Surgery Partners, Inc. Stock

Greetings, welcome to Surgery Partners Second Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to Dave Doherty, Chief Financial Officer. Thank you. You may begin.

Good morning, and thank you for joining Surgery Partners' Second Quarter 2026 Earnings Call. I'm joined today by Eric Evans, our Chief Executive Officer; and Justin Oppenheimer, our Chief Operating Officer. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements as described in this morning's press release and in the reports we file with the SEC.

The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. We have reconciled these measures to the applicable GAAP measures in this morning's press release and in the supplemental materials posted to our Investor Relations website.

With that, I will turn the call over to Eric Evans. Eric?

Thank you, Dave, and good morning, everyone. Before discussing our quarterly results, I want to address a significant portfolio optimization milestone we announced last month. As we noted, we have signed definitive agreements in escrow for the sale of our interest in the Idaho Falls market, Mountain View Hospital and Idaho Falls Community Hospital to our partner, Intermountain Health.

We have had a successful and long-standing partnership with Intermountain, not only in Idaho, but also in 15 ASCs across Utah and Montana that remain in our portfolio. The Idaho Falls facilities have built an exceptional reputation as preferred providers and leaders in delivering high-quality, affordable care for the Idaho Falls region. At the same time, they have evolved in ways that today extend well beyond our core short-stay surgical focus to include more traditional acute care services such as obstetrics, neonatology, pediatrics and other nonsurgical service lines.

We are confident these facilities will continue to grow and serve the health care needs of this community with the strength of Intermountain's partnership. This pending transaction is the most impactful part of our strategic review process to date and represents the vast majority of planned portfolio optimization. Our objectives in this process were to further sharpen our focus on our core short-stay surgical facility portfolio to simplify our operations drive growth and strengthen our balance sheet, and we believe we have been successful in achieving this.

To help investors evaluate the company on a comparable basis, in the supplemental financial information we posted on our Investor Relations website this morning, we provide key financial and nonfinancial metrics about this market to help illustrate the change in our business mix, assuming this transaction closes. Dave will speak to the transaction financials in greater detail shortly. We believe this additional information will make it easier for investors to evaluate the growth profile, margin profile and capital structure of the company following the anticipated closing of the transaction.

Upon closing, we will update our forward guidance. Turning now to our second quarter results. We delivered results that were ahead of our expectations for both revenue and adjusted EBITDA, giving us the confidence to reaffirm our full year guidance. Net revenue was approximately $849 million, up 2.7% year-over-year and adjusted EBITDA was approximately $125 million. Adjusted EBITDA margin was 14.7%.

On a year-to-date basis, net revenue was approximately $1.66 billion, up 3.6% and adjusted EBITDA was approximately $228 million. As we have consistently reiterated same facility revenue is one of the clearest indicators of the underlying performance of our platform because it captures case volume, acuity and rate. In the second quarter, same-facility net revenue increased 5% over last year with 4.8% related to rate, which reflects the continued benefit of our focus on higher acuity procedures.

On a year-to-date basis, same-facility revenue increased 4.9% with same-facility cases increasing 0.8% and net revenue per case increasing 4%. We performed approximately 168,000 surgical cases in the second quarter driven by orthopedic and vascular procedures, reflecting the continued robust growth in both acuity and joint-related surgeries. Payer mix also contributed to quarterly performance. As expected, commercial mix moderated compared to the prior year period on both a quarterly and year-to-date basis, while government mix moved correspondingly higher. This dynamic was primarily isolated to our larger surgical hospitals and was consistent with the assumption embedded in our full year guidance.

Importantly, we view this as expected revenue mix item rather than a change in the underlying patient demand environment. And our focus remains on driving acute clinical quality and appropriate reimbursement across the portfolio. Physician recruiting is another important contributor to that same facility growth profile. In the second quarter, 191 new physicians began using our facilities, bringing our year-to-date recruits to 330. The mix of new recruits continues to be broad-based across our specialties, including orthopedics, ophthalmology, GI, pain and other service lines and the initial revenue contribution from the 2026 cohort increased nearly 16% compared to last year's cohort.

As we have discussed in prior periods, these recruiting cohorts compound over time as visit build volumes in our facilities, and we believe our recruiting capabilities, physician relationships and differentiated operating platform remain key contributors to sustainable growth. Beyond same-facility performance, we are pursuing growth through targeted de novo development and M&A activity.

At quarter end, we had 6 de novo facilities under construction and an additional 7 facilities in the pipeline. These projects are an important long-term growth opportunity and are anchored by high-quality health systems and physician groups in attractive markets. Our approach to M&A continues to be disciplined as we evaluate opportunities against their strategic fit, return and growth potential and impact on our balance sheet objectives. While we maintain and continue to pursue a strong pipeline of opportunities, we have completed an immaterial amount of acquisitions year-to-date.

A significant focus this year has admittedly been on optimizing our existing portfolio, divesting assets that no longer align with our short-stay surgical strategic direction and sharpening our focus on core growth. While we do anticipate closing additional acquisitions before year-end, we will clearly not reach our $200 million average annual M&A investment target in 2026. That said, we remain confident that our M&A strategy is appropriate given how fragmented the ASC industry remains our unique position as the only scaled fully independent ASC management company and our track record successful integrations and physician partner value creation that has and will continue to make us a partner of choice. That foundation, combined with a stronger portfolio and balance sheet keeps us well positioned as the right opportunities emerge.

Before turning the call back to Dave, I want to thank our colleagues, physicians, partners and operators across the company. We are excited about our growth trajectory, the value of our physician partnerships and the significant long-term opportunity we have to expand access to high-quality, high-value surgical care provided in the optimal setting. The pending Idaho Falls transaction represents an important step on that journey, and our first half results reinforce our confidence that our full year outlook and long-term strategy.

With that, I'll turn it to Dave. Dave?

Thanks, Eric. As Eric mentioned, our second quarter net revenue was approximately $849 million, up 2.7% year-over-year. Adjusted EBITDA was approximately $125 million compared to approximately $129 million in the prior year period and in line with our expectations. Adjusted EBITDA margin was 14.7%.

For the first half of the year, net revenue was approximately $1.66 billion, up 3.6% year-over-year and adjusted EBITDA was approximately $228 million, down 2.3% year-over-year. Year-to-date adjusted EBITDA margin was 13.7% compared to 14.5% in the prior year period.

Looking at the quarter in more detail. Revenue growth was driven primarily by higher acuity cases, bringing strong net revenue per case partially offset by the anticipated increase in our government payer mix. Same facility revenue increased 5% in the quarter with case growth of 0.3% and net revenue per case growth of 4.8%.

The year-to-date, same facility revenue has increased 4.9%, with cases increasing 0.8% and net revenue per case increasing 4%. Our commercial payer mix was approximately 49% of net revenue in the second quarter, approximately 350 basis points lower than last year, with a correspondingly higher mix of government payments driven by shifts within our larger surgical hospitals and case growth that skewed slightly towards higher government paid.

Turning to expenses. Salaries and wages were approximately 29.8% of revenue in the second quarter, improving sequentially from 30.5% in the first quarter, though higher than 28.5% in the prior year quarter, due primarily to the change in payer mix we've noted. Suppliers were 26.7% of revenue, also improving sequentially from 27.2% last quarter, though higher than 26.0% reported in the second quarter of 2025.

Professional fees and medical-related expenses were 12.1% of revenue, improving from 12.5% sequentially and 12.4% in the prior year quarter. Other operating expenses were 6.1% of revenue compared to 7.3% in the first quarter and 6.7% in the prior year quarter. G&A expenses were 4.3% of revenue compared to 4.8% in the first quarter and 4.4% in the prior year quarter. Taken together, operating expenses improved meaningfully as a percentage of revenue compared to the first quarter, reflecting the expected seasonal step-up in revenue as well as continued operating discipline.

Turning back to the balance sheet and cash flow. Interest payments were approximately $90 million in the second quarter compared to approximately $81 million in the prior year quarter. On a year-to-date basis, interest payments were approximately $134 million compared to approximately $126 million in the prior year period. Operating cash flow was approximately $59 million in the second quarter. We distributed $46 million to physician partners and had approximately $7 million of maintenance capital expenditures.

On a year-to-date basis, operating cash flow was approximately $71 million. We anticipate improvement in working capital at our facilities during the remainder of the year, consistent with the seasonal nature of our business. At quarter end, cash flow was approximately $217 million. Revolver borrowings were approximately $75 million and available revolver capacity was approximately $618 million. Credit agreement net debt leverage was approximately 4.4x compared to 4.3x at the end of the first quarter and 4.1x in the prior year quarter. Balance sheet-based net debt to EBITDA was approximately 5.1x, consistent with the first quarter.

Before discussing our outlook, I want to spend a few minutes reviewing the financial implications of the expected Idaho Falls transaction and how we believe investors should think about Surgery Partners following closing. This transaction represents the largest step in our portfolio optimization strategy, and it reinforces our commitment to streamlining the business, sharpening our focus on our core short-stay surgical platform improving the conversion of adjusted EBITDA to cash and supporting further deleveraging over time.

I would like to spend some time elaborating on how this transaction streamlines our remaining business. The anticipated transaction is expected to simplify the go-forward portfolio in several important ways. In the supplemental information released today and included on our website, we help illustrate the changes to our business, excluding the Idaho Falls facilities. Excluding these facilities, we expect the company to have a clear ASC and short-stay surgical profile, a significantly lower Medicaid mix, no obstetrics and neonatology services, meaningfully smaller exposure to ICU beds and emergency department visits and a majority reduction of our nonsurgical admissions.

The transaction is also expected to eliminate our inpatient pediatric business and retail and compounding pharmacy services and will decrease our exposure to Medicaid and other state-based reimbursement program changes. We are immensely proud of the growth of the Idaho Falls facilities and the comprehensive service we offered to its community. But as my comments illustrate the market has become more complex than the rest of our portfolio. Another distinguishing fact about this market compared to the rest of our portfolio is the capital intensity of these facilities.

Over the past 3 years, average annual capital expenditures for these facilities have been approximately $17 million. and the Idaho Falls facilities represented approximately 32% of the company's total finance lease obligations. When combined, these factors demonstrate that the capital required to manage these facilities is meaningfully different from the rest of our portfolio and more closely aligned with what you would expect to see in traditional acute care settings.

After factoring these capital-related items, the distributions we have received from Idaho Falls have represented less than 50% of the facility's adjusted EBITDA. This capital intensity was a significant factor in our portfolio optimization review and supports our view that these facilities are better positioned under ownership with resources and scale to support their continued long-term growth.

Following the completion of this transaction, we believe the company will be easier to understand, more operationally focused and better aligned with the areas where we believe Surgery Partners has the strongest long-term growth opportunity. At closing, the total consideration we expect to receive is approximately $795 million of gross proceeds.

From a transaction economics perspective, we recognize the transaction can be evaluated through multiple lenses. Based on the Idaho Falls facility's historical earnings contribution, the proceeds represent approximately 7x LTM adjusted EBITDA. However, we also believe it is important to evaluate the transaction based on the cash flow ultimately accrued to Surgery Partners, given the meaningful facility level debt service and capital investment associated with these assets.

On that basis, transaction proceeds represent approximately 17x the distributions we have received from the facilities on average over the past 3 years, which we believe better reflects the value realized for Surgery Partners shareholders. Net cash proceeds will be determined at closing as the final amount will be impacted by closing levels of indebtedness, cash and working capital. These proceeds will be used primarily to pay down debt.

We expect this transaction to reduce the consolidated debt on our balance sheet, reducing our balance sheet leverage by approximately 0.3 turns. On a historical basis, excluding the Idaho Falls facility, the company would have generated revenue in the second quarter of approximately $660 million and adjusted EBITDA of approximately $98 million. For the first half of 2026, excluding Idaho Falls, revenue would have been roughly $1.29 billion and adjusted EBITDA would have been approximately $173 million.

We believe these ex Idaho Falls metrics are important because they provide a better view of the future growth profile of the company, particularly as we continue to focus on higher acuity outpatient procedures, physician recruitment, de novo development, health system partnerships and disciplined capital allocation.

Turning to our outlook. We are reaffirming our previously issued full year 2026 guidance for revenue of $3.35 billion to $3.45 billion and adjusted EBITDA of at least $530 million. This excludes any financial impact from the Idaho Falls transaction. As we've noted, the transaction has not yet closed and remains subject to customary closing conditions, including the requisite physician member and physician governing board approvals. Given this fact, we believe the cleanest approach is to reaffirm our existing guidance at this time and provide updated guidance as soon as the transaction closes, which we expect to occur in the near term.

Following the anticipated closing of the Idaho Falls transaction, we expect to provide updated guidance, additional detail regarding the company's go-forward financial profile. We will continue to prioritize disciplined capital allocation with a focus on deleveraging high-return organic growth, de novo development and strategic acquisitions that fit our return threshold.

In summary, we delivered second quarter results ahead of our expectations, continue to generate same facility revenue growth, reaffirmed our full year 2026 guidance in advance a significant portfolio optimization transaction that we believe strengthens the go-forward profile of the business. We expect to provide updated guidance promptly following the closing of the Idaho Falls transaction.

With that, I will turn the call back to the operator for questions. Operator?

[Operator Instructions] Our first question is from Brian Tanquilut with Jefferies.

Maybe, Eric, I'll start just on the core business. I mean it looks like volumes are holding up okay here. Really good rev per procedure performance Curious what you're seeing in the market. I know there's a lot of concern about broader surgical volumes. So if you can share with us kind of insights on that and how you're expecting the strategy with acute or higher acuity procedures continuing to progress?

Brian, thank you. Appreciate the question. Yes, so we're really quite pleased with the, obviously, acuity growth in our volume. You can see it showing up. As we mentioned, in our prepared remarks, we're seeing strong acuity growth across total joints. I'd also say we're seeing it in spine in a big way within the MSK bucket and also in vascular procedures.

So as far as we continue to point everyone towards that same-store net revenue growth number because it is really the right way to think about the business. Clearly, that total case number is a number that the industry typically has seen higher. We expect that it will be higher over time. But we are actively pursuing and obviously prioritizing high acuity procedures and quite good about the year so far, and it's basically very, very aligned with our expectations.

Got it. And then maybe just to click on the Idaho Falls discussion here a little bit. As we think about the go-forward strategy, should we expect more divestitures or any other surgical hospitals that you would consider either partnering or maybe even divesting?

And then, Dave, just any other color on tax liability leases and things like that, that we need to consider? Or is the $795 million the right kind of like net number? I know you already gave the impact on leverage. Just anything you can add to those discussions in Idaho Falls and go-forward strategy?

Yes, I really appreciate the question, Brian. I think on the portfolio optimization, I would say this is by far and away, the biggest part of what we were planning to do. Obviously, the most impactful or big size of the business. And as we show in our supplemental information, we posted had such a dramatic impact on kind of the simplification of our business, giving us a pure-play short-stay surgical company.

I would say this, we -- I want to reiterate, we really, really like the surgical hospital business. We have a lot of great vertical hospitals that perform very well. They're very focused on driving high-value elective surgery cases. And in general, that's a business we are quite happy with. Now I would say, from an optimization standpoint, I would use the example last year, we did the partnership in Bryan, Texas with Baylor.

I think you'll continue to see us do thoughtful partnerships that we think continue the goals we talked about with optimization, deleveraging expediting free cash flow growth and simplifying the business. But this is by far and away, the biggest part and step there. And so you shouldn't expect there's going to be specific reports beyond that.

And Dave, I'll let you maybe dive in a little bit on this question.

Yes, yes, sure. So first off, on the tax piece, Brian, were protected still even with this transaction with the state and federal NOLs that we carry into this transaction. So there will be no tax leakage on this transaction, and we're still protected on future earnings by some portion of the of the NOL. So there won't be a tax cash payer for the foreseeable future at this point. .

And on the transaction itself and the calculations on how you look at that, the $795 million total consideration that we'll receive as an organization, will be used partially to pay down debt on the balance sheet. So the net cash proceeds of those will be determined at the closing date after you look at the net indebtedness of the facility as well as working capital on a couple of other matters that sit inside there.

In our financial supplement that we released this morning, you'll see that the Idaho Falls facilities themselves carry about 1/3 of the company's total noncorporate debt. So about $350 million of consolidated debt that sits on the books, about 3/4 of that is our proportionate share based on the ownership that we have out there. I hope that helps.

Our next question is from Joanna Gajuk with Bank of America.

So I guess in terms of the core business, if I may, first. On the payer mix, right, and you said it was anticipated that the government mix will increase. So just to clarify. So you're talking about the surgical hospital exposure now ASCs because my related question is in the ASC side of things, have you seen kind of the inflow of some of the procedures because of the removal of the process of moving the Medicare inpatient [indiscernible]. Is that something that you can also maybe flesh out in terms of the types of procedures you're seeing from that?

Joanna, thanks for that question. I'm going to go ahead and turn this over to Justin to give some detail on what they're seeing in operations from a payer mix perspective.

Great. Thanks, Eric, and thanks, Joanna, for the question. Maybe first just on the payer mix. As mentioned during the opening remarks, the Paris team in for the first 6 months of the year on plan. And that's something that we studied in prioritize going into the year. To your question though about ASCs versus hospitals, it was also mentioned, we saw a moderation in paramyx slightly more on the hospital side than on the ASC side.

And then shifting to your second question, we have started seeing cases and continue to see cases that come off the inpatient us come into the ASCs. That's part of what's driving the acuity that we're seeing, especially more complex things in orthopedics, cardiovascular and spine, as Eric mentioned before.

Great. If I may follow up on that comment about hospitals, so the entire medical rotation on the hospital side or strategic hospital side, is that related to some of the people losing issuance on exchanges or just something else? Because you made it sound like you had expected it. So that's why I just want to clarify like what exactly what's happening with the payment in surgical hospitals.

Yes. It's largely just what we're all seeing in the industry is a shift in the basis in where they're being performed, which is also having an effect on revenue and payer mix. Just to clarify your comment about exchange and the HIX business, that's a relatively small and material part of our business. Our exposure to it is much, much smaller than what you see in broader acute care hospital operators, right?

So we're a short-stay surgical facility provider. And because we don't have a lot of emergency departments or uninsured exposure, that really makes our risk much smaller. And I think we even smaller now with the divestiture of Idaho Falls.

Yes. Justin, just to tag on to that. I mean, just to reiterate the point, when you look at the transaction we just made, we have a very small emerge business today, which is part of the reason we have very little HIX exposure over half of that goes away with the sale. And so we're clearly simplifying the business.

On the payer mix side, you mentioned uninsured and HIX, I would just remind everyone that really isn't a risk for us. purely elected business. Our Medicaid business actually post the pending transaction would be less than 2%. And so we look at that going forward as risk that we would have in any kind of economic situation would simply be volume, we would not have exposure to uninsured or underpaying -- or underinsured patients.

Our next question is from Matthew Gillmor with KeyBanc.

Just two. First, quick confirmations on Idaho Falls. Just in terms of the mathematics in terms of the net proceeds, the way to think about it is the $795 million and then we deduct the finance lease and the other debt, and that gives us some sense for the net proceeds to you all.

And then also, could you just confirm that the transaction includes some of the related operations in that market, not just the hospital facilities themselves?

Yes. Yes, Matt. I can confirm both the way you're thinking about the cash proceeds is approximately correct. But just be careful when you're looking at the debt that we included in our financial supplement, which is the consolidated debt, all of that consolidated debt, of course, is going to come off of our balance sheet. But what will affect the net capital is it's just our proportionate share, which is roughly 3/4 of that amount.

Of course, cash proceeds will also be impacted by the cash that sits on the books at the time of closing and as well as the working capital. So that's what makes it difficult for us to give you an accurate number on that net cash proceeds at this point. those won't be known until the closing, of course. And this transaction, when it does close, does represent the entirety of the Idaho Falls market. in the ASCs, physician practices and other ancillary businesses that were owned by Mountain View Hospital.

Great. And then I thought I might ask about the ASC rate proposal for 2027. It seems sort of in line with what you normally expect, but MSK maybe got a little bit of a bigger bump. So I just thought I'd see if you had any perspective to share on how that proposal lined up with your general expectations.

Matt, I guess we -- I would say we were very pleased with how the Medicare program continues to, I think, value the ASC space. We've said in the past, no matter whether it's a Democrat or Republican government, we've had broad support. And obviously, the reason for that is we create a ton of value. We're seeing that investment continue to happen. And I think that, yes, you're right.

We like the fact that they're focusing on some of those really higher-acuity places where we create the most value. We expect that we'll continue to see strong support for the ASCs from the governing forward. And very pleased with the initial read and it was in line with what we expected.

Our next question is from Benjamin Rossi with JPMorgan.

Bringing some of the Idaho Hospital operating changes, you mentioned that Idaho Falls includes business lines like ED, ICU and some other noncore services. How should we think about the degree to which this divestiture reduces your exposure to acute care volatility and headwinds versus your core ambulatory short-stay model?

And then on the expense side, how do you think the shift in service mix and payer mix will adjust to your consolidated expense profile on the remaining assets going forward? Do you think this will allow some cost release on maybe hospital-based areas like pro fees for emergency medicine or radiology?

Yes, great question. So I would just start with saying that -- and this is somewhat highlighted in our supplemental documents, but it greatly simplifies our business and dramatically reduces our exposure to traditional acute care. As we point out in the documents, over about 3/4 of our total nonsurgical admissions are in this market. The majority of our ICU beds, really the -- this is probably by far and away, the market that's furthest from the pen as far as pure short-stay surgery.

And what you're seeing even in the year, if you look at the way the market is laid out in the document, you can see it's really not growing, partially because of the pressures that you're seeing from things like Medicaid, some of the changes that are happening related to infusion on site of care, there's a lot of unique things there that only happen there.

And so we definitely -- you can read into this that this takes away a lot of those things, we're not really in that business in traditional acute care, and it certainly reduces our exposure to those pressures moving forward, which is a significant positive, obviously, for the company.

The second question, I'll let Dave give a little more color on.

Yes. On the -- I think again, spot on the question, the expense profile of the company does change, predominantly on the pro fees and medical fees line item, as you would imagine, with some of these nonsurgical procedures and the high expense profile that sits there. So I think you'll see a noticeable change there. I think it will be more muted in the other aspects of our simplified P&L. But we'll provide that color when we've updated guidance ex Idaho Falls.

