About Surgery Partners

Surgery Partners, Inc., through its subsidiaries, owns and operates a national network of surgical facilities and ancillary services. The company is a leading healthcare services company with an integrated outpatient delivery model focused on providing high-quality, cost-effective solutions for surgical and related ancillary care in the support of both patients and physicians. The company is one of the largest and fastest growing surgical services businesses in the United States (‘U.S.’), with more than 180 locations in 33 states, including ambulatory surgery centers (‘ASCs’), short-stay surgical hospitals (‘surgical hospitals’), and multi-specialty physician practices, among others. Growth Strategies The key components to the company’s strategy are to deliver outstanding patient care and clinical outcomes; continue to execute and expand upon the company’s physician engagement strategy in attractive markets; become the partner of choice for physicians seeking to become or stay independent; drive organic growth at existing facilities through targeted physician recruitment, service line expansion and implementing the company’s efficient operating model; seek partnership opportunities with payors to make health care more affordable for their members; continue the company’s disciplined acquisition strategy; offer new services to provide a more comprehensive continuum of care; enhance productivity by delivering on integration; and seek strategic relationship opportunities with health care systems looking to develop and/or enhance their ambulatory surgery footprint to better meet the needs of the patients and medical staff. Segments The company operates in two reporting segments: Surgical Facility Services and Ancillary Services. Surgical Facility Services segment The company’s Surgical Facility Services segment consists of the operation of ASCs and surgical hospitals and includes the company’s anesthesia services. The company’s surgical facilities primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics and pain management, ophthalmology, gastroenterology (‘GI’) and general surgery. Surgical Facility Operations As of December 31, 2023, the company owned or operated 162 surgical facilities, including 144 ASCs and 18 licensed surgical hospitals. The company’s typical ASC is a free-standing facility that performs planned surgical procedures on an outpatient basis for patients not requiring hospitalization and for whom an overnight stay is not expected after surgery. Each ASC usually has one to seven operating or procedure rooms with areas for reception, pre-operative care, recovery and administration. The staff of the company’s ASCs generally includes a center administrator, registered nurses, operating room technicians, as well as other administrative staff. The company’s surgical hospitals generally are larger than its ASCs and include inpatient hospital rooms and, in certain cases, emergency departments. The company’s surgical hospitals may also provide services, such as diagnostic imaging, laboratory, oncology, pharmacy, physical therapy and wound care. The company operates both multi-specialty and single-specialty facilities. In multi-specialty facilities, a variety of surgical procedures are performed, including among others, orthopedics and pain management, gastroenterology, ophthalmology, and general surgery. The company has diversified the mix of procedures performed at the company’s facilities by strategically introducing select specialties that will complement existing services. In many cases, the company keeps certain facilities as single-specialty where it suits an individual facility or market demand. The company provides each of its surgical facilities with a full range of financial, marketing and operating services. For example, the company’s regional managed care directors assist the local management team at each of the company’s surgical facilities in developing relationships with private insurance payors and negotiating private insurance contracts. Surgical Facility Ownership Structure The company owns and operates its surgical facilities through partnerships or limited liability companies with physicians, physician groups and health care systems. In some instances, the company acquires ownership in a surgical facility with the prior owners retaining ownership, and, in some cases, the company offers new ownership to other physicians or health care systems. Of the 162 surgical facilities that were operational as of December 31, 2023, the company held majority ownership in 90 of these surgical facilities and consolidated 123 for financial reporting purposes. The company provides day-to-day management services for a majority of the company’s surgical facilities pursuant to a management agreement and receive a management fee that is typically equal to a percentage of the facility revenue. The company also provides intercompany loans to some of the surgical facilities which often are secured by a pledge of assets of the facility. Strategic Relationships When attractive opportunities arise, the company may develop, acquire or operate surgical facilities through strategic relationships with payors, health care systems, and other health care providers. Forming such strategic relationships can enhance the company’s ability to attract physicians and access favorable private insurance contracts for the company’s surgical facilities in that market. The strategic relationships through which the company owns and operates surgical facilities are governed by partnership and operating agreements that generally are comparable to the partnership and operating agreements of the other surgical facilities in which the company owns an interest. Sources of Revenue Revenue from the company’s consolidated surgical facilities is earned from facility fees related to health care services performed in the company’s surgical facilities and is included in the company’s patient service revenues. The company is dependent upon government and private insurance sources of payment for the services the company provides. Medicare Reimbursement - Hospital Inpatient Services Eighteen of the company’s surgical