at it, talking to physicians, moving it out. I will tell you from our physician base, you know, they are increasingly comfortable with most procedures that would be on that list over time coming over. So I think there's going to be a natural doctor push. There's going to be a natural patient push. The value proposition is so strong. The fact that it might be a little slower on those procedures, which represent a very small fraction, I mean, less than what is a half a percent or whatever of the procedures that you know, over time, I expect it to end up in the same place. This, to me, is a cautionary approach that the administration decided to take on these. And again, you know, in the grand scheme of what we see as our opportunity, really not an impact.

Makes sense. Thanks. Just one or two more. You've had such great success with the adoption in robotics cases. I'm curious if you might be accelerating deployment there and then Maybe an update on the cardio developments for you guys.

Sure. So robotics has been a great story for us. I wouldn't say it's going to be accelerating. I think we've actually obviously accelerated over the last 18 months in a lot of areas where, again, a piece of technology was all that was keeping us from moving patients to the right side of care. So what we're looking at is where can we enable patients getting a higher value procedure or having a better satisfaction, better outcomes, cheaper price by having a piece of technology. And so we're looking at those all the time. I don't think it'll be at quite the pace it's been at the last 18 months. But as we add more joint programs, as we even have one center that has a da Vinci that's a little bit harder to make the math work in an ASC setting, certainly our surgical hospitals have these. For us, it's less about pace as it is individual market opportunity. And the good news for us, too, when it comes to robotics, which is a little bit different than in the pure acute care world, For us, this is all offense, right? So this is groups of docs who use us. They can't bring procedures they don't want to without a piece of technology. And so it's not as if we're having any cannibalization of patients going to a higher cost piece of equipment. It's all new business. And it's allowed us to really accelerate even further getting total joints, especially into the right setting of care. And then on cardiac, just to follow up on that. So cardiac, look, we continue to believe that there's cardiologists across the country who want the opportunity to use our really highly efficient, high-value facilities for their procedures, again, this is going to be a multi-year approach. We're starting with the most basic of procedures, which is cardiac rhythm management. So think AICDs, defibrillators, wire extractions. Roughly 60% of our facilities can do those procedures today. So in those markets, we're trying to get cardiologists comfortable with the ASC setting. Clearly, over time, anytime we're expanding, adding capacity somewhere, we're taking a hard look at our market dynamics with cardiologists and saying, is this the right time to add a cath lab? And so over time, we do expect that to be really meaningful. And again, it's structurally very different by market. Some markets in this country, 100% of cardiologists are employed. That doesn't mean it won't someday be in ASCs. It means it might be a two- to three-year kind of transition period. In other markets, you're going to see it move faster. So we actually are still really bullish on that. It is a, you know, we're making some progress there. We got a couple of new centers already launched. We're hoping to have, you know, four or five a year that we start adding cardiac procedures. We've added it to one of our surgical hospitals recently. Continue to believe it's just a tremendous opportunity, particularly on the value-based side. I go back to this is a procedure that's going to save the health system a lot of money when you think about those cardiac procedures. Getting them to the right side of care, there's going to be an increasing push, not just from us, but from any value-based care platform, any payer involved. And so I think those things combined together make it just an exciting opportunity.

Yeah, it strikes me that it could lead you to some, you know, an increased level of virtual kinds of care that, you know, is part of your whole approach, you know, with monitoring. Thanks for all the color. Thanks, everybody.

Thanks, Bill. Thanks, Bill. Thank you. Our last question is from Ralph Jacoby with Citi.

Please proceed.

Thanks. Good morning. I guess first, do the CMS changes influence the momentum at all on the commercial side of the shift to outpatient? I guess just wondering how much they rely on, commercial players rely on some of the CMS rulings.

Hey, Ralph. Good morning. So, no. And actually, what I would say is, oh, We actually, commercial has been way ahead of CMS on this for a long time, right? We were doing commercial joints. We were doing commercial procedures long before this. We've got a great safety track record. I mean, the commercial payers are quite bullish on trying to push into our setting, whether that's through pre-authorizations or other things. And honestly, I think that that momentum, nothing's going to change that. It's such a value proposition for them. And increasingly, in fact, I think they're going to push faster. I don't think this has any impact on the commercial side of the business.

