Q2 2019 Earnings Call
Greetings and welcome to the surgery partners Inc. second quarter 2019 earnings call.
At this time all participants are in a listen only my age.
A brief question and answer session that will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Tom Kelly Chief Financial Officer.
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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 mornings 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, which is posted on our website at surgery partners Dotcom and in our most recent interim report on Form 10-Q , when filed with that I will turn the call over to Wayne Wayne. Good morning. Thank you Tom and thank you all for joining US today, Let me first apologize for the technical difficulties that we had right at the beginning.
But we look forward to this morning's call with you for our call. This morning, I would like to review some highlights from our second quarter results.
Ill then provide an update on several of our strategic initiatives, so supporting our organic growth and margin expansion as we drive sustainable double digit adjusted EBITDA growth and finally, I will turn the call over to Tom to provide further details on the quarter.
Starting with the quarter.
I'm pleased to report second quarter 2019, adjusted revenues of $452.8 million and adjusted EBITDA of $61.2 million, reflecting continued traction from our strategic initiatives as we look deeper into the quarter. Adjusted EBITDA grew by 10.5% over the second quarter of 2018, consistent with our previous guidance and our targeted full year growth.
Same facility revenue increased by 7.9% from the prior year quarter, driven by strong net revenue per case and volume growth.
And while we're excited by the significant growth over the prior year. We'd also like to highlight that this represents our fourth consecutive quarter of same facility revenue and case volume growth, which we believe is a testament to our efforts and finally adjusted EBITDA margins were 13.5% 100 basis point improvement versus the prior year quarter, which is especially encouraging when considering our government payer mix increased by approximately 200 basis points as compared to the same period in the last year.
We are encouraged by our results for the quarter, which as we cross the halfway Mark in 2019 affirms our confidence in our ability to grow adjusted EBITDA at a double digit rate in 2019 and beyond.
Turning to our strategic initiatives supporting organic growth and margin expansion. This morning, I'd like to focus on three topics of interest to investors.
First I'd like to highlight the strength of our physician recruitment efforts, which are not only help us grow our topline organically.
But are also helping us outperform the broader ambulatory sector.
Second I would like to comment on our capacity to continue to accelerate this topline growth through the expansion of our existing facility footprint and continued appetite for innovative in market partnerships and finally I would like to provide an update on the near term and longer term tailwinds, we see for our industry, resulting from the proposed 2020 Medicare fee schedule that was recently published.
Starting with topline organic growth through physician recruitment as you may recall, we rebuilt our physician recruitment team last year and made additional investments to empower them with proprietary data and tracking systems, improving our ability to identify and partner with high quality and high value physicians. As a result, we continue to outpace new physician additions year to date in 2019 over the accelerated pace at which we were adding positions in 2018.
As we seek to measure the value of our physician recruiting efforts during the 2019 calendar year. We are tracking three specific cohorts of doctors those that were recruited in 2017 prior to the implementation of our data driven approach versus those that were recruited in 2018 and the first six months of 2019 and how each of those cohorts contribute to our 2019 growth.
Some data points to anchor on as we think about the composition of our first half 2019 growth.
Our 2018 cohort has already contributed 20% greater case volume in 2019 as compared to the class of 2017 cohort more importantly, our 2018 cohort of doctors have already produced more cases at higher net revenue per case and contribution margins in the first half of 2019 than they did in all of 2018.
Early data points are telling us that the class of 2019 is already delivering strong growth, which is on pace to accelerate throughout the year as they become more familiar with our facilities and supporting medical staff.
These results give us increased confidence that our efforts in physician recruiting will have a compounding impact on volume and revenue growth that should allow us to outperform the broader industry for years to come.
As you can see in our reported results our physician recruitment efforts coupled with our targeted net revenue per case improvement initiatives have enabled us to exceed our previously discussed long term organic growth targets.
Now I'd like to discuss how we further leverage our existing footprint, our ability to leverage our infrastructure and investments with our geographic footprint should provide for accelerated organic growth and margin expansion over time.
These initiatives range from expansion of existing facilities in terms of number of operating and procedural rooms, the relocation of existing facilities to establish a more attractive physician recruiting space, while enhancing the patient experience.
