Surgery Partners, Inc. (SGRY) Earnings Call Transcript & Summary

Good afternoon. My name is Lisa Gill, and I am the JPMorgan services analyst. With us this afternoon, we have Surgery Partners. Presenting on behalf of Surgery Partners is Chairman, Wayne DeVeydt. Post that, we will have a Q&A session. So let me turn it over to Wayne, and then we'll come back for Q&A. Thanks for joining me, Wayne.

Thanks, Lisa. Thanks for having us today. What I'm going to do is put some slides on the screen that will kind of help us walk through a little bit about who we are. Hopefully, you'll find this helpful, and then we'll have plenty of time for Q&A. Before I begin, though, I do want to throw forward the legal disclaimer or just remind everyone that we will be making some forward-looking statements during this presentation. I would encourage you, in fact, recommend that you review our periodic filings with the SEC, both our Form 10-Qs as well as our annual 10-K. We will also make some non-GAAP measurement references along the way. We have included a reconciliation at the end of the presentation and have also made references in previous filings with the SEC. With that, let me go ahead and jump into Surgery Partners, and we've broken this presentation into really 2 core sections. The first section is just a little bit about who we are. For those of you that are not familiar with our story, this will give you kind of a high-level brief overview of Surgery Partners. And then the second section is a little bit around kind of investment highlights. Why would you consider our organization as you're evaluating companies to potentially invest in the health care space? And during that part of the presentation, we want to provide a few highlights of how resilient the business has been during COVID and to give you a feel of how we've managed through that process. So let me start with a little bit about who we are. And the thing that I want you to really walk away with is we're the leading independent surgery center operator in the United States. We operate in 31 states, a very diversified geographic footprint, representing 115 ambulatory centers and 18 short-stay surgical hospitals. What's important about that is that we're the only opportunity to invest directly in a pure play of national size and scale. This is all we do. We are a surgical facility owner and operator. And we're specifically focused on what are really the high acuity, high value-added, high-growth specialties and supported by an aging population. So as you look at Slide 6, the 2 points I want to have you to take away is as you think about our book of business, think about when the majority of certain procedures are performed in life, and it's as we get older as we age, as you think about musculoskeletal, I want you to think about hip replacement, knee replacement. GI, think about colonoscopies and late-stage surgeries or in ophthalmology, think about glaucoma or cataracts. So we have over 10,000 Americans turning 65 every single day. And if you were to look at a bell curve of when a lot of these procedures are performed, it's really when you get into that later part of life. More importantly, as you think about MSK, and you think about hip replacement, knee replacement, it represents more than half our revenue, and it is really the largest growth opportunity that's out there. And ultimately, because of that, we are built around $150 billion TAM. So as you think about the ambulatory surgical space and surgical facilities, we have $150 billion TAM that we're pursuing. And that leads us to believe that we cannot only have sustainable long-term growth, but we'll show you how we've been doing it over the last 4 years and why we believe that will continue to be sustainable. So let me walk through some investment highlights. And hopefully, this will give you a little bit of a feel of why we think that we are an interesting investment opportunity. There are 6 core areas that we're going to focus on. I won't read each one on this slide, but rather I'll walk you through each of these areas and how we come to the conclusions that we've come to, along with what our track record has been. Let me start with the first one, which is just getting everybody's head around the size of the opportunity that is in front of us and the macro drivers that how we're aligned with these mega trends of high quality, low-cost in specialized settings. So starting with that. The TAM we talk about is $150 billion. And it represents what is in the outpatient segment today and the organic opportunities that are available today but it also represents the migration of procedures from the inpatient setting to the outpatient setting and the catchers net that we built, if you will, for those procedures as they move into that setting. And then finally, it's a highly fragmented industry, and we'll walk through that as well. So as you think about this TAM, I would look at it with really 2 buckets. The first bucket is $90 billion of the $150 billion is what is currently done today in an HOPD setting or in an ambulatory surgery center setting. And you can see how we've differentiated those between about $55 billion today in the HOPD setting and about $35 billion directly in the ASC setting. And so that first $90 billion there, that's what organically we pursue it every day, right? We de novo facilities from scratch. We recruit physicians to do their procedures in our facilities. We operate the facilities. We handle all scheduling, all billings. And that's the space today that will show you our organic trends at. But even more importantly, when you think about high acuity procedures, those procedures that represent the higher dollar contribution to us as well as the higher margin businesses over time, there's a significant shift occurring from an inpatient setting to an outpatient setting. And if you look at recently, there's about $60 billion of TAM that is moving out of the hospital inpatient setting into HOPD and to ASCs. And specifically, as you look at the shift, it is in those procedures that represent where the majority of our business is built. It's a migration of orthopedic, spine and cardio