facilities are licensed as hospitals. Most inpatient services provided by hospitals are reimbursed by Medicare under the inpatient prospective payment system (‘IPPS’). Under the IPPS, a hospital receives a fixed amount for inpatient hospital services based on each patient's final assigned Medicare-severity diagnosis related group (‘MS-DRG’). Each MS-DRG is assigned a payment rate that is prospectively set by the Centers for Medicare and Medicaid Services (‘CMS’) using national average resources used per case for treating a patient with a particular diagnosis. This assignment also affects the prospectively determined capital rate paid with each MS-DRG. MS-DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located. The index used to adjust the MS-DRG rates, known as the ‘hospital market basket index,’ gives consideration to the inflation experienced by hospitals in purchasing goods and services. On August 1, 2023, CMS published the IPPS final rule for federal fiscal year (‘FFY’) 2024, which began on October 1, 2023. Under the FFY 2024 final rule, rates for inpatient stays in hospitals paid under the IPPS that successfully report certain quality data under the Hospital Inpatient Quality Reporting (‘IQR’) Program and demonstrate meaningful use of certified electronic health record (‘EHR’) technology will be increased by 3.1%. Those hospitals that do not successfully report quality data under the IQR Program (but are meaningful EHR users) would be subject to a one-fourth reduction in their annual payment update. In addition to the IQR Program, hospitals will be subject to payment adjustments under the Value Based Purchasing Program, Readmissions Reduction Program and Hospital Acquired Conditions Reduction Programs that have been implemented by the Department of Health and Human Services (‘HHS’). Medicare Reimbursement - Hospital Outpatient Departments Surgical services that are provided in hospital outpatient departments (‘HOPDs’) generally are reimbursed by CMS using the Outpatient Prospective Payment System (the ‘OPPS’). The OPPS, established by the Secretary of HHS, determines payment amounts prospectively (generally the following calendar year) for various categories of medical services performed in HOPDs. On November 2, 2023, CMS published its OPPS final rule for 2024. On November 2, 2023, CMS additionally released final updates to its Medicare Part B drug payment policy for hospitals participating in the 340B drug pricing program. The policy change was included in the OPPS final rule, which outlines the 2024 OPPS payment rates. Under the new policy, Medicare will pay lower rates to all OPPS participating HOPDs for non-drug services. As a result of legislative changes related to off-campus HOPDs, certain off-campus HOPDs that began billing under the OPPS (or underwent certain changes) on or after November 2, 2015 are no longer paid for most services under the OPPS. Instead, these facilities are paid under the Medicare Physician Fee Schedule (‘MPFS’), which typically results in lower reimbursements. Services provided in a dedicated emergency department are still paid under the OPPS. This change has not significantly affected reimbursement to any of the company’s HOPDs, but the company cannot assure you that its HOPDs will not be impacted in the future. Medicare Reimbursement - ASCs Payments under the Medicare program to ASCs are also made based on the OPPS; however, the payment received from CMS is a percentage of the payment to HOPDs. CMS has established the Ambulatory Surgical Center for Quality Reporting (‘ASCQR’) Program as a pay-for-reporting, quality data program. The company’s ASCs that participate in the ASCQR Program receive the full annual update to the ASC payment rate. Those ASCs that do not successfully report quality data under the ASCQR Program may receive a payment reduction. Ancillary Services segment The company’s Ancillary Services segment consists of multi-specialty physician practices, including physician practices owned and operated pursuant to long-term management service agreements. Ancillary Services Operations The company’s portfolio of outpatient surgical facilities is complemented by a suite of ancillary services that the company provides to support physicians in providing patient care. This segment includes multi-specialty physician practices, urgent care facilities and anesthesia services. The company, physicians and patients benefit from these services through improved clinical efficiency and scheduling, and from incremental revenue associated with retaining fees for these services. The company employs two models in its network of multi-specialty physician practices. In one model, the company wholly owns and operates physician practices. For example, in the state of Florida, where the law does not preclude a business corporation from employing physicians, the company wholly-owns and operates physician practices in several locations throughout the state. In the other model, the company operates physician practices pursuant to long-term management service agreements with separate professional corporations that are wholly-owned by physicians. Sources of Revenue The fees charged for services in the company’s Ancillary Services segment depend on a variety of factors, including the type of service provided, the location in which the service is provided and the provider of the service. Service fees are received from both government and private insurance payors. The amounts that the company receives in payment for the provision of ancillary services may be adversely affected by market and cost factors, as well as other factors over which the company has no control, including Medicare, Medicaid and state regulations, cost containment and utilization decisions and reduced reimbursement schedules of private insurance payors. Acquisition and Development Programs Acquisition Program. In addition to the company’s operational strategy, the company continuously evaluates opportunities to expand its presence in the surgical facility market by making strategic acquisitions of existing surgical facilities and by developing new surgical facilities in cooperation with local physician