And our ability to enter into attractive innovative partnerships with existing provider systems.
While we have a number of in flight expansion activities within our existing facilities I would like to highlight one specific innovative partnership that we recently completed which leverages, our current relationship and infrastructure in the southern California market.
In the second quarter, we acquired a minority stake in management rights in 40, SCS in Southern California in concert with you CLA and the Southern California, Orthopedic Institute share refer to as Scully.
A transaction that we agree to in late 2018 as you know you CLA is one of the most prestigious academic medical centers in the country and Scoli is the largest orthopedic practice in the state of California with nearly 40 practicing physicians.
We successfully leveraged our existing assay relationship with U.S CLA to establish a three way joint venture that will drive accelerated organic growth for all parties and cement our position as the facility management company of choice for this prestigious academic Institute.
At a time when many of our competitors are conflicted surgery partners partnership with you CLA and scope is further validation of our increasingly unique value proposition.
Furthermore, this expansion of our southern California footprint fits perfectly with our long term growth strategy and we could not be more pleased to welcome. These new centers into the growing surgery partners family.
Finally last Monday CMS introduced the proposed calendar 2020 fee schedule updates for Medicare's hospital outpatient prospective payment system and ambulatory surgery centers.
The proposed rates appear attractive with increases from muscular skeletal procedures at approximately 2% ophthalmology at approximately 3% and gastrointestinal codes at approximately 1%.
Based on our case mix, we estimate that we will net at least a 2% increase at finalized a solid increase we believe recognize the quality and value that we provide in the marketplace. Importantly, CMS also proposed adding multiple high acuity procedures, including total knee replacement procedures to the AMC covered procedure list.
We remain confident that we can provide a high quality result on these procedures in our facilities as we do that routinely for our commercial and other patients as an example in the second quarter of 2019, we conducted nearly 300 total joint procedures in our Asps alone, which was more than double the amount we did in the second quarter of 2018.
CMS also proposed moving total hip replacements from the inpatient only lifts in their recent proposal a step they took with total needs for the 2018 payment year.
Hip and knee replacements are the most common inpatient surgery for Medicare beneficiaries with more than 400000 procedures in 2014 costing more than $7 billion for the Hospitalisations alone.
We look forward to seeing the development of the final fee schedule for 2020 and remain optimistic that our ability to access this exciting new market opportunity remains just around the corner.
Before I turn the call over to Tom I wanted to take a moment to discuss the ongoing public debate over how best to overhaul. The U.S healthcare system to continue to provide access to quality care, while addressing the issue of affordability.
This is a topic that continues to receive much focus and wide variations in opinion as to how best to proceed legislatively.
More importantly, it raises a number of questions for investors as to how surgery partners is positioned for the variation of outcomes. Let me start by saying that we are in network business model that focus on plan procedures.
We partnered with over 4000 physicians that share our goal of offering high quality at affordable prices a goal shared with the payer community.
Our business model is uniquely built to address these challenges, which is why we support any legislation that continues to expand access to quality care at lower cost. We believe we are aligned with regulators payers and patients and our distinctive business model should prove to be quite resilient in the wide spectrum outcomes that may evolve in the U.S healthcare debate.
With that let me hand, the call back over to Tom for an overview of our second quarter financial results and 2019 outlook. Tom. Thank you Wayne today I'll spend a few minutes on our second quarter 2019 financial performance starting with some of our key revenue drivers then moving onto adjusted EBITDA cash flows and our 2019 outlook starting with the top line. We ended the second quarter with approximately $452.8 million and adjusted revenue.
Approximately 2% as compared to the prior year quarter, a result that positions us well to achieve our full year revenue guidance of low single digit growth or high single digit growth, excluding divested revenues from the 2018 baseline.
Surgical cases were just over 133000 in the quarter up 1.2% from the prior year period. Despite the loss of cases from closed or divested facilities.
On a same facility basis total company surgical revenues were up 7.9% from the prior year quarter, driven primarily by net revenue per case, but also by higher same store volumes.