Yes. I got a highlight, too. You see in the document that our cash conversion improves. This is a very capital-intensive market. And so it simplifies the business, improve cash conversion, reduces our exposure to some of those pressures. And so again, we feel like it accomplished those key objectives we set out for when we started a portfolio optimization.

Super helpful. Just as a follow-up on maybe OR capacity and general throughput. Can you just comment on potential capacity constraints from things like OR staffing, anesthesia coverage or block availability that could potentially impact volumes in 3Q and 4Q? And then when you compare between the ASC surgical hospitals? Are there any noticeable differences in those OR dynamics?

Yes. Maybe I'll hop in and answer the second one first, which there are no notable dynamics differences between the surgical go in our ASCs on capacity they're really very similar acting facilities now in our first state business. In terms of constraints as we look at the back half of the year, you're not seeing any staffing issues or shortages. We are not seeing any anesthesia issues that are different than we've been talking about in the past, nothing to constrain capacity for sure.

And then all of our facilities do still have some facility -- some capacity of room to grow. So no foreseen barriers from that standpoint.

Yes. I might just remind you on capacity. We tend to -- as you guys know, we've run a day -- weekday business. We have kind of a limited ability in the short run to open up eevi weekend. You see us do that and we are constantly assessing our facilities and trying to stay ahead of, and we do a pretty good job of this, adding capacity where we see the run rate increasing.

So Justin and his team look at that constantly, luckily the smaller facilities as you get away from facilities like Idaho Falls, the ability to pivot add procedures, even move the facilities if required, is obviously much easier and then the complexity of some of the large markets like Idaho Falls.

Our next question is from Sarah James with Cantor Fitzgerald.

I just wanted to circle back to the commercial mix pressure. Was any of this related to the physician churn that you brought up in 4Q with a little bit more Medicare mix away from commercial. Has that improved in those markets? I think you called it Market 3. And then being that this is mostly a large surgical hospital, can you confirm if it is or is not Idaho Falls that was caused in this mix pressure.

Yes. So thanks for the question. I would say we are -- certainly, there's some of last year's experience is in our guide, right, that's in moderating. And so we're lapping that as we go through the course of the year. So there is certainly part of that. .

And then again, in a given year, we watch very closely the mix of our new recruits. Sometimes for higher acuity reasons, it might start out being a little bit higher Medicare. We do watch that, and we have guided for that where it's applicable. But the underlying business mix, we feel really good about. We're still competing very well in the commercial space. expect to continue to do that. And so I would say, yes, there's some of that that's in there from last year's exposure, but it's been moderating as expected throughout the course of the year.

And your second question was...

Just whether it was Idaho Falls.

Yes. So Idaho Falls as we pointed out, obviously has a payer mix that's a little bit different than the rest of the company. So again, if you look at our document, you'll see that Medicaid falls by over half for the company. Certainly, because of its ER exposure, its mix can vary differently from the company. But there were other surgical hospitals that had unique challenges last year that are all taken into account here, and we feel good about how they have recovered. In fact, those facilities are on track this year with what we expect and continue to be a big part of our portfolio going forward.

Great. And last one, could you just refresh us on site neutrality exposure after the closing of Idaho Falls?

Yes. So look, we think from a site anchor perspective, obviously, we want to be crew to our ethos, which is we believe patients should be taking care of in the right side of care. Certainly, we become a less acute traditional acute kind of looking place when we only have -- when Idaho Falls goes away, we're basically pure play.

From a site neutrality perspective, we continue to believe that where the government is heading and what needs to happen in the health care system aligns perfectly with what we're trying to do, getting patients at the right price, the right place at the right time. And so while there certainly will be transitions timing issues for that. We think in the long run, we're going to pick up additional business as it moves out of the traditional acute setting, given our large footprint, and that includes at our short-stay surgical hospitals, which are well positioned from a value perspective.

So I continue to believe that the direction and the value position that payers and Medicare is taking aligns very, very well with where we want to take the business. Of course.

Our next question is from Andrew Mok with Barclays.

You called out SWB as a percentage of revenue increasing due to payer mix. However, the expense itself was also up, I think, 7% year-over-year. Can you provide a little bit more color on the underlying drivers of that growth and how we should be thinking about wage inflation going forward? And related to that, as you continue to shift towards higher acuity procedures, does that typically require a more specialized and higher cost surgeon mix as well?

Yes. Thanks for the question. On SW&B, we have not seen from a per unit cost or from a labor cost an abnormal pressures. That's been well controlled. When we say payer mix, obviously, as we have a higher acuity, it definitely shows up in net revenue, but in some of those, obviously, longer procedures do require some additional labor and that's showing up in the numbers. But underlying that, or the labor market has recovered very nicely. We don't have any pressures there. We're not seeing the need for any kind of premium labor. .

We continue to be a preferred site of care, and our expectation is that's going to continue to be a driver of our operating leverage moving forward. When it comes to the higher acuity stuff, you're correct. They can be -- they can certainly have higher implant costs -- but the reality of it is on a permanent basis is how we think about the business per minute earnings, adjusted EBITDA, a little lower margin but higher overall earnings growth, a place we're very, very excited to grow and certainly I've been focusing on.

Great. And maybe just a follow-up on the commercial mix. I think in the back half of '25, you shared some of the deliberate actions you were taking to address commercial mix. I understand that, that number is still moving negatively through the second quarter, but can you update us on the initiatives that you took and progress there?

Yes. Specifically with the markets that we called out last year, we've been very, very focused on partnering with our positions to ensure we're positioning that marketplace to compete and hopefully take commercial market share. given our value position, again, we feel like we are very well positioned against traditional acute care players in the service lines we're in. And in all 3 of the markets we called out, we have action plans moving.

We have -- we are on pace or ahead of base with where we expected to be for the year. And so those steps include a tighter partnership all the way through the referral chain, making sure we are actively managing what's happening in the marketplace. We had a couple of those pressures last year, but feel really good about our commercial position. Again, this business is highly commercial.

When you look at our base, all elective while there will naturally be some government growth just based on the aging of the population, we continue to expect that we are going to maintain and grow commercial share moving forward.

Our next question is from A.J. Rice with UBS.

I know you mentioned in the prepared remarks that you've obviously been focused on this transaction, and therefore, your pursuit of incremental acquisitions has sort of moderated at this point. How quick can you get that pipeline back up and running? What does any pipeline look like at this point? And thoughts on being able to get back to a normal year of acquisitions in 2027.

A.J., I appreciate the question. Yes, so a great question. Obviously, we've had an immaterial amount of transactions this year, which is a little bit abnormal for us, although even last year, we tended -- we very weighted to the fourth quarter. We still have an active pipeline we're managing. We feel good about our position in the industry.

As you know, still highly fragmented across this 6,500-plus Medicare license ASCs and there's a bunch that aren't medical license. And we feel like given our position as the last independent scaled player in the industry, we're really well positioned to continue to be a consolidator in that. We do expect before the end of the year, we'll get some deals done. But we've acknowledged it's not going to be at the $200 million level. Bigger picture to your point, we have no change in our belief or our opportunity in M&A investment going forward. So we -- that hasn't changed.

Obviously, again, M&A can be fit on timing. We're going to be extremely, extremely disciplined which is what we've done throughout, which often means that platform mobiles aren't going to be something we have to pay because we do find great opportunities on smaller opportunities that we can quickly integrate into our company. And we think those -- we know those continue to exist in the marketplace and are excited about that.

I'd also mention just reiterate our de novo focus that -- those tend to be highly MSK. We have 6 underway, 7 in the pipeline. We're very excited about. Those all take time. But again, that's a part of our broader M&A strategy to ensure we're delivering shareholders the most cost-effective use of capital as we grow our business.

Okay. All right. I know you've talked about cost efficiency programs, some as technology investments, some as other initiatives. And I think you've highlighted opportunities around anesthesia costs, purchase standardization, operating room utilization and staffing efficiency. I know you've touched on some of that on some of the previous questions, but anything more to highlight on initiatives there and progress you're making?

Yes. I appreciate the question. And we are very, very focused on cost management, our opportunities to continue to maintain and grow our margin. And that's one reason I'm super excited to have Justin Oppenheimer as our COO. I'll let Justin give you a little bit more flavor there, and you're going to hear a lot more about that over the coming quarters because it remains a big, big focus for us. .

Sure. Thanks, Eric. Yes. So cost management discipline is definitely one of our key strategic pillars as an operating unit this year. Maybe just to add a little bit of detail I'd say, 3 key levers we're going after labor supplies and then eliminating other systematic inefficiencies that are across our business. And we're starting to see the results of those. I think -- if you look at our SW&B or supplies or DNA, all of those are going down as a percent of revenue from Q1 to Q2, and there's certainly more to unlock there and continues to be a priority of the team.

Our next question is from Whit Mayo with Leerink Partners.

I haven't heard you guys talk about physician recruiting and the contribution year-to-date from the new physicians. Anything to share any numbers around that might be helpful.

Sure. Whit. I'll go back -- I'll start with kind of what we shared in the opening remarks. We've added 191 positions in Q2. really strong number. We feel quite good about our physician recruitment. In that cohort, their net revenue is up 16% versus the cohort last year. So as you know, last year was a year where the net was more of a pressure point than it's been in the past.

We're quite excited about where the recruiting sits year-to-date and the focus and renewed kind of push we've had around making sure we're well positioned there when it comes to physician transition. So it's been a big focus for us. Year-to-date, we are at or above where we expect to be in that number, and we'll continue to keep you guys upgraded updated throughout the year.

Okay. Great. And did you share how much MSK or joints were up year-over-year in the quarter on a same-store basis?

Yes. Great question. No, we hear what I would say on the overall volume. We -- what -- when you look at our net revenue growth, there's a few things I would point to. First of all, it's not just total joints. And total joints continues to be an outsized grower for us. It's a big opportunity for us. You know it's been a double-digit opportunity for a long time, continues to do that.

On top of that, though, we would emphasize that we're seeing really nice double-digit growth in other places. -- our cardiology, particularly in the vascular space is growing quite nicely, and spine really is starting to move out of hospitals. There was a question earlier about the inpatient outpatient or inpatient only list. I do think as some of those complex cases become eligible in our space, you're seeing technology allow them to come in.

So look, joints has a long way to go. As you guys know, the majority of those are still done in a traditional acute care setting. We expect to continue to see that drive outsized growth. But I would also broaden that out to say our acuity is growing in several places, notably in spine and also notably in cardiovascular cases.

Our next question is from Brian Hendrix with RBC Capital Markets.

This is Ben Hendrix. Just a quick question Idaho Falls, the roughly 1/4 of those acute type facilities maybe nonsurgical EV, et cetera, that are continuing in the portfolio. I want to get an idea of how much of those are either congruent with or complementary to your remaining surgical hospitals. Is there a place for those within those capabilities? Or should we think about that remaining one quarter as fair gain for continued portfolio optimization in the future.

Yes, it's a great question, Ben. I would say that, that 1 quarter is not all that concentrated. We're certainly going to still be, as I mentioned, we're going to be opportunistic if there are opportunities to simplify the business. .

When you think about what's left there, our surgical hospitals in general, even the ones that do have ER, see so very few in kind of anyone location, you're down to a de minimis number as far as the impact on our business. Actually, well over 90% -- over 95% of our business is now outpatient -- or is now a short-stay surge cases. So you think about the kind of the mix of the business has changed post pending sale.

So while that number there still is some left, it's really not necessarily all that concentrated. We're going to continue, again, to look for opportunistic opportunities I would point to the Bryan, Texas example as a way we could do that. But the biggest step in our portfolio optimization was this transaction.

Dave, you want to add anything?

Yes. Maybe just a quick reminder. The emergency room as a referral pattern really only apply to the Idaho Falls market. In many of the surgical hospitals that we do have an they're largely because state requirements are there. And we're more of the diversionary ED than we are the referral pattern. Most of the referral pattern in the rest of the business surgical hospitals are going to look very much like an ASC, where it comes from the independent physician office who also has an ownership interest in the surgical hospital.

Great. Just a follow-up to a prior question. You mentioned seeing double-digit growth in the cardiac space and other outside of MSK. Is this signaling maybe there's a pickup in more greater adoption of cardiac activity? I knew that was a slower burn than the ortho stuff. So just wanted to see if maybe there's something that's happening where we were seeing more pickup in ASC cardio.

Yes, I appreciate the question. I would say it's more vascular base is where most of the growth is. While we have some cardio growth, it's a small end. And I think our story there remains the same that -- we've got a long runway in orthopedics. I think when in and if that ever starts to slow down, certainly, cardiology presents a tremendous opportunity for cost savings, but it will be a very slow burn, as you mentioned, just because of the structural things within states, the high level of employment, where we're really seeing progress is on the vascular side think about vascular EP, CRM, those kind of places where less cat lab intensive, at least initially. But again, over time, we certainly see the opportunity in cardiology being bigger than that.

Our final question comes from Ryan Langston with TD Cowen.

Can you give us a sense on the case growth and revenue per case growth split between ambulatory and surgical hospitals? Anything interesting to call out in terms of trends between the two?

No. I think what I'd say is those businesses are all in one segment because they do look so similar. I don't think there's anything that I would call out that's made significantly different in those businesses or where a trend has been different. That's especially true now that we've -- we're in the process of letting go about halls, which clearly did have a little bit of a different approach with the community hospital attached to it. But big picture, what we love about our go-forward portfolio is that it's focused on the fast growth short-stay surgery space and it in almost all cases, it looks very similar across the entire platform.

Got it. And I appreciate the -- sorry, go ahead.

You go ahead. Go ahead.

Just I was -- on the physician recruiting details, I appreciate all the context there. Can you remind us how long typically takes a position to get up and running like at a normal running at your centers?

Of course. Yes. So typically, we've talked about this in the past that physician recruit will double their business in year 2, which kind of makes sense if you think of a midyear convention. But there certainly is a period of time where that position is coming in, getting the other facility getting more comfortable with our clinical capabilities before they bring their whole book. But again, that typically doubles in the second year of a cohort, and we see tremendous double-digit growth in that third year.

So there is a multiyear growth opportunity there. I think it depends on the type of physician and maybe the level of acuity just how long it takes them to get comfortable in this setting, especially if they have not been in our ambulatory setting before, but we see rapid progress over that first couple of years.

With that, I think that was our last question today. I want to thank you again for joining us for today's call, and have a great rest of the day.

Thank you. This will conclude today's conference. You may disconnect at this time. and thank you for your participation.

Ladies and gentlemen, greetings, and welcome to the Surgery Partners First Quarter 2026 Earnings Conference Call.

[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dave Doherty, Surgery Partners' Chief Financial Officer. Please go ahead.

Good morning, and thank you for joining Surgery Partners First Quarter 2026 Earnings Call. I am joined today by Eric Evans, our Chief Executive Officer; as well as Justin Oppenheimer, our Chief Operating Officer, who joined the company in January.

During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements as described in this morning's press release and the reports we file with the SEC. Company does not undertake any duty to update these forward-looking statements. In addition, we reference certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. we reconcile these measures to the most applicable GAAP measure in this morning's press release.

With that, I will turn the call over to Eric. Eric?

Thank you, Dave, and good morning, everyone. Before we get started, I'd like to introduce Justin Oppenheimer on the call this morning. Justin joined the company as our Chief Operating Officer in January and has made an immediate positive impact on the organization. By way of background, Justin was previously an executive at Hospital for Special Surgery, the world's leading academic system focused on musculoskeletal care, where he held several roles overseeing operations and strategy. Justin will be available to answer questions during the Q&A portion of our call, and we look forward to using to know him better in the months ahead.

Now moving to our first quarter operational and financial performance. I'll start with a brief overview of our first quarter results, followed by additional color on our progress across the 3 pillars of our growth algorithm, organic growth, margin improvement and capital deployment.

Let's start with the highlights. We are encouraged by our start to the year. First quarter performance broadly in line with our internal expectations, reflecting improved stability across the portfolio and initial signs of recovery in areas that were pressured towards the end of 2025. As a reminder, we ended last year with a select number of clearly identified addressable headwinds, particularly within a small subset of our surgical hospital portfolio. Entering 2026, our focus has been on restoring operating consistency and predictability, better supporting physician transitions and positioning the business for sustainable growth. We believe our first quarter results reflect early progress we have made and position us well to meet or exceed our 2026 objectives.

At a high level, during the quarter, we delivered approximately $811 million of net revenue, same-facility revenue growth of 4.4% and adjusted EBITDA of approximately $102 million, as we continue to execute against the foundational drivers of our long-term growth strategy. Dave will walk through the financial details shortly.

Tracking our first pillar, organic growth. Same-facility case growth of 0.6% in the first quarter was modest and below our long-term growth algorithm driven by primarily by temporary weather-related disruptions early in the quarter that led to case losses or deferrals in several higher volume but lower acuity markets. Importantly, these impacts were not broad-based and did not materially affect the higher acuity portion of our portfolio. We would also note that this performance is relative to a strong prior year comparison where we delivered approximately 6.5% same-facility case growth in the first quarter of 2025.

As we have noted in the past and given the continued acuity shift in our space, we believe the total same-facility net revenue metric remains the best to assess our growth as it reflects both total cases, acuity and rate improvements. At 4.4%, our same-facility revenue growth was in line with our first quarter and long-term expectations. We remain focused on executing our organic growth strategy centered on expanding surgical case volumes while strategically shifting towards higher acuity procedures.

To this end, we continue to see favorable trends in our musculoskeletal service line with total joints performed in our ASCs growing 14.6% year-over-year. Our investment in surgical robotics continues to support this momentum. Our portfolio consists of 73 surgical robots, further supporting higher acuity procedures, we can perform safely and efficiently across the platform. We remain focused on thoughtfully deploying this technology to enhance our capabilities where it drives clinical value and enables us to earn more complex, higher acuity cases. Physician recruiting remains another key driver of long-term growth.

During the quarter, we recruited approximately 140 physicians with a strong concentration in orthopedics, ophthalmology, GI and other priority specialties. While new recruits take time to ramp, these additions position us well for accelerating volume and acuity as the year progresses. De novo development continues to provide one of the highest returns on capital across our portfolio. During the first quarter, we opened one de novo, bringing our total openings to 9 over the trailing 12 months. Our de novo ASCs are heavily weighted towards MSK, aligning closely with our long-term strategy to expand higher acuity capabilities in attractive markets.

Turning to margin expansion. Our adjusted EBITDA margin was 12.6%, in line with our expectations for the seasonally lower margin first quarter. Overall, cost management was solid in the quarter, with both labor and supply costs showing sequential improvements as a percentage of net revenue relative to the first quarter of 2025, which Dave will provide greater detail on in his comments. Our proactive efforts allowed us to partially offset the onetime pressures related to reestablishing incentive compensation, increased provider taxes and tariff pressures that are detailed in our posted slides.

Regarding payer mix, while we did see modest payer mix pressure in the first quarter, the trend is moderating from the second half of 2025, and we are continuing to take action to both recover and grow our commercial market share as well as to reduce our expenses to improve our Medicare case profitability. Importantly, regarding the 3 surgical hospital markets we discussed on our fourth quarter call, they are executing their plan through the first quarter, and I am confident that our new leadership teams that are in place will continue to drive progress.

Moving into -- on to our third pillar, capital deployment towards M&A. During the first quarter, we deployed approximately $4 million of capital. Our pipeline remains active, and we continue to target deploying approximately $200 million in capital annually. While first quarter deployment was modest, we continue to have a healthy pipeline and remain optimistic about our long-term opportunity to be an accretive consolidator in the very fragmented ASC landscape. As a reminder, our full year 2026 guidance does not factor in any potential impact of M&A.

In parallel to continued execution of disciplined M&A, we have made progress on our portfolio optimization initiative. Our efforts remain focused on a small number of larger surgical hospital markets that have broader services than our core short-stay surgical focus. We are in advanced discussions on one key opportunity in a larger surgical hospital market and are working through customary diligence and transaction considerations. Our Board is actively engaged in this process, and we continue to target an announcement in mid-2026.

As we continue to advance our portfolio optimization efforts, our focus remains on unlocking financial benefit to the company through reduced leverage and improved free cash flow conversion.

Before turning the call back to Dave, I want to thank our teams across the organization as well as our physician partners for their focus and execution, particularly in navigating a dynamic operating environment. We remain confident in the durability and value of our model, the strength of our physician partnerships and our ability to execute against our strategy as we move through the remainder of the year.

With that said, I will turn the call back to Dave. Dave?

Thanks, Eric. Adjusted EBITDA for the quarter was $102 million. Compared to last year, results reflected the planned impact of payer mix and provider tax items discussed on our fourth quarter call and embedded in our 2026 outlook. Against that backdrop, overall performance came in modestly ahead of expectations and in line with our underlying assumptions for the year. Supply expense represented approximately 27.2% of net revenue during the quarter, while SWB expense was approximately 30.5% of revenue, both showing modest improvement year-over-year.

Both professional and medical fees and G&A expenses were broadly in line with the prior year. Other operating expenses were 7.3% of revenue, higher year-over-year, reflecting the provider taxes we have previously discussed. While these items contributed to margin pressure during the quarter, they were fully contemplated in our internal expectations and full year outlook. Collectively, expense ratios were generally consistent with the prior year and our expectations. Same-facility case growth was 0.6%, with several specialties contributing above 2% growth, including vascular and orthopedics. These trends helped offset case deferrals driven by weather-related disruption in higher volume, low acuity markets early in the quarter, which we estimated affected growth by approximately 40 basis points.

Working capital performance remained solid. Days sales outstanding were approximately 66 days, consistent with both the fourth quarter of 2025 and the first quarter of 2025. Interest expense increased year-over-year by approximately $7 million, reflecting higher rates following the expiration of our interest rate swap. This increase represented a meaningful cash headwind during the quarter, though it was partially offset by base rate reductions we executed on our credit facility in 2025 and by improved working capital performance. Operating cash flow for the quarter was approximately $12 million, an increase from $6 million from the prior year period, reflecting improved underlying performance consistent with typical first quarter seasonality and timing-related movements in working capital.

Capital expenditures during the quarter included $9 million of maintenance-related spend, largely associated with equipment refreshes, information technology and routine facility investments necessary to support ongoing operations. In addition, we made $58 million of distributions to our physician partners, consistent with the historical patterns and our partnership-based model. Net leverage under our credit agreement was approximately 4.3x, which is consistent with the fourth quarter. GAAP net debt to adjusted EBITDA was approximately 5.1x. We remain focused on disciplined capital allocation and expect to continue to drive gradual deleveraging over time, supported by earnings growth and ongoing portfolio optimization.

