Q2 2021 Surgery Partners Inc Earnings Call
[music].
Greetings and welcome to surgery Partners, Inc. Second quarter 2021 earnings call.
At this time all participants are in a listen only mode.
And the answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on yourself from key pad.
The longer this conference is being recorded.
I would now like to turn the conference over to your host Tom Kelly CFO.
Good morning, and welcome to surgery partners second quarter 2021 earnings call. This is Tom <unk> Chief Financial Officer, joining me today of Wayne debate 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 from 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 quarter.
The report when filed which will be available on our website at surgery partners Dot 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 6 months of the year on the books 2021 promises to be another strong year of growth.
The 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 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 the 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 execution of our key strategic drivers, which our team continue 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 replacements, 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.
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All of this comes together with strong 45% same facility revenue growth with volumes up nearly 68% over the prior year quarter.
Partially offsetting the 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-19 impacted second quarter 2020 base line.
But more importantly year to date same facility revenues are up nearly 17% as compared to the 2019 baseline with nearly 4 points of volume growth.
On the capital deployment front, we 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 of 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 3 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 of proceeds this year and we remain confident that we will meet or exceed the capital deployment goals in.
In summary, we're executing well on our growth plans, we remain a leader in an industry with significant tailwind and a total addressable market of 150 billion with high acuity muscular skeletal and cardiac surgical cases, continuing the 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 O P. P. S 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 per cent 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 grant recognition second quarter adjusted EBITDA margins were $13.4 per cent generally consistent with our second quarter of 2019 margins.
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 of physicians.
As Wayne noted, we continue to execute well in this area and have added 24% more new physicians in the first 2 quarters of 2021 as compared to a year ago.
Another key component of our industry, leading same 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 <unk> 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 4 facility since our last earnings call deploying over $100 million of capital year to date.
Free of these facilities were in northern California of geography, we know well and the final facility was the New York, which represents a new market for surgery partners and 1 in which we expect and are excited to grow with this new partnership.
These acquisitions also added depth across our major specialties muscle skeletal gastrointestinal and ophthalmology.
We are excited to welcome our new physician partners and employees for 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, and a very appealing geographies and at attractive multiples.
A new an 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 the 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.
The company, we are confident that we provide our high quality services at meaningful side of service discounts when compared to our peers across the spectrum of health care 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 of 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 the 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 of trusted leader for value based care arrangements of wind with payers providers and patients on some of the highest acuity procedures impacting our health care system.
Our current business model is fully aligned with the goals of value based payment arrangements and partnership opportunities should be of further accelerant to our growth.
We look forward to updating you on our progress in the coming quarters.
Moving onto the 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 backlog 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 result.
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 O P. P. S. 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 and hospital outpatient departments and <unk> by approximately 2.3% in 2022.
Of greater inks to investors with CMS decision to rescind the planned elimination of the inpatient only list and to remove 258 procedures from the ASC covered procedures list or the ASC 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 1 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 ASC such as hips knees does not change the 19 cardiac codes that moved onto the ASC CPL in 2019, and the sixth 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 for.
Further and CMS onwards, we expect that we will continue to expand the a S. C. 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. 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 140000 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 newly of 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 interests.
At June 30, we have less than 1 million of grants deferred liability on our balance sheet.
During the quarter, we reported 11.4 million of transaction integration and acquisition costs of.
Of note second quarter, 2021 transaction integration and acquisition costs included $2.2 million of losses associated with our de Novo 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 onto 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've held these advanced payments as deferred revenue on our financial statements Recoupment of these funds from future Medicare revenue.
<unk> from 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.
For the department of Justice relating to Logan labs of 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 acquisitions 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.
For this calendar year.
The company's ratio of total net debt to EBITDA at the end of the second quarter as calculated under the Companys credit agreement was 6.1 times consistent with our first quarter leverage normalizing for 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 of recruits and engaging in strategic renegotiations 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 confident in our growth model and our second quarter performance Cares Act grant recognition in 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 a bias towards the middle to upper end of the range based on capital deployed to date.
Implied adjusted EBITDA margins of 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 the seasonal trend combined with expected contribution of profit 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 projection 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 of 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.
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Well. The first question is from Brian <unk> with Jefferies. Please proceed.
Hey, good morning, guys congrats on the solid quarter.
I guess, thanks for my first 1 yeah I guess my first question just on Covid right.