Turning to operating earnings our second quarter 2019, adjusted EBITDA was $61.2 million, a 10.5% increase over the comparable period. In 2018. This strong result is consistent with our expected quarterly cadence and positions us well to achieve full year double digit adjusted EBITDA growth.
Our second quarter adjusted EBITDA margin also improved to 13.5% of 100 basis point increase as compared to the prior year period, primarily driven by higher gross margins and our cost containment efforts.
During the quarter, we recorded approximately 8 million of transaction integration and acquisition costs, bringing our year to date total to $11.5 million, a greater than 50% decline from our first half 2018 costs and consistent with our guidance at integration related costs would subside.
Of note the second quarter 2019 transaction integration and acquisition costs included approximately $2.6 million of costs associated with our de Novo Hospital in Idaho Falls, we continue to expect to record these costs outside of adjusted EBITDA for at least the remainder of 2019.
While net revenues on our ancillary and optical segments were up slightly on a combined basis versus the prior year period combined adjusted EBITDA from these two segments was relatively stable versus the prior year quarter and consistent with previous comments about our outlook for these businesses.
Moving on to cash flow and liquidity.
We ended the second quarter, the company had cash balances of approximately $117 million and our revolving credit facility remains undrawn with nearly $116 million worth of availability.
Of note during the second quarter surgery partners had net operating cash flows defined as operating cash flow less distributions to non controlling interests of zero point $4 million, we deployed approximately $20.8 million primarily related to the acquisition of a minority stake in for SCS in Southern California, we used approximately $9.9 million for payments on our long term debt.
And as previously discussed in April of 2019, we issued a new $430 million unsecured senior unsecured notes the proceeds of which were primarily used to retire our existing 2021 notes.
The ratio of total net debt to EBITDA at the end of the second quarter of 2019 as calculated under the company's credit agreement was up slightly at approximately 7.8% times, primarily as a result of higher debt from the April refinancing transaction, partially offset by higher trailing 12 month adjusted EBITDA.
The company has an appropriately cap flexible capital structure with no financial covenant on the term loan or our senior unsecured notes. We continue to project that the company's total net debt to EBITDA ratio should naturally decline overtime as our business continues to grow but may fluctuate on a quarterly basis based on timing of cash flows.
Moving onto our 2019 outlook, we're excited by our progress this quarter on a variety of fronts and remain committed to double digit adjusted EBITDA growth this year.
While we do not provide quarterly guidance, we will remind investors that we are projecting that roughly one third of our full year adjusted EBITDA will occur in the fourth quarter consistent with our historical seasonality and the projected timing of some of our strategic initiatives.
In summary, we believe the first half of 2019 demonstrates the power of our model, our strategic initiatives and our potential.
We are pleased to see continued same facility growth in both volumes and rate with strong margin improvement as our initiatives take hold we continue to invest to expand existing facilities and enter new markets that will support organic growth, while the introduction of Medicare total joints to our SCS appears to be on the horizon.
Untapped opportunities in rate procurement and revenue cycle optimization give us conviction in our 2019 outlook with additional benefits that will drive growth in 2020 and beyond.
With that we will open the call for culinary operator.
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Thank you. Your first question comes from Kevin Fischbeck Bank of America Merrill Lynch go ahead. Please.
Great. Thanks, I guess a couple of questions first appreciate the comments on the seasonality heading into Q4 I guess.
When we think about that one third of the earnings coming in the Q4 number how much of that is just kind of normal seasonality and all you I guess commercial mix heading into Q4 versus some of the cost items and if there's if you haven't please.
Hey, Kevin It's Tom Thanks for the question you know as you think about the fourth quarter I'd encourage you to take a look at last year gives us the first year, where we've got a full year of those businesses inside the four walls and inside the calendar year. So we're using that as a we think that thats a reasonable proxy as you look at that it's probably 30, 132% of the adjusted EBITDA that was sitting inside that fourth quarter.