procedures. And that's what's really fueling the rapid growth in ASCs. If you look down below in this pie chart or these bar charts, you'll see that cardiology is in the very early stages of migrating into an outpatient setting. Same with spine and then orthopedics. Now what's interesting in Orthopedics is when you look at that, it looks like there's been a really decent migration from the 44% in 2015 to around 68% projected by mid-2020s. But what's really happening is the high acuity procedures are just starting to move in. And why is that relevant? Well, when you think about MSK and high acuity and you think about cardio, it's important to recognize that Surgery Partners specifically is built for this moment in time. Over 80% of our facilities today perform MSK procedures. And we've been making significant investments in both robotics as well as in the physician recruitment we've done to continue to grow our facilities organically. In addition, over 60% of our facilities today either do cardio [indiscernible] procedures or positioned to do cardio procedures in the next year. And why is that most relevant? Well, as you think about this demographic that's happening and this aging population as well as the government's focus of moving more Medicare patients out of the inpatient setting into the high-quality, low-cost, high patient satisfaction, this is where our model comes into play. It's a simple model though. We focus on demographics that have good trends around them in terms of demographics around aging population. We recruit doctors that specialize on those facilities, and then we make investments around the service line. So if we need robotics, we invest in robotics. If we need to expand an OR, we expand an OR. And then essentially, we bring our scale to these facilities on a local level. Why is that relevant? And how has that translated? We've driven very strong case and revenue growth. If you go back as far as 2012, you'll see that our net revenue CAGR has been 27%. What I really want you to focus on though is the growth in the actual case volume by specialty with particular focus on the far right, where MSK has really exploded at 3.7x case growth over the last 9 years and the vast majority of that has happened in the last 4 years, and we're in the very early innings of this MSK high acuity opportunity. To give you kind of a real data point for us, if you were to look at this, since 2017, when this team came together in early '18, you will see that our actual case volume in Orthopedics has grown almost 15% compound annual growth rate. So this is just volume, ignoring the acuity at this point. When you think about high acuity procedures, where I would draw your attention on this slide is that in 2020, and I'm going to emphasize this point, which was a period of heavy COVID where facilities were actually shut down while our country dealt with the PPE shortages, the ventilator shortages and the need for emergency space, we still grew our total joints by over 100% during that period of time over the previous non-COVID period. In 2021, which is the bottom left orange, we've grown an additional 108% in 2021 over that high growth rate from last year. So the high acuity procedures are just moving over, and we continue to capture a disproportionate rate of volume in MSK. As you think about the MSK landscape and you think about inpatient hips and outpatient hip and knee replacement forecast, if you can -- you look at a variety of forecasts and all of them are going to fall in this 5% to 7% range in terms of what is the expected growth rate, just the actual rate of growth and people getting hip and knee replacement. And as you'll see from this particular study that was done, the estimate is around 6.3% CAGR. So all things being equal, you have a disproportionate growth rate just due to the aging population. But what's more important and more important for our business model is you'll see that the growth rate is not proportionate to versus inpatient versus outpatient. And specifically, the growth rate in the outpatient segment, which is what we really specialize in is expected to be at 20% CAGR with over 1 million cases, representing approximately 50% of those going to an outpatient setting. So just to take a step back, think about it as you have this $150 billion TAM. You've got the current $90 billion that exists today that has an opportunity for same-store growth. And then on top of that, you have a $60 billion shift from an inpatient to an outpatient setting. But having all that and not having a superior product will not make a difference. You have to have a landing spot where your product is a better offering than what the alternatives that are available. And I would tell you, we focus on what matters most, clinical quality and patient experience. So to give you a feel of our product and what our patients experience and what our physicians experience, I want to share a few highlights of how Surgery Partners stacks up. And I'll start with just first and foremost, which is we hold ourselves to high clinical standards. We do not benchmark against what industry says is the best-in-class. We even put bars above that. You will see that if you were to look at average deficiencies per survey and you look at ASCs, we averaged 25% fewer deficiencies than all other ASCs that report. And if you look at surgical hospitals versus other hospitals, we averaged 48% fewer deficiencies. So one of the things is we know we deliver on our clinical standards. And we measure and benchmark every performance of clinical quality. This is done at the facility level, rolls up to the corporate level, and it is shared with our Board at every single Board meeting, so that we understand if we are maintaining a best-in-class position. And that track record has really proven to be exceptional clinical results. And this is one example of some of the awards the company has got. We could fill up another 4 or 5 pages with the quality that we've created on a clinical side. But clinical side is not enough, right? It has to also be an exceptional patient experience for them. And what we like to highlight on the patient experience front are a couple of factors to consider. Consider first and foremost, that nationally, CMS every year comes out with their coveted 4- and 5-star ratings. And as you know, on a scale of 1 to 5, only 8% of nationwide hospitals receive the 5-star rating with 32% receiving the 4-star rating and all others receiving a 3-star or lower around the patient experience. 