Surgery Partners, Inc.

Greetings. Welcome to Surgery Partners' third 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 telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, Tom Cowhey. Please go ahead.

Good afternoon. And welcome to Surgery Partners' third 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 afternoon'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 in 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 afternoon, and thank you all for joining us today. As we approach the end of 2021, we continue to be encouraged by the resiliency of our business model and the execution of our associates in these rapidly changing times. The third quarter had many headwinds to navigate, including surging COVID-19 cases, labor shortages and inflation, and a major hurricane in Louisiana that impacted a number of our facilities. Despite these headwinds, the strength of our value proposition combined with our organic and inorganic strategies resulted in 10% year-over-year case growth and record-breaking quarterly revenues of $559 million. Our third quarter adjusted EBITDA grew to $76.4 million, representing 25% growth over the prior year quarter. While we continue to remain cautious as to the impact of the previously mentioned headwinds on our operations, we are pleased to be able to increase our full year 2021 outlook today to between $325 and $330 million of projected adjusted EBITDA. Our growth continues to be driven by a relentless focus on and execution of our key strategic drivers. Some highlights. Our physician recruiting efforts continue to outpace last year's strong results Our current active physician base, having added nearly 10% new physicians to our facilities this year, is now over 4,400 strong and continuing to grow. Total ASC joint replacements, which approximately doubled in 2020 compared to 2019, continue to grow in 2021, increasing approximately 108% on a year-to-date basis as compared to the prior year period. This growth is led by Medicare total joints which grew by approximately 300% year to date, and now represents over one third of our ASC total joint procedures. On a same facility basis, we continue to be pleased with our same facility revenue growth, which increased 8.3% in the quarter over a more normalized third quarter 2020 baseline. Volume made up over 6% of this growth, while net revenue per case increased by approximately 2%, as the return of lower acuity cases such as ophthalmology and GI, partially offset other rate and high acuity growth. When compared to the 2019 pre-COVID baseline, quarter-to-date same-facility revenues are up nearly 17% as compared to 2019, with approximately three points attributable to 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 130 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 August of 2021 and in a syndication transaction that closed this week. Our pipeline continues to expand driven by the persistent efforts of our business development teams. Currently, we have approximately 225 million of single site acquisitions under letter of intent at attractive multiples that are expected to close in the next three to six months, subject to our typical due diligence procedures. We continue to target deploying at least an additional 100 million in proceeds by the end of this year. And at this stage, we believe we were highly likely to exceed our annual capital deployment goal of 200 million in 2021. In summary, We are 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 surgical cases, and cardio procedures 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 sustained 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 afternoon, everyone. Today I will focus my comments on providing a few additional highlights on our third quarter results and some of our key strategic initiatives before covering our outlook. We were very pleased with our third quarter results, highlighted by adjusted EBITDA that grew 25% as compared to the prior year quarter. Total company revenue growth of nearly 13%, led by a strong year-over-year revenue growth at our new hospital in Idaho Falls, which achieved revenues over $21 million in the quarter and posted its first profitable quarter of EBITDA contributions. Margin performance was also solid in the third quarter, with adjusted EBITDA margins of approximately 14%. Margins, which reflect our continued investments in our near and long-term organic growth initiatives, along with headwinds associated with labor shortages and inflation, are projected to increase in the fourth quarter 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 data-driven, value-based approach to managed care contracting. We achieved these results while also overcoming substantial headwinds, including heightened COVID census in some of our larger surgical facilities and Hurricane Ida, which disrupted several of our facilities, including our surgical hospital in Houma, Louisiana, which remains closed at this time due to the severity of damage and is not expected to reopen until late in the fourth quarter. We continue to see new and increased physician demand for our short-stay surgical facilities. And our targeted recruitment approach remains focused on attracting the highest quality physicians. As Wayne noted, we are executing well in this area, and our 2021 new physician class is 7% larger when compared to the new physician class of 2020 at this stage in the year. Another key component of our industry-leading SANE facility growth has been the investments we've made to become a national leader in outpatient total joint procedures in our ambulatory surgery centers. Our current footprint now counts 39 ASCs that perform outpatient joint procedures across 17 states. We have grown ASC joint volumes by 108% year-to-date after nearly doubling our volume in 2020. Robotics cases are up 62% year-to-date on an installed base that has reached 14 of our ambulatory surgery centers with 34 total robots deployed across our surgical facilities. While ASC total joint procedures still represent a small portion of our overall case mix, they are an important and fast growing part of our value proposition to consumers, providers, and payers. Another focus for our team has been to position our business to capture the longer term opportunity in cardiology. While cardiology has always been a focus at some of our surgical hospitals, including Lubbock Heart and Surgical Hospital and Bakersfield Heart Hospital, we also have new or revitalized programs in 2021 at four of our ambulatory surgery centers and one additional surgical hospital, with plans to expand to another six locations in 2022. Our ASC focus to date is in cardiac rhythm management procedures, including pacemakers, ICD implants and replacements, and loop recorder implants. But we're also looking at expansions into higher acuity interventions to include PCIs, as those procedures were approved by CMS for ASCs last year. We look forward to continuing to update investors on our progress in this area over the coming years. On the consolidation front, we are pleased to have closed the acquisition of three facilities during the third quarter, deploying over $130 million of capital year to date. As Wayne mentioned, our current pipeline remains robust, with approximately $225 million of additional single-site opportunities under letter of intent. These