During the quarter, we deployed approximately $4 million on acquisitions. Based on internal development reporting, we estimate these acquisitions will contribute approximately $7 million of revenue in 2026. Regarding our share repurchase authorization, we did not repurchase shares during the quarter. As discussed previously, we will remain disciplined in the use of this program and we'll evaluate repurchases opportunistically based on valuation, liquidity and alternative uses of capital. We are reiterating our full year 2026 revenue guidance of $3.35 billion to $3.45 billion and adjusted EBITDA guidance of at least $530 million.

For the second quarter, we expect revenue to represent 24% to 24.5% of the annual target and adjusted EBITDA to be 23% to 23.5%. We -- as you've heard from us today, we continue to manage the business prudently with a focus on enhancing execution and protecting and growing margins. While we know there is still work to be done as we continue to navigate near-term market dynamics, we believe our early efforts have laid solid groundwork for continued improvements in 2026. In addition to disciplined execution of our organic growth strategy and continuing to drive operational efficiencies, progress on M&A and our portfolio optimization initiative represents additional potential levers to accelerate our return to our long-term growth algorithm.

We remain confident in our full year outlook and more broadly, our ability to return to consistent and sustainable growth, fueled by the strength of our unique short-stay surgical platform.

With that, I will turn the call back over to the operator for questions. Operator?

[Operator Instructions] We take the first question from the line of Brian Tanquilut from Jefferies.

Congrats on the quarter. I know it was tough. So maybe I'll start with Justin, since you're new to the earnings call, just curious, I mean, you've been here about 4 months now. Anything you can share with us in terms of what you see -- what you've learned about the company, the operations and then what areas of opportunity you see in terms of like blocking and tackling or areas of further productivity and efficiency gains where you can make a difference in the operations.

Thank you for the very first question. Maybe what I'll do is just highlight 3 categories of early observations just to stay organized, maybe one around people second around our organization's positioning and three, our operational priorities. So the first, our people, I've spent nearly every week on the ground in our markets, spending time with our people and physician partners. And very impressed with the positive culture of Surgery Partners. It's palpable. Everyone is committed to their patients, to their physician partners to each other. We have talented people who want to have an impact and create value for our physician partners and our shareholders.

And so I think just a level set summary on our people, and I think our culture is very strong. Initial talent assessment as our core operators are strong. There's always places to shore up, but that's to be expected.

The second category just around our organization's positioning. One of the reasons I joined Surgery Partners is its positioning in the market. The tailwinds in this sector are real, and you can really see them on the ground. Patients want and appreciate the convenient high-value care that we're producing. Physicians want to bring their patients to our efficient facilities and partnered facilities and payers want the procedures done in the right setting. And so you can really see this on the ground. And what's more positive from my mindset is Surgery Partners is the only company at scale focused solely on the management of surgical facilities into the future. So this has been all confirming.

To get to your question about operational priorities, with the cultural foundation and these industry tailwinds, the priority is really on execution. And I do believe there are a lot of embedded earnings with better execution, a real focus for our teams coming out of the first quarter is on organic growth and operational excellence. And those have been the central themes coming out of my first 100 days. Growth means physician recruiting and physician relationships, operational excellence means hardwiring cost management and really pulling the key levers that make surgical facilities. And so both our teams and you all hear this drumbeat of growth and operational excellence from me throughout the year. So maybe I'll end with that.

That's very helpful. Maybe, Dave, just shifting gears quickly. As I look at the P&L, a lot of progress here on SWB, supplies cost and even profits. So just curious, I mean, how do we think about, number one, what those levers were pulled during the quarter? And second, the sustainability of these levels of cost essentially its operations level.

Yes. Thanks, Brian. I may jump in here, and then I'll let Dave add a little color if he wants to. First of all, thank you for the comments on the quarter. Glad to have a solid start to the year.

I think when we look at the cost controls and Justin has been jumping in with this, our team has been focused on cost management for a long time. But we came out of last fourth quarter with a real focus on driving some cost out of the business to improve margins on the Medicare business. You're seeing that show up in SWB and supply management. We do think there's still opportunities there. We've talked about -- if you look across the business the last 5 years, we have consistently improve margin over time. We do have some near-term headwinds. We've outlined in our slides, but we still feel really good about the team's ability to continue to take advantage of our scale in efficiency to drive those costs down as a percent of net revenue.

So I don't know, Dave, if you have anything to add to that. But I mean I would say we believe Q1 with a lot of confidence in our ability to manage those costs and to find ways to drive improvement around margins.

Yes. I'd just supplement that with a couple of things maybe to highlight where we're going to see some of this pressure coming through on those headwinds that we've cited. And we experienced a little bit inside the first quarter. So those are legitimate headwinds that we're seeing. Reestablishing the bonus is a big one that will start to show up in the second quarter, and you'll really start to see that more significant in the third quarter. So you'll see a little bit of pressure really more of a return to normal on that SWB line as a result of that.

The provider tax pressure that we'll see will pop up in our other expenses, and that's a net new item for us. I think historically, that number has been around $200 million for the year. That number will be a little bit elevated this year as we overcome those new -- those new pressures that we've talked about before. Offsetting all of that is exactly what Eric was talking about and what we alluded to in our fourth quarter call as we adjust to the payer mix that we've talked about, cost containment is the other way that we're doing that in a strong partnership. That's what we're really excited about the early work that Justin has done. That we'll see kind of across the board supplies G&A and SWB improvement accelerating more in the second half of the year.

We take the next question from the line of Matthew Gillmor from KeyBanc Capital Markets.

I appreciate the comments on the 3 markets showing some recovery. I just wanted to see if there's any additional details to share, especially with respect to some of the payer mix dynamics that you called out last quarter.

Yes. Thanks for the question, Matt. And Justin has actually been on the ground a lot as have I in those markets. What I would say is, look, the pressures have moderated, although there are certainly -- it sounds like we've bounced back completely. We've talked about a little bit. We've got new leadership teams in those markets. We've also got a just -- we've had a lot of time to sit down with our physician partners and focus on the fact that despite all their hard work and growth efforts, they didn't necessarily see it flow through. And so the focus on really, really coordinating closer and tighter to make sure we're competing appropriately for each and every commercial patient to maintain and grow that market share has been there.

We've also done a lot of work around just timing of physician transitions, and that continues to be a focus area for us. I would say pretty pleased with the first quarter. Those 3 markets are in line with where we expected them to be making progress. And again, I will reiterate, while those 3 markets had pressure, they are really great markets for us overall. They continue to have really strong payer mix in general, despite the pressure. They also have really, really strong market positions. But yes, no, it's encouraging to see those get back online. Obviously, the fourth quarter was an unexpected kind of challenge in those 3 markets, and we're excited to kind of see the early progress.

Great. And then following up on the comment you made about surgical robots and the contribution to total joints. Can you maybe just sort of paint the picture in terms of the growth in surgical robots over the past maybe a year or 2? And how many you think you can add to the portfolio over the next couple of years?

Yes. Great question. I mean surgical robots really over the last 4 or 5 years have been an unlock for us and largely with physicians that might have already been partners are using our facility. And we did not feel comfortable bringing those higher acuity cases until they had the matching technology. We continue to see technology in general robotics, whether it be orthopedic robots in some cases, some of the new soft tissue robots that are coming out. The ability for us to make it easy for physicians to move patients safely and have the same level of technology they get in the traditional acute care setting has been a big unlock.

And we still see opportunity there. Again, roughly 70% of our total facilities have the ability to do MSK. And a lot of those over time have added robots. We still have a ways to go there. I mean you see that even -- we're still seeing strong double-digit growth in total joints. I don't see that changing in the near future. There's still a lot of cases to transition. When you think about -- we talked a little bit in the opening comments about our de novo pipeline, again, very, very MSK heavy. I think you can expect to see robotic expansion there as well.

So we think we're in the early innings. Over the last several years, I mean, we've added double-digit robots on average most every year, continue to find opportunities for that. And in some cases, as we're out recruiting, one of the things we have to be very focused on is how do we match up technology and capacity in a way that's attracted to physicians. And I think our team does that very, very well.

We take the next question from the line of Ben Hendrix from RBC Capital Markets.

I just wanted to talk a little bit about the lower acuity deferrals weather-related that you saw in the first quarter, just how you're thinking about those getting back on the schedule. Should we expect some skewness in the second quarter in terms of the case growth versus rate balance? And how do you expect that mix to kind of track through the rest of the year?

Ben, thanks for the question. So as far as the weather-related deferrals, obviously, I think you've heard all of our peers and everyone talk about January and February, certainly had some weather where it hit us tended to be in markets where we had a lot of kind of high volume, lower acuity procedures, think GI and eyes. About -- Dave mentioned in the script, about 40 basis points of impact on our growth. So instead of 60 basis points, we would have been at 1%, still not where we expect to be long term. As far as getting those cases back, some of them will probably come back over the course of the year. The reality of it is when you lose those cases for weather, you lose a day, it's hard. A lot of those really busy facilities. They're full most of the time. And so yes, we'll capture some of that, but I wouldn't think it's going to lead to any kind of real skewing. The good news is we've seen really strong growth within high acuity.

So I don't know, Dave, if you would add anything to that.

Yes. Maybe just one thing, just a reminder on the calculation for same-store rate, particularly on a business that has high-acuity business and lower acuity business. And it's not a return of those cases, but a return to normalcy sequentially between the first quarter and second quarter, we'll put a little bit of pressure on that rate just sequentially, if you're looking at net revenue per case.

And just to follow up. We're getting some incomings on the cash flow from operations print. Just any more detail you can provide on the working capital dynamics you're expecting? And how should we about timing of cash flow realization through the year?

Yes, I'll let Dave dive into the details. I'd just say high level on free cash flow, we're very, very focused on driving improvement there. First quarter was an improvement over last year. This business produces a lot of cash. We've got to make sure we continue to convert that and grow with our business along the way we see lots of opportunities in working capital.

I'll let Dave talk about a few of those that he's working on this year.

Yes. Yes. So first off, just dissecting the first quarter cash flow from operations. We did have some benefit from working capital relatively marginal. I'll talk about that in just a quick second. But other factors that you can kind of look at lower below-the-line spend year-over-year as that number comes back down as we've been guiding to more in line with long-term historical perspective. And interest cost is interesting. There's 2 components of our corporate debt. As you might recall, last year, we did refinance our term loan and the revolver, bringing that down to very good interest rates of SOFR plus 250 basis points. That generated a net positive for us in the quarter of about $9 million. However, in the quarter, that was offset by pressure from unwinding the last quarter's benefit of the interest rate swap that we had last year and then marginally higher debt that we hold related to our refinancing of last year.

So working capital, we will now kind of overcome that. Starting in the second quarter, you won't see that interest pressure from the interest rate swap termination. So that unlock should start to happen there. On a working capital basis, again, something I'm super excited about working with Justin and his team on is embedding greater working capital discipline at the facility level. Our days sales outstanding was 66 days in the quarter. That's the same as it was in the fourth quarter. We need to make that better as we progress throughout the course of the year, and we've got plans in place. That's the single largest lever that we have at the facility level in order to unlock that cash flow.

Our physician partners are aligned with that because they get better distributions when that happens. So we do expect that, that unlock should happen over the course of the year.

We take the next question from the line of Whitt Mao from Leerink Partners. .

I may have missed this, but how much were the provider taxes in the quarter, both revenue and other operating expenses?

Yes. Thanks, Liz, for the question. Yes. So as a reminder for the large group, we did talk about new headwinds that we're facing this year that fall into kind of 2 categories. In one state, the -- pretty much the only state where we have any exposure to Medicaid that was in across the board, 4% rate reduction that started to impact us in the fourth quarter of last year and did impact this year. That had a very small impact on revenue, almost inconsequential, but of course, that flows all the way down to the bottom line.

And we also had provider taxes introduced in 2 new states, for which we have virtually no Medicaid business just for the fact that we carry the title hospital in those 2 markets. The combined pressure on the adjusted earnings line for those 2 things is estimated to be around $8 million for the full year, a little bit more front loaded because of that Medicaid rate pressure only affects 3 quarters of the year. So we're a little bit more than 25% of that number impacting our results, split between revenue and other operating expenses.

Okay. So divide it by 4, so more than 2 in the quarter year-over-year was the pressure...

That's fair.

Yes. Okay. And my other question is just around like what we're seeing with a lot of the payers that continue to push this campaign around prior authorization. And I'm just wondering if you're seeing any changes with the plan's behavior? And then just also any comments you have around CMS' prior of demo with the Wiser model, whether or not that's having any impact one way or the other.

Yes. Thanks, Whit. Appreciate the question. Look, we are certainly all on board and in favor of all the work the payers are talking about when all of the prior authorizations. We do see in markets one of the great things about our model is we are aligned with payers and saving the system money. So this idea of payers making it harder to get approval in the wrong setting of care is a great thing for us. We obviously fully supportive this push to reduce prior authorization burden going back to that 66 DSO days and all the other complexities we face, obviously, would be a welcome headwind -- or a welcome tailwind for cash flow.

So we do see payers making real efforts there, and I do think that benefits our business moving forward just because of our cost position. With regard to the Wiser program, that has gone in place the Medicare demo. We have seen -- early on, there were some learnings there just to make sure, as you know, it add some more administrative, unfortunately, work on our side. But we feel like we're through understanding the program. We don't see any material impact. And we understand the goals of that program, which, again, I want to make sure patients are getting the care they need the right care in the right place. All of those efforts align perfectly with our mission, which is really to provide high-value care at the right setting, right care, right place, right price. And so we think those are going to be long-term tailwinds. We haven't seen tremendous impact there yet, although there are certainly markets where we are hearing that it's harder for physicians to get their patients into a hospital when there's an ASC option, and that's great.

We take the next question from the line of Joanna Gajuk from Bank of America.

So can you give us an update on the portfolio optimization and selling or, I guess, reducing exposure to your surgical hospitals?

Sure, Joanna, thanks for the question. Obviously, it's something we've talked about for last several quarters is portfolio optimization. We remain committed to reviewing those opportunities within our portfolio to do several things. I just want to remind everyone what we're looking to accomplish with this. One is to make -- to actually delever faster, so finding a way to help us delever improving free cash flow conversion. Some of those places are a little bit more capital intensive than our core business.

The third is really to improve our growth rate going forward. And then lastly, just simplify the business to our core short-stay strategy. So we do see opportunities there. It has been -- as you bring up here, the timing of this, it's been hard to predict. We do have a large market, we mentioned in my comments earlier that we are in the final stages of, we are still targeting midyear. But I'd be clear on that, that we're going to be very disciplined on making sure these are good assets, making sure we get the right value while we're committed to portfolio optimization. We want to do it in a way that's accretive to shareholders and make sure we accomplish those things that I talked about earlier.

So there's one market that's in the very advanced stages there. We're targeting midyear. We'll see. Obviously, nothing is done until it's signed. And then there are a couple of other markets that we're going to be exploring and we'll give you the right -- we'll give you the updates as those are appropriate.

And I guess with that, if I can, any update on your Investor Day that you were planning? I guess, is it still in the works? So are you waiting to complete more of these before you have this meeting?

Yes. No, we're definitely still committed to doing an Investor Day. As we've said before, we are tying that to having something meaningful done within our portfolio optimization. We do plan to do that later this year. And so we're staying very closely tied to that timing. And as we have something to update you on there, we'll obviously do it quickly.

We take the next question from the line of Andrew Mok from Barclays.

This is Thomas Walsh on for Andrew. You shared some of the deliberate actions taken to address payer mix pressures from the back half of 2025. How did commercial mix come in, in the quarter? And could you comment more broadly on the view of the strength of the consumer wallet and employment trends in your markets?

Sure. So commercial came in about 50% for the first quarter, which was -- had a little pressure. If you look at sequentially, and we always have a little bit of pressure. Obviously, our population is aging. We've got to take commercial market share to stay even. But I feel pretty good about the moderation of that. We are seeing some -- again, some improvement signs there. It was not nearly the same pressure we saw in the fourth quarter, but also did not totally abate. So we're very, very focused on that.

I think from your question around just the consumer wallet, it's interesting, the pressure we saw in cases in the first quarter relative to kind of lower acuity, higher volume rates was mainly around weather. I think it's a little early to say. I mean the economy still seems to be holding up relatively well. I'm not ready to say that we're seeing consumers make different decisions. But again, one of the hardest things in health care is to determine why patients don't walk into your doors. But we feel good about the start year for growth.

When it comes to -- I think you're kind of alluding to some of the pressure, too, that's been on exchange -- the exchanges and kind of patients transitions there. We've mentioned before because of the nature of our business. We don't really have ERs. It's purely elective. We have not historically in most markets, seen a lot of those HIX patients. And so we haven't really felt a material pressure there, but we continue to watch that.

The good news is we're not exposed to kind of payer mix weakening. The only thing that we would have to watch closely is there some kind of dampening or postponing of procedures. And I think it's too early to say we've seen any of that. We continue to believe have great confidence in our outlook for cases this year, which admittedly is a bit below our kind of long-term algorithm of 2% to 3%.

And following up, you provided second quarter revenue and EBITDA outlook, that appears slightly below your normal revenue seasonality and some below consensus estimates. Are there any timing elements in the second quarter to consider or for the remaining of the year?

Yes. Thanks for the question. I mean there's always some timing elements. I would say -- let me start off by saying we were very confident in our full year guidance. The second quarter guide is just a prudent guide from where we sit today. We feel it's -- actually, if you look at the longer-term seasonality, it's relatively in line with what we've said historically. Certainly, we're entering Q2 with confidence in how the business is progressing this year. We feel good about our ability to meet or exceed our outlook. And I think you should just say that -- I should say it's early in the year. It's a prudent guidance for Q2.

I don't know, Dave, if you would add anything.

Yes, perhaps just a point of emphasis when you're doing a comparison year-over-year. In the second quarter of last year, we -- I'm sorry, in the third quarter of last year, we announced one of our initial portfolio optimization efforts that took a surgical hospital from a consolidated position down to a deconsolidated position. So that revenue would have been in the second quarter last year, not in the revenue for this year. Any other factor that's going to affect your year-over-year performance inside the second quarter are those headwinds that we've highlighted in our financial supplement.

We take the next question from the line of Sarah James from Cantor Fitzgerald.

I want to continue that topic a little bit more. Can you help us bridge the first half to the second half, the EBITDA ramp there? How much of that depends on payer mix recovery versus your cost actions?

Yes. Thanks for the question, Sarah. I think look, if you want to -- if you're thinking about bridging the first half performance second half performance, we are not -- there's nothing embedded in there that's some dramatic improvement in our payer mix. So we do have -- again, we're seeing moderation so that is contemplated, but it's -- the second half does not depend on that. From a cost standpoint, we're always working on ways to more efficiently run the business. We do expect to continue to drive improvement on that throughout the year. But I think what I would say is from a seasonal adjustment standpoint that this is a relatively normal spread. And we feel really confident in our ability to deliver not only on Q2, but on the full year.

Maybe if I just add just to that fair -- for your benefit. As a reminder, I mentioned this a little bit earlier on the call, but some of those headwinds that we've noted are more front-end loaded and the biggest one being that Medicaid cut, which will not affect our year-over-year performance in the fourth quarter. And the other thing is -- the other 2 things, Eric did mention the focus on cost containment in the industry as those pick up, and we kind of mature into those, those will have an impact inside the second half of the year.

And then finally, that portfolio optimization work that we talked about a little bit earlier in my last question, the increase that comes from an earnings perspective, as we talked about last year, is mostly back half of the year weighted. So those are the key components that would drive better performance in the second half of the year, all relatively marginal. But when you add them together, that's how you get north of 50% of the earnings in the second half of the year which is normally the case. It's normal, yes.

We take the next question from the line of A.J. Rice from UBS.

First question around the deal activity, you did $4 million in the quarter, you're saying you're still reiterating the $200 million spend. That's been an area of volatility the last 2 years, 2 years ago above expectations last year, well below. Can you comment on visibility on that deal spend, what the pipeline looks like, what the competitive landscape looks like?

Sure, A.J. And it's a great question. Actually, the point you're bringing up is exactly why we don't have it in guidance this year, right? I think we've struggled the last several years with kind of over and under and the timing of M&A is fickle. We'll say, look, we feel good about our pipeline. We continue to see new things coming in. And certainly, it's a very fragmented industry. So big picture that $200 annual number is one that we are continuing to talk about long term.

Obviously, off to a little bit of a modest start this year, but we do feel good about the pipeline. It's always a little bit fickle. I would remind everyone that anything we do on the M&A pipeline is pure upside to guidance. And so we do -- look, I expect we're going to make progress. I think last year, we ended up finishing not too far off A.J. I think we had up spending about $180 million had some great deals. We finished up with a big one in the fourth quarter. it was back-end weighted, obviously. And this year, it looks like we're going to end up being a little back-end weighted to given the first quarter. But look, I would say we're were the last kind of only stand-alone short-stay surgical operator. We're well positioned in the market that need -- that is going to continue to consolidate.

We think we're well positioned to be one of those consolidators. And so like I don't -- long term, nothing's changed, but the timing is fickle and admittedly, it's been a slow start.

Okay. The other thing I was going to ask you about, you mentioned that you recruited roughly 140 physicians in the quarter. I usually think of the heavy recruiting periods more in the second half of the year, the back half of the year, but maybe not in your case. But just give us a perspective on that. Is that sort of normal course? Or are you -- is that a step up? And anything to call out on where their focus is in terms of any kind of surgical specialty or anything?

Yes. Great question. I would say the 140 is kind of -- is basically in line with where we would expect in the first quarter. You're right, we are back-end loaded when it comes to recruitment. That's always the case. And so our physicians that we recruited in August through December of last year, obviously contributing into this year, that will be where you'll see that number raised in the back part of the year. Very focused still on MSK. We spend a lot of time on those higher acuity services and so the team is focused on driving growth there. I would say as a kind of a positive of those 140 doctors this year, they are, by doctor, higher net revenue in total than last year's recruiting class. So again, we very much closely watch kind of that performance. And we've got a very targeted list we're going after.

The good news is with technology and with the inpatient only list coming off, that eligible list of proceduralists who can bring all their cases continues to grow. We continue to stay focused on going after the right docs. But definitely back-end loaded, I feel good about the early start.

We take the next question from the line of William Spivack from TD Cowen.