100% of Surgery Partners facilities have a 4-star high rating, with 71% having a coveted 5-star rating. So we know we've built a great patient experience at our surgical facilities and specifically our surgical hospitals. But look at it on even a broader scale in our ambulatory surgery centers. And what you'll see is we have an over 94 overall patient experience score, and we measure from facility whether it be cleanliness and comfort to financial. Do they understand what their insurance is responsible for versus what they're responsible for? And really building out a patient experience that we think is second to none. And what happens is it results in a best-in-class patient Net Promoter Score. We're very proud of this promoter score. It's a function of the ASC industry. And when you compare it to like our large national and global brands that have great promoter scores and you asked the basic question, would you recommend, we're very proud of the score that we've established and grown into. But that experience then also translates to happier physicians. Physicians want their patients to have great clinical quality. They want their patients to have a great experience. What you're seeing on Page 25 is how we operate. There's really 3 different types of model. There's the -- do we just manage facilities on the far left to the far right? There are going to be 3-way joint ventures where there's us, physician and a health system but the vast majority of our business falls in this middle orange, which is really to a joint venture. It's us and the physicians. We partner together, and we focus on the patient together and we focus on the quality together. And what that's led to is really a highly satisfied physician. And as you'll see here, our physician Net Promoter Scores are quite high at 81. Again, something that we believe that if we provide an exceptional experience and we align our equity ownership model with the physicians, we will get that Net Promoter Score. And it's also lent itself to great physician engagement and retention, and we average over 95% partner retention. So if you think about great TAM, focused in the right space with the right tailwinds and a great product and an experience, those are some of the things that give us a lot of optimism about our growth trajectory. What also gives us great optimism though is how highly fragmented this market is. There has been de minimis consolidation in this market. What you'll see on this slide is that there are over 5,850 ASCs. Now this is as of 2020. Just this past week, Beckers came out with a new update saying that the ASC population has grown another 4%, just brand-new facilities popping up. So this continues to grow. What I want to bring your attention to, though, is of those 5,800 plus now over 6,000 ASCs, there's over 4,000 of them that are independent single site ASCs or affiliated ASCs that would really benefit from a partner of scale and a partner that focuses exclusively on owning and operating these facilities with the physician partners. But in addition to that, on the far right, you'll notice there's around 240 physician-owned hospitals. The Affordable Care Act limited any further physician-owned hospitals. So those hospitals are ripe for consolidation, these surgical facilities. And as you'll see, we own about 6% of those today, but there's a very large opportunity for us to continue to consolidate this market. And we find that to be highly attractive as the only pure play across the country. And we bring unique benefits to that, right? The idea that we can bring consistency and practice and approach around clinical practices and our in-state platforms, revenue cycle management. data warehouse, the ability to make decisions and leverage our scale and our purchasing power and really what a large carrier can bring, but at a local patient-centric physician-centric level. And how do we do it? It's really simple. We bring supply chain to those facilities. We bring recruiting. We bring data analytics, so they understand where the opportunities reside. Revenue cycle, and we bring managed care, the ability to negotiate on a national level with large national carriers but bringing those benefits to the local level. So what have we done on the M&A front? Well, this team came together 4 years ago. And when we first started, the first goal was we wanted to be a pure play, purely a surgical facility owned on operator. So we divested of over $100 million of revenue back in '18. And in 2020, we closed the lab. We sold some selected anesthesia assets, and we had a GPO in optical that was not core to what we did. So we've eliminated all distractions over the last 4 years. And during that period, we focused exclusively on starting the consolidation process of this industry. As you'll see in '18 and '19, we were redeploying those areas that we were exiting. In 2020, we began to ramp up even during COVID. And in 2021, we've closed over $325 million of transactions, representing 12 transactions. The average multiple paid is around 7.5x, and that is not a synergized multiple. Once we overlay our synergies, we generally pull off an extra turn to 1.5 turns. Just to give you some highlights of what we did in 2021 on the $325 million a really successful year for us. We were able to expand our footprint in California even further, more in Northern California. We have a large footprint in Southern California. We entered the state of New York. We have 2 facilities there, both a multi-specialty very heavy orthopedic focus along with the GI asset. We have a great footprint down in Florida and Tampa specifically. We were able to expand that. And we recently closed in the last 2 days of this past year on a multispecialty surgical hospital in Omaha, Nebraska that is heavily focused on orthopedics. So very excited about