acquisitions remain in our core specialties, in very appealing geographies and attractive multiples that will improve over time as we bring our expertise in operational efficiency, as well as recruiting, managed care, revenue cycle, and procurement to bear. We also continue to explore ways to enhance our unique position and independent structure in value-based care arrangements, both through new product opportunities and partnerships, and hope to announce details 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 fourth quarter of 2021. With strong support from our year-to-date results, improving national COVID hospitalizations, and a full quarterly benefit from our recent acquisitions, we have raised our outlook guidance to $325 to $330 million of adjusted EBITDA. As we think about the longer term, our goal is to grow adjusted EBITDA in the mid-teens driven by volume, rate and efficiency gains, and with the benefit of $200 million of annual capital deployment. At this stage, we have no reason to believe that 2022 will be an exception to our growth formula, even with the headwinds our industry is facing. 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 third quarter financial performance before moving on to liquidity and some considerations we have as we move into the final quarter of 2021 and into 2022. Starting with the top line, surgical cases increased 10% in the third quarter to nearly 140,000 cases, driven by recovering volumes in our ophthalmology and GI business line, as well as acquisitions, partially offset by lower case volumes in our pain management business. Revenues for the third quarter were $559 million, nearly 13% higher than the prior year period. As Eric mentioned, reported results included approximately $21 million of contribution from our new community hospital in Idaho Falls, a 39% increase as compared to the prior year quarter. On a same facility basis, total revenue increased 8% in the third quarter. Looking at the components of this increase, our case volume was 6% higher than the prior year period, and net revenue per case increased 2%, driven by a return of lower acuity cases to pre-pandemic mixed levels. Turning to operating earnings, our third quarter 2021 adjusted EBITDA with $76.4 million, 25% higher than the comparable period in 2020, or 15% higher than the comparable 2020 period when the impact of CARES Act grants is excluded. As a reminder, due to changing regulations, we reversed certain prior CARES Act grant accruals in the third quarter of 2020, which ultimately were recognized in later periods. No grant funds were recognized in the third quarter of 2021. At September 30, we have less than $1 million of grants deferred liability on our balance sheet. During the quarter, we recorded $10.2 million of transaction integration and acquisition costs. The primary driver of this expense was one-time external spend on closed and pipeline acquisitions. Of note, third quarter 2021 transaction integration and acquisition costs did not include any losses associated with our DeNovo Hospital in Idaho Falls for the first time since the hospital began operations. We do not expect to adjust for Idaho Falls Community Hospital results in future periods. Moving on to cash flow and liquidity. We ended the quarter with a strong cash position of $330 million, which includes approximately $80 million of Medicare advance payments. 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 third quarter, surgery partners had operating cash net inflows of $15 million, which included the CMS recoupment of approximately $20 million related to the Medicare Advanced Payment Program. In the quarter, we deployed $102 million on acquisitions, syndication activity, and CapEx investments. Looking forward to the remainder of 2021, some of the other material uses of cash include a tax receivable agreement payment of $21 million in the fourth quarter, continued funding for the Idaho Falls Community Hospital, repayment of 50% of the deferred payroll taxes from 2020 of $8 million, and over $30 million of projected additional repayments for the Medicare Advanced Payment Program this calendar year. Further, we expect to deploy capital on acquisitions throughout the remainder of the year, with a goal to close at least another $100 million of transactions by year-end. As we evaluate both our cash on hand and our untapped revolver, we project we will have sufficient liquidity to execute on the full 225 million pipeline that both Wayne and Eric discussed, if prudent to do so. The company's ratio of total net debt to EBITDA at the end of the third quarter, as calculated under the company's credit agreement, was 6.25 times, up slightly from the second quarter, primarily due to the deployment of cash at attractive multiples that were higher than our leverage ratio, and also due to the repayment of Medicare advance payment funds inside the quarter. Normalizing for the impact of the remaining Medicare advance payment funds, the total ratio of net debt to EBITDA would have been approximately 0.2 times higher. Moving on to our outlook. As we evaluate our full-year revenue, our momentum and closed acquisitions gives us confidence to now project that we will achieve between 19% and 21% revenue growth over our 2020 result, implying revenues of approximately $2.21 to $2.25 billion. Relative to adjusted EBITDA, our primary profit metric, we project that we will achieve between $325 and $330 million in 2021, implying between $100 and $105 million of adjusted EBITDA in the fourth quarter. This projection assumes continued COVID impacts, including labor and inflation, and incorporates a small benefit from the recently completed syndication activity at one of our larger surgical hospitals mentioned earlier. We currently project that other pipeline acquisition activity is likely to transact late in the fourth quarter, and the benefit of such activity is likely to be modest but could represent further upside to this projection. We are currently in the midst of our planning processes for 2022, but wanted to provide investors with some thoughts on headwinds and tailwinds as we evaluate our 2022 growth goals. These include the benefit of CARES Act grants in 2021 that we are not projecting to occur in 2022, and the likely return of sequestration. These headwinds are offset by a continuing return of volumes in our COVID-impacted business lines and geographies, organic growth and efficiency initiatives, the annualization of our completed 2021 transactions, and the impact of any additional 2021 or 2022 acquisition activity. As we evaluate these headwinds and tailwinds at this early stage in our process, we project that we will achieve at least $370 million of adjusted EBITDA next year and look forward to updating and refining those estimates as we move through our processes and see how our acquisition pipeline continues to develop. We have stated for years now that we believe we have a powerful business model that benefits from favorable organic trends, demographics, and a fragmented marketplace that provides ample opportunity for consolidation. Our 2020 run results speak to the strength of our operations and our business model, and we believe that 2022 should continue to capitalize on that momentum. With that, I'd like to turn the call back over to the operator for questions. Operator?

Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please limit yourself to one question and one follow-up. Your first question comes from Kevin Fishback with Bank of America.

Okay, great. Thanks. Just want to turn to your guidance for a second here. Very helpful to explicitly say out that the 370. But I guess, Tom, one of the things that was in the process but didn't hear you mention as kind of a headwind really was labor costs. Can you give a little bit of sense? It sounds like that might be a pressure into Q4. And how are you thinking about that as you think about next year's guidance? Does that moderate or are you assuming some pressure in there as well?

Hey, Kevin, let me start and then I'll ask Tom to throw a little bit on there and appreciate the question. First and foremost, I do want to remind folks that our business model is fairly unique in that most of our individuals that work for us are on a set schedule. They're not working necessarily weekends or extended overtime. And they've worked with these position partners for a big part of their life and career. And so I'm not saying that we are isolated in any way, shape, or form from the broader labor dynamics that are affecting the industry as a whole. But you really should know that, you know, we're somewhat insulated, though, from the impacts that are as meaningful to others versus our own business. And so, you know, with that being said, you know, we clearly were impacted in the quarter, but we feel we have the ability to kind of manage through them. I think, Eric, you recently had looked at some data on this, just kind of looking at our year-over-year comps back even in 19 and kind of our wages and labors versus today and how we how we rapidly reduced our staffing, but then to build back up, but maybe comment a little bit on some of those statistics as well.

Sure. So I guess to reiterate Wayne's point, we certainly are not immune to this, but just to put some perspective around it, if you look at our labor as a percent of revenues, SWMB, it's actually at a lower level than it was in 2019. So we clearly have markets where we're feeling this impact. And I guess I would add, so big picture, if you think about that, that we feel like it's been managed quite well. And part of the reason We've had such success there as a lot of the labor efficiency actions we took during the pandemic have held. And we're able to have that number actually come in lower than it was in 2019, which we're pretty proud of. I would add to that just a little bit more about our business. We try to hold core staff in all of our facilities to meet the general demand. And then we work with flex staff, as most facilities do, to deal with the peaks and troughs. That flex staff has a lot of pressure, right? And we see that. We're working through that. The good news is our continued efforts around getting more efficient about how we schedule cases, how we run our ORs, we think that allows us to manage that appropriately, and it's showing up that way so far.