Can you just talk about your expectations for the split between case growth and revenue per case growth as the year progresses?

Yes. Thanks, William, for the question. So what we have implied in our guidance for the year continues to be approximately 3-plus percent same facility revenue growth, which is how we prefer to look at this. As you saw in the first quarter, we had just under 1% same-facility case growth. I think you'll skew more positively on the rate side as the year progresses. Of course, as I mentioned earlier, with the return to normalcy in the second quarter, that may be pressured a little bit. But -- so that -- I would consider that to be normal fluctuations. But you'll roughly get an equal contribution between both of those, perhaps skewing a little bit more towards the rate side.

Okay. Just as a follow-up, just to clarify a question from earlier on the other OpEx and provider taxes. So I think you said that was about a $2 million headwind maybe a little bit more to EBITDA in the quarter. So I think other OpEx was up about $15 million. Can you break out how much of that other OpEx increase was the provider tax side so we can kind of back into the revenue as well?

Yes. So there's a lot of moving parts there because of all the different states and how they flow through. If you think about in total at a gross level, that OpEx expense related to provider taxes is about $11 million, with the biggest part of that being the new states that we've added. But we'll certainly -- we're happy to go through those details. Then I would also say that other operating expense, if you look at it over time, it does fluctuate quite a bit. This year, though, that change is driven by those provider tax changes, not only in existing states, but importantly and the biggest contributor this year as the new states that added those. And unfortunately, added those without any Medicaid benefit for us. We're obviously still going to be very active in advocacy on some of those areas. So I don't think those things are necessarily forever, if we can work on them, but that's where that's showing up, and that's roughly the numbers.

Yes. Yes. I would say a large majority of that year-over-year increase is related to provider taxes, roughly a little bit less than half of that relates to the new provider taxes associated with those programs from which we get no benefit. The good news is those -- even though there may be a big number on provider or other operating expenses, they are in facilities that we don't have a significant ownership interest in some cases, they're relatively small. So that does move down to -- in line with kind of what our long-term growth algorithm, the way I answered with question earlier. So the adjusted earnings piece of that is going to be a little bit lower -- a lot lower, I should say.

We take the next question from the line of Bill Sutherland from the Benchmark Company.

Just want to think about the de novos for a second. Can you give us a sense of kind of what's in the pipeline and maybe how they're sort of moving towards consolidation as a group?

Bill, I appreciate the question. We are excited about the de novo pipeline. We have 5 expected to open later this year, 7 more in the pipeline, and we continue to see interest in that area. It is a place where we see the opportunity for accretive growth. Unfortunately, it takes a while to show up. As we've talked about, it takes 12 to 18 months to syndicate and 12 to 18 months to build, a year to get to cash flow breakeven, but the return on these is quite good. And so we're getting into that point where we've been doing this now for a couple of years, it will start becoming run rate.

We are not yet to the point, Bill, where we're doing buy-ups in those facilities. We've got about half of those that are with health systems about half that are independent although that independent number, I think, is going to go up over time. In those independent centers, there will be an opportunity as they ramp, we expect to buy up and consolidate those centers. But we're not to that level of maturation, but we're super excited about where those are heading. And feel good about the opportunity to continue to have that be a nice lever to help meet our growth.

Ladies and gentlemen, we take the last question from the line of Benjamin Rossi from JPMorgan.

Just following up on your physician recruitment comment, in the language from the final OPPS rule, much of the logic stream from CMS' discussion about removing the inpatient-only list come from this concept of greater physician autonomy over where they treat their patient case load. Just taking a step back, when thinking about the changes that allow physicians to take a greater portion of their book of business into the outpatient setting, what do you consider to be some of the remaining obstacle they're paying points for doctors that prevent them from treating their entire caseload of Medicare and commercial patients in the outpatient setting at this point?

Yes. Great question, Benjamin. I appreciate the question. So the inpatient only [indiscernible], we are very excited about the fact that the government has decided to put the decision back in the physician's hands. As you probably know, over the last 10 years, the government has spent a lot more money than it needed to because they were behind on getting Medicare caught up with what was happening with commercial patients. It happened with total joints. It certainly happened in vascular procedures. And so you I think you look at some of these things, and the government has seen repeatedly where commercial has moved faster and doctors that move patients safely based on technology in front of their list on the Medicare side.

So we're always excited when the government leans in to prefer our setting because we know we create great value. We've got great outcomes. So continue to see that as a nice tailwind for the business going forward. Some of the obstacles that still remain. There are some states that haven't caught up with CMS in certain areas of vascular and EP. There are -- in cardiovascular. There are -- I think there's obviously always different parts of the country that physicians have. It's a little bit sometimes going to be a little bit of gill mentality. They have their own reasons they think patients can't be safely treated and certain side of care that we have to go through.

Technology is sometimes a barrier. There are certain specialties where the technology, the robotics technology, for instance, is sometimes a limiting factor for ASCs to be able to afford the capital. We think there's real opportunity with payers and with some of the new technologies coming out to fix that issue. So There are some minor things left. I do think that a lot of those things continue to melt away as physicians experience our side of care, continue to have great outcomes with patients and higher acuity. And we're thrilled that no matter which administration has been in democratic, republic and they've supported the ASC space. But in particular, this administration with the removement of the inpatient-only list, that plays perfectly into our thesis, perfectly into what we're trying to deliver for the health care system, and we expect that, that's going to be a nice tailwind for us in the coming years.

With that, I appreciate -- go ahead, sorry.

No, sorry, I just wanted to say appreciate the color there. Just real quick then. Now 140 new additions on physician recruiting. Any comments on if these are replacing retirees and departures versus being truly additive?

Yes. So I think in the first quarter, we feel really good about the additions we have had. Some of those would be replacing retiring some of them are pure net adds. I don't have that net number. We haven't released that. But I would say we're pretty happy with our start around this recruiting. We do see it as additive to the -- to our growth profile going forward. We're going to be closely watching that this year. Obviously, last year, we had a bit higher retirement rate than we've seen in the past, and we are adjusting to that to make sure we manage that very, very carefully. But super excited about kind of the early reads on recruitment this year. And again, I think as technology and as government regulation allows us to target additional procedures, it certainly continues to open up that world of recruits for us, and we're being very focused on that.

So -- appreciate the question. I think that was our last question. I appreciate everyone's time today. And look, I'll let you enjoy the rest of the day. Thanks so much for your time. See you.

Thank you. Ladies and gentlemen, with that, we conclude today's conference call of Surgery Partners. Thank you for your participation. You may now disconnect your lines.

Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the facilities and managed care analyst here at Barclays. And pleased to welcome on stage Surgery Partners' CEO, Eric Evans. Eric, welcome.

Eric, you framed 2025 as a tale of 2 halves with solid momentum in the first half, giving way to headwinds in the second half.

So to start, can you talk about what changed over the course of the year, both at the macro level and at the facility level? And it would be helpful to highlight some of the actions you're taking to tighten execution as you move into 2026.

Sure. And I guess before I get started, my CFO is not with me up here on the stage today. I'll just remind everyone that I'll be making forward-looking statements and our risk factors and GAAP reconciliations are in our 10-K. So yes, no, I think you -- that is the way I framed the year. We had a really solid start to the year. second half of the year fell short of expectations. Really a couple of things happened.

If you guys may recall on our Q3 call, we had started to see in the third quarter going into the fourth quarter, softer volumes than we expected. I think if you looked at our volumes overall, they compared pretty well to peers, but they were below our expectations and some payer mix pressure.

As you guys know, in our business, fourth quarter is an all-important quarter where you typically see a pretty big flip in payer mix, particularly in our surgical hospitals. And we had noted that, that really wasn't happening at the pace we had seen historically. So we noted that in the third quarter, we adjusted for that. If you'll recall, we adjusted for 2 things. One is timing of M&A, which we'll talk about later. We're changing our approach on guidance there. The second was this kind of softer volume, a little bit weaker payer mix. And then what changed in the back half of the year, mostly that was correct.

So if I think about big picture, let's talk about we were a little softer on our mix, a little softer on volume. And really, that had a lot to do with our physician transitions this year. You guys know we recruit on average somewhere around 700 new docs a year into our facilities. In any given month, that represents something around 10% of our business. And we can look at every cohort, and we have -- we track very closely what that payer mix looks like. And last year, the new docs we brought in definitely skewed higher government.

Some of that's transition timing, right? We got to try to marry that up as well -- as good as we can. And some of that was just the mix of doctors this year that retired and departed. And so that put pressure we weren't really expecting in the big picture. That particularly affected the national group. The national group is our surgical hospitals. Our surgical hospitals tend to be in marketplaces where we're actually recruiting in new-to-market docs. And you can imagine those kind of transitions take a bit longer. And so big picture, we had that pressure. That also then affected our expenses when it came to anesthesia coverage. And so -- and we'll talk about that a little bit later. Beyond that -- so that's big picture. Beyond that, so fourth quarter, we did hit our consensus revenue, but we did not get there on the bottom line.

And we -- there's really 3 markets that accounted for that. If you look back over the 6 years I've been with the company, we've had just an amazingly consistent payer mix. So we haven't seen these shifts. And if you're anything like me, the first time I started seeing these mix shifts, the first question I had, the data must be wrong, right, because things just don't move this quickly. So I will admit that can raise some skepticism.

But we spent a lot of time kind of looking about what happened to us, and there were really 3 markets that explained the entire miss on the bottom line. And I'll just spend a second kind of walking through those 3 different stories. In one market, we really had a change in competitive dynamics.

So we had a marketplace where we compete with 2 large integrated nonprofit systems, when I say integrated employment models, closed systems that had been moving away and pushing out and canceling MA contracts were the loan independent kind of surgical facility along with an independent primary care base. And we didn't react fast enough to the fact that we were the MA access point and that we were not doing a good enough job of saving capacity for commercial patients.

And when you think about that, it may sound simple, but keep in mind, our physician partners are not employed by us and the primary care base is not employed by us. And so some of this stuff is coordination that we're going to have to tighten up when you look at payer mix. Again, in the 6 years I've been here, we haven't had that dynamic change.

So that was one market that we -- I would say that's not going to be an overnight thing. We did not expect that to bounce back overnight, but we are going to go work on that. That's a marketplace where we've consistently earned and taken commercial market share. We've got the best value product. We got great positions. And so I have every expectation we'll recover that over time.

The second market was -- is an anomaly that I still struggle with we had a market where we grew our acuity -- high acuity procedures by 18%. If you would have told me in this market, we're the leading market share provider of orthopedics and a relatively good-sized MSA.

Peter told me we grew high-acuity procedures by 18%, I'd say we had a fantastic quarter. Unfortunately, in that particular marketplace, all of that growth was Medicare. And that's the only market, and I'll point out, we don't have a lot of exchange patients. Exchange patients tend to -- tend to access the health care system through the ER, and we are primarily an elective business. And so we don't tend to get a lot of exchange patients.

In this particular market, we did have exchange pressure with the Affordable Care Act subsidies going away for the exchange patients. And so within our commercial base, we also had pressure. So at a market that grew 18% on high-acuity patients that actually had less net revenue with 18% more cases. I'll come back to that. You can imagine our positions had a lot of questions around working that hard and not seeing that come through their dividends. The good news about our business is we are perfectly connected.

And then the third market was a rural market where it really was about physician transitions. We had some retirement timing around new recruits that didn't match up particularly well. We also had some docs that were out for personal reasons. And the fact that I'm up here talking about a handful of docs is probably surprising but in a rural market that big can have a big impact, and those physicians are already back. So there's a mix of reasons in there. Those 3 markets really drove the entire difference on the earnings line. We feel like we've ring-fenced it. The question was as I talked to you about what are we going to do about it.

First and foremost, those specialists, we sit with every day and they look at the fourth quarter our margins were compressed, I'm going to get lower -- I'm going to get my lower dividends. We have a real opportunity to talk to them about a bunch of things.

So number one is taking out cost. So we are already -- we've been actively taking out costs, getting more efficient these surgical hospitals, if any of you have been to them, these are the facilities you would want to go to get care. It's where you send your grandparents. These are kind of our physicians built their Taj Mahal.

I would say, in many ways, these are really high patient experience facilities, often in top 5% in the country, great outcomes. And when things are going really well, physicians, they tend to want to have a little extra staffing. They don't want to be pushed on their physician preference items.

And if you're growing and you've got great margins and you can have a great case, you'd probably get a little more leeway. Those doctors that have felt the pressure, we've got their attention that the payer mix has changed. We had to do some things on cost. We have to change our approach on anesthesia. So if you think about anesthesia coverage, we have obviously a payment difference between commercial and Medicare that's pretty large. Anesthesia, it's 3 to 4x, right?

And so for anesthesia, we had subsidies in place that were higher because of that mix. The doctors are now more aware of that. I would just say on the anesthesia point, loss -- often physicians don't want to move away from an NDA model. They don't want to move away from the coverage they're used to on flip rooms unless they have to, unless there's a compelling reason. And we now have a compelling reason.

So we've taken action on cost. In those markets, we've made some leadership changes. Clearly, these are dynamics we need to be sure we react to quickly. So I'm excited about also our new Chief Operating Officer that we've added to the company, Justin Oppenheimer, who's very, very focused on these dynamics.

And then thirdly, we are very focused on working with our physician partners on having access in those offices to commercial patients, making sure we're really, really focused not just at our level because I do think, ultimately, while we don't control those offices, our physicians do care deeply about competing for those patients, and we're very, very focused on that.

So we leave that 2025 headed to '26 in a position where we feel like we put together a great plan, a conservative plan for this year that we're excited about for 2026.

Great. Eric, 1 point I wanted to clarify was that total case volumes came in below expectations. There were some payer mix issues in the quarter that you just noted, yet you still exceeded the high end of revenue guidance. How does that happen? How should we reconcile those events?

Yes. No, it's very frustrating. I mean I'm going to go back to -- we had really, really strong acuity growth. So we pointed out in the quarter versus a very tough comp in the prior year, we grew total joints by 15%. So we created tremendous value for the health care system. Unfortunately, we didn't capture enough of that because of the mix of patients, right? So it certainly was an acuity story.

I'm proud of the team and our focus on orthopedics, particularly on high acuity cases, both total joint and spine. So it was an acuity case where you're getting to the top line, but because of the mix of patients, your bottom line was impacted both by the fact that you're getting lower reimbursement and also by the need to subsidize anesthesiology.

Understood. While some of these issues you described earlier have seen transitory in nature, things like the ACA exchange crowding out physician time off, others may take time to address things like competitive dynamics, physician turnover. So from a guidance standpoint, can you help us understand what's already expected to rebound and what would represent potential upside.

Yes. So I'll start with, we did not assume this is going to bounce back, right? So our guidance takes into account the current trend. There are some things that will come back immediately, physicians that were gone that we know are back already for personal reasons. Certainly, the onetime HIX pressure with the subsidies going away, we don't expect that to happen again. But other things, like the dynamics around MA and commercial access, those will take time in coordination with our independent position base.

So from a guidance point, we did not expect and did not guide to a number that would bounce back to where we were. We accepted kind of where we landed, allowed for a little bit of room on the trend to continue, but we have offset that with obviously cost actions. I look back, I want to remind everyone, our surgical hospitals are very highly managed care mix of facilities.

So if you compare it to a traditional acute care hospital, we're running 50% managed care. It's a very -- these are great payer mix places. So I want to make sure, despite the pressures we've had, these are facilities we're really excited about, and they are great parts of our organization.

And so when we think about our ability to go compete for commercial lives, we're higher value. We have outstanding patient service. We've got independent physicians who are highly motivated to provide great care for patients. So we think we're well positioned to maintain and build that back, but we did not assume that we're going to get back there overnight, and we did let some of that be through into 2026.

Right. Sticking with guidance, you've taken a more conservative approach to 2026 guidance by excluding unannounced M&A, even as your capital deployment targets of at least $200 million remain unchanged. Can you walk us through the thinking behind that shift and how you're balancing conservatism in guidance with confidence in capital deployment?

For sure. I think back -- going into year 7, it's hard to believe. I think back when I joined this company, we, I think, rightfully have included M&A in our guidance because it's a big part of our story, right? We're in a very fragmented industry. There's over 12,000 ASCs, half of which are Medicare license, half of which are not. There's not that many players of scale.

We think we're well positioned to be a consolidator. We feel good about that. It's a big part of our story. And I think for many years, it worked quite well for us. Over the last several years, I mean, as you guys know, timing on M&A can be quite fickle. We had one year where we were way above our target, and that ended up with extra costs associated with integrating all of those, which created issues for us.

We had another year. We finished below that, and we missed guidance because we didn't -- just because of M&A timing. And then, of course, this year, I mean we ended the year close to our $200 million target, but it was very back-end loaded. And I think just from a -- the purpose of -- Dave and I both want to be a B company. We have historically been that. We don't want to find ourselves again where we were sitting for the Q4 situation this year.

We thought it was prudent just to say, you know what, our target hasn't changed. We still want to do $200 million plus of M&A, but we want that to be additive and not something that is built into guidance in quite the same way. We did a lot of research on growth companies in the marketplace. And we think this is certainly the most prudent approach going forward.

Right. Understood. Last part, the BLS released the weak jobs report with negative February headline numbers and downward revisions to prior months. Commercial mix is a meaningful part of your business, which leads to strong reimbursement, but also introduces economic sensitivity. So can you speak to the changes in employment trends and consumer confidence on commercial mix or utilization. And how are you positioning the business in the event of a broader slowdown in employment?

Yes. I mean I think we're all reading the same jobs reports, right? In our local markets, we haven't seen a tremendous change in employment, but I've been in the business long enough. I think for those of you who are here the last time we had potential economic uncertainty in the rapid increase outside of COVID, the financial crisis, it actually led to an increase in procedures.

Patients who -- if you recall, they were worried about getting it done while they still had care before they got -- before COVID ran out, you actually saw a spike the last time you had this. I don't know if that will be the case today. You've obviously got the exchanges. You've got more safety nets. But historically, that has not been a huge headwind for us.

Clearly, I think that one of the benefits of our business model is we don't have the downside exposure that traditional acute care does to a payer mix change, meaning we're not going to see uninsured. We're not going to see -- Medicaid is a very small part of our business. So payer mix situation is not going to be an issue. We're not really exposed to that.

From the commercial side, even in a world where there might be less covered lives, I'm going to go back to my point, we feel are really well positioned being a value player, right? If you think about across our portfolio, 40% to 60% cheaper when you think about our procedures, really great service, really great quality.

So in an economic position where people are really concerned about paying for where the health care system needs savings, we think we're well positioned there. And -- look, again, it's hard to predict what exactly happens because sometimes it's counterintuitive. The only other thing I'd mention is the procedures we do, think about 50% of our business is MSK, knees, hips, cataracts, GI procedures.

Most of those things -- you might be able to put off a bad knee or a cataract for a while, but they're not -- elective is probably not the right term over the long term. So there's pretty demand and there's a time frame around those. So we don't see that as a huge headwind for us, and it does happen, we think because of our value position, we're extremely well positioned.

Great. Let's move on to some of your portfolio optimization efforts. Surgical hospitals have always been an important and strategic part of your business, right? So can you help us understand the current exposure to surgical hospitals within the portfolio and the rationale for exploring divestitures now?

Of course. So let me start by saying I love surgical hospitals. There's only 240 or so of them in the U.S. There won't be any more that are physician-owned. These are JV physician hospitals pre-moratorium. What's amazing about these assets is they allow us to have physician partnership across the acuity spectrum.

So almost all of our surgical hospitals have ASCs that we -- an ASC network we built around them because we can't expand these hospitals, right? They're unique asset, they are set moment in time. And the idea with our physician partners is let's keep their higher-acuity patients in a facility they own and that controls the quality, have control of the experience.

And then let's dean ourselves and build ASCs to pull that lower acuity stuff out. So we love the model. Surgical hospitals in general have payer mix that's very similar to ASCs. The traditional surgical hospital just so you guys can picture it, 10 ORs, 15 beds, right? May or may not have an ER. A lot of them don't, a few do. Even if they have any, not a very busy year, right?

So payer mix and procedural mix that looks a lot like an ASC. So we really, really like them. Now with that said, going to part optimization, one of the points of feedback we've had over the last several years is we do have a few markets that go beyond just short-stay surge right?

So these are markets where we -- there are still attractive markets, but we've expanded beyond that core ethos. And we hear from our investors, gosh, we really love the short-stay surgery space. We would like you to be even more pure play, right? That's one thing we've heard. The second thing we've heard is we'd like you to delever faster, we'd like you to drive free cash flow faster. And so what led to the portfolio optimization work is we think there's an opportunity to do all of those things, right?

So we have a handful of facilities, let's call it, less than that are meaningful in size that are material that tend to have higher debt loads, right? These are bigger facilities Unlike our ASCs, they're not as easy to move or just expand. You're going to be in that facility for a while. They tend to have finance leases that goes on the books as debt. They tend to have a lower free cash flow conversion, a little higher a little bit higher cash needs than our typical short-stay surgical business.

So the whole goal here is making moves that lower our leverage increase our free cash flow conversion, increase our growth profile going forward. And as we said on the call, we're in advanced discussions in one of those markets that's meaningful.

And we would hope to kind of -- our goal will be to address all of those opportunities within the year. So do you think it's meaningful for investors. And again, we understand that there's a real need for us to delever faster and drive free cash flow in the business, and we think this is an opportunity to do that right?

And the Board also authorized the repurchase program, which gives you some optionality for capital allocation. Could you see the company buying back shares in advance of a hospital transaction? Or is the thinking that the authorization will give you flexibility soon after receiving those proceeds.

Yes, it's a great question. There's certainly nothing that keeps us from buying shares in advance. I would say you should read a couple of things into the Board's decision to our decision to approve a shareholder buyback of a reasonable size, a couple of hundred million dollars One is that's a pretty good sign that we think we're going to have funds coming in from portfolio optimization, right?

Because the idea we know we have to do lever. There's no plans to lever up to buy back shares. So that should be a sign, I think, of the confidence we have in our portfolio optimization work. I think secondly, we're really disciplined around how we think about capital allocation, right? The cheaper.

I mean our share, we -- obviously, everybody believes this, but we believe our shares are certainly undervalued where they said today. And as we look at that cost of shares, we compare that to our other options, right? Deleveraging, M&A. We have a very attractive M&A profile, typically can buy at 8x or less, take a turn off within 12 months.

