Surgery Partners, Inc. Q1 FY2020 Earnings Call

Good afternoon, and welcome to the Surgery Partners, Inc. First Quarter 2020 Earnings Call. I would now like to turn the conference over to Tom Cowhey, Chief Financial Officer. Please go ahead.

Good afternoon. And welcome to Surgery Partners' first quarter 2020 earnings call. This is Tom Cowhey, Chief Financial Officer. Joining me today are Wayne DeVeydt, Surgery Partners' Executive Chairman; and Eric Evans, Surgery Partners' Chief Executive Officer. As a reminder, during this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this afternoon's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The information presentation of this additional measure should not be considered in isolation, or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in our earnings release, which is posted on our website at surgerypartners.com, and in our most recent quarterly report when filed. With that, I'll turn the call over to Wayne.

Thank you, Tom. Good afternoon, and thank you all for joining us today. I want to start today by recognizing the crisis facing our nation. The COVID-19 pandemic literally impacts all of us as nothing else in our recent history has. And we hope that this day finds you and your loved ones safe and healthy. This crisis has also shown us our collective strength. I'm continually humbled by the dedication of our nation's frontline workers, doctors, and particularly our nurses and medical staff, who are fighting the deadly disease each and every day and saving lives. Thank you. While the COVID-19 pandemic has presented us unique challenges for Surgery Partners, it is a testament to the strength of the team we've built over the last two years to see how quickly and effectively they responded to the task. We started the quarter with two months that saw same-store revenues and adjusted EBITDA grow at nearly a double-digit rate. March was also off to a strong start. Before COVID-19 began its exponential spread, we saw volumes drop by nearly 75% as some of our facilities reduced operations to a day or two per week, serving only the most critical patients. Our team quickly mobilized to the task at hand, reducing facility-level overhead, slowing capital distributions, while tightly managing working capital. Eric will talk about our actions in greater detail. But know that this team reacted swiftly, decisively, and responsibly to preserve our business and liquidity. To further enhance our liquidity in this uncertain environment, on April 22, we closed an incremental term loan raise that, when combined with assistance from government programs, should give us ample availability to weather this storm. Tom will speak to our liquidity efforts and position in more detail. But our ability to execute a financing transaction in this market that was 13 times oversubscribed speaks to the power of our business model and the execution of our teams. Strategically, we've never felt stronger. Surgeries are back on the rise, PPE availability is increasing, states are lifting restrictions, and we are beginning the process of ramping our operations back up after the pause in operations our facilities experienced for the last several weeks. Further, this crisis has demonstrated the power of our short-stay surgical model to the healthcare ecosystem. Now more than ever, patients, providers, and payors recognize the value, convenience, and safety of our facilities. Our physician recruiting efforts in March and April have yielded strong results. Our pipeline of M&A and partnership activity remains robust. Stand-alone facilities have a new appreciation of the benefits of being part of a larger organization, and we are looking forward, over time, to return to and potential acceleration of our previous growth trajectory. With that, let me turn the call over to Eric to talk about the company's operations.