Yeah, I think, Kevin, to answer your specific question relative to the guidance, as we think about headwinds and tailwinds, that's certainly one. But we think that it's manageable as we think about some of the efficiencies that we still can get out of our operations. And hopefully, as we see a little bit of the COVID hospitalization subside, Some of the demand for contract labor will subside as well, and some of that pricing will normalize. And so as we consider all those factors, we think that we've adequately reflected that in our preliminary outlook at this stage.

Okay, thank you. And I guess the other comment I've got is you mentioned that the return of volumes or normalization of volumes into next year is going to be one of the tailwinds. Can you just remind us, it sounded like you were saying in Q3 you're kind of back to a normal mix, as you might expect, but I guess the comment is more kind of year-to-date. Can you just remind us what areas are still kind of year-to-date, below average, and how would you think about that volume versus price dynamic as we go into next year? Because I'm assuming it's the lower acuity specialties and how to think about that.

Yeah, no, that last point's a great one, Kevin, because I think some investors got a little confused by our second quarter print because the return of lower acuity cases had a dampening effect on some of the net revenue per case growth. As we look at our business lines, actually consistent with what we would have said in the second quarter, the place where we're probably feeling the most pinch is still the pain management business. We still are materially below 2019 volumes. And we're actually probably about 10% off of what we would have seen in 2019 now some of that is portfolio We're shuffling but some of that is just you know Those are those tend to be office visit based And those office visits haven't returned at the same pace that we might have hoped that they would have by this stage I would say even as we look inside our orthopedics business though one of the things that's really interesting is as you do a double-click there we are seeing growth in a lot of the higher acuity procedures, but some of the lower acuity orthopedics procedures are that are really tied to sports medicine have not rebounded and are actually still depressed relative to some of those 2019 levels. And then you look at other specialties, which are small percentages of volume like ENT, And they're in almost that pain management kind of category. They tend to be office visit follow through. And so we haven't seen that rebound. And so there's a couple of business lines that, you know, they are lower net revenue per case, but they're excellent profitability for us, especially when you think about putting incremental volume through existing shifts in capacity. And so we're hopeful that as we see some of that return, that'll help to offset some of the other headwinds that we're seeing from you know, CARES grants, which we're not projecting, or any impacts from sequestration, to help just normalize some of that out. All right, great. Thanks.

Next question, Ralph Giacobbe with Citi.

Thanks. Good afternoon. This is Jason Caserlan for Ralph Giacobbe. I guess, just going back to the 4Q commentary with the, you're expecting above $100 million in EBITDA. Can you walk through what gives you the confidence of that number? And... Maybe if I missed it, can you help us parse out the benefit of acquisitions that are embedded in 4Q? Thanks.

Hey, Jason, this is Wayne. Let me maybe start off with, obviously, we have some insights to October results in terms of volumes at this point in time. Clearly too early for us to be closing our books since we're only two days since the month ended. That being said, we also start getting early reads on what November scheduling looks like at this point. So you know, still a lot to do in the quarter. And, you know, December is always a very big month for us. But, you know, some of the confidence really just comes from what this team's done over the last, you know, three plus years and the ability to, you know, execute and find a way to get to where we need to get to. And, you know, you should recognize that, you know, we actually have some confidence in underlying results that have been able to not only overcome some of the labor we talked about and some of the general inflation pressures, but, it's important to recognize that we had a hospital that was fully shut down, a surgical hospital in Houma, Louisiana, for the entire month of September. And we are anticipating that will not reopen until the end of the quarter. And so, you know, we believe the core run rate looks strong. We think it's indicative of the fact that if we can come out of the third quarter with the elevated COVID that we saw, that there's a lot of reason for optimism going into the fourth quarter. So, you know, it's more really a function of – You know, we're data-driven in how we evaluate our business. We hold our executives accountable for execution, and we would expect to continue to deliver.

Yeah, and I would just point out on the Q4, when you look at that number, I would also point out that, you know, it's really – it matches our previous seasonality. So we're not actually showing you a percentage in Q4 that's not, you know, matching up with what we've done over the last several years. You know, we do have – there are some acquisitions in there. It's not a huge part of that number. And certainly, you know, Idaho Falls, as we mentioned, came above the line this quarter. You know, it'll be a contributor to the fourth quarter, which it hasn't been historically. So, you know, we feel good about that number. It matches up with historical performance. And, you know, early indications are that that trend is holding.