what that does in terms of our long-term growth rate. I would also tell you, we hear a lot about value-based care. I always joke that for some reason, this has a tendency to go through cycles, and we talk about it sometimes like it's new, but value-based care has been around for 20-plus years. The challenges have always been who can really create the value-based care, who can really create the proof points it shows that they've created value. What's really unique about our business model is it's the easiest one to prove to anybody. I mean Medicare will show you for the exact same procedure, but they pay almost 45% less in an ambulatory surgery center than they do in an inpatient setting for the exact same procedure. But we can economically make that math work, and we know the patient has a better experience. So we are uniquely positioned in the value chain of value-based care over anybody else that's out there, and we believe we will be a heavy influencer as this continued shift from inpatient to outpatient occurs. And then finally, I would just show you that we have a very dynamic growth model. It's not very difficult. It's not very sexy, but we generate top line growth. We always say if we can get 2% to 3% in volume and get 2% to 3% in rate, there's no reason we shouldn't be able to grow 4% to 6% of our top line. We have consistently exceeded that with same-store metrics on the low end, around 7.5%, and this year we're in the 20% plus. We always talk about getting 3% to 5% EBITDA growth through margin expansion. And that's really just pulling the synergies forward that we should get from a company of scale, whether it be procurement, revenue cycle or just organ workflow efficiencies. And then finally, we target $200 million a year in capital deployment. This past year, we did more than that. But if we can continue to do $200-plus million a year, we do generate another 3% to 5% through capital deployment, and whether that be acquisitions or de novos is how we do that. So let me walk you through a little bit of some financial overview of how did we do during COVID though? So the model is simple, the opportunities are straightforward, but how resilient was the business model? And what I hope you'll see from these slides is that it's quite resilient. On Slide 36, our surgical case volume has grown by 2.2% CAGR, even with COVID. You'll see a slight dip in 2020, but I would remind everybody, we were physically required to shut down facilities for a period of time while our country dealt with the PPE shortage and ventilator shortage. So if you really look at it, though, even including that window, and we always say we target 2% to 3% in volume, that's our goal, we still achieved a 2.2% CAGR even with COVID. As you look at our revenue growth, did we achieve our 2% to 3% revenue, we did much better than that. As you'll see, we averaged 10.9% almost an 11% CAGR on revenue when you go back to the pre-COVID window for the first 9 months of 2019 versus the first 9 months of 2021. Our same facility growth. Pre-COVID, we were doing north of 7.5%, and that was why we were rebuilding our engine to be a pure play focused on MSK and the other high-growth specialties. You'll see year-to-date this year, we're doing north of 21%. And more importantly, when you look at our adjusted EBITDA during that window of time, we averaged a 13.7% CAGR on a COVID-based adjusted compared to 2019. Give you some same-store metrics. So right a logical question is, well, was this acquired EBITDA? Or was this actually same-store growth? What I want you to see here is that if you go back to Q1 of 2020 and you look at how did we do during COVID though? And you'll see Q2 2020, that's when we -- facilities were shut down for part of March and part of April of Q2, late Q1 and early Q2. You'll see Q1 was impacted. We were shut down for 2 weeks in March. Now we were shut down for a big chunk of April. But what you'll see is once the facilities were allowed to be reopened, we consistently grew our same-store revenue, and we averaged 117% during that period of time. And those trends have not slowed down. So when you think about kind of how do we target this double-digit growth, it's really simple. We believe organically, we should be able to grow double digit, right? We have a track record all the way back to '19 of growing at least 7.6% on same store. We had a number of de novo facilities that started to open up during COVID. You'll see that in 2020, or before COVID hit, we were averaging 9.4% same-store and through the first 9 months of this year, 21%. We have a number of industry tailwinds, MSK and cardio that are just now hitting our industry. And we have existing de novos that we opened up over the last 2 years that will drive $30 million of adjusted EBITDA growth. We target $200 million of capital annually. We have a track record of doing it. We have a track record of getting attractive multiples. And as we said, we recently just closed 2021 with over $325 million of capital deployed. And so when you do the basic math of double digit there, 3% to 5% there, there's no reason we should not be able to grow in the mid-teens. And we leverage that we target between 5 and 6. And with our recent capital raise, we are slightly below 6x leverage. So as I bring this kind of all together and look at -- so why do you invest in Surgery Partners and what are the opportunities you see there? I would just say, look, we have a large market opportunity supported by great macro. It's $150 billion TAM. We've got exceptional same-store metrics with a patient experience that is really second to none. This team has a track record of capital deployment. We've got really uniquely positioned for value-based care and believe we can continue the trend that we started back in 2018 when this team came together. From 2018 to 2021, we grew approximately 12% CAGR, even with COVID, we believe that we could do north of 15%. And as you heard today, we reaffirmed our guidance for 2022 with an at least number, which shows at least 12% growth, and we believe we'll do better than that as the year progresses. With that, operator, I'm going to turn it over, and we'll go to Q&A.