Thank you, Wayne, and good afternoon. Today, I'd like to review highlights of our most recent results and then provide an update on our COVID-19 planning. Tom will then close our prepared remarks with greater detail on first quarter financial results and liquidity before we take questions. We entered 2020 with a strong plan to deliver another year of double-digit growth. Our investments in physician recruiting were demonstrating significant traction. Our managed care efforts were delivering robust rate growth, and our portfolio positioning over the last two years had created a stronger core set of assets that we were continuing to optimize as we matured our Surgery Partners operating system. As evidence of our progress, February 2020 year-to-date results saw adjusted revenues up over 12% over the prior year period, with adjusted EBITDA up nearly 10%, and a seasonally long March expected to further add to our momentum. Our confidence levels in our outlook were high. However, by mid-March, it was clear that troubles overseas had rooted themselves in our country as well. In response to the growing pandemic, on March 14, the Surgeon General recommended that hospitals and healthcare systems consider stopping elective surgeries. On March 15, CMS issued formal guidance on how to triage and delay elective surgeries to preserve PPE and limit exposure to the virus. By that point, our command centers were up and running, and our executives were meeting daily to react to these measures and additional state mandates curtailing procedures and to make the critical and necessary decisions to navigate through what has become an unprecedented crisis. By late March, our surgical hospitals were performing surgical procedures at approximately 20% to 40% of normal operating levels, with significant variability based on specific geographies. Our ASCs were performing surgical procedures at a reduced schedule of one to two days a week, focused on our most critical procedures, resulting in case volumes that totaled approximately 10% to 20% of normal operating levels. In response to the COVID-19 outbreak and elective surgery restrictions, we took immediate actions to ensure the health and well-being of our colleagues and patients, as well as having to flex down volumes. Specific actions we took included furloughing a significant portion of our workforce, reducing corporate headcount, converting salaried workers to hourly rates, negotiating with the company's vendors and lessors for revised payment terms, and reducing pay for certain top executives by 50% and salary for the majority of our corporate employees by 20%. These actions helped lower cash operating expenses by approximately 45% to 55%, and most were fully implemented by the end of March. As quickly as we reacted, the impact on the quarter-to-date results of the company's rapidly declining revenues are evident in the results we announced this morning. Quarter-to-date March revenues grew at 6%, well below the pace we established through February. Adjusted EBITDA contracted by approximately 8% as compared to the prior year quarter. Same-facility revenue was positive, with large case volume declines more than offset by significantly higher increases in net revenue per case, both a function of our rate progress, but also indicative of higher acuity mix at the end of March, when only medically emergent or urgent cases were performed. Our current data suggests that these late March trends stabilized in the month of April, and we're closely monitoring May. Key states have restarted elective procedures, with California representing approximately 5% of our annual revenue restarting on April 24, and Florida representing approximately 10% of our annual revenue restarting on May 9. It's also worth noting that other significant geographies for us, such as Idaho, while impacted by the COVID crisis, never implemented elective surgery restrictions. As we think about reopening and increasing surgical procedures over the next few weeks, we are focused on three key priorities: first, ensuring that our facilities are safe places to conduct procedures. We are strictly following CDC guidelines as well as screening patients, visitors, and our colleagues to ensure compliance. Our facilities follow stringent cleaning policies, which have been further enhanced in focus and frequency, and most only see prescreen patients by appointment, which helps to reduce our overall risk profile, making our facilities highly attractive options in this environment. Second, and closely tied to our first principle, we are focused on ensuring appropriate use and quantity of PPE. Our teams have been hard at work since January, thinking about supply chain implications of disposable medical equipment. Our procurement teams have done an exceptional job this year, proactively managing our supply and actively securing alternate supply on the spot market. While appropriate use and conservation of PPE remains a focus of our entire team, our channel checks indicate that some of the most difficult items to find, like masks, should become much more widely available over the next few weeks. While demand for critical items remains higher than ever, we believe we have sufficient inventory to reopen and ramp up our operations. Finally, we have been focused on managing our costs to scale them appropriately with volumes. It will take time to get back to traditional levels of operation, and we are committed to adding staff and costs back into the system in a very responsible manner, commensurate to revenue. One final thought: Our recruiting teams have never been busier. In the first three months of this year, we recruited nearly as many new doctors as we did in the first quarter of 2019 despite the crisis. We believe that this crisis has fundamentally changed how patients and surgeons will think about the role that outpatient facilities play in healthcare delivery. I will turn the call over to Tom, who will provide additional color on our financial results.