So from a capital allocation standpoint, we want to make sure we have all of those levers at our disposal, and we will be opportunistic, right? If it's the right use of capital that's most accretive for our shareholders to create shareholder value, we'll go after it.

Great. Maybe moving on to some of the policy items. Site-neutral payment has been an ongoing conversation in Washington if hospital outpatient reimbursement were to move closer to ASC rates for similar procedures, how do you ensure that ASCs continue to differentiate and retain their value proposition?

Yes. So first of all, let me just say from site neutrality in general, it's like -- it's basically the whole thesis of our company, right, which is we believe care should be delivered in the right place at the right time at the right cost. So again, our sites of care, even our surgical hospitals, we typically don't have health system partners in those, and we're 30% cheaper than traditional acute care. So we are deep believers in side of care inside neutrality as far as being part of the answer.

With that said, I think that even if you had site neutrality on the Medicare side, there's so much cross subsidy that happens with the commercial side. It's hard to imagine. It's hard to imagine a world where you could move those payments fast enough to actually caused a real true difference.

So number one, I think it's unlikely you get that kind of overall payer pressure on an ASC. With ASCs being 40% to 60% cheaper already, I don't think there's -- I don't think that's going to be a cost competitive fight. The other thing I would say, and people who are close to the ASCs and our surgical hospitals would know this.

But if you survey positions, like why are they invested in our ASCs? Why do they come to our places. Yes, yes, there's the financial impact, that's not #1 on their list. Number 1 is convenient block time that's not disrupted, right? Do they have control of their day? And look, having run big surgical hospitals in my life, it's almost impossible when you have busy ER you're running, you're trying to be all things to all people. It's almost impossible to be as efficient as we can be in our surgical facilities, right?

So they're time machines for physicians. Physicians don't have a lot of time. They want to get 6 procedures done in the morning and they want to go to their office and not have to cancel it. That doesn't happen very well in the acute care setting. So outside of the issue around price, these are time machines that are great for their lifestyle. They also like to have a voice.

I've run hospitals that have a couple of thousand docs on the medical staff. For me to say that an individual doc actually has to say, is not really truthful, right? In our surgical facilities, we're trying to do a few things, do them exceptionally well.

And our docs really do have a voice. Those 2 things matter a lot. We have our positions to stay independent by giving them another source of income. That's certainly part of it. So there's the price difference, which is meaningful, and I don't think actually that bridge can be -- I don't think that can be bridged given the cross subsidy requirements of the acute care space. But even further, it's really just about physicians efficiency and time.

Right. Another disruptive policy item ongoing is the expiration of enhanced ACA subsidies. I know that ACA is a relatively small part of your overall mix which is like time it's somewhat surprising that an isolated incident inside one of your surgical hospitals could contribute towards the fourth quarter miss. So maybe help us understand what's going on there?

Is the mix of ACA seizures just different from a typical commercial patient or the reimbursement differential, is that significant?

Yes. So it's kind of a combination of all those things. I think Again, most of our business is not through an ER. We don't have ERs that over half our hospital hospitals. Obviously, our ASCs are completely elective. And so that flow of referrals tends to be a different flow than exchange patients. A lot of those patients do access the health care system through an ER in a more emergent way. That's one of the reasons. And then honestly, we just -- our facilities and positions have never really had that connection. So we haven't had a ton of that business. It was really a state-driven thing.

In the market we were talking about pretty big MSA, we're 40% of the market. And I think as these patients realized they were up against the deadline, there were so many of them that did impact what came into the offices. And interestingly enough, when you think about exchange patients, they often come in under some kind of commercial plan.

And so I don't think that our offices, our independent physician offices were always sophisticated enough to rise that this commercial patients is not a commercial patient, it's not a commercial patient. In our world, when you think about exchange patients, they pay very, very close to Medicare versus commercial. And so I do think that was -- and again, it's 1 market, a big picture, just Medicaid is less than 4% of our business. HIX is a very small percent of our business. But in that particular market was meaningful in the fourth quarter.

Right. And maybe circling back to one of the cost items we talked about earlier. You've highlighted a linkage between labor and anesthesia costs and shifts in government payer mix. can you walk through that relationship in more detail and explain how changes the payer mix translate to higher anesthesia costs?

Yes. I gave you a little detailed answer on this earlier. But just a reminder, anesthesiologists have not had an increase from Medicare pay increase for a long, long time. They've had a lot of challenges, obviously, on reimbursement with the No Surprises Act.

And look, depending on who you talk to, there's no tier shed for anesthesiologist basing their payment, but it's been a real challenge on having enough capacity, both for NDA anesthesiology and CRNAs. Going back to my earlier comment, the way when I ran big hospitals, the way I'd bring my anesthesia study down was to allow them to get the coverage of ASCs and surgical hospitals.

So we have a preferred site of care. Even with that, there's such a challenge on capacity that in order to ensure we have coverage, we often do have to enter into agreements that say there's going to be some kind of minimum collections to cover their expenses.

For the most part, what's -- well, a couple of interesting points on anesthesiology. You guys may all know this, I find it fascinating. Anesthesiologist do really well in lower acuity ASC. So think about GI-only centers, ophthalmology, those are fantastic places for anesthesiologists. They love them because of what they're paid, because of the mix of patients, because of their efficiency. Unfortunately, it's not quite as good on orthopedics, which is where our focus is, right?

So you have a mismatch of our economics and their economics that sometimes flows through. And then when you get into the pay rate differences, they're probably one of the most exposed specialties on just how different, I think their Medicare rate is something like $22 a unit, and it's easily 3 to 5x higher on commercial.

And so that difference creates -- imagine if you're in a 70% Medicare facility versus a 30% Medicare facility, mean your revenue is dramatically swinging. And so they have choices on where to go. We often have to enter into agreements that give them some kind of collections guarantee. And when we see swings, it always hurt our revenue and increase kind of our cost statistics as a percent of revenue, but it requires then that we subsidize anesthesia coverage in a way that sometimes is counterintuitive.

Right. Understood. Well, with that, we're out of time. So Eric, thank you so much for joining us today. Please enjoy the rest of the conference.

Good to see you. Thank you. Appreciate the time.

Greetings, and welcome to the Surgery Partners Q4 and Full Year 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Dave Doherty, CFO. Please go ahead.

Good morning, and welcome to Surgery Partners' Q4 and Full Year 2025 Earnings Call. I am joined today by Eric Evans, our CEO.

During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements as described in yesterday's press release and the reports we file with the SEC, each of which are available on our corporate website. The company does not undertake any duty to update these forward-looking statements. In addition, we reference certain financial measures that are non-GAAP, which we believe can be useful in evaluating our performance. These measures are reconciled to the most applicable GAAP measure in yesterday's press release.

With that, I will turn the call over to Eric. Eric?

Thank you, Dave. Good morning, and thank you all for joining us today. My initial comments will briefly highlight our consolidated fourth quarter and full year 2025 results. I will then provide additional color on the drivers of performance this quarter and our initial outlook for 2026.

First, let me provide highlights from our fourth quarter and full year results. We reported full year net revenue at the low end of expectations at $3.3 billion, up 6.2% year-over-year, with same facility revenue growth of 4.9%. Full year adjusted EBITDA was $526 million, up 3.5% year-over-year, but significantly below our expectations. Our adjusted EBITDA margin was 15.9%, reflecting 40 basis points of margin compression. These results tell a tale of 2 halves where momentum in the first half of the year gave way to significant headwinds in the second half, culminating in fourth quarter performance that fell short of our revised expectations.

Before getting into the details, I want to level set the scope of the challenges we experienced in the second half of the year. In our Q3 call, we lowered our guidance based on delayed net capital deployment as well as slower case growth and payer mix trends we experienced in Q3 and early Q4. While those trends continued in Q4, the impacts were isolated to our surgical hospitals, and our earnings shortfall was concentrated in just 3 surgical hospital markets. These markets had a combination of softer-than-expected case growth, payer mix shifts and anesthesia dynamics that created outsized pressure.

The balance of our portfolio performed in line with expectations, and these issues were not systemic across the enterprise. I will address these headwinds in more detail shortly. However, I first want to emphasize that we are confident that our long-term structural growth opportunity remains intact, driven by a combination of organic, de novo and acquired growth. We remain committed to our growth algorithm and our focus on improving free cash flow, reducing leverage and creating long-term shareholder value through our portfolio optimization strategy.

I will now turn to the drivers of Q4 performance in more detail. Starting with organic growth. In the facilities we consolidate, we performed nearly 670,000 surgical cases in 2025 compared to 656,000 cases in 2024. We ended the quarter with 1.3% same facility case growth, reflecting marginally softer-than-expected volume growth. Despite this short-term weakness, we remain committed to our organic growth strategy, centered on expanding surgical case volumes while strategically shifting towards higher acuity procedures in orthopedic specialties, including total joint replacements. We performed over 42,000 orthopedic cases in the fourth quarter, supported by strong growth in total joints, with these cases growing 15% in the fourth quarter and 19% on a year-to-date basis compared to the same periods last year.

We are reaffirming and continuing to execute on expanding our facilities capabilities to deliver high acuity procedures. Our investment in robotics and physician recruitment remain core to our strategy of capturing greater high acuity demand. Within our portfolio, we have 74 surgical robots in service, including the addition of 6 in 2025 that enable our physician partners to safely perform increasingly complex procedures.

Physician recruitment, a critical component of our organic growth initiatives, remains on track with almost 700 physicians recruited in 2025. That said, a portion of our payer mix pressure in the second half of 2025 was attributable to physician transitions. Several experienced physicians who historically contributed to higher commercial payer mix and volumes, retired or departed during the period. At the same time, many of our newly recruited physicians served a higher proportion of Medicare patients than previous cohorts and did not ramp as quickly as anticipated. This position transition dynamic contributed to our payer mix pressure as commercial payers represented a declining percentage of total revenue year-over-year. Notably, this phenomenon was not seen across the full enterprise. It was largely seen in our surgical hospital markets and was more concentrated in a handful of our larger facilities. We anticipate improvement in both volume and payer mix as these newer physicians mature within our platform, but we will need to lower operating expenses in the short term to protect margin.

As I mentioned earlier, fourth quarter margins saw compression year-over-year and came in below our revised outlook from the third quarter. At a high level, the margin pressure we experienced in the fourth quarter was driven by 2 primary factors concentrated in 3 surgical hospital markets. First, we saw slower-than-expected case growth and sharper-than-anticipated shift in payer mix in those facilities, driven by both physician transitions as well as near-term addressable market-specific dynamics.

Second, in those same markets, our cost structure, including labor expenses as well as the cost of anesthesia coverage, did not adjust quickly enough to that changing payer mix, creating an incremental near-term margin pressure. While we've been managing anesthesia dynamics across our ASC portfolio for several years, the incremental pressure we saw in 2025 was largely in our surgical hospitals with a higher Medicare mix rather than broad-based across our ambulatory footprint.

Given these impacts, we acknowledge that our performance does not reflect the potential of our business or the strength of our model, and we recognize that there is work to be done in terms of execution. Importantly, the dynamics we experienced in the second half are identifiable, measurable and addressable. We now have clear visibility into the drivers of our recent performance, and those learnings are embedded in our 2026 planning assumptions.

Reflecting on performance and the need for improvement, we have also invested in new leadership at those facilities and our recently named Chief Operating Officer, Justin Oppenheimer, is dedicating substantial time to support their success.

I'll speak about the 2026 outlook shortly and our plan to move forward, but first, let me finish my review of the quarter with a brief discussion on capital deployment. In 2025, we deployed $182 million of capital towards acquisitions, modestly below our annual target of $200 million plus proceeds from divestitures and admittedly, back-end weighted. We continue to believe this is the right annual deployment level given how fragmented our industry remains and the breadth of opportunities available to us. Importantly, the acquisitions we completed during the year were made at attractive valuations and represent meaningful additions to our portfolio that we expect will support future growth. The pace of deployment reflected our disciplined approach to capital allocation, and we remain encouraged by the strength of near and midterm pipeline.

M&A remains a critical component of our growth strategy, and we remain focused on executing transactions that align with our strategic objectives and generate long-term value at favorable multiples. Investing in the development of de novo facilities represent a relatively new and expanding component of our long-term growth, enabling us to establish ASCs in strategically selected high-growth markets, so they focus on higher acuity specialties. In the fourth quarter, we opened 4 de novos, which makes a total of 8 openings throughout 2025. As a reminder, the typical development time line for de novo facilities entails 12 to 18 months to build with an additional year required to reach breakeven performance.

Now I'd like to take a moment to share a progress update on our portfolio optimization process. As a reminder, we are executing a comprehensive portfolio optimization strategy designed to accelerate balance sheet improvement without sacrificing growth. The portfolio optimization process reflects a proactive long-term approach to unlock value and drive sustained success rather than a reactive response to near-term market pressures. Our focus remains on selectively partnering our divesting facilities that will help us best meet the goals of our strategy.

We continue to advance our portfolio optimization efforts, which are focused on a small number of our larger surgical hospitals that fall outside of our core short-stay surgical strategy. These efforts, some of which are in active negotiations, are intended to be incremental and disciplined, and any actions we ultimately take will be guided by value creation rather than timing. We believe these actions will be accretive to shareholder value and demonstrate financial benefit to the company through reduced leverage and increased cash conversion as a percentage of adjusted EBITDA.

We are encouraged by the steady advancement of our portfolio optimization efforts, and our team is confident we will reach a resolution on a key part of this effort within the first half of the year. The recent Baylor Scott & White joint venture involving our surgical hospital in Bryan, Texas is an example of the strategic alignment we are seeking through our portfolio optimization efforts. This transaction allows us to partner with a leading health system that is well positioned to support long-term growth and physician alignment in the market.

As a result of the transaction, we will no longer consolidate the facility, which will reduce reported revenue. However, on a run rate basis, we expect the earnings contribution to improve despite our lower ownership, reflecting a more efficient capital structure and improved alignment with our strategic objectives. Importantly, this transaction was driven by long-term value creation rather than near term financial impact, and it reinforces our focus on simplifying the portfolio and concentrating on assets that best fit our short-stay surgical strategy.

We look forward to sharing any further material updates from the ongoing portfolio review process when appropriate. We also plan to provide a comprehensive update on our longer-term portfolio composition at the upcoming Investor Day, the timing of which will be aligned with a validating milestone in our portfolio optimization process.

As we assess our operating landscape and plan for the year ahead, we are taking a measured and conservative approach to the 2026 preliminary guidance reflective of earnings growth rate resets for parts of the business. Our initial guidance for net revenue is $3.35 billion to $3.45 billion, representing single-digit year-over-year growth and underscoring our continued conviction in the company's organic growth opportunities. We are providing initial guidance of at least $530 million of adjusted EBITDA, contributing to growth of at least 0.7%, which incorporates the anticipated near-term impact from many of the key headwinds we have discussed this morning. We have quantified the impact of anticipated headwinds and the core organic growth underlying our initial guidance in the supplemental slide that we provided with our earnings materials.

Let me now take you through the slide to help you understand how we arrived at this initial guidance starting with our 2025 adjusted EBITDA of $526 million. We anticipate $9 million in full year contributions from last year's net acquisitions and divestitures. Additionally, as we enter our new fiscal year, we estimate a $15 million impact related to funding our annual cash incentive at target.

Recall that in the third quarter, we reported lower incentive-based compensation to account for our year-to-date performance. This impact effectively represents a return to baseline G&A expenses, assuming achievement of our targets this year. We have included state-specific reimbursement and newer increased hospital provider taxes in 3 markets that will pressure earnings in 2026 by an estimated $8 million. We do not expect any benefit from the additional provider taxes given our immaterial Medicaid mix.

Although the Supreme Court recently weighed on existing tariffs, we have estimated year-over-year pressure of $4 million of potential tariff exposure embedded in our supply costs. Our guidance allows for a degree continued pressure on payer mix, but we are also taking actions to help alleviate this short-term pressure and to support future commercial growth. Regarding the 3 market-specific pressures that I discussed earlier, we are confident that we have plans in place to address and resolve them, and they are appropriately reflected in our 2026 outlook, though we will continue to monitor the landscape diligently.

We believe that our approach is based on measured assumptions. Importantly, we remain optimistic in the structural tailwinds underpinning long-term ASC market growth, and we believe we remain well positioned to continue to drive that shift to higher acuity procedures to capture long-term momentum in the market. We are also confident in our ability to drive improvements across the business as our new physician cohorts mature, our cost containment programs continue to support long-term margin expansion and our portfolio optimization progresses.

Lastly, we remain committed to pursuing disciplined and strategic M&A in 2026. Unlike past years and recognizing the fickle nature of M&A timing, we are not explicitly including the impact of M&A in our initial guidance for 2026. We continue to be excited by our strong pipeline of opportunities that align with our short-stay surgical ethos, representing additional levers to drive growth and shareholder value creation. As the year unfolds and we gain additional clarity on market dynamics and the active portfolio optimization efforts underway, we will update our full year outlook.

Before concluding, I would like to share a couple of Board-related actions that took place last week. At that meeting, we authorized the company to repurchase up to $200 million of the company's common stock. This authorization conveys the Board's confidence in the company's future and our opportunity to deliver significant shareholder value as we execute on our strategy. It also positions the company to optimize capital allocation, recognizing our portfolio optimization progress and that our stock price offers an increasingly attractive relative return at current prices. Of note, Bain Capital has informed us that they won't be a seller in the share buyback program.

In addition, last week, the Board appointed Lloyd Dean as our newest director. Lloyd is a well-known and a highly respected health care executive who most recently served as CEO of CommonSpirit Health, one of the largest health care systems in the country. His deep health care services experience and expertise, combined with his dedication to improving health and expanding access across health care for all, make him an outstanding addition. He will also be an invaluable resource as we grow our health system partnerships. I'm excited to work with Lloyd, and will undoubtedly benefit from his insights and counsel.

With that, I will now turn the call over to Dave to provide additional color on our financial results as well as the 2026 outlook. Dave?

Thanks, Eric. Starting with the top line. We performed over 170,000 surgical cases in our consolidated facilities in the fourth quarter, bringing our full year case count to nearly 670,000, 2% higher than 2024. This growth overcame the loss of 41,000 surgical cases related to facilities that we have since divested, with roughly 11,000 surgical cases lost relative to fourth quarter. The continued shift to higher acuity procedures in orthopedic specialties and total joint replacements supported our fourth quarter revenue growth of 2.4% to $885 million. For the full year, revenue grew 6.2% to $3.3 billion.

Same-facility total revenue increased 3.5% in the fourth quarter, with same-facility case growth of 1.3% and rate growth of 2.1%. Given our structure, most of our revenue is generated by commercial payers. However, as Eric mentioned in his remarks, our payer mix softened during the fourth quarter due to a continued relative decline in commercial patients versus our historical experience, a trend that we initially began to observe in the third quarter. We ended the quarter with 1.3% same-facility case growth, which was somewhat softer than we expected. We anticipate an improvement in both volume and payer mix as these newer physicians mature within our platform. Adjusted EBITDA was $156.9 million for the fourth quarter, giving us a margin of 17.7%. For the full year, we reported $526.2 million in adjusted EBITDA, 3.5% over 2024 and below our revised guidance expectation we provided on our last call.

Turning to fourth quarter expenses. Salaries and wages were 28.7% of net revenue, nearly 100 basis points higher than the prior year, reflecting both pressure from the change in payer mix and marginally higher health benefit costs. Supply costs were 27% of net revenue, up 120 basis points from last year, again, reflecting the pressure associated with the shift in payer mix. G&A expenses were 2.7% of revenue, down from 4.2% in the prior year period, primarily reflecting lower incentive-based compensation related to our year-to-date performance.

As Eric outlined, the margin compression that we saw during the fourth quarter resulted from a convergence of discrete headwinds at 3 of our larger surgical hospitals. We saw unfavorable payer mix and had to make unanticipated payments to anesthesiologists who faced similar reimbursement pressure. In a couple of our larger facilities, we also experienced specific cost pressures as they were unable to adjust quickly enough to the changing payer mix to preserve margin.

Finally, although we deployed $182 million on acquisitions, our M&A activity skewed later in the year, providing relatively lower in-year impact than usual. This convergence of near-term addressable events drove the earnings miss during the fourth quarter. We fully acknowledge that margin improvement represents a significant opportunity to drive growth going forward, and we recognize the need to step up our execution in 2026. I'll speak to the bridge to 2026 shortly to provide further color on how we anticipate these headwinds will play out this year and what we are doing to mitigate and address those factors.

We ended the quarter with $240 million of cash and revolver capacity of $693 million, which comes out to $933 million of available liquidity. We reported operating cash flows of $274 million in 2025, distributed $226 million to our physician partners and deployed $33 million for maintenance-related capital expenditures.

Operating cash flows in 2025 were lower than 2024, primarily due to higher overall interest costs on corporate debt. This interest cost reflected a year-over-year increase of approximately $42 million as the previous interest rate swaps expired in the first quarter of 2025 and increased interest related to incremental unsecured senior notes raised last year. Operating cash flows were also somewhat lower than our expectations due to the slower-than-anticipated earnings growth. Controllable spending, including transaction and integration costs, was lower in 2025, with the second half spending levels in line with our long-term expectations.

Moving to the balance sheet. We have $2.6 billion in outstanding corporate debt with no maturity until 2030. As previously mentioned, during the third quarter, we completed a repricing of our loan and revolving credit facility, reducing our rates to SOFR plus 250 basis points. This action positions us to achieve meaningful interest expense savings and improved cash flows going forward. The current floating rate is 4%, and interest payments for the quarter increased $7 million compared to the fourth quarter of 2024.

Our capital structure remains well positioned to support sustainable long-term growth while providing flexibility for future capital deployment. At quarter end, our net leverage ratio under the credit agreement was 4.3x and is 4.9x on a balance sheet net debt to EBITDA basis. This level is consistent with our expectations, reflecting timing on capital deployment. We deployed $182 million in 2025, adding several facilities at attractive multiples that have robust growth potential. In 2025, we divested 5 ASCs and sold down interest in the surgical hospital to a minority position, generating cash proceeds of $50 million and a reduction in debt of $31 million. As mentioned, these proceeds were not redeployed, which impacted the net benefit we originally expected in our guidance for 2025.

M&A remains a priority growth initiative, and we have a strong and active pipeline. De novo development and openings position us for meaningful and sustainable growth. In 2025, we opened 8 facilities, bringing our total de novos opened since 2022 to 27. Of these, 2 turned profitable in 2025 and more are expected to contribute to growth in 2026. We currently have 5 additional de novos under construction and more than a dozen currently in the development pipeline. We're excited about the future of these investments.