And as you think about that fourth quarter. In particular, we also were bearing some losses from some of our divested facilities and so as we think about the seasonality plus the ramp associated with some of our initiatives in particular, our health benefit plan initiatives, where we believe that we'll have better visibility into what our costs are for the full year based on the claims lag in the fourth quarter and therefore have thought about where that benefit will come through will be weighted towards the fourth quarter. We think that a third of the of the earnings plus or minus is a is a good proxy and a good way to think about the seasonality for the remainder of the year.
All right. That's helpful and then I guess, when we think about the.
Volume growth in the quarter.
Something you're doing a lot on this your recruiting side.
But you're still talking about kind of like to forget because you saw 2% volume growth in the quarter, which I think is kind of the low end of what you might think of 2% to 3% long term so.
Why are we at the low end of that long term volume number this experience come again.
And you know it sounds like you're really optimistic about this should we expect it to be.
At 3% at some point you know in the next year or two.
Yes, Kevin This is Wayne I really appreciate the question.
Yes, the thing to keep in mind is is that there's a compounding effect it kind of snowballed overtime and so if you were to look at last year take first quarter of last year case volume down roughly 4% and then what you will see of course and as it went to roughly down.
2% to then basically flat to then up one and then of course, we're migrating up. So here. We are now to the 2% threshold and so I would anticipate that that will continue to ramp up relative to our targeted two to three and we'll be at the higher end, but I would say, we're still working through what I would call kind of the.
The kind of recruitment history here and the things that where we had a lot of doctors that were disengaging, which is why there was negative same store growth when we joined versus now actually moving the volume on the right trajectory second thing I would highlight is very interesting fact, we shared with our board just last week was if you look at the compounding effect of how this ramps up as well as I mentioned, we know already that the 18 cohort of doctors have all exceeded what they did in all of 18 and just the first six months of this year and the trajectory would imply that will more than double.
Than where they were at last year that same phenomenon, we expect with a 19 cohorts and so.
And then of course, we actually think you still get an additive you are even after that so we think you get kind of a three year period. So there is a multi year period that we feel before we get to what I would call run rate organic growth that should not be above average. So we think we're still two to three years out just on that so I think you'll see that continue to ramp up over time and the other thing I would highlight just keep in mind on case volume, we have changed our focus from a year ago.
Where the focus was broadly around recruiting doctors without necessarily a focused on those specialties that drive the highest DCM per minute for us and so.
Our specialty focus is much heavier on MSK, which will be fewer procedures, but much higher dollar contribution margin per minute and while we're still recruiting other procedures, such as Gi and ophthalmology, which generate a lot of case volume they don't necessarily drive rate a lot of a lot of revenue and so again I highlight that for you as well that.
Our growth is into areas that have smaller case volume, but higher DCF per minute just as a point of reference our MSK procedures in the first six months of this year were 2200 more than we did all of last year in the first six months. So it gives you kind of a feeling on kind of same store, what we're trying to drive towards and that does not include the impact of the southern California Orthopedic Institute that we just spoke to as that transaction, we finalized late in the quarter.
And when you say that.
That's probably say that.
The 2018 doing quite a bit more than the 2017 was.
That's for sure yes, how much of that is because of the number of docs versus the amount of.
Volume.
You stock is doing.
So it's more of the volume per Doctor.
Because if you actually look at the number of doctors, we're not talking about huge variations year over year.
You may be looking at if you were to look at first six months of 17 for example versus the first six months of recruited doctors and 18 that variation is only around 20 doctors right now the difference is the doctors we focused on the procedures, we focus on and what we believe that will drive and so the other thing to keep in mind is that a doctor is a doctor, meaning two years ago, if that Dr. did one procedure. It was counted as a recruited dr. in 2017, and while that's factually accurate.
To us.
That may be a new doctor, but they're not doing volume and they're not doing a number of procedures. It doesn't really move the needle for our company and so I would say it's a it's the volume of doctors. The other data point I would give you is.
Is that we are averaging almost $500 more per procedure on our newly recruited doctors that came into 18 and 19 than we did the year before so another another data point for you that shows that we are creating that shift to more MSK.
As well as spine and.
These higher acuity procedures.
And then just the last question.
They most of the commentary.
On recruitment of ER docs recruiter to talk a lot about retention and what you're seeing there.