You you guys talked about how your physicians are saying that there is a backlog out there or some of the we're already building backlog. So as we've seen an uptick in where the 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 Green.
Great question, and obviously, 1 that's on all of our mines and we have a fair amount of humility on this variant just because this has been a little bit unpredictable.
Date, we really haven't seen an impact clearly there are certain markets I will 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 of different even if something does change at this time you know we've got full PPE. We have really good processes that are at our purpose built facility and we.
Feel like we're well prepared to continue to serve what appears to be a growing backlog need for cases, and so we're monitoring it closely its different by market. So far we have not seen net impact we see some continuing good trends, but we have to watch it closely so.
Im going to be relatively humble here, because I have no idea of where it could go but so far we think we're pretty well positioned to deal with what it looks like it will be at the thus far.
I appreciate that and then the shifting.
Shifting gears on the margins you said, 47% midpoint of guidance you did 14% of this past quarter, I guess seasonality, but.
On an apples to apples basis kind of like 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.
Yes, that's of Great question Brian.
As we think about where we are over the course of the next couple of years. Our goal is to drive of 150 to 200 basis points of improvement in the annual margins and.
Theres 2 countervailing forces that you need to be aware of as you think about that that equation the.
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 1 of our lower percentage margin businesses.
From a dollars per minute of contribution of profit per minute of operating room time, Inc.
It's what it is 1 of the highest things highest contributions that we have in the portfolio. So we know that that's a great business from them, but from a percentage margin.
It has a little bit of a dampening effect and so what's really helping then 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 were doing on volume just to leverage our scale by bringing in new facilities.
<unk>, what we do on revenue cycle to enhance our our realization of revenues and what we're doing quite simply on G&A.
Whether that's at corporate or at the field.
Try to improve and be more efficient in how we deliver our services and so the combination of those 2 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 the same store revenue per case.
And that sort of $37.63 level is that the rate base line to be thinking about as we try to model this going forward.
Yes, 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 where governments of the slightly higher mix than what we would have even seen a couple of years ago. We think the 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 lumpiness of 2000.
'twenty 1 just as we think about who got vaccinated first and who is 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. It is acuity intensifies, but that's a good starting point, yes, I would just reemphasize that acuity point, clearly, where the where we're growing and focusing both in our current portfolio and what we are.
Buying is pushing that acuity up which will also have an impact on that over time, but good.
Good starting point.
Awesome. Thanks, guys.
Thanks, Brian.
Our next question is from Frank Morgan with RBC capital markets. Please proceed.
Good morning, 2 questions here wanted to talk about use of capital of obviously you are you referenced as much as a $100 million of remaining backlog over the course of this year and I know you do have some.
The continuation of this the scheduled repayments of Medicare advantage payments and payroll taxes. So I guess the first part would be can you talk a little bit about more about that backlog that's out there today than anything.
Anything unique or any particular service lines or markets that's associated with it.
And the odds of perhaps getting more than that 100 million and then 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 of few minutes and I want to make sure that we answer this adequately and then I'm going to flip it the Tom to maybe talk Big picture of 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.
As of June June 30.
The $200 million under LOI currently over $200 million under LOI currently and we are very optimistic to get at least $100 million of that thought 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 of LOI submitted on the we did not speak to in our prepared with.
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 what we think is an incredibly strong cash position to fund all of these as well as the CMS Reaper.
Repayments that are occurring in the back half of the year and how we're how reviewing future transactions.
Hey, Frank.
And if you look at the cash balance at June 30 of its about $465 million on a consolidated.
Elevated basis, so you've 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. The $3.75 of that $3.75 remaining that needs to be quote unquote repaid.
On the advance payment program of $100 million. So you can think about that as being $275 million worth of consolidated cash and equivalents. Some of that we would keep for for working capital purposes, but that's obviously, we're very liquid we have a lot of of cash on the balance sheet as we think about our pipeline. We also have.
The revolver, which is undrawn at the stage.
$170 million $10 million ish letters of credit for $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 pass that pipeline.
Thanks, that's great second question and I'll hop.
Just wanted to get a bit of labor. It seems like Thats. The question that keeps getting repeated in all of the calls so I'm just curious for.
On the staffing perspective with nursing and.
Surgical AIDS just kind of.
Any difference between your business model and what we're hearing from other people across the the delay.
Every spectrum thanks.
Yes, Frank Hey, this is Eric.