partners and, when appropriate, health care systems and other strategic partners. The company generally structures its partnerships where either the company is a majority owner partnered with physicians or the company is a minority owner with buy-up rights. These buy-up rights give the company the option to own a controlling interest at some point in the future. Alternatively, the company may choose to pursue a strategic relationship with physicians and a health care system. The company employs a dedicated acquisition team with experience in health care services. The company’s team seeks to acquire surgical facilities that meet the company’s criteria, including prominence and quality of physician partners, specialty mix, opportunities for growth, level of competition in the local market, level of private insurance penetration and the company’s ability to access private insurance contracts. The company carefully evaluates each of its acquisition opportunities through an extensive due diligence process to determine which facilities have the greatest potential for growth and profitability improvements under the company’s operating structure. The company’s team may also identify opportunities to attract additional physicians to increase the acquired facility’s revenues and profitability. Development Program. The company develops surgical facilities in markets that the company identifies as having substantial interest by physicians and payors. The company has experience in developing both single and multi-specialty surgical facilities. When the company develops a new surgical facility, the company generally provides all of the services necessary to complete the project. The company offers in-house capabilities for structuring partnerships and financing facilities and work with architects and construction firms in the design and development of surgical facilities. Before and during the development phase of a new surgical facility, the company analyzes the competitive environment in the local market, review market data to identify appropriate services to provide, prepare and analyze financial forecasts, evaluate regulatory and licensing issues and assist in designing the surgical facility and identifying appropriate equipment to purchase or lease. After a surgical facility is developed, the company typically provides general startup operational support, including information systems, equipment procurement and financing. Marketing The company primarily directs its sales and marketing efforts at physicians who would utilize the company’s surgical facilities. Marketing activities directed at physicians and other health care providers are coordinated locally by the individual surgical facility and are supplemented by dedicated corporate personnel. These activities generally emphasize the benefits offered by the company’s surgical facilities compared to other facilities in the market, such as the proximity of the company’s surgical facilities to physicians’ offices, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the efficient turnaround time between cases, the company’s advanced surgical equipment and the company’s simplified administrative procedures. Although the facility administrator is the primary point of contact, physicians who utilize the company’s surgical facilities are important sources of recommendations to other physicians regarding the benefits of using the company’s surgical facilities. Recruiting teams develop a target list of physicians, and the company continually reviews its progress in successfully recruiting additional local physicians. The company also markets its surgical facilities directly to private insurance payors. Payor marketing activities conducted by the company’s corporate office management and facility administrators emphasize the high quality of care, cost advantages and convenience of the company’s surgical facilities, and are focused on making each surgical facility an approved provider under local managed care plans. Seasonality The company’s revenue fluctuates based on the number of business days in each calendar quarter (year ended December 2023), because the majority of services provided by physicians in the company’s surgical facilities consist of scheduled procedures and office visits that occur during weekday business hours. Governmental Regulation As of December 31, 2023, the majority of the company’s facilities were accredited by either The Joint Commission or the Accreditation Association for Ambulatory Health Care, two of the major national organizations that establish standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of various types of health care facilities. To participate in the Medicare program and receive Medicare payment, the company’s surgical facilities must comply with regulations promulgated by HHS. The company has implemented formal compliance programs designed to safeguard against overbilling and the company’s management agreements comply with the requirements of the Anti-Kickback Statute. The company’s arrangements for anesthesia services are distinguishable from those described in Advisory Opinion 12-06 (May 25, 2012) and are in compliance with the requirements of the federal Anti-Kickback Statute. The company is subject to HIPAA, including the Health Information Technology for Economic and Clinical Health Act (the ‘HITECH Act’), which was enacted as part of The American Recovery and Reinvestment Act of 2009. The HIPAA security standards require the company to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic protected health and related financial information. The company’s facilities also remain subject to any state laws that relate to privacy or the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act. The company’s surgical hospitals are subject to the Emergency Medical Treatment and Active Labor Act (‘EMTALA’). The company’s clinical laboratories are subject to federal oversight under the Clinical Laboratory Improvement Amendments of 1988 (‘CLIA’) which extends federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. History Surgery Partners, Inc., a Delaware corporation, was founded in 2004. The company was incorporated in 2015.