Yes, that's actually a really good question. So one of the things we did change with our recruiters, though because at the end of the day.
Kind of filling the bath to up with water only to have.
Leak at the bottom of the tub doesn't really accomplish our goals and so we've actually as part of the recruitment role to actually have a job of maintaining a partnership not only with those doctors, but the existing positions within the facility that support us and so we've actually seen our retention improve as well.
I would still say, though that we're in the early innings on the retention effort. Because initially the goal was really to refine where our strategy was refocus on who we recruited and how we recruited.
And start building more of a relationship that that really stands the test of time.
Versus just the one off recruitment of a procedure into the facility. So.
Again, another reason why I think over time, Kevin you will see us really pushing closer to that higher end on the on the case volume.
As we continue to ramp that up.
Great. Thanks.
Thank you. Your next question comes from Chad Vanacore Stifel Go ahead. Please.
Thanks, a lot and good morning.
So just thinking about the total knee opportunity what would you have to change in terms of structure recruiting to take full advantage of opportunity maybe you could quantify what you think the total long term opportunity there is.
Yeah, Chad it's a very good question interesting enough because we've been building our model for where this opportunities coming.
Couple of things that structurally you have to if you really want to be successful first and foremost.
Still being a network is an important aspect of our business model right, while a big chunk of the Medicare opportunity is Medicare direct an even bigger chunk. We know is really with managed care companies and so our models already built to be in network. The second thing is I would say structurally our facilities are already very well positioned to take on this new opportunity. We have a number of all our expansions, though that we're doing on existing facilities. This year.
To basically bring in the next wave of opportunity.
And in the case of are seeing Charles in Chicago, which is just a suburb just outside of the greater Chicago area. We actually have a brand new facility that will be opening in the third quarter of this year. So we're moving to more procedural rooms, and more ours and so we have been building for kind of this opportunity to come and then finally, what I would tell you is.
We have been putting our recruiters in this space already while I won't provide the physicians name. It's just one of many examples where I know today one of our leaders is actually meeting with the physician that does over 1200 total knees a year in the Medicare population. So just an insane number right and the idea is nurturing these relationships throughout 18, continuing to build on them in 19, so that when we get to 2020, we're in a position that if these rules were to stay as proposed we really can start catching as many of these procedures as quickly as possible. So I would say no major structural shifts they're all underway as.
As we operate our business recognizing that if the proposal doesn't hold the opportunity doesn't go away, though it just may have been deferred and so we're going to continue to ramp up as if its going into play next year.
Alright, then one of the things I noticed on the balance sheet.
<unk> income statement.
Interest expense jumped up pretty significantly from one Q2, Q Thats 4.4 million on what looks to be only about 13 million change in incremental debt anything unusual there and absent any changes.
Net should we expect that around 46 million interest expense per quarter.
No I think as you look at Chad. This is Tom. Thanks for the question interest expense is going to go up.
Just because we replaced $400 million worth of worth of Eaton Seventyth paper with $430 million worth of 10% paper.
And I think whats going what you're seeing there and capturing might be a little bit of noise relative to just the the transactions themselves and how the how the accounting on that works as I think about what the payments will be.
On an annualized basis I think we're looking at about $175 million worth of principal and interest payments annually, because we do have to amortize about 1% of the term loan per year, and that's probably a reasonable proxy for you know about where you should be modeling and thinking about the full year interest expense and.
Were cash use for for interest and principal payments.
Alright.
And then just on just on interest expense any opportunity now that interest rates to move.
Fairly significantly in a short period of time already leased by the end of the year, maybe take advantage of any kind of refinancing would that make any sense.
I'm not sure about refinancing we did take the opportunity of the in vivo inverted yield curve to actually hedge out another three swapped out another 300 million.
At rates that are LIBOR rates that are sub to which we will we'll see how that that ultimately works over overtime, but for US. This has always been about you know trying to stabilize the capital structure stabilize the you know the interest expense. So that we have a set bogey that we can we can climb over as we grow the EBITDA of the business.
All right and then just one more you talked about expanding facilities in markets and then you gave us a new CLA example.