The labor is obviously, a hot topic and I think every industry right now across the country.
Particularly in health care 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 of the job world. That's out there for them our facilities tend to be preferred for lots of reasons, including its more of 9 to 5 less call less weekends. We're a good place to work we have.
High satisfaction scores patients might come and their doctors might come in there. It's predictable. So we feel like we're well positioned within the world of health.
Health care, we're not going to have a ton of COVID-19 exposure et cetera et cetera.
That said there are clearly our pockets of markets, where we have some pressure our HR team has done a fantastic job of 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 theres nothing more drastic that happens later in the year.
Thank you very much.
Sure.
Yeah.
Our next question is from Tom Q with Stifel. Please proceed.
Hey, good morning.
My first question is really on the guidance.
Each of our EBITDA guidance for the year, but plus the well when you are looking changed whereas when you look at the revenue per case. It is pretty much close to the <unk> 20 level, but sounds like you guys are expecting continuing the amortization of the acuity mix and maybe a lower mix of newly acquired facilities is that why you decided to keep the revenue.
Looking change or is there anything else, though we need to consider here.
No I think and Todd This is Tom.
As you think about the revenue guidance 1 what we did say is that we have a bias towards the upper end of the range.
As we see the year continued to progress I do think particularly as we think about our M&A.
We Pierce the upper end of that range, Yes, I think it's possible. So I wouldn't want you to read too much into that other than just it's the.
Bill a little bit early we want to see how all of that shakes out.
Got you that's helpful.
I appreciate the comment.
The other.
Changes in the old PPS CSC rule.
You mentioned day. It is has been really the impact maybe half a percent of all your car.
But how does that affect your of investment, particularly when you look at the pipeline and the pace you wanted to make those investments.
Yes. So this is Eric.
I'll answer that I mean, clearly we see the impact of the changes being de Minimis and actually quite quite pleased that another administration has again confirmed that the higher acuity procedures joins cardiac.
The safe and appropriate for Ase's and honestly it has no impact on our pipeline when you look at our pipeline and we have tremendous opportunities to grow.
We're just in the early innings of what's happening on joints, and we think that between that and the fact that the.
Guidance, they've talked about with the new with the inpatient only list coming back very similar to what the industry has had in the past we expect more of that will come off that list as technology continues to improve and maybe Tom 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 yes, absolutely as you look at the second quarter.
It's just important to reiterate that we grew 144% on total joints in just the Asc's. So just we continue to see very rapid growth there and that's 1 of the areas that we and I think most investors have really been focused on and CMS if anything reaffirmed that the.
Continue to see that that debt those those procedures will transition to both outpatient and ASC departments by the best math. We have there is over 1 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 2 third by 2 thirds of that number by 2030 <unk>.
Inside our numbers inside of the second quarter I would say just about 1 third of our volume in the Afcs is Medicare total joints and Thats up 3 <unk> over where it was last year. So we can we continue to think that that trend will continue and potentially even improve.
And we've been building out our facilities and invest in capital to ensure that we are capable of capturing that trend.
Got you I appreciate the color there. The last question for me I think the number of surgical facility is felt by 4 in the quarter and I think the consolidated facility. The facility is felt by 1 did you guys sell any facility during the quarter.
There is always some portfolio reshuffling that happens that which we've either closed or sold as really immaterial to the overall operations.
Okay. Thanks, that's it for me.
Thank you.
Our next question is from Kevin Fischbeck with Bank of America. Please proceed.
Great. Thanks, I guess I wanted to dig in a little bit to your comment about the fact that youre seeing physician backlogs start to Reaccelerate I guess it seems like surgery is broadly speaking have been coming back faster than other types of health care utilization. So you 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 because you have the 19 is 1 thing but.
Yes, you bet recruiting doctors.
Theory demand grows every year I mean, how far shorter we versus kind of that trend line of where it should be still.
Yes, so great question, Kevin This is Eric I'll start with saying that the.
Surgery surgery volume certainly have responded faster than other areas of healthcare and we've seen that kind of throughout the pandemic, although theres a period of time, there where youre below baseline that we still believe that this backlog out there right and when we talk about backlog. We're really we're giving you the front end of the funnel, which is physician visits so what we're starting to hear is the options are getting better busier, which is obviously.
The kind of where the flow starts for us.
