Surgery Partners, Inc. Q1 FY2026 Earnings Call

Ladies and gentlemen, greetings, and welcome to the Surgery Partners First Quarter 2026 Earnings Conference Call. 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. The 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 getting 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 three 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 was 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 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 nine over the trailing 12 months. Our de novo ASCs are heavily weighted towards musculoskeletal, 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 one-time 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 three 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 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.

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%. 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?

We will take the first question from Brian Tanquilut of Jefferies. Our organic growth strategy and continued focus on driving operational efficiencies, progress on M&A, and our portfolio optimization initiative represent additional levers to accelerate our return to our long-term growth algorithm. We remain confident in our full-year outlook and, more broadly, in 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?

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 four 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 three 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. I'm 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. So I think just a level-set summary on our people is that our culture is very strong. Initial talent assessment: our core operators are strong. There's always places to shore up, but that's to be expected. The second category is 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. 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. 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 more efficient. So both our teams and you will hear this drumbeat of growth and operational excellence from me throughout the year. 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 at the 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. If you look across the business the last five years, we have consistently improved 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 and 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 would say we believe Q1 gives us 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 — 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 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 from the early work that Justin has done. We'll see that 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 three 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.

Thanks for the question, Matt. 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 I wouldn't say we've bounced back completely. We've got new leadership teams in those markets. We've also 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. So the focus on 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 timing of physician transitions, and that continues to be a focus area for us. I would say I'm pretty pleased with the first quarter. Those three markets are in line with where we expected them to be making progress. And again, while those three 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 strong market positions. It's encouraging to see those get back online. Obviously, the fourth quarter was an unexpected challenge in those three markets, and we're excited to 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 two? And how many you think you can add to the portfolio over the next couple of years?

Surgical robots over the last four or five years have been an unlock for us and largely with physicians that might have already been partners using our facilities. 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. Roughly 70% of our total facilities have the ability to do musculoskeletal, and a lot of those over time have added robots. We still have a ways to go there. 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 our de novo pipeline, again, very musculoskeletal-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, we've added double-digit robots on average most every year and continue to find opportunities for that. As we're out recruiting, one of the things we have to be very focused on is how we match up technology and capacity in a way that's attractive to physicians. I think our team does that 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 track through the rest of the year?

Ben, thanks for the question. 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 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 is when you lose those cases for weather, you lose a day; in a lot of those really busy facilities, they're full most of the time. 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.

Maybe just one thing, a reminder on the calculation for same-store rate, particularly on a business that has high-acuity business and lower acuity business. If there's 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. For working capital dynamics: first off, dissecting the first quarter cash flow from operations, we did have some benefit from working capital relatively marginal. Other factors include 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. Interest cost has two components. Last year, we refinanced our term loan and revolver, bringing that down to 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. 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. On a working capital basis, something I'm 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 — the same as the fourth quarter. We need to make that better as we progress throughout the year, and we've got plans in place. That's the single largest lever we have at the facility level to unlock cash flow. Our physician partners are aligned with that because they get better distributions when that happens. So we do expect 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. So as a reminder for the large group, we did talk about new headwinds that we're facing this year that fall into two categories. In one state, the Medicaid exposure was across the board a 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 two new states for which we have virtually no Medicaid business just because we carry the title hospital in those two markets. The combined pressure on the adjusted earnings line for those two things is estimated to be around $8 million for the full year, a little bit more front-loaded because the Medicaid rate pressure only affects three 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 four, so more than $2 million in the quarter year-over-year was the pressure... And my other question is around what we're seeing with a lot of the payers that continue to push this campaign around prior authorization. Are you seeing any changes with the plans' behavior? And then any comments around CMS' prior authorization demo with the Wiser model, whether or not that's having any impact one way or the other?

We are certainly in favor of efforts to make prior authorization more appropriate. We do see payers making real efforts there, and I do think that benefits our business because of our cost position. With regard to the Wiser Medicare demonstration, early on there were some learnings and some additional administrative work required on our side. But we feel like we're through understanding the program. We don't see any material impact. We understand the goals of that program, which are to ensure patients are getting the care they need in the right setting. All of those efforts align with our mission to provide high-value care in the right setting at the right price. We think those are long-term tailwinds. We haven't seen a tremendous impact yet, although there are certainly markets where we're hearing it's harder for physicians to get their patients into a hospital when there's an ASC option, and that's a positive dynamic for us.