We continue to be pleased with our disciplined management of capital deployed for maintenance-related purchases and with cost management controls for transaction and integration costs, with our second half levels consistent with 2023 and materially below the elevated activity we saw in the second half of 2024. As Eric already walked through during his earlier remarks, we are taking a measured stance on our preliminary full year 2026 guidance as we continue to assess the longevity of several near-term market dynamics and our ongoing portfolio optimization process.

Our 2026 revenue guidance is a range of $3.35 billion to $3.45 billion, driven by same-facility revenue growth for the full year of 3% to 5%. Key drivers of this growth include moderate organic growth, contributions from our recent acquisitions, partially offset by abating pressure on our payer mix. Our initial guidance for adjusted EBITDA is at least $530 million, which accounts for several known contributing factors and headwinds that we have clear visibility into, as Eric mentioned and is summarized in our supplemental financial disclosures.

Our guidance framework for 2026 includes an additional layer of granularity that is an evolution from our historical practice as part of our efforts to provide a transparent outlook on our business. This includes the $9 million estimated contributions from last year's M&A activity, a line that is usually rolled up into our full year guidance, with this making the first time we are separately calling out the direct anticipated impact of annualized M&A.

Several of the other headwinds that Eric discussed, namely the $8 million estimated impact from state-specific hospital provider taxes and a $4 million estimated impact from tariffs, represent new and discrete inputs that have not been included in our historical guidance framework. This further underscores the rapidly evolving landscape in which we operate and the steps we have taken to be comprehensive in our assessment of the near-term market dynamics. Our guidance implies a slight margin compression in 2026. However, we remain focused on driving operational efficiency across the business through improving supply chain, revenue cycle operations and targeted cost reduction plans that will enable us to overcome near-term headwinds and return to steady margin expansion.

In line with our historical targets, we expect to deploy at least $200 million of capital towards M&A, but are not including the impact of earnings of this assumption in our preliminary guidance. Integration benefits from our acquisitions and contributions from our de novo facilities will continue to be a core element of our long-term growth trajectory. However, we expect continued cost discipline in these expenses. We expect capital expenditures related to maintenance activities to be roughly in line with 2025 spend. Distributions to our partners should grow in line with our underlying earnings growth.

Lastly, we expect cash flow from operations to increase in 2026 based on our forecasted adjusted EBITDA growth and continued working capital management activities, partially offset by increased interest costs as we annualize the interest costs on our increased corporate debt. Our guidance does not include the potential impact of ongoing portfolio optimization efforts. We remain focused on actions that will accelerate leverage reduction, improve cash flows and focus the enterprise on the short-stay ambulatory surgical business.

As we prepare to navigate for the upcoming year, we remain disciplined and confident in our ability to improve the business and return to the consistent and predictable growth the market has come to expect from us, supported by strong fundamentals and a solid long-term growth strategy. We believe the framework we have outlined today appropriately balances caution with the long-term opportunities in the business, and we have clear paths towards repositioning Surgery Partners for the long-term sustainable growth that we believe this business is capable of.

Before getting to Q&A, I'm going to turn the call back over to Eric one more time.

The year closed out against a challenging backdrop, with several headwinds impacting our business in ways we didn't anticipate. While some of the pressures we outlined were outside of our control, how we respond is entirely within it. We're taking deliberate actions to strengthen our resiliency through tightening execution and protecting margins, and we're entering 2026 with renewed focus.

Lastly, before I hand it back to the operator, I want to take a moment to express my deep appreciation for the dedication and commitment of our colleagues and physician partners. Their unwavering focus on delivering exceptional high-value patient care and operational excellence is the true foundation of our long-term success.

With that, I'll now turn the call back to the operator for questions. Operator?

[Operator Instructions] And our first question will come from Brian Tanquilut with Jefferies.

Eric, maybe as I just think through the challenges of the headwinds here, right? On one hand, I think there is a call on conservatism or a little bit of a muted tone on volumes. But the other, you're saying that you don't think that the fundamentals or the demand equation changes. I'm just curious how you'd want us to think through that kind of like dynamic.

And then the other side of it is the payer mix situation. You have a volume headwind, mostly commercial, I think, is what you called out in Q3, but then I think there's a payer mix dynamic here now that is more Medicare. So just curious how that all plays out. And then the last piece there is just these 3 specific markets that you called out. So how do we think through what's the weighting maybe of the issues and how fixable you think these are?

Okay. Brian, I got a lot of things there. Let me -- appreciate the questions. I'll start with kind of just the outlook on the growth of the business. I mean I think fundamentally, just -- I'll remind everyone, we are in a space where we create a ton of value. Maybe one of the true value-based care creators within the fee-for-service system patients, physicians and payers prefer us.

So we sit in that position and when I think about the growth opportunities with technology and what needs to come out of hospitals, how we add value to the health care system, I think -- you think about our growth algorithm. We still have strong belief in our ability to go get that. And we think we're well positioned to get that. You kind of balance that this year, as you said, we are kind of hitting 2 points. One is our core organic growth that we're guiding to is 4% or more. That is at the lower end of our guidance range. But I think prudent given the situation we find ourselves in coming out of the year, clearly, we don't want to be in the situation again. We haven't been here before. But I think we all, in this business, still believe deeply in the core value we're creating and the need and ability to continue to transition patients. So from that perspective, we didn't put M&A in this year. So that obviously makes the number look considerably lower when you think about historical, but we're excited about where the business is going. We do have some tailwinds that we called out that are, I think, mostly onetime in nature.

We get the payer mix, I think it's a great question, and I would level set a little to say this business has been incredibly steady on payer mix. And when I say that, demographics naturally put some pressure on our commercial mix. We've been able to go out and earn more than our fair share over time and we've had a very balanced payer mix. I think our value proposition in the marketplace, being lower cost and great service and high-quality, positions us to effectively compete for commercial payers. We've had some very, I think, unique things that have happened to us in this quarter. But I would not say, given this is my -- I'm entering my seventh year, it's not something that I've seen before and not something I expect necessarily to repeat.

You went on and just talk about the kind of the 3 markets we called out. And I think those are all good examples of things that happened to us in the fourth quarter and second half of the year that are a little bit unique. Maybe I'll just spend a moment talking about those 3 markets. And I wish there was one common story I could tell you, but these are distinct in individual markets at 3 of the larger surgical hospitals. I think we did call out in the script that most of our pressure on the managed care side of the business was in the national group. ASCs were very, very steady, and it was concentrated in a few places. So let's talk about those 3 markets. I won't talk about geography, but I will talk about the dynamics.

In one of those markets, we have a couple of major competitors only that have either canceled or pushed away MA patients. Made the conscious choice to not really add access to that business. And it's allowed them to really improve their ability to cater to commercial patients in a way they hadn't historically. We obviously -- fortunately, we're in a position in our business where we have a margin on MA and Medicare and commercial. Commercial, obviously, a lot better. I think in this particular market where the dynamics changed in the market, the access points really catered to commercial. And in many cases, did not allow for Medicare Advantage access.

I think we found ourselves probably a little bit flat-footed on reacting to that. We haven't seen that dramatically in the past. But it's certainly something when we think about our ability to compete with our private physician partners who are very agile, great physicians. Our ability to go earn that business back and make sure that we're appropriately driving the commercial business to our facilities, we think is quite high. We've got focus on that in that particular market, that market is really about making sure we -- particularly in some of the high acuity areas like spine that we are very focused on creating easy paths to use our facilities, which are higher value in that marketplace, lower cost and greater patient experience. So I don't see that as a long-term thing, did get caught a little bit there.

The second market I would call out was -- really, we had fantastic growth. It was almost all in government patients. And so when we start the year, we typically look at very closely at where we expect physician additions, where we expect program expansion. And historically, when we think about our new physician cohort and growth, we have seen their mix very much mirror our overall mix. So if I look back at our physician cohorts the last several years, just have not seen a huge dichotomy and mix. This year, we did see the difference between retiring and exiting positions and new physicians, that payer mix difference was a little bit more pronounced.

So the second market -- all the growth primarily, we had great growth, but it was all in Medicare. No real position issues there. It's a great group of physicians that have a fantastic market share, just tremendous Medicare growth. And what I'd say in that market, we have to do is we have to adjust our cost basis. We have to adjust our costs and how we staff, how we become a little bit sharper on managing supply costs. And I would say, as Dave pointed out in the call, one of the things that happens when you have this kind of mix change, as you invariably get pressure on anesthesia coverage.

And you guys know that that's been a -- it's been a real issue in our industry in many, many places. We think, in general, it's kind of reached a bottom point. But I would say in markets where you have dramatic change, it's probably a 3x or 4x different in the payment anesthesiologists receive. And so it's kind of a double whammy when you see this kind of quick shift. But in that particular market, we've got great market share. We have to remain very focused. I think we'll take the same lessons learned about making sure that we prioritize commercial access, especially in a place where we had so much growth, all in the government side. So that's the second market.

And the third market really was the case going back to what we talked about physician recruitment where we -- it is more of a rural market. We have a pretty good sized position there and we had some physician departures that were replaced initially with physicians that picked up Medicare business before commercial. We don't expect that to be the long-term play, but the mix was considerably different. We also, in that particular market, had a couple of physicians unexpectedly out. And in the rural market with big service lines, being on a call of the $3.3 billion company and talking about a few positions seem strange, but that market access for some of our critical service lines, larger service lines like cardiology do make a difference.

So 3 discrete issues in those markets explain our entire gap. And we -- I will say, for each one of those markets, we have robust plans. We have built the kind of the situation we're in into our guidance, and we do not expect a repeat of that.

Just to go back to payer mix again, I think it's a tough thing to talk about because it's a little amorphous. I look at our company, we've had very, very steady payer mix, with the exception of the second half of this year. We expect to return to that. We've identified the issues that have pressured that. And our goal is to continue to go out and effectively win the commercial patient, which we have every right to do given our value position.

No, I really appreciate that. And then maybe, Dave, as a follow-up, when I think of capital deployment, you obviously you have to balance the levered balance sheet with a $200 million acquisition target and now a buyback introduction. Just walk me through how you're thinking about that, especially, again, giving consideration for how levered the balance sheet is on a relative basis.

Yes. Brian, I might take that one. So just on the share buyback, it's a great question. I would say that we are focused on maximizing shareholder value. And when we think about capital allocation, I think the approval of this $200 million just shows the Board's thoughtful and kind of measured approach to thinking about how we best use funds, funds that may -- would likely be coming in from our portfolio optimization efforts. Access to capital, we have lots of leverage at our disposal, right? There's M&A. There's paying down debt, which is obviously a focus. And there's the opportunity to buy back shares of the company.

I think given where prices are and the pressure on the company, clearly, that becomes a lot more of an attractive option when you kind of look at where we sit today and starts to look very attractive even relative to those other layers. So we wanted to make sure we had the flexibility to react if there was an opportunity here to find really accretive opportunity to buy back shares.

But you should see that as a very measured approach. The Board is thinking about this as we've got a number of different options. We're going to look at the ones that are most accretive to creating shareholder value. Being very mindful, let's be clear, being very mindful that we know we need to delever. And you can probably read a little bit into this, too, that the fact that we approve this, we do have some increasing confidence in what's happening in our portfolio optimization efforts.

And our next question comes from Sarah James with Cantor Fitzgerald.

I wanted to start, could you clarify in your 3% same-store revenue guide, what's the breakdown between price and volume assumed in that?

It's roughly even.

Okay. Great. And then I think in the past, you've talked about when you have conversations with your surgeons, you get a look at like what's coming down the pipeline in 8 to 12 weeks. So as you start to work with them on influencing mix, when do you think you could start to see some positive signs there? And what are the main tools that you're assisting them with?

Yes, it's a great question. I mean, obviously, one of the things we're going to have to do is be very, very coordinated. We've done this pretty well in the past with our physician scheduling, how they think about their business. That's -- those are conversations that are obviously ongoing coming out of Q4.

I can say, obviously, quarter 1 is historically a very high Medicare quarter. So it's not going to be the quarter where you necessarily see a big influx of commercial patients. This is going to be something that as we put our strategies in place, working with our physician partners to make sure we're set up in an ideal fashion to be the path of least resistance for commercial patients, we'll see those benefits as we head towards the back half of the year where you start to see kind of the commercial patient pressure.

But yes, to answer your question, the great news about our business or the great thing about our business is we do get to sit with our partners as owners. We have insights into what they're seeing, and we're certainly taking this moment to reinforce the opportunity to sharpen our processes around access for commercial patients, making sure commercial patients don't get crowded out, and making sure we're competing for what really should be, I mean, in many ways, again, I go back to -- you guys all know the whole thesis of our company is the value proposition we add, which is we provide a lower cost service that allows physicians to stay independent and also provides great value to payers and the patients. So we need to make sure we're pushing on all angles. That's from health system -- or health plan conversations to physician conversations, to ease of access. And those are all part of our objectives this year to make sure we return to kind of our commercial mix expectations.

And moving on to Matthew Gillmor with KeyBanc Capital Markets.

I just wanted to follow up on Sarah's line of question, but maybe from a higher level. When you think about the surgical hospital markets, obviously, appreciate all the details you provided in terms of the actions you're taking. Can you give us a sense for what you're assuming in terms of the recovery in those markets and sort of how that plays out throughout the year?

Sure. And let me step back too and just frame surgical hospitals. So I do want to be very careful here because surgical hospitals and even the mix we're talking about is dramatically -- it's a dramatically stronger commercial mix than you see in traditional hospitals. So I want to be clear that our surgical hospitals very much mirror what we have happened in our ASCs in general. So we like the business a lot. We're not getting out of the surgical hospital business. I know we do have some, as you know, targeted portfolio optimization efforts. But these are businesses that very much mirror kind of the payer mix and expectations you'd have in the ASCs. So I want to start there on a positive note.

As far as what we've allowed -- obviously, we've allowed some of the pressure from this year to come into our numbers, which we think is appropriate as we work to address some of the challenges we saw. But we're not assuming nor should we assume that you're going to see a repeat of the kind of degradation that we saw this year. So it's -- I think we've taken a balanced approach of what we've allowed to come into the forecast. But in general, I would be really clear that the surgical hospitals are fantastic assets. And while there is some pressure, the difference between their mix and the traditional hospital mix is quite different.

The other thing I would point out is we are really focused on these assets in our turnaround plan. So we have new leadership in a couple of these facilities. We have a new Chief Operating Officer who will probably bring on to future calls, Justin Oppenheimer, who's leading a lot of our efforts there. We don't expect this to be a long-term headwind, but we've appropriately allowed some of that pressure into our guidance this year.

And then one quick numbers question. I appreciate you're not assuming sort of unannounced M&A at this point, which I think is very prudent. Just so we sort of understand apples-to-apples, what would been like sort of a historical M&A contribution from EBITDA, if you're willing to kind of give us a sense there, just so we can make the right comparison.

Yes. Let me frame it up this way. We've typically guided to $200 million to $250 million of EBITDA, assuming an 8x multiple at midyear convention. So that's kind of how I would think about those numbers. And then, of course, typically, we had a weaker M&A year in 2025. Typically, you have that same carryforward of M&A from the prior year. So you can kind of put that in perspective as far as what that means for the growth.

And moving next to Andrew Mok with Barclays.

I'm still trying to better understand the scope and nature of the issue. So first, is the fourth quarter issue an extension of what you saw in the third quarter or is this a new dynamic? Because I don't remember hearing any of these issues identified today on the last call?

And second, you framed the issue is being concentrated in 3 surgical hospital markets. Is this exclusively a surgical hospital issue? Or are the surrounding ASCs also being impacted? And if it's the latter, can you help us understand how many total facilities across both surgical and ASCs -- surgical hospitals and ASCs are affected by the issue?

Thanks, Andrew. Appreciate the questions. Let me start with kind of high level, what we saw in the third quarter coming into the fourth quarter was, as we talked about, slightly softer volume and a softer mix. So we pointed a pressure going into the fourth quarter at about $7.5 million, and largely, what we saw was in line with what we projected. The difference is what is a little bit -- the way back up to, that pressure, as we've looked at it across the fourth quarter, it's evident that the payer mix pressure really is in the national group, which is our surgical hospitals. So if you think about how we talk about that.

So our surgical hospitals is where we saw the most pressure on payer mix. And that makes sense because honestly, our ASCs don't have the same level of seasonality. And so as we head into the fourth quarter, you typically see a pretty big uptick in the national -- or in the surgical hospitals. We did not see that this year. And so to any extent -- and it was more concentrated when you get to this, where we kind of went out off of the guidance we gave in the third quarter were these 3 markets that had particular market pressures that we're addressing.

Overall, I'm going to go back to my point. If you look at the whole year, we're 120 basis points lower on commercial. That number was 370 basis points in the fourth quarter, which is quite unusual. We think it's highly concentrated. We do have plans around it. And I would just look at that historically, we have had very, very consistent performance here. We're working to get back to that. We understand the issues in those 3 markets. And in total, it really is the surgical hospitals that saw the pressure. Our ASC business was very much in line with history.

Great. And if I could, can I follow up on the $200 million share repurchase authorization? Is this something you're actively pursuing under the current cash flow profile? Or is this contingent on completing divestitures?

Yes. Andrew, it's Dave here. So the $200 million that Eric spoke about is an authorization that's available to us today, the Board authorized that in their last Board meeting, but will be dependent on market conditions as we go forward. Clearly, one of the things that's out there for us is that portfolio optimization opportunity that should manifest at some point this year. So that's available to us, but it will all be measured against all potential uses of capital as we sit out there.

Yes. Andrew, you should take away, too. I mean, we clearly have a focus on deleveraging, right? So this is going to be something that we want to have in case there's really accretive opportunities for us to reacquire shares. But in total, we are focused on deleveraging. And again, I think this approval was made in light of progress on portfolio optimization.

[Operator Instructions] Our next question comes from Benjamin Rossi with JPMorgan.

Appreciate your comments regarding the demand backdrop and some of the market-specific dynamics weighing on growth trends. As we think about volume trends to start the year and maybe any potential weather-related impacts in the winter storms, how would you characterize patient throughput across your ORs and the incremental cost to manage additional throughput or free up any additional capacity?

Okay. Ben, let me try to take those questions. Thanks for the question. So I think, obviously, look, there's -- people are aware there's been weather across the country, there's weather every year. We have to manage through that, and certainly, it can affect facilities that can't be open for elective procedures. We're not in a business of emergent procedures. So we're always focused on safety in those situations. So that does have an impact.

I would say that we still see and believe that there's ample demand for our services. We expect to -- again, in our projections, you can see we're expecting to grow cases in same-store revenue and organic growth at that 4% plus number. I think that if you look at the Q1, we're obviously not talking about Q1 today as far as numbers go. You should assume that every health care company was, in fact, every national health care company was impacted by weather in some way. Of course, our job is to hopefully never have to point at those things and outrun it and execute.

So I don't have a lot of comments on that other than -- when I think about the general demand backdrop for our services, which if you think about the ASC side of the business, even the hospitals, we're anywhere from 30% to 60% cheaper, provide a great product. These are high demand services that are, while elective, are needed by lots of folks, provides a great difference for patients. We see no reason that that long-term trend of the industry, which is kind of a $40 billion space growing at 6%, plus the technology opportunities to move more stuff to our space, that hasn't changed at all. In the short run, quarter-to-quarter, there can be all kinds of things that impact it such as weather, but underlying that is a real strength of opportunity for our space.

Again, those -- it might be just a quick reminder as to how we look at these trends. Although we have to report on a quarterly basis, to your point, there's only 60 or so surgical operating days inside any given quarter. So it's hard to kind of determine a trend inside just that one quarter. So we tend to look at it over a longer period of time, which allows us to kind of say weather-related events shouldn't impact the underlying kind of business performance. But if it is material by the end of the first quarter, we'll certainly highlight that.

Got it. I guess just as a follow-up on acuity and maybe service line expansion for this year, can you just walk us through how you're thinking about service line expansion opportunities and maybe some of the more promising specialty areas or procedures and maybe the receptivity you're getting from physicians to take on some of these higher acuity procedures?

Yes. I appreciate the question. Well, let me start with -- I think our company remains incredibly focused on the orthopedic opportunity, right? So you've seen -- you saw again this quarter what -- the one thing that allowed us to have the revenue we did was we had strong acuity growth. We had 15% growth in total joints for the quarter, 19% for the year. We will continue to focus on growing and expanding that effort. That's part of our de novo strategy. It's certainly part of our same-store growth strategy. I would add into that, from total joints, also spine. It's a place where we're spending a lot of time trying to make sure that we do our part and moving that to the right side of care.

More recently, we have seen vascular opportunities that we're pretty excited about. So our most recent transaction was vascular based. And we do think there are a number of procedures that can be safely done and effectively done in ASCs that save the health system a lot of money are much better for patients. So we see that as a very exciting opportunity to grow time.

But our core business of MSK being over half our revenues, GI and ophthalmology, we like all those businesses. We think they all have lots of room to run. And then on top of that, as you mentioned, I would point to things. The vascular EP are interesting, certainly general surgery, urology, there are a lot of spaces that give us levers in our multi-specialty centers that we're excited about, we'll continue to pursue.

We'll hear next from Joanna Gajuk with Bank of America.

So first, I guess, just coming back to this payer mix issue because clearly, a lot of talk about that. So thanks for the color. So just to kind of come back and frame some of the numbers around that. So you cut your Q4 right already with 3 months ago or so, call it by $10 million, and you said $7.5 million or so was from this payer mix pressure. But then you missed, I guess, that outlook by [ $11 million ] and I assume that's payer mix. So I just want to confirm that number. And also with that, what exactly you assume for payer mix pressure in '26 EBITDA that's included in, what you call organic growth, I guess, of $22 million on Slide 6. And I guess last one on that point, when you talk about what's assumed, when do you expect the resolution of the issue spec set because you made it sound like this is temporary.

Yes. Great questions. So let me start with the -- going back to payer mix. And again, the payer mix discussion is always one that you fundamentally have to go back to the core physicians to talk about. We did -- as you mentioned, we did change our guidance based on that and that largely came through the $11 million or so difference between our earnings outcome and where we guided to, really was those 3 facilities. Part of their story was payer mix. But in addition to that, the payer mix had an impact, as you know, on the expenses of the facility, right? So we talked about anesthesia pressure, some labor pressure that we'll have to adjust to. All of those things are underway as far as taking cost out of the business.