Great. Thank you, Wayne, for all of the details this afternoon. So also joining us are Eric Evans and Tom Cowhey. So let me first start just with labor headwinds. So as we think about a lot of providers out in the marketplace talking about labor headwinds, looks like as we're going into 2022, they're going to continue to persist. Can you just talk about where it is for you guys on the last earnings call, you said you were expecting potential labor headwinds to last into 2022? I know your surgeons are not prone to burnout due to the employment structure that you nicely laid out today, but has your position changed at all as we think about this next wave of COVID and just everything else that's happening from a burnout perspective.

So Lisa. I'm going to have Eric highlight that question. I would just start by saying, well, we're not isolated from the labor pressures that we're seeing on a broader market basis. Our business model is uniquely insulated, which is why we were comfortable reaffirming both our fourth quarter guidance as well as our 2022 guidance. So maybe, Eric, talk a little bit about our model and what we're seeing.

Yes, sure. I think it's important first to step back and just kind of think about the jobs we offer. And so if you think about our surgical nurses, our scrub techs even our nurses on the floor, we are typically an elective business. We don't have typical weekend hours or late-night hours. And the staff has largely often been with the physician partners for a long time. They've been handpicked. It's a facility where the staffing ratios are quite good. As you saw, we have an exceptional patient experience. It's a really great work environment. So we'll just start off with like the opportunity for someone to work in our facilities is quite attractive. I mentioned in the end of -- in our third quarter comments, I made clear that we -- while we've had some labor increases in the third quarter compared to 2020, but the reality was, even with all the noise around increasing labor costs, our SWB as a percentage of net revenue was actually 30 basis points less than 2019. So positioning-wise, we've managed through this pretty well. That said, Omicron is obviously a little different. And as Omicron spreads through communities, obviously the contagiousness and the level of positivity has been quite dramatic. And so we certainly, in the fourth quarter, have had headwinds with Omicron, facilities with 30% to 50% of staff positive. We've got physicians positive. We've had -- patients have to cancel. And so that's led to additional overtime. So you think about premium dollars. So we've had to work staff that were helping more hours. We've had to use some contract labor. We see all of that as transient. The good news here is it seems to be less acute as far as the level of mortality and really big symptoms. And so people are coming back. And so while we might have delays, and we see that continuing, obviously, in the first quarter, we were able to manage through well enough to reaffirm guidance both for this year and next year. And so look, we are certainly not immune to this. But I will say we have a national recruitment team has done an exceptional job this year. If you look at our ability to fill positions, we're still filling them in that 35- to 40-day range. We bring that capability to all of our partners. And so it's been a big win for us. We certainly believe we provide a great work environment. And our job is any kind of pressure that we do experience is to try to offset that by next year reducing off that premium labor baseline and also continuing to find efficiencies. So a little bit different than some parts of the health care sector, certainly not immune. We are feeling some of that. We had some of the headwinds, but we feel good about our ability to manage through that next year.