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

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

Sure, Joanna. It's something we've talked about for the last several quarters — portfolio optimization. We remain committed to reviewing those opportunities within our portfolio to accomplish several things: deleverage faster, improve free cash flow conversion, improve our growth rate going forward and simplify the business to our core short-stay strategy. We do see opportunities there. Timing has been hard to predict. We have a larger market we mentioned in my comments earlier that we're in the final stages of. We are still targeting midyear. I'd be clear that we're going to be very disciplined to make sure these are good assets and we get the right value while remaining committed to portfolio optimization. We want to do it in a way that's accretive to shareholders and that accomplishes the things I talked about earlier. So there's one market that's in very advanced stages; we're targeting midyear. We'll see. Nothing is done until it's signed. Then there are a couple of other markets we'll be exploring and we'll provide updates as appropriate.

And with that, any update on your Investor Day that you were planning? Is it still in the works? Are you waiting to complete more of these before you have the meeting?

We are 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 are closely tied to that timing. As we have something to update you on, we'll do it quickly.

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

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?

Commercial came in about 50% for the first quarter, which had a little pressure. Sequentially, we typically see some pressure because our population is aging; we have to take commercial market share to stay even. I'm pleased with the moderation of that trend. It was not nearly the same pressure we saw in the fourth quarter, but it did not totally abate. We're very focused on that and seeing some improvement signs. On the consumer wallet, the pressure we saw in cases in the first quarter relative to lower acuity, higher volume cases was mainly weather-related. It's a little early to say the economy is driving different decisions by patients; the economy still seems to be holding up relatively well. Determining why patients don't walk into your doors is hard, but we feel good about the start to the year for growth. Regarding exchanges and HIX patients, given the nature of our business — we don't have ERs and we're purely elective — we have historically not seen a lot of exchange patients in most markets, so we haven't felt material pressure there. We continue to watch that. The good news is we're not exposed to broad payer mix weakening. The main thing to watch is whether there's dampening or postponing of procedures, and it's too early to say we've seen that. We remain confident in our outlook for cases this year, which admittedly is a bit below our long-term algorithm of 2% to 3%.

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?

There's always some timing elements. The second quarter guide is a prudent guide from where we sit today. If you look at longer-term seasonality, it's relatively in line with what we've said historically. 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. It's early in the year, and this is a prudent guidance for Q2.

Perhaps a point of emphasis when you're doing a comparison year-over-year: 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. That revenue was in the second quarter last year, not in revenue for this year. Any other factor that will affect your year-over-year performance in the second quarter are those headwinds 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?

If you're thinking about bridging first half performance to second half performance, there's nothing embedded that expects a dramatic improvement in payer mix. We are seeing moderation, and that is contemplated, but the second half does not depend on a dramatic payer mix recovery. From a cost standpoint, we're always working on ways to run the business more efficiently. We expect to continue to drive improvement on that throughout the year. From a seasonal adjustment standpoint, this is a relatively normal spread, and we feel confident in our ability to deliver on Q2 and the full year.

To add: some of the headwinds we've noted are more front-end loaded, the biggest being that Medicaid cut, which will not affect our year-over-year performance in the fourth quarter. Also, cost containment actions we take will mature and have more impact in the second half. Finally, portfolio optimization benefits are mostly back-half weighted. When you add these marginal components together, you get more than 50% of the earnings in the second half of the year, which is normally the case. It's normal seasonality.

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

First question around 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 two years. Can you comment on visibility on that deal spend, what the pipeline looks like, what the competitive landscape looks like?

Great question. The timing of M&A is fickle. That's exactly why we don't include it in guidance. We feel good about our pipeline and continue to see new opportunities. The industry is very fragmented, and long term, the $200 million annual target makes sense for us. Off to a modest start this year, but the pipeline is healthy. Anything we do on M&A is upside to guidance. Last year we finished somewhat back-end weighted and did a meaningful deal in the fourth quarter. This year also looks back-end weighted so far. Long term, our positioning as the only stand-alone short-stay surgical operator at scale remains unchanged, and we expect to be an acquiror over time; it's the timing that's uncertain.