Thanks, Eric. Today, I'll spend a few minutes on our first-quarter financial performance before moving on to liquidity and commenting on when we expect to update our outlook. Starting with the top line, surgical cases declined to approximately 116,000 in the quarter, driven by COVID-19-related restrictions in the month of March. Surgical case volumes were up nearly 2% through February. Adjusted revenues for the quarter were $451 million, 6% higher than the same period last year, including approximately $10 million of contribution from our New Community Hospital in Idaho Falls. On a same-facility basis, total revenue grew approximately 1% in the first quarter, as higher acuity mix and improved reimbursement rates contributed over 11% to this growth, partially offset by case decline due to COVID-19. Our best estimate is that there were approximately 14,500 canceled or deferred cases in March due to the coronavirus outbreak, which would have generated nearly $45 million of adjusted revenue and driven quarterly adjusted EBITDA growth into the double digits, consistent with our previous full year guidance. Turning to operating earnings, our first-quarter 2020 adjusted EBITDA was $46.5 million, an 8% decrease over the comparable period in 2019. The decrease over the prior year quarter was related to COVID-19. During the quarter, we recorded $12.6 million of transaction, integration, and acquisition costs. Of note, first-quarter 2020 transaction, integration, and acquisition costs included approximately $7 million of EBITDA losses associated with our de novo hospital in Idaho Falls, which was modestly better than our projections. As I've noted before, we expect to report results from this facility separately throughout 2020. Moving on to cash flow and liquidity, we ended the quarter with a cash balance of approximately $195 million of cash and equivalents. As previously noted, on March 18, the company drew down the available capacity under its $120 million revolving credit facility, excluding approximately $7 million of capacity that remains reserved for outstanding letters of credit. During the first quarter, Surgery Partners had operating cash flows of approximately $29.2 million. We had distributions to non-controlling interests of approximately $24 million. We would remind investors that, in light of the COVID-19 crisis, we project that second-quarter distributions should be lower than historic baselines as distributions are reduced to preserve liquidity. We spent approximately $12 million on capital expenditures in the quarter, primarily before our COVID-19 action plan took place. In the current environment, we are closely watching capital expenditures and generally only advancing those that are critical; $5.5 million early in the quarter related to the acquisition of a new ASC in the state of Ohio. In April, we issued $120 million of new term loans for general corporate purposes. This highly successful offering, which was approximately 13 times oversubscribed, was a critical part of our COVID-19 liquidity planning, ensuring that the company has ample liquidity this year. The company is also closely monitoring legislative actions at federal and state levels, including the impact of the Cares Act and other governmental assistance on its business. Programs that may benefit the company include the deferral of the social security payroll tax match, which will be deferred for the remainder of 2020. The company expects that this will result in not having to fund approximately $15 million to $20 million of taxes in 2020, half of which will have to be paid in December 2021 and the other half in December 2022. As part of its efforts to distribute Cares Act funds, starting on April 10, 2020, Surgery Partners facilities received approximately $45 million of grants. Our current view is that these grants will be recorded as revenue in the second quarter of 2020. The company also received approximately $120 million of accelerated payments prior to April 26, when CMS suspended this program. Per the terms of the program, we expect to start repayment 120 days from receipt of funds, and we project that the vast majority of our advanced payments will be settled this calendar year. The company's ratio of total net debt-to-EBITDA at the end of the first quarter of 2019, as calculated under the company's credit agreement, was up slightly at approximately 7.3 times, primarily as a result of modestly higher net debt at March 31 and lower trailing 12-month adjusted EBITDA in the current quarter. Importantly, as part of the incremental term loan raise in April 2020, we negotiated with the company's lenders, under its revolving credit facility, to waive our leverage covenant on that facility for the remainder of 2020, providing substantial flexibility for the calculation in 2021. Moving on to our 2020 outlook, as you know, on March 23, due to the evolving unpredictable and unprecedented nature of the COVID-19 pandemic on the global economy and our business, the company withdrew its full year 2020 outlook. While we remain optimistic that the month of May could bring materially higher volumes than we experienced in the back half of March or in April, the company is not providing an updated outlook at this time. We expect to be in a better position to provide an update to investors when we report June results later this year. In summary, while Surgery Partners had a strong start to the year, the coronavirus pandemic has impacted our business across the country. Through quick and decisive actions, our team has proven to investors that we are prudent stewards of your capital, and we bring that same level of diligence and focus as we reopen and prepare for the new opportunities that we believe will arise due to this crisis. With that, we will open the call for Q&A.

Our first question comes from Kevin Fishbeck with Bank of America. Please go ahead.

