Surgery Partners, Inc. (SGRY) Q4 FY2025 Earnings Call Transcript & Summary

Greetings, and welcome to the Surgery Partners Q4 and Full Year 2025 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Dave Doherty, CFO. Please go ahead.

Good morning, and welcome to Surgery Partners' Q4 and Full Year 2025 Earnings Call. I am joined today by Eric Evans, our CEO. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements as described in yesterday's press release and the reports we file with the SEC, each of which are available on our corporate website. The company does not undertake any duty to update these forward-looking statements. In addition, we reference certain financial measures that are non-GAAP, which we believe can be useful in evaluating our performance. These measures are reconciled to the most applicable GAAP measure in yesterday's press release. With that, I will turn the call over to Eric. Eric?

Thank you, Dave. Good morning, and thank you all for joining us today. My initial comments will briefly highlight our consolidated fourth quarter and full year 2025 results. I will then provide additional color on the drivers of performance this quarter and our initial outlook for 2026. First, let me provide highlights from our fourth quarter and full year results. We reported full year net revenue at the low end of expectations at $3.3 billion, up 6.2% year-over-year, with same facility revenue growth of 4.9%. Full year adjusted EBITDA was $526 million, up 3.5% year-over-year, but significantly below our expectations. Our adjusted EBITDA margin was 15.9%, reflecting 40 basis points of margin compression. These results tell a tale of 2 halves where momentum in the first half of the year gave way to significant headwinds in the second half, culminating in fourth quarter performance that fell short of our revised expectations. Before getting into the details, I want to level set the scope of the challenges we experienced in the second half of the year. In our Q3 call, we lowered our guidance based on delayed net capital deployment as well as slower case growth and payer mix trends we experienced in Q3 and early Q4. While those trends continued in Q4, the impacts were isolated to our surgical hospitals, and our earnings shortfall was concentrated in just 3 surgical hospital markets. These markets had a combination of softer-than-expected case growth, payer mix shifts and anesthesia dynamics that created outsized pressure. The balance of our portfolio performed in line with expectations, and these issues were not systemic across the enterprise. I will address these headwinds in more detail shortly. However, I first want to emphasize that we are confident that our long-term structural growth opportunity remains intact, driven by a combination of organic, de novo and acquired growth. We remain committed to our growth algorithm and our focus on improving free cash flow, reducing leverage and creating long-term shareholder value through our portfolio optimization strategy. I will now turn to the drivers of Q4 performance in more detail. Starting with organic growth. In the facilities we consolidate, we performed nearly 670,000 surgical cases in 2025 compared to 656,000 cases in 2024. We ended the quarter with 1.3% same facility case growth, reflecting marginally softer-than-expected volume growth. Despite this short-term weakness, we remain committed to our organic growth strategy, centered on expanding surgical case volumes while strategically shifting towards higher acuity procedures in orthopedic specialties, including total joint replacements. We performed over 42,000 orthopedic cases in the fourth quarter, supported by strong growth in total joints, with these cases growing 15% in the fourth quarter and 19% on a year-to-date basis compared to the same periods last year. We are reaffirming and continuing to execute on expanding our facilities capabilities to deliver high acuity procedures. Our investment in robotics and physician recruitment remain core to our strategy of capturing greater high acuity demand. Within our portfolio, we have 74 surgical robots in service, including the addition of 6 in 2025 that enable our physician partners to safely perform increasingly complex procedures. Physician recruitment, a critical component of our organic growth initiatives, remains on track with almost 700 physicians recruited in 2025. That said, a portion of our payer mix pressure in the second half of 2025 was attributable to physician transitions. Several experienced physicians who historically contributed to higher commercial payer mix and volumes, retired or departed during the period. At the same time, many of our newly recruited physicians served a higher proportion of Medicare patients than previous cohorts and did not ramp as quickly as anticipated. This position transition dynamic contributed to our payer mix pressure as commercial payers represented a declining percentage of total revenue year-over-year. Notably, this phenomenon was not seen across the full enterprise. It was largely seen in our surgical hospital markets and was more concentrated in a handful of our larger facilities. We anticipate improvement in both volume and payer mix as these newer physicians mature within our platform, but we will need to lower operating expenses