Yeah, I would say the only other point I'd point out there is, you know, I don't think this has dramatically changed from kind of the updates that we gave folks after the second quarter. But I'd also say maybe the one new thing here is the recently completed syndication transaction. And, you know, I think that as we think about that relative to the hospital that, you know, we're not going to see any benefit from over the remainder of the year. You know, those two are pretty close to, you know, counteracting each other. And so we think this is indicative of where kind of the run rate will be.

Got it. Okay, thanks. And I guess this is my follow-up. Just wanted to turn to capital deployment and your commentary around at least $100 million expected for the rest of the year. And can you just maybe delve into the $225 million pipeline? It seems like it keeps increasing. And what's driving this accelerated capital deployment outlook? And then just quickly, can you just remind us what your criteria is for acquisitions outright? And if you're looking to build out any certain specialties, or is it geographic concentration or maybe just what you're looking for there. Thanks.

So let me unbundle a little bit of this and start by saying we clearly are focused on what we view as the high growth specialties with broad industry dynamics that have several tailwinds. That would include muscular skeletal, cardiology, type procedures. We are still always attracted, though, to other businesses such as ophthalmology and GI if we can get those assets at attractive multiples. In terms of the robustness of the pipeline, I would simply say that the pipeline is kind of, in some ways, a living organism in that there are things that we put under LOI that ultimately when we get to the quality of earnings we may or may not like, and there are things that we continue to like. And the LOI is a very important gating process, though, for us to get to an acquisition that we think not only aligns with those specialties that we just highlighted, but more importantly, with the type of company we think we can drive real value and growth from. And so that being said, many of these transactions in that 225, as Tom said, we thought we could do at least another $100 million this quarter. Our are well in the due diligence phases and in the latter parts of those phases that give us a lot of confidence that there's more reasons to believe we'll get these over the finish line than there are to not believe that. I don't think the robustness of pipeline is going to diminish. I mean, at the end of the day, this is a business that if you want to be successful, scale matters. And it's a business that if you really want to grow and grow disproportionate to the broader industry, scale matters. And I think the more that surgery partners can continue to execute and show the value creation for the facilities we bring on, the more it becomes a little bit easier to convince the next acquisition that we can really drive the value that we're telling these physicians. So in general, I really don't see the pipeline slowing down. Eric, anything you want to add?

No, I just remind everyone, you know, the biggest companies in this space, if you added us all together, we're less than 20% of the total market, right? We've got over 4,000 centers out there that are potential targets. And so we've got a lot of running room here. We're obviously a national scale independent operator that has a particular attractiveness to a lot of docs who like that independent approach. And we're having great success there. We don't see that changing. We certainly like our pipeline. It is in high growth specialties. We do look a lot at demographics. We dive deep on all of these. So clearly, we have robust criteria we go through. But we feel good about the pipeline. It's not slowing down. And we're excited to continue to execute on that for the foreseeable future.

Got it. All right. Thank you.

Next question, Brian Tankula with Jefferies.

Hey, guys. Congrats on a good quarter. I guess my first question, you know, in your press release, as you talked about the strength of the quarter, you talked about, or you highlighted health plan collaboration as one of the drivers of that. Maybe if you can just help us, you know, think through what that is and how that's playing out and how that's driving growth in your business.

Sure. Thanks, Brian. I'll take that. And thank you for the kind comments on the quarter. We're happy with it as well. So we are working with a lot of major health plans all the time on discussions. And as you can imagine, health plans are quite interested in finding ways to get more patients to our sites of care. And so we've talked about this some in the past, but there's definitely growing and broadening discussions around how do you get the incentives right for specialists to take their cases to the best place possible for those patients on value. And so increasingly, you're seeing payers be more open to this idea of raising profits, finding other incentives to get physicians to go to the right site of care. And then, you know, just broader partnerships around how do we collaboratively think through with a payer for those high-dollar specialties where we can make a big difference. So total joints, where we might save them $20,000 a case. Cardiac cases, where we can save them, you know, we're saving them five figures. They really start to matter for payers, and payers, I think, are increasingly focused on side of care as one of their primary ways to control costs. And so, you know, we hope to have more to talk about in this space. I will tell you, we're having a lot of conversations, not only with payers, but I would say value-based care providers in general, some of the new pay providers. You know, anybody in this space that's trying to find ways to be part of the answer on the healthcare cost continuum, when you get to procedures, we're in the sweet spot. We're independent. We don't come with conflicts. We have the ability to lower their cost trend, and those conversations are only increasing, and we expect to have a lot more to talk about that over the coming quarters.