We look at we look at our by service line numbers and we're typically looking for 2% to 3% case growth of year CAGR, we're seeing that versus 2019 kind of across 2021, we're seeing that in a lot of our important service line, whether that's the ophthalmology is actually a little stronger that ortho is right in that range and.
And so we've seen that hold up although we do believe that there are several service lines, where there is that period of time, where delayed cases are out there and they are going to have to get caught up at some point. So what we were talking about specifics on the backlog is we're hearing for the first time from physicians that they are seeing the backlog build in their office, which again bodes well for what comes down the Pike.
For us so that's really the first time in the last month or 2 that we started the here that a bit and so hopefully the plan with the most delta change is something there that should be a nice flow through for us in the second half of the year.
Yes, I guess I mean, I guess, we think about surgeries as being something that is deferrable.
So the fact that you are kind of back towards that trajectory of some of these things do you have a sense of whether it's you know.
Deferred procedures that are that are getting you there and that the core volume sales and back to normal or is it the deferred volume really it still deferred and it's still uncertain as to when or how big that all of this will be.
Yes, so it's always hard to make some of that who shows up and who doesn't of I think we are getting back to our core volume with some deferred beginning to show up right. So if you think about it there is 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 as the government business come back faster largely vaccinated sooner and so we think some.
Of that backlog is likely in the commercial book when you think about what Youre seeing Inc.
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 of that Theres. Some deferred cases theyre across the 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 Payor 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.
The government programs are a little bit less I mean, when you make that comment of that is that adjusted for the services you are obviously pushing things like joints.
The 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 for government and commercial that's lagging.
It's certainly part of it but I do think in our particular world and surgeries where people are.
People have delayed things the ones that got vaccinated soon as start coming back the fastest so I would say we it is a Medicare kind of focused business. Our mix is higher government then I would say on a normalized for them. We would expect that I do expect that the normalized.
Okay, great. Thanks.
Yes.
Yes.
Okay.
Our next question is from Bill Sutherland with Benchmark Company. Please proceed.
Hey, good morning, everybody.
Eric I guess for you just just thinking about the the changes that the.
CMS put out.
Basically we're sending the.
The last years.
Update.
What 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're seeing on that.
Yes, so bill it is I'd say a couple of things.
First of all clearly going back to what has been the traditional approach and having an inpatient only list 2 to verify these procedures in a little more detail I'm not totally surprised by them is a little bit surprising that they made the full leap and it came back.
I would say bill that my expectation is we're going to get back to the same kind of approach. We had went back when I was in the acute care world and I weighted 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.
They are increasingly comfortable with most procedures that would be on that list over time coming over so I think theres going to be of natural doctor push is going to be 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 less than 1 of the half a percent or whatever of the procedures.
Over time I expect at the end up in the same place. This to me is a cautionary approach that the administration decided to take on these and again in the Grand scheme of what we see as our opportunity.
Really not an impact.
Makes sense. Thanks.
Just 1 or 2 more the.
You've had such great success with <unk>.
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 it's been a great story for us I wouldn't say, it's going to be accelerating I think we are we've actually obviously accelerated over the last 18 months and a lot of areas, where again a piece of technology with all of that was keeping us from moving patients for the right side of care. So what we're looking at is where can we enable patients getting a higher value of prestige.
Or getting 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 will be up at a quite the pace. It's been at the last 18 months, but as we add more joint programs as we even have 1 center that has the da Vinci that the little bit harder to make the math work.
In the ASC setting certainly our surgical hospitals have these for.
It's less about pace as it has 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 the 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.
All of new business and it has allowed us to really.
Accelerate even further getting total joints, especially into the right setting of care.
And then the on cardiac I just the follow up on that so cardiac look we continue to believe that there is cardiologists across the country want the opportunity to use our really the highly efficient high value <unk>.
The facilities for their procedures again this is going to be a multiyear approach. We're starting with the most basic of procedures, which is cardiac rhythm management, So think ICD.
Icd's defibrillators of wire extractions, roughly 60% of our facilities can do those procedures today. So in those markets, we're trying to get cardiologist 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 out of Cath lab.
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 of 100% of cardiologists are employed that doesn't mean it won't someday be an ASC. It means it might be a 2 to 3 year kind of transition period and other markets youre going to see it move faster. So we actually are still really bullish on that it is a we're making some progress there.
We've got a couple of new centers.
Already launched we're hoping to have 4 of 5 a year that we start adding cardiac procedures. We've added it to 1 of our surgical hospitals recently continue.