On the payer mix side, I would just point back to what we're actively working on in those 3 markets to make sure we're positioned to go -- compete for the commercial patient. Again, we -- I'm not going to say that's going to recover right away, nor did we allow it to recover right away in our plans for next year. We certainly took this year's impact into account, as I said, but we also -- we don't expect a repeat of this. And so our job is to go back and compete for that commercial patient. We've been very consistently capable of doing that in the past. We think our value position is strong. And so going forward into 2026, that will be a huge focus. But there certainly is a little bit of that that's been in -- that's been allowed to go into the 2026 guide.

And I guess, just as it relates to -- you also gave the Q1 guidance. So I assume that includes continuation of that pressure, right? And then things start to improve maybe later in the year. So what I'm asking is like what's the level of confidence in this trajectory. And I guess you -- pretty deep into the first quarter already. So that's why you gave us the guidance, but kind of help us understand the ramp through the year.

Yes, it's a great question. So the Q1 guide, what I would say about that is it's not that different in the past years when you look at those percentages. So I wouldn't read too much into that, that the seasonality is different than prior years. I think we are around those same numbers last first quarter. So not tremendously different. First quarter is a high Medicare quarter. So certainly, it wouldn't be necessarily the quarter where you would expect to see tremendous amount of commercial gains. But your inference that we've allowed, some of that flow-through is correct. And our expectation is we're going to make progress on that throughout the year.

If I may, last one, on your organic EBITDA growth, 4% to the lower end of what you had kind of talk about in the past for your long-term targets, organic rate at payer mix, but it sounds like that's just temporary. So I would like to hear you say that, but is the organic growth still 4% to 6%? And also in the context of -- you touched a little bit on the opportunities in vascular and such, can you touch on your views of the Medicare ASC rule and the fact that over 500 codes will be moving to ASC setting this year?

Yes. So great questions. So yes, we are starting out at a 4-plus percent kind of organic growth rate expectation. And as you know, that's at the low end of our 4% to 6% range. That 4% to 6% same-store range has not changed. We still believe 2% to 3% case growth, 2% to 3% revenue growth is the right model long term. Again, there can be fluctuations. Obviously, we've got some near-term pressures we've called out, but that's how we got to that 4%. We still have a lot of confidence in our ability to drive organic growth.

On the vascular side, I would say, I really, really like this service line in the ASC simply because it's a cheaper and more customer-friendly access point for lots of things, including renal access points that actually help dialysis patients, procedures that often are maybe not prioritized in the hospital setting just because of all the other things going on. We feel really well positioned to grow in the vascular space and excited about that going forward.

In your last question -- I'm sorry.

Medicare.

Medicare, yes.

Medicare, yes.

You take away some of the -- what I call the friction that's created, yes.

[indiscernible]. So here's what I'd say about that. It is certainly a positive backdrop. And let me give you the broader -- it's not the immediate 500 procedures, although there are certainly some cases there.

What starts to happen with Medicare, when you take away that inpatient-only list over time is you take away some of the, what I call, the friction that's created when you have half the procedures that might be approved for the ASC and the other half in the hospital. And what I would say is historically, Medicare -- and one of the reasons that the logic of getting rid of the inpatient-only list is Medicare has been well behind the commercial in capturing the savings that our site of care represents. So for example, cath lab procedures were done in ASCs commercially for years before Medicare actually approved in the ASC space, same with total joints. We were doing commercial total joints in the ASC well before Medicare approved it.

And so I think the really big benefit of this is that it allows the doctor to make the decision. It allows Medicare to benefit from the savings of technology without having to wait years just based on the bureaucracy of a list. So we see that as a huge benefit. It's an underlying tailwind to the business that over time just allows our positions to -- as they find it safe to bring new procedures over to do it and not have to think about, gosh, is this one procedure? Is it something I have to do at the hospital? Because once you do that, the physicians hate to split their day, right? If they have a day of surgery and they have 2 hospital required patients and 4 that can go to the ASC, they're going to go to the place where they can do them all. So it's definitely a tailwind. Again, it's not so much about the 500 procedures. It is about the backdrop of allowing cases to move to the appropriate site of care at pace with technology and safety.

Our next question comes from Whit Mayo with Leerink Partners.

Why is the ending 2025 EBITDA the right baseline to grow this in your bridge when clearly, the second half run rate is lower, and things presumably got worse in November and December. It just feels like there might be a few points more than the 4% core growth to consider within your assumptions.

Yes, Whit, great question. I think you look, here's what I'd say, when we think about our 2026 guide, we obviously took into account the entire year. I'll start there. The second part I would say is the commercial impact -- mix impact and some of the things we felt are unique to the third and fourth quarter and that seasonality. So we do think it's the right baseline for that 4% growth. And we've certainly taken into account the trends throughout the year as we put that together.

Okay. When did these issues in the 3 markets -- I mean when did you identify them? I mean you reported the third quarter in the middle of November, you did a bond deal in December. I'm just confused on the timing of when things got sideways. And can you actually quantify how much revenue was down in those 3 markets?

Yes. So let me start with, again, as we gave our -- as we had our third quarter call, we were seeing trends that were kind of a little broader. It did obviously clarified as we went through the fourth quarter that the primary pressure was in the national group and was isolated more to a few facilities.

I would say with -- when you go into the fourth quarter at these type of facilities, we've had a very consistent shift in that payer mix that you kind of just count on. It's been happening for years. It did not happen this year. We were a little worried going in. We adjusted for that. We saw that mix be quite different for the reasons I said, in those 3 markets. But it wasn't just mix, too. I mean, it was about physician transitions. In some case, it was the service line growth. It ended up being much higher mix of government than we expected. So I mean, we had some visibility, which we adjusted for. These 3 facilities turned out to be worse than we expected for the reasons we called out. And what I can say is we feel like we have our arms around that. We've got plans around that to development and they've been taken into account in our guidance.

And our final question will come from Ben Hendrix with RBC Capital Markets.

This is Michael Murray on for Ben. I have a follow-up question on your previous comment on the inpatient-only list. Does the phaseout impact your expectations for cardiology procedures to ramp?

Michael, I appreciate the question. And yes, so again, we're actually -- we're thrilled, obviously, with the administration's decision to recognize that the choice should be in the physician's hands and if there's a high-value opportunity, say they should go to our facilities.

I think cardiology is a specialty that there is real opportunity in. It is one of the harder ones to transition just because of the amount of physician employment and the fact that you probably know this, there are still, I think, 20 states that have restrictions that are above and beyond Medicare. With that said, I think in the coming years, it's such a big opportunity. One of the things that's made total joints and spine so attractive as they are procedures where for the payer, it's a 5-figure savings. And cardiology is another place where I do believe there's tremendous opportunities for savings.

It will take a bit longer because it's going to be state by state. It's going to be physicians rehanging shingles in some cases. And/or it's going to be health systems, the ones that are brave enough to lead to the outpatient space dealing with the economics of that transition. But there's no doubt that cardiology is a place -- through the combination of what's happening with the inpatient-only list, as you know, a lot of EP procedures are coming over now. I think EP ablations. Not all of them, but certainly, that's a place where I do think you'll see faster movement.

Clearly, we've seen cardiac rhythm management and vascular -- as I mentioned earlier, part of that cardiovascular service line that are fast growth. I think when you get into true interventional cardiology, it's happening a bit slower just again because of that physician transition and the complexities around some of the state rules. But if orthopedics ever does slow down, which right now, we think we're still -- the most in the middle innings, the cardiology opportunity with technology and with these changes certainly will be there going forward.

I think that's it for the questions. Yes, do you have a follow-up? I'm sorry.

No, that was it.

Okay. Great. Well, I appreciate everyone's time today. I appreciate the questions. I hope you guys have a great rest of the day. Take care.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Greetings, and welcome to the Surgery Partners' Third Quarter 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Dave Doherty. Please go ahead.

Good morning, and thank you for joining Surgery Partners' third quarter 2025 earnings call. I am joined today by Eric Evans, our CEO.

During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements as described in this morning's press release and the reports we file with the SEC, each of which are available on our corporate website. The company does not undertake any duty to update these forward-looking statements.

In addition, we reference certain financial measures that are non-GAAP, which we believe can be useful in evaluating our performance. We reconcile these measures to the most applicable GAAP measure in this morning's press release.

With that, I will turn the call over to Eric.

Thank you, Dave. Good morning, and thank you all for joining us today. My opening comments will briefly highlight our third quarter results, which reflect continued execution and consistency with our long-term growth algorithm. Then I will discuss in more detail our recent progress across our 3 growth pillars: organic growth, margin improvement and deploying capital for M&A. I will also provide some additional color on our ongoing strategic portfolio optimization process before concluding with some commentary on our outlook for the remainder of the year.

First, let me provide highlights from our third quarter earnings. Net revenue was $821.5 million, up 6.6% year-over-year. Adjusted EBITDA was $136.4 million, up 6.1% year-over-year. Adjusted EBITDA margin was 16.6%. Same facility revenue grew 6.3%. These results are a testament to the focus of our colleagues and physician partners who serve our communities with valuable, high quality and convenient care. Our team continues to deliver on our mission to enhance patient quality of life through partnership.

Starting with our organic growth. In our consolidated facilities, we performed over 166,000 surgical cases in the third quarter. Volume growth in GI and MSK procedures was relatively high, including continued growth in Orthopedics, driven by an increase in joint-related surgeries, while ophthalmology procedures were slightly lower this quarter. Growth in total joint surgeries in our ASC facilities continues to be robust, with these cases growing 16% in the third quarter and 23% on a year-to-date basis compared to the same periods last year. Our investments in robotics and physician recruitment continue to position us to capture high acuity demand. Within our portfolio, we have invested in 74 surgical robots that enable our physician partners to perform increasingly more complex and higher acuity procedures. These investments are also an enabler of our strong physician recruitment team. Through September 30th of this year, we have recruited over 500 new physicians into our facilities, many of which we expect to eventually become partners.

In the third quarter, payer mix moved modestly with commercial payers, representing 50.6% of revenues, down 160 basis points year-over-year and governmental sources, primarily Medicare, up 120 basis points. While these changes fall with a normal quarterly variability, we are also observing softer-than-expected same-facility volume growth in recent months. Although volumes remain positive and generally in line with industry trends, they have trailed our internal expectations, prompting us to adjust our fourth quarter outlook. Given our typical seasonal lift in commercial volumes during Q4, we are monitoring this closely and refining expectations accordingly. Margin performance was stable with cost discipline and reduced incentive-based compensation offsetting inflationary pressures and weaker-than-expected volume and payer mix. That said, we continue to drive improvements through procurement and revenue cycle operating efficiencies that will contribute to margin expansion moving forward.

Moving to capital deployment. To date in 2025, we have deployed approximately $71 million in capital for acquisitions, adding several facilities at attractive multiples. We also sold interest in 3 ASCs at an enterprise value of $50 million of cash plus sold debt, achieving a combined double-digit effective multiple. The most significant of these divestitures occurred late in the second quarter. Our long-term growth algorithm and initial 2025 outlook contemplated deploying $200 million plus proceeds from divestitures for a total of roughly $250 million of acquisitions this year. While we have not reached that level of deployment year-to-date and in your earnings contributions will be lower than originally anticipated, our disciplined approach prioritizes long-term value over short-term gains. Importantly, the near and mid-term M&A pipeline remains robust with well over $300 million in opportunities under active evaluation. We are focused on deploying capital strategically in the months ahead and anticipate a return to our normal levels of annual capital investment moving into 2026.

Our investments in de novo facilities remain an important part of our growth strategy and among the highest return opportunities in our portfolio. In the third quarter, we opened 2 new de novos with 9 currently under construction and more than a dozen in the development pipeline. These de novos are primarily focused on higher acuity specialties with a majority devoted to orthopedics. These facilities typically require 12 to 18 months to build and up to another year post opening to reach breakeven, given the nature of building scale from the ground up. Over the last 9 months, several recently opened de novos have turned profitable. while others are still ramping and have not reached breakeven as quickly as anticipated, primarily due to construction and regulatory approval delays. While this timing creates modest near-term pressure on earnings, these investments are strategically positioned in high-growth markets and are expected to be highly accretive and profitable moving forward. We remain confident that the current pipeline will drive meaningful value creation and reinforce our long-term double-digit growth algorithm.

Now I'd like to spend a moment updating you on our portfolio optimization review. As we shared during our second quarter earnings call, we have initiated a strategic portfolio review designed to enhance our flexibility, streamline our portfolio and self-fund our long-term growth algorithm. Today, we want to provide additional color on the types of assets under evaluation and the objectives of this process. Our focus is on selectively partnering or divesting facilities that can expedite leverage reduction, accelerate cash flow generation and sharpen our focus on our core ASC service lines. The facilities we are evaluating for this effort are primarily larger surgical hospitals that provide services beyond our short-stay surgical focus. Often, these facilities are more capital intensive and also carry higher levels of finance lease obligations, which adversely impact cash flow conversion. We are currently in active discussions on a small number of assets, which we believe will be accretive to shareholder value and demonstrate the financial benefit to the company with reduced leverage and increased cash conversion as a percent of EBITDA.

Given the timing of these discussions and the long-term value creation it will generate, we will not be in a position to share material details during our December Investor Day. To ensure we provide the most comprehensive and meaningful update on our portfolio optimization efforts, we have made the decision to shift our inaugural Investor Day to the spring in 2026. At that event, we will share greater detail on these portfolio optimization efforts as well as additional details on our long-term growth drivers and outlook for the business.

As we look ahead to the remainder of 2025, we are revising our full year guidance to reflect timing-related impacts of capital activity and a revised outlook for our fourth quarter. We now expect revenue in the range of $3.275 billion to $3.3 billion and adjusted EBITDA in the range of $535 million to $540 million. During our second quarter earnings call, we implied approximately $5 million of adjusted EBITDA pressure, tied to slower M&A timing. Today, we are acknowledging incremental impacts from delayed capital investments lost earnings from the 3 ASC divestitures in the first half of the year, for which proceeds have not yet been redeployed. We remain disciplined and confident in our ability to deploy this capital, supported by a strong pipeline of opportunities that line with our short-stay surgical ethos.

Based on the trends we observed in the third quarter, we now anticipate that same facility revenue growth for the full year will more closely align with the midpoint of our long-term target range of 4% to 6%. This adjustment reflects our prudent approach as we monitor recent shifts in surgical demand and payer mix, particularly among commercial patients, which typically increase proportionately in the fourth quarter. While we remain confident in the underlying strength of our business, we believe it is appropriate to take a measured stance heading into the fourth quarter, ensuring our expectations are well calibrated to current market dynamics. While our updated outlook acknowledges some near-term challenges, we are confident in the resilience of our growth algorithm, the significant tailwinds in the ambulatory surgery space and our ability to execute. We are closely tracking these dynamics and will factor in any near to midterm implications into our 2026 planning, which we intend to review during our Q4 call. Finally, we remain focused on disciplined capital employment, operational excellence and strategic initiatives that position us for sustainable growth and shareholder value creation well beyond 2025.

Before I turn the call back to Dave, I want to take a moment to honor Dr. Patricia Maryland, who recently passed away. Pat served on our Board with distinction, our thoughtful counsel and unwavering dedication to advancing access and equity in health care inspired us all. We are profoundly grateful for her contributions and the legacy she leaves behind.

With that, I'll turn the call back to Dave for a detailed financial review.

Thank you, Eric. Starting with the top line. Total consolidated net revenue for the quarter was $821.5 million, up 6.6% from the third quarter of 2024. We performed over 166,000 surgical cases in our consolidated facilities in the third quarter, representing 2.1% growth. This growth was broad-based across our specialties, with higher relative increases in gastrointestinal and MSK procedures, including continued strength in orthopedics. This growth overcame 10,000 surgical cases in the third quarter of 2024 related to facilities that we have since divested. Same-facility total revenue increased 6.3% in the third quarter with same-facility case growth of 3.4% and rate growth of 2.8%. Adjusted EBITDA for the quarter was $136.4 million, representing 6.1% growth over the prior year and a margin of 16.6%, essentially flat to last year. Year-to-date, adjusted EBITDA stands at $369.3 million, up 7.2% from the prior year, and our year-to-date margin is 15.2%. We ended the quarter with a cash balance of $203.4 million and a revolver capacity of $405.9 million, providing total available liquidity of over $600 million.

Operating cash flow for the third quarter was $83.6 million. During the quarter, we distributed $52.5 million to our physician partners and invested $10 million in maintenance-related capital expenditures. There were no unusual transactions or matters affecting operating cash flows other than the change in interest rates on our corporate debt portfolio that we have previously discussed. We remain pleased with the disciplined management of capital deployed for maintenance-related purchases and with cost management controls for transaction and integration costs, which are at levels consistent with 2023 and significantly below the elevated activity we saw in the second half of last year. We have approximately $2.2 billion in outstanding corporate debt with no maturities until 2030. During the third quarter, we completed a repricing of our term loan and revolving credit facility reducing our rates to SOFR plus 250 basis points. This action positions us to achieve meaningful interest expense savings and improved cash flows going forward. The current floating rate is 4.0% and interest payments for the quarter increased by $9 million compared to the third quarter of 2024, primarily due to the favorable swaps that matured earlier this year. Our capital structure remains well positioned to support our long-term growth algorithm, while providing flexibility for future capital deployment. At quarter end, our net leverage ratio under the credit agreement was 4.2x and is 4.6x on a balance sheet net debt-to-EBITDA basis. This level is consistent with our expectations, reflecting timing on capital deployment.

Turning to expenses. Salaries and wages were 29.6% of net revenue, flat with the prior year. Supply costs were 25.4% of net revenue, down 70 basis points from last year, reflecting ongoing procurement and efficiency initiatives. G&A expenses were 2.7% of revenue, down from 3.8% in the prior year period, primarily reflecting lower stock-based and incentive-based compensation related to our year-to-date performance.

From a capital deployment perspective, to date in 2025, we have deployed $71 million for acquisitions, adding several facilities at attractive multiples. We also completed divestitures of 3 ASCs in the first half of the year, generating cash proceeds of $45 million and a reduction in debt of $5 million, the largest of which sold at a 15x effective multiple. These proceeds have not yet been redeployed, which, along with the timing of M&A, is reflected in our revised guidance.

As Eric mentioned, our de novo programs continues to be a key driver of long-term value. With recent openings 9 under construction and more than a dozen in the development pipeline, we are excited about the future of these investments. Our revised guidance reflects a slower ramp on recently opened de novo facilities.

Guidance for the full year 2025 has been revised to reflect these timing-related impacts. We now expect revenue in the range of $3.275 billion to $3.3 billion and adjusted EBITDA in the range of $535 million to $540 million. As noted, the revision reflects delayed capital deployment, lost earnings from divested ASCs and a more cautious outlook on the commercial payer mix and volume in the fourth quarter. We remain disciplined and confident in our ability to deploy capital, supported by a strong pipeline of opportunities aligned with our long-term growth strategy.

Same facility revenue growth for the full year is now expected to be closer to the midpoint of our long-term growth algorithm of 4% to 6%, reflecting a prudent approach to the fourth quarter as we hedge against potential softness in both volume and the overall commercial payer mix while still anticipating positive contributions from both case growth and pricing. While we are not assuming this recent shift is an ongoing headwind, we are monitoring these dynamics closely, and we'll consider any potential near- to midterm implications as part of our 2026 planning that we plan to discuss in our fourth quarter call.

Finally, I want to echo Eric's appreciation for the dedication of our colleagues and physician partners. Their commitment continues to drive our results and positions us for long-term success.

With that, I'll turn the call over to the operator for questions.

[Operator Instructions] And our first question comes from Brian Tanquilut with Jefferies.

Maybe, Eric, as I think about the weakness that you called out in demand or in procedure volumes as you think through Q4. Anything you can point us to? Is that specific to certain kinds of procedures or serve classes procedures, ortho versus GI, or geographies? And just kind of like what you guys are thinking in terms of what's causing some of that? Is that a referral flow issue or just broader macro?

Brian, first of all, thanks for the question. Obviously, we've spent a lot of time looking at this. In Q3, we saw to our internal inspections, some weakness on -- internal expectations of weakness on both volumes and payer mix. It's obviously always a big ramp going into Q4. We looked at that really, really closely, relatively broad-based, higher government payer mix than we would expect entering Q4 and just a bit softer on the growth. Now look, we still expect fourth quarter to be a growth on both cases and rate but below our internal expectations. And some of that -- some of those things in certain markets, you can have a very specific story, but it was broad enough and apparent enough to us that we had to react to it. We're still looking at that. We don't expect this to be a long-term trend, but it was, again, material enough that we wanted to make sure we are prudent in our guide. I wouldn't say it was necessarily any particular specialty as we think about this across the spectrum. And it was just a broader base weakness. Hard to know, right, like what patients show up in a doctor's office in any given period. We did expect that mix to flip it always has a little bit stronger. And so we're just -- we're reacting to the trends we've seen, whether that's macroeconomic, who knows. I think we're too early to say, but we are certainly seeing enough that we had to react to it.

I appreciate that. And then maybe just on the pull back, we're kind of like a relatively low level of spend on acquisitions. Is that a matter of just deal timing, or is that valuation? I mean what are you seeing in that area, or is that more of a company-specific decision to kind of like throttle back a little bit as you also look at divestitures here.

Yes, Brian, great question. We continue to be encouraged by our pipeline. We actually -- we've had relatively strong deal flow. We've had a couple we've turned down. We're very, very disciplined in how we think about these opportunities. We're in a very fragmented industry where we still have a preferential position to be partners with independent ASCs. And so we feel good about it. It is a matter of timing, and it is about with us being quite disciplined. We don't see any reason. We don't get back to our normal M&A flow as we move forward. Of course.

And our next question comes from Joanna Gajuk with Bank of America.

Just maybe to follow up on the payer mix commentary, just to make sure, so is it just a volume -- commercial [indiscernible] weaker relative to government or anything to call out in terms of denials or radar [indiscernible] from commercial? Because obviously, we're hearing from other types of providers some pressure there. So I just want to ask that question.