Okay. And then I guess my follow-up question, you talked about how, you know, Medicare joints was, you know, we're up 300%. So how much runway do you think is left there or in your view, what percentage of joints are being done outpatient now and where can you take that?

Yeah. So we're just, we're just getting started there, right? Like, so it's been tremendous growth. We grew it, you know, a hundred percent, nearly a hundred percent last year. We're up again over that this year. I would say this, if you look over to the next, you know, 10, the next decade, The amount of joints being done in the outpatient setting, I think, triples. Your CAGR is something over 20, right? And so we're just getting started on the opportunity. We clearly believe that we can disproportionately take market share in this space because of our facility presence, because of our experience. So we're still early innings in joints. Obviously, it's a lot farther along than cardiology, but we feel like over the next six to 10 years, this is going to be a tremendous growth engine for our industry.

Awesome. Thanks, guys. Congrats again. Thank you. Thanks, Brian.

Next question, Whit Mayo with SVB Lear Inc.

Hey, thanks. Eric, you mentioned earlier some efficiency opportunities around scheduling. I was just hoping maybe you could delve into a little bit more detail there, just anything new around either perioperative or postoperative that makes you enthusiastic about finding some additional efficiency opportunities going forward.

Yeah, so we've gotten a lot more sophisticated on our data-driven approach to scheduling. We have better visibility than we've ever had. Part of this was built out during the COVID pandemic, but the ability to take like centers across the country and compare what our costs look like, how efficient we are at scheduling, what the gaps are between different cases, how we line up specialties, and actually take a data-driven approach to say, you know, I've got 20 centers that are below our median, that opportunity can be a lot of money. Now, it's not always easy to get, but it at least gives us a very data-driven way to identify where we have opportunities. And so we're just, you know, we're getting better at that path all the time. We're getting, you know, the pandemic allowed us to have a different conversation with our physicians around operations, and they've been much more engaged on helping us think through the best way to to line up cases, the best way to ensure you don't have gaps. We're really, really disciplined about the right people in the room. That's not a problem for us. Every time we're going to have the right staffing in the room, the real magic is how do you minimize gaps and how do you stage your cases and specialties in a way that allows you to maximize that OR time, which is our most precious resource. And just from a data standpoint, we're making strides there. And we believe that efficiency opportunity as we continue to push through on that, getting cases started on time, minimizing the gaps, being able to make sure that all of our rooms are as, you know, utilized as possible. That's an opportunity that we think can help us offset any pressure we might have on the labor side.

That's helpful. And maybe just an update around revenue cycle. Just where are you in consolidating some of the systems? I think you've got many disparate systems out there. And two, maybe just on like contract management, you know, things you're doing to reduce some of the claims leakage.

Yeah, you know, thanks for that, Whit. You know, there's a lot of opportunities still on revenue cycle. I will say we do have a distributed system, but we actually do, as we've evaluated it, we do quite a good job out at our facilities. You know, when we have a decentralized, you know, operation system, it tends to be reasonably efficient. That said, you hit on one of the places where we're focused on trying to drive data improvements, and that's contract management. And so we have various tools that we use across our ASCs, most of which are on one platform, HST. And we do use some of the tools that they provide to help us to understand under and over payments, which is really what a contract management system is looking to do. I mean, we are rolling out a new contract management platform. We've had great early success with that. We've used it at a small handful of some of our surgical hospitals, and we'll be rolling it out to another wave in the coming months. And, you know, as we've gone through that, we've had a lot of lessons learned, but we've also seen a lot of additional opportunity, even at some of our higher performing facilities. And so RevCycle continues to be a place where I think, based on our history, we haven't standardized a lot of our operations, and there still remains a tremendous amount of opportunity there. And our teams are going after it on a weekly and monthly and yearly basis.

Thanks, guys.

Next question, Gary Taylor. Cowan, please go ahead.

Hey, good afternoon. Thanks for taking my call. My two questions, I want to ask about supplies a little bit. Positive trend there, at least as a percent of revenue, and I presume that's still, when we look year over year, partly the lower acuity procedures coming back. Is there anything else to think about in terms of supply trend, and then particularly with joints moving up, et cetera, as we move into next year? Do you still think there's a favorable percent of revenue on supply trends?