Eric, you brought up the point that in some cases, you had a number of your employees that had COVID. Has that impacted -- and again, you talked about primarily as elective procedures, so you can push off the time line. Did that have an impact from a timing perspective for surgeries?

Yes, I can. I mean keep in mind, it's not as long as it used to be, right? So I mean the reality of it is the good news at this point is we're just simply rescheduling the patient on that day for a future date. And so it might get pushed out a week or 2. We use an anecdotal example of one of our physicians who got COVID last year and was out for, I think, almost 2 weeks. And it was a very busy position. We did 150 procedures in a month. And it was amazing in the month of December, this physician made all of that up. And so I just -- I would just keep in mind that usually, we see our positions there, our model is that they obviously are getting paid for what they do. And so they are very motivated to get back. And patients want these procedures done. We talk a lot about elective is a little bit of a misnomer. If you're in pain with joints or you have an eye issue, like those don't feel very elective and we've shown that we can be a safe haven for those surgeries throughout the pandemic, and we're able to get those rescheduled. It simply is a delay. But clearly, a delay that can cause headwinds in a given month or a period of time, but we expect to be transient.

And I think that as we think about Surgery Partners, Wayne, I appreciated your comments around value-based care. I've been bio health care analyst for north of 20 years. And I do appreciate like kind of how it ebbs and flows. And what I would say is that the focus by the Street right now is the fact that you are a lower cost setting that, in some ways, COVID has presented this opportunity for health plans and others to push procedures towards lower cost, high-quality places for services. As we think about the future of your business and we think about potential around capitated relationships or we think about other types of reimbursement rather than just traditional fee-for-service, what are you seeing thus far in the marketplace? And what is your expectation as we move forward?

So Lisa, as you said, right, we've been doing this for like 2 decades. We hear the story about value-based care, value-based care. But as you know, it requires a very little effort on the patient's part, because they're going to go whether doctors suggest they go, right? So managed care is always try to influence physicians on where they take it. Physicians, in many cases, were concerned about that I really want to take this patient from an inpatient to an outpatient. And what COVID has really done, is kind of brought many of these fear factors of the unknown together because of many physicians who had never experienced an outpatient setting within an ASC were almost forced to because the hospitals had no capacity, and COVID was taking up beds. And so one of the things that we'll talk about on our upcoming earnings call, but we had another record year on physician recruitment. So it's interesting in that what's finally happening is the patient walls also have been broken down because the physician walls have been broken down. And so finally, we're seeing more procedures come over. The second big wall that had to get broken down to really value-based care work was, we needed the government of CMS to remove the gatekeeping model that said, these procedures could only be done in an inpatient setting. And now they've done that. They've actually concluded that these procedures are safely done in outpatient setting, hips, knees, certain cardiac procedures that they are actually a better quality and a better patient experience. And so as those walls have come down, it's really allowed not only the doctors to make those decisions that they can do it, those that were uncomfortable have gotten comfortable. Those that were always comfortable but couldn't can now do it. And really, it's been more of an accelerator because I think it's clear to see for managed care earnings the last 2 years, they've done quite well because either electric procedures didn't get performed or they're finally getting performed in the right setting. And so much so that they were able to grow earnings so well even with COVID. And so I think we're finally at an inflection point, kind of a catalyst that forces the industry to move much more aggressively than it has in the last 20 years. And in many ways, not all that different than what the Affordable Care Act forced the industry to do differently, right? You almost have to have that impetus to really force it. And it's either a change in legislation or it's a crisis, and we got a little bit of both now. And so it just feels like it's finally starting to happen. And now it's just -- it's got to be a real proof points. So we think we represent a real proof point.

And you've brought up physician recruitment, right? So the 2 things you said physician recruitment, gatekeeping model, and I understand the gatekeeping side. There's so many physicians that are trying to be recruited in so many ways. And if I -- we're having this conversation 5 years ago, it was all about the hospitals, right? They follow the doctors, they employ the doctors, et cetera. So where are you primarily recruiting physicians from? Are they now coming back out of the hospital system? Is it independent doctors? Is it kind of fresh out of medical school kind of guys? How do we think about the opportunity of what you see today and how you see it going forward?