in the short term to protect margin. As I mentioned earlier, fourth quarter margins saw compression year-over-year and came in below our revised outlook from the third quarter. At a high level, the margin pressure we experienced in the fourth quarter was driven by 2 primary factors concentrated in 3 surgical hospital markets. First, we saw slower-than-expected case growth and sharper-than-anticipated shift in payer mix in those facilities, driven by both physician transitions as well as near-term addressable market-specific dynamics. Second, in those same markets, our cost structure, including labor expenses as well as the cost of anesthesia coverage, did not adjust quickly enough to that changing payer mix, creating an incremental near-term margin pressure. While we've been managing anesthesia dynamics across our ASC portfolio for several years, the incremental pressure we saw in 2025 was largely in our surgical hospitals with a higher Medicare mix rather than broad-based across our ambulatory footprint. Given these impacts, we acknowledge that our performance does not reflect the potential of our business or the strength of our model, and we recognize that there is work to be done in terms of execution. Importantly, the dynamics we experienced in the second half are identifiable, measurable and addressable. We now have clear visibility into the drivers of our recent performance, and those learnings are embedded in our 2026 planning assumptions. Reflecting on performance and the need for improvement, we have also invested in new leadership at those facilities and our recently named Chief Operating Officer, Justin Oppenheimer, is dedicating substantial time to support their success. I'll speak about the 2026 outlook shortly and our plan to move forward, but first, let me finish my review of the quarter with a brief discussion on capital deployment. In 2025, we deployed $182 million of capital towards acquisitions, modestly below our annual target of $200 million plus proceeds from divestitures and admittedly, back-end weighted. We continue to believe this is the right annual deployment level given how fragmented our industry remains and the breadth of opportunities available to us. Importantly, the acquisitions we completed during the year were made at attractive valuations and represent meaningful additions to our portfolio that we expect will support future growth. The pace of deployment reflected our disciplined approach to capital allocation, and we remain encouraged by the strength of near and midterm pipeline. M&A remains a critical component of our growth strategy, and we remain focused on executing transactions that align with our strategic objectives and generate long-term value at favorable multiples. Investing in the development of de novo facilities represent a relatively new and expanding component of our long-term growth, enabling us to establish ASCs in strategically selected high-growth markets, so they focus on higher acuity specialties. In the fourth quarter, we opened 4 de novos, which makes a total of 8 openings throughout 2025. As a reminder, the typical development time line for de novo facilities entails 12 to 18 months to build with an additional year required to reach breakeven performance. Now I'd like to take a moment to share a progress update on our portfolio optimization process. As a reminder, we are executing a comprehensive portfolio optimization strategy designed to accelerate balance sheet improvement without sacrificing growth. The portfolio optimization process reflects a proactive long-term approach to unlock value and drive sustained success rather than a reactive response to near-term market pressures. Our focus remains on selectively partnering our divesting facilities that will help us best meet the goals of our strategy. We continue to advance our portfolio optimization efforts, which are focused on a small number of our larger surgical hospitals that fall outside of our core short-stay surgical strategy. These efforts, some of which are in active negotiations, are intended to be incremental and disciplined, and any actions we ultimately take will be guided by value creation rather than timing. We believe these actions will be accretive to shareholder value and demonstrate financial benefit to the company through reduced leverage and increased cash conversion as a percentage of adjusted EBITDA. We are encouraged by the steady advancement of our portfolio optimization efforts, and our team is confident we will reach a resolution on a key part of this effort within the first half of the year. The recent Baylor Scott & White joint venture involving our surgical hospital in Bryan, Texas is an example of the strategic alignment we are seeking through our portfolio optimization efforts. This transaction allows us to partner with a leading health system that is well positioned to support long-term growth and physician alignment in the market. As a result of the transaction, we will no longer consolidate the facility, which will reduce reported revenue. However, on a run rate basis, we expect the earnings contribution to improve despite our lower ownership, reflecting a more efficient capital structure and improved alignment with our strategic objectives. Importantly, this transaction was driven by