Former Market C-level executive at Surgery Partners Inc
- Overview of Surgery Partners (NASDAQ: SGRY)
- Trends and themes over the past 12-18 months
- Competitive landscape vs key players such as Covenant and Stryker (NYSE: SYK) and differentiation in product offering
- Potential expertise and segment expansion areas for Surgery Partners
- H2 2021 outlook
What’s your assessment of Surgery Partners’ Q2 2021 results? What is driving the strong growth into ASCs [ambulatory surgery centres]?
Surgery Partners highlights a national USD 60bn opportunity as it relates to migration of in-patient procedures to the ASC. Do you think the company’s framing is overly optimistic, reasonable or conservative?
Surgery Partners estimates an USD 16bn-17bn opportunity for major hip and knee joint replacement or re attachment of lower extremity without MCC [major co-morbidities and/or complications]. Why is this such a large opportunity for ASCs? What limitations or considerations should we note when assessing this potential migration from intake of the in-patient hospital setting?
What is your outlook for doctor recruiting and retention given that large hospitals seem to have no recourse but to adopt an ASC or a greater ASC model? Several large operators have already done this, such as HCA and Tenet.
Surgery Partners highlighted spinal fusion except cervical without MCC as another large opportunity in the USD 4bn-5bn vicinity. How do you characterise this opportunity? What limitations or considerations should be noted when assessing this potential migration from in-patient hospital setting to the ASCs?
Can you elaborate on the cardiovascular opportunity? Surgery Partners framed this as a potential procedure to migrate, but not in the highly likely category.
Surgery Partners has highlighted cardiology, spinal and orthopaedics as three very strong areas of growth for ASCs over the past five years. What’s driving the migration in these three categories? Where could penetration plateau over the next five years?
What do you make of Surgery Partners’ 6.3% CAGR estimate for hip and knee replacements, also with out patient penetration moving from an estimated 23% to 57% by 2028? I presume that CAGR is driven by demographics because the orthopaedic market didn’t used to grow at that rate. Is a mid-single to higher-single digit CAGR reasonable to assume in hip and knee replacements over the next five years?
What’s your assessment of Surgery Partners’ position in orthopaedics given that the company now has a total of 30 robotics surgery platforms?
Medicare seems to continue to advantage the out-patient surgical facilities but what do you make of CMS’s direction with ASCs? It approved total knee arthroplasty in ASCs in 2020, then approved total hip arthroplasty in ASCs in 2021, and plans to eliminate roughly 300 orthopaedic surgeries from the in-patient-only list over the next year, including 266 codes in 2021. Furthermore, roughly 1,400 additional procedures are expected to be removed from the in-patient list. Is this sustainable and what is the likely reaction from hospital systems? Is the latter less of an issue given the integration of the ASC model with players such as HCA and Tenet?
Do you think Community Health will get on board with the model? Does the company have the flexibility or liquidity given its net leverage to position itself similarly to Tenet and HCA?
It would be insightful to know the projected savings from in-patient to out-patient across the 1,400 procedures that are expected to be removed from the in-patient list. Surgery Partners stipulates 20% and 17% cost savings respectively for hip replacements and knee replacements performed in the ASC, out-patient setting. Do you agree with these estimates? How does it achieve them vs the in-patient setting?
What are your thoughts on the preliminary PPS [Prospective Payment System], ASC, Medicare payment system update and how might the final ruling play out? CMS has a headline proposal for a 2.4% increase but when Surgery Partners calculated on a mix adjustment, it projected a 2.9% mix-adjusted increase for 2021.
How should we better understand acuity and case mix? Surgery Partners’ revenue per case declined 14% YoY in Q2 2021 – probably the only negative metric in the report. Do you think this as an anomaly? The YTD H1 2021 results indicate that revenue per case was down only 2.9% YoY. How can investors get more comfortable with revenue per case mix and the mix across ortho or cardio or gastrointestinal, so they aren’t surprised to the upside or the downside? Obviously, upside is great if you’re long, not so great if you’re short.
Where are the opportunities and risks in ophthalmology and gastrointestinal? They were often areas of consternation and Surgery Partners has clearly made tremendous strides to reduce those and push towards orthopaedics. Surgery Partners’ centres remain at 25% in ophthalmology and 19% in gastrointestinal. What were past challenges in these categories and how could they develop?
Excluding the care grants recognition, Surgery Partners’ Q2 2021 adjusted EBITDA margin came in at 13.4%. This is generally consistent with Q2 2019 margins – I’m using pre-coronavirus for a normalised comparison. Mix typically intensifies in H2 of any given year, but what is your longer-term outlook for annualised margins? Where are the company’s opportunities to expand margin, especially as it relates to procurement, revenue cycle management and org and workflow efficiencies?
What’s your take on Surgery Partners’ investments in denials management and coding technologies?
Can you elaborate on Surgery Partners’ enterprise-wide contract management system which is being piloted to improve dialogue in liaison with managed care?
What’s your outlook for Surgery Partners’ adjusted EBITDA margins? What do you think is a realistic goal in terms of driving margin expansion? Can the company go 200bps or 300bps higher?
How is Surgery Partners able to achieve such impressive, best-in-class patient experience? The company has an average deficiency of 6.3% vs an industry ASC average of 8.4%. Roughly 73% of Surgery Partners’ patient experiences have been rated five stars vs the nationwide hospitals average of 8% of patients rating five stars. How is it maintaining this superior quality?
What’s your take on Surgery Partners’ M&A strategy? The constant acquisitions and divestiture cycle means there’s never a clean P&L, but how successful is the company at integration and ensuring M&A is truly accretive in the long term?
What are your expectations around physician recruitment and retention, especially given the massive opportunity set in the migration from in-patient to out-patient? What is Surgery Partners’ strategy to continue having de novo ASCs or increasing doctor capacity in current ASCs?
What do you make of Surgery Partners’ recent refinancing of USD 1.55bn of term loans? What about its capital structure overall, given its net leverage stands at 6.3x?
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