So I'm going to ask Eric to highlight a little bit about unique relationship that's happening where physicians that are still employed by hospitals, but how they're starting to see the world regarding the need for ASCs. The one thing I would highlight though is this, Lisa, a number of us on this call grew up in managed care. And there was always a big data available, and it was like how do you put it to work. And so we first came to Surgery Partners, we were like, well, we know all the data is there. We know how many doctors are employed and not employed. We know how many procedures a doctor does. We know how much is Medicare versus Medicaid versus commercial. And all the data was there. So a big part of our recruiting effort is quite simple. We just use data. And we decide, oh, here's the free agents, and these are the ones that are doing great quality care and these are the ones with the volume. And why not give them a great opportunity to schedule all their procedures on a Monday morning over a 4-hour window and they can visit their patients that afternoon and go home. So we deployed a very basic model. But what's really changing is that hospitals now recognize that it's a little late to get into the ASC game and they need partners. So Eric, maybe talk about how we're starting to get more physicians through hospital partnerships that are realizing the need to move this direction.

Yes. So I think you've covered a lot of it. I mean the one thing that we've changed on the physician recruitment side is becoming much more targeted. So we've always been able to recruit physicians not the level we have now with our experienced team across the country. But we've always been able to recruit physicians, but now the list we have and the level we have are the doctors we really want. So every year, we're getting more targeted on how we reach out, how we get them engaged. I mean we know what physicians want from us, like, first of all, first and foremost, they want efficiency, right, which they don't typically get from the hospitals in the way they would like to, not because they think the hospital is doing wrong, but they have disruptions from the ER. They have a lot more complexity. We can be a really focused factory for them. Secondly, they want block time. And we give them that and we give them quality of life, so that their daughter has a soccer game, they can get there. And lastly, they want a chance to be at the table and potentially be an owner. And so all of those things are a big part of our pitch. They also like to do that in a way where they're not necessarily having to commit to 1 health system or 1 payer. And so we bring all of those things to the gate. And that's number one, allowed us to be quite successful. What's been changing is our level of focus on exactly who we target. And so every year, we get a little better at targeting the particular docs we want in a given market. It's becoming ingrained into how we build out our business plans. We have a 3-year plan for every single one of our facilities that includes kind of our targeted physician recruitment. It is typically not a new doctor out of school. We will do some of those in existing practices, we'll work with especially our hospitals. But typically, it's a sweet spot. We have continued to lower the age of our average medical staff. And so you think about this, these are doctors usually. They're probably in their mid-40s. They're in a position where they've experienced the hospital or the other world long enough, they want something different. They really want to be -- feel like they're at the table on strategy on how you deliver the product. And we have a lot of success. And like I said, we've got a very experienced team at this point. In many parts of the country, we continue to break records in bringing physicians in. And part of that, I got to give the operators a lot of kudos, right? This is making sure when a physician comes in, their experience goes extremely well, rolling out the red carpet. I mean these docs, you want to make sure that, that first experience is fantastic. And then from there, Wayne often talks about we look at each one of our cohorts by year and when we do this well, this is kind of an annuity. Every year, they're going to bring more and more procedures to us. And we focus a lot on our existing medical staff and our market share of their procedures, which is part of the reason we're into robotics in a big way is we had a lot of physicians who said, gosh, I'm bringing my orthopedics, I'd love to bring joints. Here's the equipment and investments we need. So it's a very dynamic process. We're getting better at it every year. And now we've just opened up a new world of cardiologists and EP docs, who prior to this wouldn't have been in that mix. And I can't go back and I can't really emphasize enough what Wayne said earlier about the physician world has changed and that they don't have to split their day. So if they've got 3 commercial and 2 Medicare, they're not having to drive down the street. They can do it all in our facility. It's just one more obstacle that makes life easier, that certainly has aided in our recruitment as well.

And maybe Pinnacle Medical is talking about the competitive marketplace, right? So obviously, you're competing against the hospital. There's other ambulatory surgery centers. But how do we think about that competitive market, number one? And number two, at this point that we really are finally hopefully driving towards the best outcome at the lowest cost, most convenient location from a consumer perspective?