Thanks for the question. First, let me just say for all those participating, we appreciate you being here. We recognize that this is a little bit unusual, and that all of us are honoring the stay-in-shelter orders and don't allow us to be face-to-face during this period. But that being said, let me start by saying that we feel very fortunate. Obviously, these were not procedures that we were waiting to come to us, but rather many of these were procedures that we've already rescheduled. We've been working with our surgeon partners. And as we started to shut down facilities, we were regularly reaching out to those patients to find the right time to reschedule. So with that, I'm going to ask Eric to comment in a little more granularity and can give you some color commentary around how things are actually ramping up.

Yes, Kevin, thanks for the question. A couple of things I would say: we're obviously guardedly optimistic. There's a lot we don't know about the pandemic, and many things could change. It's incredibly different by geography. But in general, we are very, very pleased with the amount of momentum we have in scheduling. Early returns show a significant uptick week after week. And so I would say this: that I don't want to get into giving you a specific percentage just because there are so many unknowns with how the pandemic will go, what will happen in a local market, how physicians react. I will tell you, in general, our physicians are anxious to get back to work. So far, our patients have been very open to coming back for procedures. We have facilities that are ramping up slower, and we have facilities that are already back to budget. And so giving you a percentage would be too early at this point, that's the reason we pulled guidance, but we're certainly pleased with the early results as markets start to open up.

All right. Well then, I guess, when we think about the volumes coming back, this should get back to normal. Do you believe that there will be pent-up demand that we could see potential periods of above-average volume? And if so, are there gating factors to that volume coming back? Do you have enough excess capacity? Is there enough physician hours in the day to get everything back? And how do you think about those types of gating factors?

Kevin, this is Wayne. A couple of interesting comments. I'm going to ask Eric to elaborate in just a moment. But first and foremost, I think, as you mentioned, we're already almost back to normal. And so I think at what pace we'll get back to normal will have to be evaluated. We've been at belief that we could get to capacity maybe sooner than expected. The question becomes, well, what if there's excess demand? I would tell you, first and foremost, that I do think there are many reasons we could see incremental demand as the year progresses. The emphasis placed there is because of what we've seen on the physician recruiting front. And I'm going to let Eric elaborate on that in just a moment. The other thing that I would highlight is around capacity. That is not necessarily a concern for us. If you remember, we typically run normal hours Monday through Friday. We don't typically run past 6 p.m. It wouldn't take much for us to open a few more hours each day. We're typically not open on Saturdays and Sundays. As you saw at year-end last year, we can flex up and down and actually open up on Saturdays and Sundays. So the ability to add anywhere from 25% to 40% additional capacity is very much available to us if the opportunity presents itself. But I'm going to ask Eric to elaborate a little bit on physician recruiting, as I think it's really relevant to what we're seeing right now in this environment. And I also think that was a significant gating factor we initially faced when our country was first impacted by this. Eric?

Yes, Kevin. So as we go into a little more detail. Certainly, I would just concur with Wayne's comments. As far as capacity goes, we feel very comfortable with our ability to flex up. And we certainly know that there is a backlog, right? So we have a number of cases that will need to be done. And the question by market, of course, is how fast we will get those rescheduled? We're encouraged early on. There certainly is a possibility we could end up with excess demand. There's some question, though, obviously, primary care is getting back up to speed. There are questions around consumer behavior. But early indications would suggest that there is a real chance for that. And I would just say, big picture, net-net, we feel like coming out of this closure period, we are better positioned for growth than we were before. So high level and longer term, we feel very, very bullish on the business. There are a lot of questions around just how fast it comes back, and we're certainly encouraged by early signs. To go to Wayne's point, from a physician recruitment standpoint, it's notable that we were close to having the same number of new physicians even with the pandemic hitting. And we've been really impressed, too. The physicians we've added this year have been significantly higher producers and higher net revenue. We continue to be very successful in our focused physician recruitment. And that's not only on our traditional path, but in the time of this closure or slowdown, we've had a lot of physicians in markets that have reached out to us or that we've made contact with that are newly interested in having outpatient facilities focused on these procedures. So I would say my outlook is very, very positive. The timing is hard to know because of consumer behavior. We know that there's a pent-up backlog of patients that we're going to be scheduling. We don't know how fast new patients will return, although early signs are very positive. And, to add to that, and I think Wayne's major point is, we do see real upside in physicians who have backlogs, who maybe can't get into their hospitals that they're used to going to or maybe want a different location-based on patient requests or their own comfort level, which is focused on doing outpatient surgery, which our facilities are very, very specifically focused on doing just that. So overall, very, very optimistic longer term. In the short term, there are still a lot of unknowns that we have to manage through.