Continue to believe it's just a tremendous opportunity, particularly on the value based side I'd go back to this is the 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 and so I think those things combined together make it a just an exciting opportunity.
Yes.
Yes.
Strikes me that he could zone.
Lead you to some Inc.
And the increased level of virtual kinds of care of that.
As part of your hold true.
We will approach.
With monitoring.
Thanks for all of the color thanks for everybody.
Thanks, Thanks, Bill Thanks Bill.
Thank you.
Our last question is from well to Colby with Citi. Please proceed.
Thanks, Good morning.
Yes, I guess first do the CMS, Inc.
The momentum at all on the commercial side of the shift to outpatient guess just wondering how much they rely on of course, the payors rely on.
Some of the CNS.
CMS rulings.
Hey, Ralph good morning, So no and actually what I would say is we.
We actually commercial has been way ahead of CMS on this for a long time right. We were doing commercial joined so we're doing commercial procedures long before this we've got a great staff safety track record of the commercial payers are quite bullish on trying to push into our setting whether that's through preauthorizations 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.
Yeah makes sense, Okay, and then the the actual CMS rate bump for you guys next year.
What were 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 will do better than that.
I know that Theres 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 at the very immaterial portion of our overall business and so we feel pretty good about the overall rate package.
Got it okay. That's that's helpful. And then obviously it seems like we hear more and more hospitals pushing access strategies.
Push to value based care.
Just interested in sort of your commentary around sort of 2 way vs..3 where through a JV is at this point any more sort of inc. Incremental conversations that are coming up with with hospital systems.
Ralph Good morning. This is Wayne let me just start by saying, we we still believe that.
The 2 way partnerships in the long term will be some of the most viable partnerships for where the health care ecosystem needs to evolve that being said, we're always looking at Likeminded 3 way partnerships with systems in local hospitals that understand the value of that needs to be created for the consumer and for the physician and so all net.
<unk> exclude those I would say that to Erik and the team continue to pursue those but I would tell you that debt. 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.
Of the patient specifically and so.
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 Erik and the team are meeting with our best in breed from our perspective, and we think we can be of a very value added component of BBC.
And we think we of our right to participate because that's exactly what our business model was built for.
Eric anything you'd like to add to that yes, but I think it's interesting when you say 2 and 3 way of partnerships in my mind almost goes faster 2 of 3 way partnership with the value based.
City than it does necessarily health system, right and so I do think of going back to Wayne's point, we're positioned here to be part of the answer there are health systems. We're partnered with debt actually are very much like minded on that and most of those cases not all of it most of those cases, we don't we don't rely on their rates even in a 3 way partnership and so what I would say is we're super excited about the value based care.
<unk> is in front of us, whether that's a nextgen payer or some of the new clinic models for some of the physician enablers out there that are allowing physicians to stay independent our value proposition.
The plays well for all of those kind of.
Players out there and so we're excited to be part of the answer and some of those 3 way partnerships will be not health systems, but health plans of BBC companies and we believe that we have a very interesting role as an independent and primarily of 2 way partner to be uniquely positioned to help them add value.
Got it okay. It makes sense.
And then last 1 for me just want to go back to the recent deals as of 7.5 times pro forma or trailing so just trying to get and understand the contribution we should be thinking about 7% of half would imply something around $13 million of EBITDA contribution is that the way we need to be thinking of framing for the back half of the year.
Or any any commentary there.
Yes, Ralph.
Looking at a trailing 12 month period is better than it used to be but certainly is still COVID-19 impacted depending upon the geography and so we're thinking about that is what we think the right run rate is for the course of the next 12 months.
And so you are thinking about it in the right way in terms of what we believe the overall contribution will be from those assets inside the the full calendar year of 2020.
Got it okay alright, that's helpful. Thank you.
Thank you.
Alright, I think that was our last question and then before we conclude our call today I also want to just take a moment to express my gratitude to our 10000 over 10000 colleagues over 4000 physicians for their contributions surgery partners collectively serves over 600000 patients each year and thousands of patients each day and water often their most of the.
1 of our moments, we take the trust and faith of our physician partners and patients, placing 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 the part of the solution for the <unk>.
Alan just facing our nation's health care 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 is the daily efforts of each and every surgery partners colleague and physician that are going to make that happen. Thank you again for joining our call. This morning, and 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.