Is there any other markets that we should consider that would be attractive to you or think about.
Geographically.
Or specialty wise.
Yes, so Chad a couple of things I would highlight let me start with the with the geographic footprint.
Obviously, when you think about.
Not only the tailwinds of what we anticipate with the Medicare transition over time of total knees and then hopefully total hips and other high acuity procedures, it's hard not to focus on some of the more populous states with aging populations and Thats a combination of both Florida, where we have a very large footprint as well as southern California, and then of course when you look at the Sunbelt in general it really.
It just kind of like slaps you in the face of the market that you should continue to expand and and so we continue to have ongoing meetings, including meetings with payors and providers in the broader sunbelt.
Around the partnership opportunities for both de Novos as well as opportunities to potentially do jvs.
I think thats, probably becoming an even more attractive opportunity to us of ways for us to accelerate our expansion is through these JV models recognizing that many individuals really don't know how to run and operate. These these entities are how to recruit into these facilities and yet they recognized that the shift is moving to the outpatient setting over time and so I would say that we're focusing a lot on JV opportunities to kind of accelerate those investments into those new markets.
Thanks for the question thanks for taking the questions.
Thanks, Jim.
Thank you your next call comes from.
Mike.
Yeah.
Go ahead please.
Hey.
Maybe just to stick on the the CLA partnership for a second I mean I think so.
Pretty interesting transaction, maybe any color on how long you've been in conversation with them and I'm I'm I'm really more curious on the economics of the transaction is this an accretive trade for you this year or how do you get there there they are contracted rates any color would be helpful.
Yes, so with this was one of many and what I'll call long digestive journeys right. On this was one that we kicked off with our board early last year, explaining where we thought this could go and where we could take this thing it's important to recognize that we actually had existing partnerships in one center with usually already that we thought we really could leverage we thought that we had executed well in that partnership we have driven a lot of value not only for us but for them and so in approaching them. The idea was we would bring this independence for the for the scope of physicians, but we could also bring kind of the trust that you see only had an US along with you see all these rates, though in that market and so in essence. These will be accretive there'll be accretive out of the gate for us on day one.
Very attractive multiples for us, but more importantly, what we showed you CLA and ASCO, we partners with what we thought we could do with this three way combination over time similar to what we did on the other partnership that we have with you CLA.
I would tell you that it's our goal to continue to look at these three way jvs in a much more unique and innovative way, we did a similar transaction, which we didn't call out.
Recently with Vanderbilt here in Tennessee, where we expanded an existing relationship and actually partnered with them to open up another facility about another 30 miles south of downtown Nashville, If you will and so.
We are continuing these kind of academic relationships with these kind of what we'll call those that get it about moving cost into an outpatient setting and in a high quality setting and so.
Those are those are really easy examples I would say of of what we have in the pipeline. So those are just two examples of ones. We've closed I will tell you with many in the pipeline.
And.
We are really optimistic about getting more of these done either later this year or early next year.
Based on the current pipeline and then the only other comment I would make with is.
I would say our existing footprint in many markets really warrants a market by market assessment of whether a JV is a good thing with a large health system.
Our preference to be clear is always to partner and remain independent with the payers. We believe that if the payers believe in taking costs out of the system. If they truly believe in driving long term value. We are an excellent choice for that because as you know we are we are a discount to what the broader market is in terms of what is being charged in an outpatient setting and we really know that we can we can really create.
Physician excitement around moving their procedures to the see that being said, we also recognize that there's real value creation for our shareholders in the REIT JV partnerships with health systems, and so we have many other partnerships in existing markets as well.
Outside of academics that we are pursuing as well.
No that's helpful.
My second question just wanted to.
Focus on cash flow for a second obviously.
Skews me down year over year, but does have the higher borrowing costs do you have Tom that the cash interest payments. This year on a three month and six month basis, just trying to compare this and are there any other factors that are negatively impacting the six month.
Numbers that would be helpful and just maybe just any guidance on on cash flow for this year.