Maybe high level, I mean, always -- there's always pressure from payers, but there's nothing that we would call out that's systematically different for us. As you know, with an elective commercial business, we have a lot of control over that side of it. We have a lot of visibility. Certainly, that's not an easy process, and there are some pressure, but that's not what we're pointing to here. It's just really the commercial flip in growth. Trend is not as quite as strong as we expected, still going to grow. Look, I want to be very clear, we're going to have volume and rate growth in the fourth quarter, but we have a very detailed look into this as we head into the fourth quarter. It's a huge quarter for us, and we are just reacting to a trend that's not quite as strong as we would normally expect.

And right, in terms of the magnitude of things, if you can help us, so there's a couple of things. So there's a delay in acquisitions. You also mentioned divestitures right and then obviously, the cautious outlook for commercial mix and volume. So is there any way to break it out when we look at the annual say number in terms of your EBITDA, it looks like $20 million or so cut to that midpoint versus the last quarter commentary about being the lower half of the mentioned to kind of break it down. Can you break it out for us or at least kind of scale from higher to lowest in terms of that impact?

Sure. If you think about that full $20 million of pressure you're pointing to, I would say the majority of it, let's call it, 60% of that is development or capital timing related. What that's related to acquisitions, that's related to not redeploying money that we had from divestitures. All that's timing related, nothing we're concerned about there at all. So kind of the majority of it is that the rest of it is this trend change that we are acknowledging we saw in third quarter, and we're continuing to see as we head into the fourth quarter, just being prudent on that slight change in kind of that mix. But it is primarily timing related and the recent kind of trend change, we don't see it as anything long term. I'll reiterate, this is a business where we expect to continue to be a double-digit growth company over time, but we are reacting to both the kind of fickle nature of M&A this year and this slightly something we could trend in during the fourth quarter. I don't know, Dave, if you'd add any specifics to that?

Yes. I might just remind folks at -- on our second quarter call, we did note this slower pace of M&A, and how that would have an impact on our full year guidance. The other thing, as Eric pointed out a little bit earlier, we did [indiscernible] those three ASCs, and what we typically do when you have proceeds like that, it's about $50 million of total net proceeds for us. that gets added to our target for M&A this year. So if you were to look at our original guide of $200 million implied for the year, that number now becomes $250 million. And clearly, we've only done $70 million through this morning. So there's just not enough time in the balance of the year despite the fact that the pipeline does remain strong. So to Eric's point, that's a really big component of it. De novo is [indiscernible] breakeven, difficult to exactly pin down when that's going to happen, but there were some construction delays, some regulatory pressures that were inside there, again, that's pure timing. Those have a great trajectory and again, the best use of capital. And I would say this on the second half or kind of the 40% or so of that guidance drawdown would be related to Q4 volume, particularly related to that all-important mix shift in the commercial framework. And as Eric pointed out, it's really just early signs from the late part of the quarter. And as we've obviously marched into the fourth quarter, with good line of sight and good communication with our physician partners. This is just us being prudent in there. So again, to Eric's point, 3.4% same-facility case growth in the third quarter, pretty strong, consistent with where we thought that was going to be -- and consistent with what others are seeing in the marketplace. However, inside of that, it's just the pace of growth that you would expect to see on the commercial volume side. So we think that gives you about 200 to 300 basis points of pressure in the fourth quarter, still going to be net positive. But what that means for us is our original second quarter viewpoint, how we were going to end the year at the upper end of our long-term guidance range of 4% to 6%. Now we're pushing that down by 100 basis points. So we do expect the end of the year, same facility revenue to be somewhere at the midpoint of that long-term growth algorithm rate. So still good, still in our range, but lower than the last year expectations that we had going into the year.

Yes. And if I may, just to make sure on divestitures, any comment on the three ASCs in terms of the quarter, the guidance, but also annualized number? How should we think about it?

Yes. The -- I mean, you can assume that we sold those at a pretty decent multiple inside that year higher double-digit multiples is I think how we think about that. We also had divestitures that we did at the very end of the fourth quarter. And I think in our fourth quarter earnings call, we talked about that having an annual contribution rate of somewhere around $11 million of earnings. So you're jumping over both the divestitures from the fourth quarter. We've been doing that all year. So that's going to have a slightly higher impact in the fourth quarter because those divestitures occurred in the last week of December plus these three divestitures that occurred in the middle part of this year. And again, I think it's a double whammy for us, Joanna, because not only do you lose those earnings, but you haven't redeployed the cash in those accretive earnings that you would like to have which, again, is just a matter of timing.

And moving next to Benjamin Rossi with JPMorgan.

Just kind of taking at the de novo comment you made, it seems like activity there is going to move forward despite maybe a slower ramp on some of these recently opened de novo facilities. I know you just mentioned the construction timing, but could you just walk us through kind of how you're thinking about de novo efforts going into next year and maybe how we should be thinking about the cadence of openings as you kind of target those 9 new facilities and additional dozen in development? And then how are you kind of prioritizing geographies or markets here for your new openings?

Yes, Ben, [indiscernible] the question. So we're obviously very excited about our de novo -- growing de novo capabilities. It's a it's a very accretive way for us to put capital to work. It is quite time intensive. It typically takes 18 months to syndicate, it takes another 12 to 18 months to build and then a year or so to get to cash flow breakeven but we love these opportunities, and we do expect we're going to have double digit of those in development at any given time. We continue to have a really strong pipeline with our team talking to physicians. These -- now there's a lot of things to like about these. They're primarily higher acuity facilities. A lot of them are purposeful orthopedic facilities. They are -- they offer us the opportunity to kind of reset our discussions with payers because they're often -- they're moving stuff out of the hospitals, which is a great position to start from and with great groups of docs. We have a good visibility of who signed up, what cases they'll bring. So it continues to be a new lever to our growth engine going forward. Obviously, the start-up portion of this is you've got to make investments, you got to get to a run rate, and so we're working through that right now. So when we talked about these delays, I mean, construction has been a little bit challenging at times in certain parts of the country. Certainly, the regulatory delays are around licensing and right now, the government has obviously been delayed in clearing some of those, which creates a little bit of pressure. But ultimately, we're really, really excited about the de novo opportunities. We continue to see that pipeline remain quite strong, both with health system partners and independent docs. Again, the ones with independent docs provide us opportunities over time to buy up. So there's a lot to like about the ultimate value creation of investing in de novo facilities.

Just as a follow-up, maybe as we're thinking about your typical 4Q seasonality. I think over the last couple of years, there's been some discussion just on health care consumer pricing and benefit design and when you kind of compare your typical patient behavior during the fourth quarter, given the deductible reset at the end of the year, how maybe that behavior has changed as we've seen a higher cost backdrop. Have you seen any signs of that impact being blunted in this kind of higher cost world with any of your patient tracking, or are you seeing any noticeable changes in how patient behavior is maybe shifting around that deductible reset from like the 4Q going into 1Q?

Yes. I mean it's hard to comment on that from a macro perspective right now. What I will say is, given the trends we've seen, we're certainly hedging against trying to understand what is happening with that consumer behavior, we are seeing a little bit, like as we've talked about and acknowledged, we're seeing a little bit weaker commercial trend this year. Hard to say whether that's around specific plan design. And what we do love about our space and we talk about this a lot as we're one of the few places where all three parts of the industry, all three major consumers prefer us because of our value position. The patient has a better experience. They have a much lower cost. Obviously, the payer frequently really once -- always want their patients to choose that right place for high-value care and physicians, they love our environment because we're a time machine for them and also give them a chance to be an investor and own in our side of the business. So we like our long-term position. We think even if there are changes in plan design, our value position positions us well for whatever changes there. So I guess to hedge a little bit on your answer to your question, Hard to say at this point. It's that we don't have enough date to say that whether that's the case or not, but we're certainly seeing a little softer trends as we said, going into Q4.

And Matthew Gillmor with KeyBanc Capital Markets.

I wanted to see if there's any additional comments on the portfolio review process. Just curious about just what you're seeing in terms of the nature and depth of discussions and the pacing, just -- anything to report there?

Yes. So we'll be -- obviously, be careful about how much detail we give on this. As we put in the -- as we said in our prepared remarks, we are certainly on our way in a couple of markets. We do believe that there's real opportunity for us to move forward on transactions that will create real value acceleration when it comes to free cash flow and deleveraging within our portfolio. We are focused, as we said in the comments, a little bit -- giving you a little bit more detail. We're focused on those markets that are probably farthest from the bulk of our short-stay surgery ethos, right? So the ones that maybe are a little broader where you can make a case that perhaps there's a better natural owner, and we're off and running on those processes. We know they're very valuable markets, very valuable facilities within the marketplace they serve. We do expect to have strong interest in those. Part of why we pointed to the delayed Investor Day, obviously is we want to be a little bit farther along in that. It's important we have more to talk about when it comes to that portfolio optimization work we're doing. But we're quite we're quite encouraged with that opportunity, and we do see it as a way to accelerate our balance sheet strengthening, accelerate our ability to self-fund our core ASC growth and move even closer to being a pure play company. So lots of good starts there. Obviously, I can't go into details about markets or specific timing. So a little bit fickle. You can imagine a lot of these assets are going to be in markets where it's going to be local regional systems, many of them nonprofits that it's a little bit harder to predict timing, but we're certainly encouraged about the opportunity and believe we have great assets. I'd remind everyone that all of these are high-value assets. We don't have to do anything with them. We're going to be very, very disciplined around making sure that they truly do accelerate what we're trying to accomplish relative to deleveraging and free cash flow.

Got it. And then as a follow-up, I thought I'd ask if there's any headwinds or tailwinds to think about for 2026. From your comments, it sounded like maybe you're going to wait and see in terms of the payer mix dynamics. But any other high-level things to think about for modeling purposes for '26?

Yes, I think it's probably too early for us to get into risk and opportunities for 2026. We're obviously monitoring this recent trend to see if it's something more systemic. No reason to believe it is, but we'll watch that closely. I mean I think our core model and our core beliefs doesn't change when you think about our modeling as far as the opportunity we have in this space. So there's nothing I would point out today, that's kind of a burning issue. But certainly, we'll be coming back for a lot more detail as we go into our fourth quarter call. One other thing I'd just say, making back to your portfolio question, the other thing that we are closely looking at in our portfolio optimization opportunities, it doesn't necessarily mean when we have something that we're looking at doing a transaction with that we would completely sell out. Another option is that we partner. We partner and we stay in and the partnership that's accretive. And so there are multiple options we're considering in that portfolio review process.

[Operator Instructions] And we'll go next to Ben Hendrix with RBC Capital Markets.

Just -- most of my questions have been answered, but just a quick follow-up on that last comment, about the types of facilities you're looking to partner with. So I guess, am I right that you're looking for more partnerships with maybe broad-based facilities with broad-based capabilities and you may be more willing to kind of retain those specialty facilities like spinal hospitals and facilities like that. Some more color there.

Yes. I think what I would say, I mean, obviously, we're a partnership company. I would say that we are -- the markets that we are looking at to accelerate all the things we've talked about are all very attractive markets with we think bright futures. And so to the extent that there's a partner where they can bring some of those broader capabilities and we can stay in and be a manager, we're certainly very open to that. And that's going to be probably a possibility in some of these transactions I don't think that's different necessarily than history. We haven't talked about that that much. But we -- across the country, we have a number of partnerships with health system partners where it makes sense, although still largely an independent company, we are very, very open to whatever the market dynamics are. I don't know, Dave, would you add anything?

Yes. Maybe just a couple of things on this. Just as a reminder, as we look at this portfolio optimization, part of the driver for this is focusing on what's important to our shareholders. So we're going to try to maximize the value of these any optimization efforts, would start with are they great assets? And can we truly get the value that we believe is out there. But it's also going to be impacted by the ability to reduce leverage and improve cash flow conversion of adjusted earnings, which are obviously a paramount importance. So if you do a sale, it's very easy to see how all of those things will manifest again, assuming that the price is right. If you do a partnership-based model, you will still retain access to a very strong market, access to greater physician base, a greater network of patient catchment area off the backs of that partner and potentially improve cash flows as it comes to a different kind of relationship with commercial payers and continued management fees that kind of sit inside there. And then importantly, because of the nature of those types of partnerships in order to get there, you'll likely move to an unconsolidated position at which will remove that all-important leverage factor. So all of those things will go into the evaluation process as we think through what makes sense and where it makes sense.

And just one on the slower ramp of de novos. I appreciate it. You mentioned that's mostly timing related construction delays, licensing, et cetera. But to the extent that there is any of this volume pressure kind of driving that ramp, what is that contributing to the delay?

Yes. I wouldn't contribute any of that to those delays. I mean, those facilities actually have syndicated partners. We know what what cases they plan to bring. It's really just a matter of getting them open and the kind of checking the boxes of all the construction and regulatory things that happen in that process. So that would not be a material driver of any of that trend we talked about.

Our next question comes from Andrew Mok with Barclays.

Can you help us understand the timing of this payer mix issue? When did it first emerge? And has it accelerated sequentially into the fourth quarter? And do you have a sense whether this issue is driven more by the ACA exchanges or employer-based coverage expense?

Andrew, thanks for the question. Look, we started to see this in the third quarter. I mean, clearly, you can see that we had some pressure in the third quarter that showed up even though our volumes were strong. Definitely, that mix puts pressure on margin accretion, and we were flat margins, and we started to feel that a little bit in the third quarter, continued in the fourth quarter, a consistent basis to that pressure. So again, I don't want to overread into this. And clearly, we're making an adjustment because we see it, but it's hard to know. We don't necessarily see a systemic at this point. But again, would want to overread that. And your second part of your question, I'm sorry, was....

Health insurance.

Oh yes, health insurance changes. Look, we ltimately as a business, because we're elective, we don't really see a ton of health experience exchange business. A lot of that's ER access points. that drives some of that. So it could be some pressure there, it could be, but I don't think that's a material part of our business. So probably not the biggest pressure point.

Great. And following the guidance revision, can you share thoughts on where you expect free cash flow to land in Q4 and the year.

Yes. Well, as you know, we don't give guidance on free cash flow. I learned that lesson on kind of the intention or ability to kind of sit side there. But cash flow this quarter an all year has been pretty strong on an operating cash flow basis. If you think about the third quarter here, nearly $20 million higher than the same time last year, which is reflective of the improving and underlying cash flow generated by the core business growth and working capital improvements that helped more than offset the $9 million of pressure that we have on the interest cost in the quarter. Those interest cost pressure points will continue into the fourth quarter until we fully lap those going into 2026. We are in a slightly better position. I remind you that we did do the repricing of our term loan and our revolving credit facility. Those rates are now 25 basis points and 75 basis points improved over the prior loans that we had in place. So that pressure from interest rates will slightly persist into the fourth quarter. However, we do continue to focus and see benefits on working capital from our focus on revenue cycle investments, that standardization effort is taking hold, and we're seeing the benefits of those, and we continue to see improvement in those that spending on transaction and integration costs. They were a little bit lower than what we had expected into the third quarter, about $5.5 million lower sequentially, $17 million lower than the elevated level of spend in the third quarter. We expect that to continue to improve year-over-year. Fourth quarter was also -- fourth quarter of last year was also elevated levels of spending related to that acquisition activity last year, that number should come down and should remain relatively consistent with what we saw in the third quarter. The challenge for us is really just where distributions to our physician partners comes out. That's all a factor of working capital balances that sit at each facility and the nature of those facilities a level of ownership interest that we have out there. So I would say operating cash flow should continue to be relatively stable. Maintenance-related capital expenditures, we're not expecting any material change inside there. And then the distributions that go to our physician partners is the one that is most challenging for you to look at in any particular quarter and fundamentally why we're not going to give guidance for the fourth quarter. Generally speaking, it should continue to improve, though.

We'll go next to Sarah James with Cantor Fitzgerald.

SP59304767 Back in May, you talked out your recruiting mix of surgeons being higher in high acuity ortho and ortho than historical cohorts. So I'm wondering now that they've had a chance to start ramping. Are you seeing any benefit from that? How do you think about the time line of new surgeons ramping? And has the mix continued throughout the year to be higher in the high acuity ortho than your historical cohorts?

Sarah, good morning. Thanks for the question. Look, we're really pleased with our position recruiting team's efforts again this year. As we mentioned, we're over 500 physicians recruited to our facilities year-to-date. That continues to be a big part of our same-store growth story. That mix is about the same as we talk to May, certainly higher on the orthopedic recruiting than the overall mix, which is really helpful. Sometimes when those new physicians join your initial mix can be a little higher in Medicare. So that is true in general. But we're quite happy with the recruitment pace, and we expect to finish the year strong. We're seeing -- this is normally the kind of one of the strongest parts of the year of adding new docs. We're seeing that continue. And as you guys will recall, that's part of our growth engine as these new docs come in, we get roughly a doubling of their business in year 2. We continue to see that kind of movement in year 3. It's important that we stay really strong in this area because there always is some level of attrition, as you can imagine. So something we're really, really focused on. But Sarah, that really hasn't changed. We're still certainly more focused on those higher acuity procedures. You continue to see that show up in our total joint count. And I'll reiterate that we grew 60% year-over-year this month. We're up 23% for the quarter and are ASCs and that continues to be a big part of that is finding new physicians to join us and bring those cases to our ASCs. 60%...

23% for the year.

Yes. What did I say?

Month end, quarter-to-quarter.

Yes, sorry, quarter end and year.

Okay. And if I could just double quick on that mix comment again. So you mentioned that with new surgeons and these are coming on with higher dollar procedures, you typically have a higher Medicare mix as they onboard. So how much of an impact did that have on the mix situation that you've been talking about today?

That's probably not the big driver. I mean, honestly, that's the case all the time with new surgeons. And so I don't think that's that much. I mean there could be something there, but not a lot. I don't think that's the trend driver.

Moving on to Whit Mayo with Leerink Partners.

I've only got 1 question. I know that you guys are just moving into the budget and planning process. But Dave, do you think maybe about excluding unannounced M&A from the guidance given the challenges of timing factors, et cetera, just a lot of companies don't include M&A in our guide. So I just wanted to take your temperature on how you're thinking about that now?

Yes, a very fair question, Whit, and clearly something that has proven difficult over the past couple of years with very different stories on level of M&A spend with advanced kind of spend in 2024 and obviously relatively lower in 2025. And it is difficult to predict. The challenge that we have is reiterating the company's long-term growth algorithm, which does rely on acquisitions as about 1/3 of our growth will come from inside there. But you can be assured we're asking that same question internally. And we will have an answer for you by the time we give our fourth quarter earnings call. But I appreciate the fact that you're thinking about that the same way, that's helpful to know.

We'll go next to Bill Sutherland with the Benchmark Company.

I was just wanted to get a little more color or granularity, I guess, on the divestments you've done both late last year and then mid-year. Are there any all ASCs? And are they just pure sales or they're partnering as well?

Yes. Bill, thanks for the question. All of the divestitures that we talked about are ASCs, a couple of them were simply closures that were out there and of relatively small assets that sat inside there. A couple of them were sell down into deconsolidated positions, which happens from time to time. And that was basically the nature of those divestitures.

Okay. And now in the in the stuff that you're currently thinking about or working on, would that include the Idaho Hospital?

Bill, it's Eric. Look, we're not going to be talking about any specific markets. We're giving guidance on kind of the types of things that we're going to pursue. But as far as specific markets, we won't be clarifying that until we have something specific to announce.

Understood. And then lastly, just thinking about why ophthalmology might be soft. Is it more of a discretionary kind of procedure in general, I'm thinking of cataracts and things like that.

Yes. So Bill, it's a great question. I would just say if you look at our overall ophthalmology, we did have a fair amount of our divestiture who were in ophthalmology. So if you're looking kind of year-over-year, there's some changes there. We still are growing in ophthalmology -- we did not mention it as quite as strong as MSK and GI this quarter. Look, we see those variances across service lines. It's still positive. I wouldn't read too much into that at this point. I mean, ophthalmology has been a really strong grower for us over the last several years. But your point is one we'll watch it carefully. I don't know, Dave, if you could add anything to that?

Yes. Just to clarify something, you are looking at the consolidated case volume that we saw year-over-year. So you are seeing a decrease in the third quarter. That is all attributable to the divestitures. If you were to look at it on a same facility basis, which I know we don't disclose, that growth was actually just under 1% on a same facility basis. So it is growing to Eric's point, but obviously, that's lower than our growth algorithm would suggest. And our field checks in -- that particular market are really isolated to some unique pressure points in select facilities where we had either experienced a retirement in one case, a really high-volume doctor that retired and then some short-term disability. But turning to the [indiscernible], those are short term in nature, the fundamental operations still makes sense, but you've got to recover from those. So somewhat isolated to those things, again, not fundamental at this point.

And our final question from today comes from Ryan Langston with TD Cowen.

How should we think about the capital budget, I guess, on the maintenance side. Is there any big step-ups that are going to be required across the portfolio here over the near term, or anything else we should be thinking about there?

Yes. No, there's no major changes that we're kind of expecting. Over the past few years, we have really spend a lot of time with our physician partners to analyze the life cycle of each of pieces of equipment that sit in our facilities and increased communication with our physician partners on when it makes sense for us to plan for and execute on any maintenance-related capital expenditures. So we feel pretty good about how we budget those and the run rate that you're seeing, quite frankly, for the past 6 quarters should be consistent for the foreseeable future at this point.

Got it. And then I think I heard you say you've got a 15x sort of all-in multiple for a particular asset. But other than just the I guess, attractive multiple that you could get for some of these facilities you're looking to sell? Like what other criteria do you use to evaluate and then ultimately just make the decision to sell?

Yes. Great [indiscernible]. So as we talked about here, one of the continued reason right now is looking at facilities that give us the opportunity to delever faster and increase free cash flow faster, right? So those tend to be the larger, more complex facilities that maybe maybe go beyond our core short-stay surgical ethos. In other cases, it's really market-specific. So we'll look at the overall market, the opportunity to either partner or sell and make a decision on whether that's the best natural owner or not. In general, look, we're planning to grow our facilities rapidly in the coming years between de novos and our acquisition plans. And so obviously, we're in the business of growing our surgical account, but we'll be opportunistic and thoughtful around the right business decision and get in market. And the ones we sold are a perfect example of that.

And Ryan, maybe as a last question, I'll wrap up and just say thank you all for your time this morning. Dan want to say thank you to our colleagues and physician partners really, really proud of the high-value care we offer in the marketplace where the last dependent freestanding store state surgical company in the country. We play a very important part in the health care system. We think we're part of the answer on and we're very, very excited about our positioning to continue to grow and deliver value to our shareholders. So thank you again for the time this morning, and we'll be back in touch at the end of the Q4 call. Thanks.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.