Yeah, you know, we've made a lot of progress there, Gary, over the course of the last couple of years. Just in getting the average price of our implants down, you know, we have targets, particularly at our surgical hospitals, where there was a lot of disparity. And we're actually moving now towards our ASCs as that becomes a bigger business to ensure that we don't have local contracting where we're not getting the best price based on the number of joints that we buy as a system. You know, I think we've seen some pressure on some of the PPE items, but that's been reasonably manageable. And I think we've done a better job in tightening our protocols to ensure that we've got safe procedures that are being done with appropriate use of PPE and not excess use, especially given some of the price increases that we've seen there, much as we've made real strides, I think, in ensuring availability by by having things like a centralized warehouse where we have a couple of months of PPE on hand to ensure that supply shortages or disruptions are not really going to interfere with that. But I think that there's a tremendous amount of opportunity there. There's also opportunity just in enhancing our spend that's on contract. And so one of the things that we've started to do right now is we're rolling out a new system for our procurement system. to enable us, A, to make the lives of some of our associates easier and make buying decisions simpler. That also helps us to ensure formulary compliance by showing individuals like products where they might be more cost-effective because they're on contract with our GPO. So a lot of our teams are doing a great job on the procurement front. We've seen year-over-year enhancements, and they've driven meaningful dollars of synergies, and we don't expect that to stop anytime soon.

Appreciate it. Just one more quick one. On professional fees, just trying to make sure we're modeling that right. I'm not sure last year is a good count, but kind of versus 2019, that's been running up a couple hundred basis points, percent of revenue. Is that just a mixed effect of either Idaho Falls or some of the geographies on your ASC acquisitions that's impacting that number as a percent of revenue?

You nailed it on the head. Most of the increase in that number is associated with the Idaho Falls Community Hospital.

Okay.

And so 2019 is not a good comparison period because that hospital opened in mid to late November of 2019. And so you're probably looking at a better run right now for what we think the reasonable expenses are here to date.

Got it. Thank you.

Next question, Bill Sutherland, the Benchmark Company.

Thank you. Nice quarter despite Ida and Delta. Speaking of which, can you give us a feel for the size of the impact that they had on the quarter?

COVID, I think, is a little bit harder to attack, but we can talk a little bit about that, and maybe I'll let Eric do that. More specifically, we lost in the month of September about a half a million dollars at our closed facility in Houma, and we excluded that loss from our results. We haven't made any prospective adjustment, but we have excluded the losses. And we expect to continue to exclude any losses until that facility reopens, which we expect to be late in the fourth quarter. As we think about what the impact of that is in terms of loss profitability, it's probably about a million dollars over the course of 2021. And maybe Eric can talk a little bit about some of the COVID impacts.

Yeah, I mean, COVID, just like we've heard from many of our peers, this past quarter, the third quarter, was by far and away our heaviest COVID period. Now, keep in mind, I'll put that in context. We are primarily an elective business, although we have some hospitals that have ERs and do see a fair amount of emergency patients. It was by far and away our highest number of COVID patients we've treated. I think the impacts for us are kind of interesting in that in some places, the impact really isn't so much directly on us as it is the availability of post-acute or higher-level care beds. And so, as we think about higher-acuity procedures, some of them require a transfer to a post-acute facility and or you need to, in case of complication, have the ability to transfer to higher-level facilities. That was an impact in some of our markets that, again, we expect that to reverse as those beds are opening up, which we're seeing in many of those markets. You know, the third quarter was, you know, we were impacted by COVID. We were impacted by COVID in several markets, and there were geographies that were impacted where you saw some cancellations. Certainly, there was some pressure on our ability to do some of the higher acuity procedures we would normally be able to do, but I'm really proud of how the team managed through it, still delivered a good result, and we see those, you know, all of those challenges related to COVID we see as being, you know, transient. It's just a matter of how long it lasts, and You know, it's good to see the positive trends for Q4, but whatever happens, what I'm really proud of is our facilities have shown that they're a safe haven for surgical patients. We've done them very safely in all kinds of COVID environments, and we feel like that will continue. Great.

And just one more on the M&A front. Did I read or I hear that the entire bundle of deals that you're looking at are single site or are you buying groups at all?