Sure. So it's obviously -- look, everybody is looking at this space now, right? So whether it's private equity, hospitals, everybody is leaning in. So it's going to be competitive. What we've seen and look, we disclosed a bunch of deals and those -- all of those facilities could have gone PE, they could have gone to another provider. And what we see is our story is very different than PE, which is we are not going to buy and flip. We are a long-term holder that's going to hopefully drive and optimize your dividends. You're going to get some initial cash as we buy out. But then it's us together building something meaningful over a long period of time. And that resonates with a lot of physicians. I mean physicians who have been around a while, they've seen the PE roll-ups come and go. They've seen different things happen. What we can deliver in our track record has been quite meaningful. And so while it's quite competitive, we have really maintained the same kind of multiple we've been paying for the last several years. We tend to pay a little higher for orthopedic assets. But in general, we've been able to continue to find high-quality assets at that multiple. And part of the reason the docs want to sign up for that is that they know what we can deliver with the services we provide and how we can help them grow. So it's only going to get more competitive. We don't think our story changes. We certainly want to continue to build out our capabilities. We're going to get better at what we do as we grow. But we think our approach and our known capabilities have actually allowed us. We win more than we lose for sure. We do lose here and there, but we, in general, are able to close most of the deals we won. And the ones we just closed, I think we're highly competitive, right? There was a lot of folks that would love to have those assets. And ultimately, at the end of the day, health care is a relationship business. You saw our retention rate. And part of our mission statement is to enhance patient quality of life through partnership. It's built into our mission statement. And when you have to partner with everything you do, you get really good at trying to manage that and make sure that you're a good partner and that the positions that they're going to check on, they're going to call references only have great things to say about you.

We only have 1 minute left, Eric. And I just -- I really want to just get to -- when we think about your current net debt to EBITDA is roughly just over 6x. How do I think about your specific goal around leverage? How do I think about what your expectations are? I think you currently guide to about $200 million in annual acquisitions. Is there any way to think about how to frame that and when we think about priorities around capital deployment?

Why don't I take that one, Lisa? So as you think about where we are on a pro forma basis, and we mentioned this, as we think about the capital we've just deployed and the equity raise that we did, we'll, actually, for the first time, be at the high end of that range as we print the fourth quarter based on our current estimates. And so we're really excited about being in that range for the first time. That actually leaves us with a tremendous amount of flexibility, right? We raised $300 million in November. We deployed about $185 million. We had existing cash that was deployed on the balance sheet at that point. We continue to restructure and enhance our revolver. We have over $200 million worth of capacity on our revolver alone that is undrawn at this stage. And we're at the point now where we're really starting to generate deployable free cash flow as an enterprise. As I think about it, a rule of thumb, about $315 million is kind of the breakeven point. We generate a tremendous amount of cash. But we also have a lot of fixed charges. And so at $315 million, we generated enough and clear enough cash and we pay all of our bills. And so then every incremental dollar yields $0.65, $0.70 on the dollar of deployable free cash flow. That's EBITDA -- adjusted EBITDA to cash flow conversion. And so we're going to generate additional deployable cash this year. We've got some cash inflows that are coming in the first quarter from a legal settlement. That would be about $30 million. We've only got 1 more payment left on our tax receivable agreement of about $20 million this year, and that will go away next year. So that will be incremental cash flow again next year on top of the cash flow that we get from growth. And then we look at the balance sheet, and we say, gosh, we've got some opportunities here, in particular, I've got the 2027s that are callable in April. There was 10% notes. Even if I roll the call premium, there's substantial savings there on an annual basis from a cash flow perspective. And so I think we have a lot of opportunities in front of us to generate cash, deploy that cash. And as we think about that leverage range, we think it's a good balance between maintaining a disciplined capital structure and recognizing the significant equity value that we can create based on where we're trading versus where we can buy.

Okay. Well, we're out of time. With that said, though, I would really love the opportunity to see you all in person in 2022. So we'll connect. Tom, I know that you're leaving the company. I want to wish you the best. And I'm sorry we won't get to see each other in person, but thank you very much to Wayne, Eric and Tom for this afternoon. If you have any other incremental questions, reach out to me at JPMorgan. Thanks a lot, guys.

Thank you, Lisa.

Thank you, Lisa. Appreciate the time.