I mean, its $1.45 billion worth a term loan that we pay 1% on right and so 175 minus that you're looking at 150, a cash interest on an annual basis, plus or minus is kind of the the new run rate you should be thinking about with the with kind of the fixes that we've done on the swaps and the and the new in the new 10%.
That's probably a real thats, probably 140 950 is the numbers that I've got in front of me on total annual cash interest.
Okay, and just thinking about the cadence of cash flow over the balance of the year a minute. One are there any other factors that are depressing cash other than the obvious and then looking at the second half.
Any any help on kind of modeling that number.
Yes, we don't provide specific guidance on that you know as you think about the third quarter.
You know we are anticipating that we.
We will reach final settlement with the department, which will come with a cash use.
It's likely that we believe that that will happen in the third quarter.
And so.
And certainly by the end of this year and so that will be a use of cash as you think about the short term flows but yes.
First half other than some of the specific transactional related stuff. Some of the specific builds that we've been doing you guys think about Idaho falls there is clearly a little bit of cash strain there that would accelerate the new community hospital as you get into the back half.
Those are kind of the main things that I would keep a watch out on.
Last one for me real quick the senior secured ratio.
Thanks.
I'll have to get back to you on that.
Okay. It's fine thanks, guys.
Thank you Whit.
Thank you. Your next question comes from Frank Morgan based say capital markets go ahead. Please.
Good morning.
Lot of a lot of discussion around the volume opportunity just curious on that really strong pricing you saw in the quarter. The same store pricing could you parse that out just a little bit more color between.
Shifts in payer mix versus acuity that would be my first question. The second question would just be on.
Your your goal of pursuing this 10% EBITDA growth.
What type of same store topline growth you have to have to achieve that and then what is your long term target margin. Thanks.
Hey, Frank Thanks, Thanks for the question.
Let me, let me start with.
The same store topline growth.
Look we as we said before generally speaking in a broader industry.
At a minimum you should average the average of averages right, which as you ought to be able to get 2% to 3% in volume and you ought to be able to get 2% to 3% rate and so.
If you want to be at the upper echelon, you would be in that 4% to 6% range with a a push closer to the six that's been our long term guidance.
Thats kind of our long term targeted range that being said, we fully believe that this asset has the ability to outperform that for not only the near term, but really for the longer term as we look out to the foreseeable future.
Around both our ability to recruit physicians, but also our ability to get a better a better value prop and pricing for what we do.
So to your other question as you think about it we have shown as we look at our data that our new cases that are coming in this year that on an acuity basis is a big driver that we're recruiting the right acuities in the REIT space.
That were generating about $500 more per case and of course that then translates to more margin for us as well as we're improving margins concurrently. So acuity is a big driver because we're focused on the right procedures not necessarily the procedure that drive the highest case volume, but the ones that drive the highest DCM per minute and we can see that in our underlying data so pretty meaningful improvement on specialty mix.
And then the last question was around margins and look as we did our modeling and as we shared with our board. We are we are still I would say meaningfully far wave of what we believe we can accomplish over the next three to five years. The 100 basis point improvement that you see year over year is really a reflection of scratching the surface and if you just consider our ability to continue to replicate what we're doing and you consider our ability to continue to leverage than our size and scale, which is the benefit of scale is the ability to to leverage the DNA efficiently over that base as you grow into it we think realistically that we can grow margins in the 50 basis point a year range over the next three to five years and with a pretty high degree of confidence in that based on our own modeling and so margins clearly get up to that higher in range of industry averages between now and say 2024, Tom anything you'd like to add yes, no I mean, I think that we should think about the what we've talked about in the past we kind of said if you do the four to six if you.
Due to the three on volume in two to three on rate that we think we can get to double digit just by looking at some of the places where we have read opportunity. Some of the places that we have procurement opportunity in some of the places where we have RCM opportunity and as as Weve tried to model that out I think 50 basis points a year.
As Wayne said in terms of just margin expansion just based on where some of those things it and some of the leverage that's our longer term goal and in many ways it could be a floor.
We'll have to see some years could be a little bit more some years could be a little bit less but that's kind of a reasonable benchmark for what we're striving towards over the next few years to drive that margin back up to where we think it should be.
Okay. Thank you.