And then maybe just a last question. As part of that longer-term growth rate, how do you guys think about the impact of a recession? It seems like we're heading into one that may last for some time. So how do you think about the impact on volumes and payer mix, and if there's any offsetting cost items?

Kevin, thanks for the last question there. Let me first just start to remind folks that if you look at history, in previous recessions, particularly from 2008 and 2009, what you would have thought would have intuitively been a behavior is that people would hunker down and postpone elective procedures. We actually saw just the opposite. In fact, if you go back and look at how successful the providers were in those early years of the recession and how much of an impact managed care companies took, part of the reason is that many individuals recognized they had COBRA coverage, and if they were going to be laid off for an extended period of time, this was actually a more opportune time to get those elective procedures done when they could have more time to recover and to do it while they still had coverage provided by their employer. And so that's one dynamic that we believe could still play out. The second concept I would make, and some people may question the higher deductibles compared to those from back then; the answer is that it's not necessarily the case. In fact, in many cases, CDHP had already worked its way through the system. Many employers have actually incentivized employees to go to lower-cost settings by waiving deductibles. So if anything, I would call it net neutral when looking at deductibles from back then compared to today. From our perspective, we view this as an opportunity to ramp up rather than ramp down during a recession. I would also simply add that because we're very focused on higher acuity cases, and as you know, Medicare has been shifting a lot of procedures into the outpatient setting, and we now moved TKAs to our outpatient setting, I think we're really well-positioned for growth in Medicare, which adds to our business model. I don't want to minimize that there could be impacts with unemployment, but I would also say I think we're well-positioned based on history and the new expansion in the outpatient setting for Medicare.

Yes, Wayne. The only thing I'd add is I would just say, our ASC cost model is able to, in many cases, take on incremental government patients, especially of higher acuity, and actually drive a nice margin. So we feel like the government payer shift is not a positive, but as incremental business, it certainly is helpful. On the payor side, it will be interesting to see how payors react coming out of this. We've already seen a few that have become more active and aggressive in creating professional fee increases to do cases in the appropriate care setting. We think there's some offsets there. One big reason elective surgeries were shut down early was due to the idea around keeping capacity to deal with the surge of COVID patients. I think as that settles down, we don't see a reason, even if COVID were to come back, for us not to be able to stay open and provide great healthcare to patients.

Our next question comes from Brian Tanquilut with Jefferies. Please go ahead.

Okay. Good afternoon. I hope you guys are all doing well. My first question is for Eric or for Wayne. As I think about the healthcare system exiting COVID, how are you thinking about the shift of procedures from hospitals to outpatient settings?

I'm going to let Eric elaborate on this because we've had some pretty interesting experiences. Let me just highlight a couple of things to keep in mind. We've actually got a few of our facilities that have been licensed now to perform certain hospital procedures, which, we think, is an interesting dynamic in the environment. Two is, the physician preferences are going to be relevant. Their preferences are being driven by their patients and how they feel about going to an environment where you could still have an ER actively bringing in COVID patients. It's been interesting to see how our surgeons feel now in this new environment.

Sure. Yes, and I'd start off with the net-net. Obviously, we don't think this in any way hurts the transition of patients from hospitals, and we do think, over time, the impact of the shutdown and just people focused on their health and wanting to be cautious about exposure. We think we're well-positioned, just given that we're focused on providing surgery, and we can do some things from access and control standpoint that's hard for larger settings. I think that's certainly a good thing. I would say, across our markets, we have seen some early indications where some physicians, who in the past had not been interested in ASCs, have become more interested. We have current physicians who, due to the situation are bringing higher acuity patients to our ASCs, and we think that certainly opens the door for us to continue to make the case that there's more we can do safely in our ASCs.