Yep, makes sense. Okay. And then the actual CMS rate bump for you guys next year, what are your expectations there?

So the aggregate rate bump from CMS in the preliminary notice, right, so we'll see what the final says, is the aggregate on both the outpatient side and the ASC side is 2.3%. We actually think based on our mix of business, we'll do better than that. I know that there's been a lot of focus on optical, but as we look at the mix of procedures that we do in our facilities relative to where the rates are decreasing, it's a very immaterial portion of our overall business. And so we feel pretty good about the overall rate package.

Got it. Okay. That's helpful. And then, obviously, it seems like we hear more and more hospitals pushing access strategies and push to value-based care. You know, just interested in sort of your commentary around sort of two-way versus three-way JVs at this point, any more sort of incremental conversations that are coming up with hospital systems?

Hey, Ralph, good morning. This is Wayne. Let me just start by saying we still believe that the two-way partnerships in the long term will be, you know, some of the most viable partnerships for where the healthcare ecosystem needs to evolve. That being said, we're always looking at like-minded partnerships three-way partnerships with systems and local hospitals that understand the value that needs to be created for the consumer and for the physician. And so I will never exclude those. I would say that Eric and the team continue to pursue those. But I would tell you that it's not about a rate game anymore. We will not play that. We will participate when we truly are trying to create value for the healthcare system and for the patient specifically. And so You know, I would tell you that we're very excited about the value-based care opportunities that are in front of us. Some of the partners that Eric and the team are meeting with are best in breed from our perspective, and we think we can be a very value-added component of VBC. And we think we have a right to participate because that's exactly what our business model was built for. So, Eric, anything you'd like to add to that?

Yeah, Ralph, I think it's interesting when you say two- and three-way partnerships. My mind almost goes faster to a three-way partnership with a value-based entity than it does necessarily a health system, right? And so I do think, you know, going back to Wayne's point, we're positioned here to be part of the answer. There are health systems we're partnered with that actually are very much like-minded on that. In most of those cases, not all, in most of those cases, we don't rely on their rates, even in a three-way partnership. And so what I would say is, you know, we're super excited about the value-based care opportunities in front of us. whether that's a next-gen payer or some of the new clinic models or some of the physician enablers out there that are allowing physicians to stay independent, our value proposition plays well for all of those players out there. And so we're excited to be part of the answer. And some of those three-way partnerships will be not health systems, but health plans or BBC companies. And we believe that we have a very interesting role as an independent and primarily a two-way partner to be uniquely positioned to help them add value.

Got it. Okay. Makes sense. And then last one for me, I just want to go back to the recent deals is the seven and a half times pro forma or trailing. So just trying to get and understand the contribution we should be thinking about seven and a half would imply something around 13 million of EBITDA contribution. Is that the way we need to be, you know, thinking of framing for the back half of the year or any, any commentary there?

Yeah, Ralph, you know, looking at a trailing 12-month period is better than it used to be, but certainly is still COVID impacted depending upon the geography. And so we're thinking about that as what we think the right run rate is for the course of the next 12 months. And so you're thinking about it in the right way in terms of what we believe the overall contribution will be from those assets inside the full calendar year of 2020. Got it. Okay.

All right, that's helpful. Thank you. Thank you.

All right, I think that was our last question. And before we conclude our call today, I also want to just take a moment to express my gratitude to our 10,000, over 10,000 colleagues, over 4,000 physicians for their contributions. Surgery Partners collectively serves over 600,000 patients each year and thousands of patients each day in what are often their most vulnerable moments. We take the trust and faith our physician partners and patients place in us incredibly seriously and are truly privileged to make a positive difference in so many people's lives. I'm excited about and humbled by the opportunity we have at this company to more fully deliver on our mission of enhancing patient quality of life through partnership and truly be part of the solution for the challenges facing our nation's healthcare systems. I'm extremely proud of the value we are creating for all of our stakeholders. As we execute against our goal to become the preferred partner for operating short-stay surgical facilities across the U.S., it's the daily efforts of each and every surgery partner's colleague and physician that are going to make that happen. Thank you again for joining our call this morning, and I hope you all have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you very much for your participation. Have a great day.