This is Wayne. That's a good question. You heard it correctly. Those are single site facilities that we have around $225 million in the pipeline under LOI currently. Obviously, we continue to look at more facilities than just that. We continue to look at platform assets. But at this point under LOI, it's single site facilities.

And you're more traditional two-way deals for the most part? Correct. Correct. Okay. Thanks, gentlemen.

Thank you.

Next question, Tau Q with Stiefel.

Hey, good afternoon. I think you called out $20 million revenue contribution from the Idaho Falls Hospital and policy to be dealt for the first time. It looks like you got good momentum there. Could you provide more color on the improvement given the higher COVID census there? And I think you also mentioned in the past that the facility could contribute up to $25 million in EBITDA. How should we think about the speed of that ramp and how much of that $370 million guidance, you know, the contribution from DeNovo?

So I'll jump in here. We've been including the revenue in that hospital this year. This is the first time it's come above the line on EBITDA. And it was small in this quarter, but it's nice to have it positive. Obviously, launching a new hospital during a pandemic was not ideal timing. And so that hospital has been impacted by that. Look, we're really positive on that market. That $21 million of revenue was pretty big growth over prior year. It was COVID impacted in that market, as many of our markets have been. But they continue to see growth. They continue to make progress. We still believe in the long-term $25 million opportunity in that market. I do think, you know, with COVID and the delay of some of our more acute plans, including becoming a trauma center and some other things we want to get done there, clearly that timing has been impacted. But we remain incredibly bullish on Idaho Falls, our position in that market, that community hospital and its potential. And, you know, it's continuing to make progress. It's behind, but we're excited about where it's going.

Could you comment on the guidance? How much of that is in the $370 million guidance?

It's a modest year-over-year increase. Now, realize that we haven't actually – are you talking about for the full year, there is a benefit that's inside the fourth quarter for 2021. For next year, I think that the ramp that we're currently anticipating as we complete our processes, right, so not like I have a formal approved budget that I'm talking to here. You know, we're looking at big macros. We don't anticipate that it's going to be a meaningful year-over-year increase. contribution. It's probably going to take a little bit longer for some of the services and some of the other programs we have there to launch, but we think it'll be positive momentum as we think about 2022. Sounds good.

And just one more, on the return of the 2% Medicare sequestration next year, could you quantify the dollar impact on your revenue?

Yeah, probably the easiest way to think about that is, you know, if you say hey, how much is your Medicare revenue? It's between 35% and 40% of our total. And you're looking at maybe a 2% headwind there. And, you know, rough math, you look at kind of a 60% impact for that. You know, EBITDA less NCI, that NCI impact minority share. So you're probably looking at plus or minus a $10 million headwind from sequestration.

Great. Thank you. Thank you for taking my questions.

Thank you. Our last question comes from Frank Morgan with RBC Capital Markets.

Good afternoon. Most of my questions have been answered, but I guess you mentioned the syndication that's coming up that will transaction that's coming up here in the fourth quarter. Just curious if you can give us a little bit more detail about the specifics there, you know, the size of it and the contribution that'll make. Thanks.

Hey, Frank, one thing to keep in mind, first of all, this is a, what I'll say is it's a facility that we are extremely bullish on. We had a number of physicians that were in the latter stages of production in terms of their involvement and prepared for retirement. And so from our perspective, we actually like the idea of buying up into the facility, knowing where we see this asset going over time. What it really does is it gives us a lot of flexibility now on whether we want to re-syndicate to some of the new recruits we bring in or not. Relative to the economics in the quarter, I kind of view it a little bit as a flush with what we had happen with our surgical facility that had to be closed now for the remaining quarter due to the hurricane. So net-net, you know, it will be positive run rate going forward, but as it relates to the quarter, in a lot of ways, it's offsetting the headwind from a closed facility. Okay.

Okay, thanks.

I will now turn the call over to Eric for closing remarks.

Great. Well, first of all, I appreciate everyone's time. And before we conclude our call today, I do want to take a moment, as we always do, to say thank you to our over 10,000 colleagues and over 4,400 physicians for their many contributions. This past quarter saw the most stress on the U.S. healthcare system from the COVID pandemic as compared to any quarter to date. And I'm humbled by the efforts of our frontline colleagues and partner physicians as they continue to fulfill our mission to enhance patient quality of life through partnership. 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 all of our colleagues and physicians in the field and all of our corporate staff here that will allow us to get there. So thank you to them, and thank you all for joining our call this afternoon. Hope you have a great day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.