I appreciate that. And then I guess, Wayne, more strategically, you obviously loaded up the balance sheet with more debt, which seems prudent in this environment. But how are you thinking about future cash flows given the debt load? Are we at a level where most of your cash will be consumed by interest expense moving forward?

Brian, thanks for the question on this one. Look, how much cash we have on this balance sheet as we could, first and foremost, is to prudently prepare for the unknown. What we didn't know was whether this would be incredibly prolonged, and we still don't know today. We think we should prepare for that. But I do want to remind everybody that while we're very optimistic about what we're seeing in May already, we are still in the early innings, and we should all just keep that in mind. But that being said, long term, we were always planning to delever through growth, but we knew we needed to be offensive at some point. We believe we were in a strong position right before the pandemic to move on the offense. We believe we are in an even better position now. We believe more opportunities will present themselves that we will have to consider bringing capital into the organization, allowing us to put to work this chassis we built. We recognize that leverage is a concern right now, but we want everybody to be aware that the cash we borrowed right now is sitting there and can be easily paid back down if we think things normalize sooner than later.

Sure, Wayne, I'd be happy to do that. We have a lot of flexibility, but we're being cautious. We'd like to make sure that the shoots we're seeing in May are going to continue to grow and the business continues to recover to the line that we were previously on. But we believe that this business, if anything, is strategically stronger over the long run than it was before this crisis. As you think about adjusting EBITDA by double-digit rates, if we leave that capital outstanding past the one-year mark, it would be really about four to six months' worth of pushback on what your breakeven point would be. So it's a calculated move to help our overall liquidity position. We think of it as an insurance policy, and it gives us a lot of option value as we think about how we might want to go on offense on the other side of this crisis.

I totally agree. I definitely understand the prudence of that. But I guess, last question related to your comments. How should we think about modeling the cost structure moving forward? I know you've had adjustments with wages and all the other operating costs. So as I think about the second quarter going forward, can you help us think through the cost structure?

Yes. I'm going to ask Tom to comment on this in some detail. The one thing I want to remind all of our listeners is that our model is unique. If you think about variable costs being around 40%, we took that out right from the beginning, and we built up flat fixed costs, which is highly unusual, but we flexed down. We asked our executives to take substantial pay cuts across the board. We took other fixed costs out of the system. We did it with an intentional bias that we thought was the prudent thing to do in this environment, knowing we would need to be able to flex up quickly if things begin to ramp up again very quickly. As you've heard from Eric early on, we are seeing positive momentum. We are seeing positive momentum. But I would anticipate that we would flex up slower even with the momentum than we flexed down.

Yes. As you think about the overall cost structure, and you look at some of the big line items on the P&L, there are some that are going to be variable in nature, such as supplies, which is a very large portion of our expense; the medical and professional fees. As you look at those, those will flex up and down with volumes. When you're only working a day or two a week, you're not spending as much on some of those as possible as you might have been otherwise. It really gets into what you have done with your fixed costs, as I had a mentor who once said, 'All costs are variable over the long run.' It's really just a question of how long is the long run. For us, it was about two weeks. We converted salaried workers into hourly. We furloughed employees. We reduced corporate overhead and salaries. We worked with lessors to get deferments. We have about $380 million worth of cash expenses looking at the cost structure ex D&A. We're currently at about 50% right now. As we come back up, we need to be cautious to let those costs back out. Our operators are doing an outstanding job on this; they are rethinking how we do things, to try to take advantage of this unique window. It’s hard to predict precisely what it'll look like on the way back up, but we want to be careful not to take two steps forward, then three steps back.

Our next question comes from Whit Mayo with UBS. Please go ahead.

Hey, thanks. Good afternoon, Eric. I'm just trying to think from a perioperative standpoint. Can you talk a little bit about how cases are logistically working now? Can you operate as efficiently on a per-case basis?