Thanks Frank.
Thank you. Your next question comes from Bill Sutherland, The Benchmark Company go ahead. Please.
Thanks, Good morning.
By operational and financial questions Golden pass, but I was curious Wayne on CMS rule.
You mentioned three cardiac codes approved seizes that have any impact you guys.
It actually does we have a very large surgical facility in Lubbock, Texas.
And what I will simply say is that it would be obviously very positive for us in terms of the ability to move even further procedures in but I would also add that we are currently working with a number of potential partners in that market right now.
On both the payer and the health system side around opportunities because I think many people are recognizing that this shift is coming and that particular facility specializes and.
And.
Cardiology I'll just related specialties, and so we really feel like Thats. The next wave of high acuity procedures that will continue to move down so.
Early innings for us, but the nice thing is we have a very large facility to learn and grow in and see how this evolves and were looking at that as being kind of the next round of MSK. If you will of how we start expanding our our our rooms for that next wave as that starts to evolve.
And what did you say about the update on hips.
For hips, they've been written moved from inpatient only list.
Which in the proposal right, which is the same step that they took with with Teekay a couple of years ago. It's essentially the same continue through with it it would be probably a data gathering fees for them to understand whether or not they believe that those procedures could be moved further down the chain.
Into into it sees over time, so it's kind of a preliminary step, but it's exactly the same stuff that they took two years ago for the 18 payment year with with nice.
Got it sounds like baby steps.
Thanks.
Thanks Bill.
Thank you. Your last question comes from Brian Tanquilut Jefferies Go ahead. Please.
Hey, good morning, guys.
Wayne just wanted to ask for an update on the initiatives that you put through to drive commercial reimbursement higher where especially in markets, where you are below market, how does that where does that stand right now.
Brian Thanks for the question and good morning.
I would say that in my opinion, we are in early innings, but the opportunity is far more greater than I had anticipated. When we started this process over a year ago. So what do I mean by that.
As we look at markets, where we thought we were under paid we're putting forward a multi prong strategy, where we start first with the payers right. Our goal is we would like to remain independent we think theres massive value creation for us and for them.
And we have got a number of markets, where we are having direct dialogue with Ceos as large payers.
Around.
What would require for us to remain independent and not JV with a large health system and we're going to continue to pursue that but concurrent with that I would tell you Brian we're talking with health systems, because we don't mind being a discount play in the market. We know we offer high quality product with exceptional patient satisfaction and thats the value prop of US is that if you can offer those two at a more affordable price you win in the long term, but we don't need to be deep discount we need to get paid for the value we bring and so our goal is to continue to show payers market by market, what we think that value creation is.
Maybe in a future meeting, especially were considering an IR day early next year, we'll put a little more size around what this might look like but what I would tell you is.
The opportunity to outperform that higher into that 4% to 6% long term same store growth target.
I think the number of levers we have to pool not only for the immediate term, but for the next several years or so meaningful that we should consistently be at that high end for same store if not outperforming it over time, so but when I say early innings remember the 125 locations and you got to tackle them one location at a time and so in essence thats. What we are doing one at a time as we kind of move down down that path.
Now that makes sense just a quick follow up Tom I don't know if I missed this but is there any call outs with elevated capex during the quarter.
No shouldn't be.
I mean, there's obviously a lot of activity that's happening.
You know as we think about some of our expansions you think about Idaho Falls community Hospital, you think about the relocation and the new facilities that that Wayne talked about but.
I don't think that as you think about the ordinary way Capex has actually been pretty well managed this year and very consistent with with our historical norms.
All right got it thanks guys.
Thank you.
Well, thanks, everyone for your questions and participating on this mornings call before we conclude our call I do want to take a moment to say thank you to our 10000, plus associates and our 4000 plus physicians for their contributions.
I feel privileged to be able to participate in this journey of improving health care and making it more affordable for Americans.
As we execute against our goal to become the preferred partner for operating short stay surgical facilities across the United States. It is really the daily efforts of each and every one of these surgery partners employees and physicians that will get US there. Thanks again for joining our call. This morning and have a great day.
Okay.
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