You mentioned you recruited roughly 140 physicians in the quarter. Is that normal course or a step up? Any perspective on specialties and whether these are replacing retirees or truly additive?

The 140 is broadly in line with what we'd expect in the first quarter. Recruitment is typically back-end loaded, so you'll see more later in the year from near-term recruiting last year. We're very focused on musculoskeletal and higher acuity services. As a positive, this year's recruited doctors are higher net revenue per doctor than last year's recruiting class. We closely track that performance. Some hires replace retirements; some are net adds. We saw a higher retirement rate last year and are adjusting to manage that carefully. We're excited about the early reads on recruitment this year.

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

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

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, with the return to normalcy in the second quarter, that may be pressured a little bit, so expect normal fluctuations. Roughly, you'll get an equal contribution between case growth and rate, perhaps skewing a little more towards the rate side.

Just to clarify on the other operating expenses and provider taxes: I think you said that was about a $2 million headwind, maybe a little more to EBITDA in the quarter. Other operating expenses were up about $15 million. Can you break out how much of that increase was the provider tax side so we can back into the revenue as well?

There are a lot of moving parts because of different states and how they flow through. In total at a gross level, the operating expense related to provider taxes is about $11 million, with the biggest part being the new states we've added. Other operating expense fluctuates over time, but this year's change is driven by those provider tax changes, including the new states added. Unfortunately, those new states added provider taxes without any Medicaid benefit for us. We're active in advocacy in those areas, but that's where it's showing up.

A large majority of that year-over-year increase is related to provider taxes; roughly a little 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 facilities are ones where we don't have significant ownership interest in some cases and are relatively small, so while the provider tax number looks big year-over-year, the adjusted earnings impact is a lot lower.

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

On de novos, can you give a sense of what's in the pipeline and how they're moving towards consolidation as a group?

We're excited about the de novo pipeline. We have five expected to open later this year, seven more in the pipeline, and continue to see interest. De novos produce accretive growth, though they take time to show up. It takes 12 to 18 months to syndicate and build, and roughly a year to get to cash flow breakeven, but the returns are good and will become more run rate as we've been doing this for a couple years. About half of those are with health systems and half independent, though the independent number may go up. For the independent centers, as they ramp, there will be opportunities to buy up and consolidate those centers. We're not at a level of maturation where we're doing many buy-ups yet, but we're excited about the trajectory.

We take the last question from the line of Benjamin Rossi from JPMorgan.

Following up on physician recruitment and the language from the final OPPS rule: much of the logic from CMS' discussion about removing the inpatient-only list comes from greater physician autonomy over where they treat patients. When thinking about the changes that allow physicians to take a greater portion of their caseload into the outpatient setting, what do you consider to be the remaining obstacles or pain points for doctors that prevent them from treating their entire caseload of Medicare and commercial patients in the outpatient setting at this point?

We are very excited that CMS has put more decision-making back in physicians' hands by removing the inpatient-only list. Over the last decade, commercial has moved faster to outpatient settings and physicians have shown they can safely move cases with technology. We continue to see great value alignment with payers and the government in favoring outpatient care when appropriate. Remaining obstacles include some states that haven't fully caught up with CMS in areas like vascular and electrophysiology, variability across the country where physicians have concerns about safety in certain settings, and technology or capital constraints in some specialties — for example, robotics can be expensive for ASCs. We see opportunities to address these with payer partnerships and new technologies. Many of these frictions continue to melt away as physicians experience our setting, get great outcomes and see the value of treating higher acuity cases in outpatient facilities. We expect the removal of the inpatient-only list to be a multi-year tailwind for our business.

Appreciate the color. On the 140 new additions for physician recruiting, are these replacing retirees and departures versus being truly additive?

In the first quarter, we feel really good about the additions. Some replaced retirements and some are pure net adds. We haven't released a net number, but we see these as additive to our growth profile going forward and are closely watching recruitment dynamics. Last year had a higher retirement rate than historical, and we're managing that carefully. Early reads on recruitment this year are positive, and technology and regulatory changes expanding eligible procedures continue to open up recruiting opportunities. I appreciate everyone's time today. 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.