Thanks for the question. Yes, there are additional steps we're taking in the perioperative space when it comes to cleaning between cases, changing out PPE, and considering air flow changes. There's a lot of things that we are putting in place to make sure we keep our colleagues, physicians, and patients safe. With that said, I think within our setting, we have capacity, and we have physician patients right now, as you can imagine, being pretty patient and understanding of what we’re trying to get done. While we absolutely believe we will lose some efficiency, I don't think it’s so monumental in these shorter cases. We believe that we can work around those issues. Part of the way we're doing that, too, is this downtime has given us a chance to reevaluate block scheduling, working with our doctors to change how we schedule various cases on specific days. We've actually created more capacity during this time with these adjustments. Net-net, while turnaround times may slow us down somewhat, I don't think it's significant enough to create true capacity issues for us.

Yes, that’s really helpful. Maybe just a follow-up on Kevin's question regarding economic impacts. You alluded to possibly looking at government business a little differently than historically. Can you elaborate a little more on that?

Sure. A couple of things I'd say there. Let's start with Medicare. With Medicare, because we're doing higher acuity cases with Medicare patients, the reimbursement, given our cost structure on those cases, tends to be okay for us. We can drive margin whereas the hospitals might be negative. And where you get the big benefit when you think about growing that Medicare share is when physicians bring those Medicare patients. They tend to bring all their patients. They don't want to split their day. So we see Medicare patients, in general, as a way for us to grow our overall business, while they're not as profitable as commercial patients; they are profitable for us. We're able to manage our cost structure in a way that many hospital systems can't. So we feel good about that ability. Regarding Medicaid, it's a state-by-state issue. Some states are pretty good at making that work. Even with Medicaid, we see some room for cost savings, so it's state by state. There are some challenges in certain states, but we believe, due to cost pressures, we're seeing some payers being more aggressive in increasing professional fees for cases done in the ASC setting. There's plenty of opportunities for us.

Okay. Maybe just one last one for me. I was really curious, Wayne and Tom, on your perspective regarding COBRA. How do you think consumers view COBRA? Last time around, about 30% signed up for it; it's obviously a lot more expensive without premium support today. How do you guys think that will work out in this recessionary environment?

It will be interesting to see if what we saw back in 2008 and 2009 continues to play out. The question with COBRA is, what alternatives are available to people? In many cases, it's a better alternative than other options immediately available. We know that behaviors observed last time with COBRA were uniquely different, where people utilized it and enrolled to get elective procedures completed. The dynamics have shifted over the last decade to the ASO side; whether it's high-cost settings or low-cost incentives have grown meaningfully. Even if you model assuming there are some higher costs today than a decade ago, the various incentive programs built over the last decade might offset the higher costs seen in deductibles. This unknown environment is hard to predict, but historically, people end up getting procedures done rather than postponing them. At this point in May, we are seeing volumes move up faster than anticipated, and states are reopening.

Yes. As we think about disruption of payers' claims processing, we've been monitoring that closely. We've actually been pleasantly surprised with what we've been seeing from the AR. That’s a positive sign. On the self-pay side, we’re looking into making it easier for consumers to receive care to appeal to more patients. We see that as a differentiator moving forward.

Our next question comes from Ralph Giacobbe with Citi. Please go ahead.

Thanks. Good afternoon. Did you provide insights on April and possibly the first week of May trends? I know you mentioned surgeries are back on the rise, but if you could provide quantification around the volume and revenue, that would be helpful as well.

Ralph, we did not give specifics on April or May, but I can provide some broad goalposts. Tom, please elaborate further if warranted. Keep in mind, around mid-March is when the vast majority of our facilities were either mandated to shut down, or we started reducing procedures to preserve PPE. Thus, come mid-May, you can gauge what we disclosed, which is that we thought around 14,500 surgical procedures were down due to COVID in that two-week window toward the end of March. Those trends continued in April, so I would say it was pretty much the same as what we saw in the last two weeks of March. That being said, as the country is reopening, volumes have already grown exponentially. Now it varies by state and facility. The ramp-up we're seeing now is noticeable, and we're seeing scheduling run almost two times what we saw in April, but still low with how low April was. Tom, anything you want to elaborate on, or Eric?

No. I think you covered it well. The trends in March were stabilized in April, and May is starting back up. You can see from various sources that discuss the restrictions and lifting of mandates. A lot of our key geographies are opening back up, and it’s a function of how quickly they do so and when the patients begin returning.

Great. That was part of my next question. Can you elaborate on early conversations with patients? Are they willing to come back now versus wait? Any concern about this early bulge from pent-up demand followed by potential falloff due to slow filling of the pipeline? Any thoughts around that trajectory?

That's probably the most difficult part. Our cautious position is not proving out. We've taken the right actions to reduce costs, and the system's better positioned than we initially thought we'd see. That's a natural progression, but it's still early. We also took a cautious view that April would continue for May and June, but it’s now clear that patients are willing to get procedures scheduled. We're seeing physicians eager to return to work and patients willing to come back. Therefore, every data point we would want suggests positive momentum, but it’s two weeks in. Eric, do you want to elaborate further?

No, I think you covered it well. We've had markets where they've had virtually 100% success in rescheduling, and other markets with more caution. That local impact will influence how quickly we can get patients back. Net-net, we're optimistic moving forward based on early signs prompting a faster ramp back toward normal volumes.

Okay. Fair enough. If I could sneak in another question, I might have misunderstood or misheard, but you mentioned alternatives to get capital identified to accelerate growth. Can you flesh out those comments or clarify if I misinterpreted?

Yes, thanks, Ralph. I wouldn't read too much into the words I chose. What I will tell you is that we feel good about our company. We were seeing how strong our January and February were turning out, achieving double-digit growth, while also driving that through same-store growth. Our robust M&A pipeline was something we had discussed with the Board for a while; how to bring capital into our company and take that offensive part. All of those discussions need careful weighing against trade-offs about when to act. We spent two years building this chassis that was ready to go in January and February. We need to manage until this short-term window passes, and I want to reiterate that we have over $400 million of consolidated cash.

Just to reiterate, the double-digit growth we referenced previously did not account for M&A. Our company's organic performance is exceptional along with the various initiatives we discussed. Though M&A adds to our pipeline, our operating capabilities improved this year without any additional acquisitions.

Our last question comes from Frank Morgan with RBC Capital Markets. Please go ahead.

Good afternoon. Quick question. I appreciate the color on your most important states and the timing of when those reopened. But are you seeing any variations in terms of business returning, specifically surgical mix across key states like Texas and Florida? Are you seeing any particular type of surgery trending positively versus others?

Frank, I appreciate you asking this question. Eric, Tom, and I were discussing trends, trying to identify any specific patterns regarding acuity and surgery mix. Eric can expand more on that, as he’s been looking at these trends in detail. Indeed, we have seen some states opening where the rescheduling has been positive, such as Texas and Florida, contrasting with states like New York, where we have no facilities today. It's been interesting to look at how warmer states are performing compared to cooler ones, but Eric, I'll let you comment.

Yes, Frank. I would caution that I don't want to make any solid conclusions from a couple of weeks of data. However, most of the states opening up show positive trends and favorable momentum indicating we are moving back toward normal. In terms of specialty, we prioritize higher acuity cases causing patient discomfort. While early indicators show robust rescheduling, I want to make it clear that planned procedures won't be limited to just those with high acuity. If you're that patient in need of GI or cataract surgery, where possible, we can do it safely as we secure the necessary PPE.

This concludes our question and answer session. I’d like to turn the call back over to Mr. DeVeydt for any closing remarks.

Some final comments. I guess I just want to reiterate that there are reasons to be optimistic, but we would recommend caution at this point until we really see how things open and progress. It's still the early stages of reopening. I want to express appreciation on behalf of the Board of Directors of Surgery Partners Health for the truly remarkable efforts of the management team. They have moved aggressively on many fronts and positioned us well to assist patients. Eric, any final comments you would like to make?

Yes, absolutely, Wayne. Before we conclude, I want to express appreciation for your questions and it’s nice to be back today. I want to take a moment to thank our over 10,000 associates and over 4,000 physicians for their contributions and efforts throughout this crisis. Their commitment allows us to deliver on our mission statement, maximizing patient experience through partnership. We are humbled by the efforts of doctors, nurses, and other first responders nationwide as they fight this pandemic and save lives. Thank you all for joining, and I wish you all safety and health. Wayne, if you don’t have anything else, that concludes our call.

Nothing else from me. Thank you, Eric.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.