long-term value creation rather than near term financial impact, and it reinforces our focus on simplifying the portfolio and concentrating on assets that best fit our short-stay surgical strategy. We look forward to sharing any further material updates from the ongoing portfolio review process when appropriate. We also plan to provide a comprehensive update on our longer-term portfolio composition at the upcoming Investor Day, the timing of which will be aligned with a validating milestone in our portfolio optimization process. As we assess our operating landscape and plan for the year ahead, we are taking a measured and conservative approach to the 2026 preliminary guidance reflective of earnings growth rate resets for parts of the business. Our initial guidance for net revenue is $3.35 billion to $3.45 billion, representing single-digit year-over-year growth and underscoring our continued conviction in the company's organic growth opportunities. We are providing initial guidance of at least $530 million of adjusted EBITDA, contributing to growth of at least 0.7%, which incorporates the anticipated near-term impact from many of the key headwinds we have discussed this morning. We have quantified the impact of anticipated headwinds and the core organic growth underlying our initial guidance in the supplemental slide that we provided with our earnings materials. Let me now take you through the slide to help you understand how we arrived at this initial guidance starting with our 2025 adjusted EBITDA of $526 million. We anticipate $9 million in full year contributions from last year's net acquisitions and divestitures. Additionally, as we enter our new fiscal year, we estimate a $15 million impact related to funding our annual cash incentive at target. Recall that in the third quarter, we reported lower incentive-based compensation to account for our year-to-date performance. This impact effectively represents a return to baseline G&A expenses, assuming achievement of our targets this year. We have included state-specific reimbursement and newer increased hospital provider taxes in 3 markets that will pressure earnings in 2026 by an estimated $8 million. We do not expect any benefit from the additional provider taxes given our immaterial Medicaid mix. Although the Supreme Court recently weighed on existing tariffs, we have estimated year-over-year pressure of $4 million of potential tariff exposure embedded in our supply costs. Our guidance allows for a degree continued pressure on payer mix, but we are also taking actions to help alleviate this short-term pressure and to support future commercial growth. Regarding the 3 market-specific pressures that I discussed earlier, we are confident that we have plans in place to address and resolve them, and they are appropriately reflected in our 2026 outlook, though we will continue to monitor the landscape diligently. We believe that our approach is based on measured assumptions. Importantly, we remain optimistic in the structural tailwinds underpinning long-term ASC market growth, and we believe we remain well positioned to continue to drive that shift to higher acuity procedures to capture long-term momentum in the market. We are also confident in our ability to drive improvements across the business as our new physician cohorts mature, our cost containment programs continue to support long-term margin expansion and our portfolio optimization progresses. Lastly, we remain committed to pursuing disciplined and strategic M&A in 2026. Unlike past years and recognizing the fickle nature of M&A timing, we are not explicitly including the impact of M&A in our initial guidance for 2026. We continue to be excited by our strong pipeline of opportunities that align with our short-stay surgical ethos, representing additional levers to drive growth and shareholder value creation. As the year unfolds and we gain additional clarity on market dynamics and the active portfolio optimization efforts underway, we will update our full year outlook. Before concluding, I would like to share a couple of Board-related actions that took place last week. At that meeting, we authorized the company to repurchase up to $200 million of the company's common stock. This authorization conveys the Board's confidence in the company's future and our opportunity to deliver significant shareholder value as we execute on our strategy. It also positions the company to optimize capital allocation, recognizing our portfolio optimization progress and that our stock price offers an increasingly attractive relative return at current prices. Of note, Bain Capital has informed us that they won't be a seller in the share buyback program. In addition, last week, the Board appointed Lloyd Dean as our newest director. Lloyd is a well-known and a highly respected health care executive who most recently served as CEO of CommonSpirit Health, one of the largest health care systems in the country. His deep health care services experience and expertise, combined with his dedication to improving health and expanding access across health care for all, make him an outstanding addition. He will also be an invaluable resource as we grow our health system partnerships. I'm excited to work with Lloyd, and will undoubtedly benefit from his insights and counsel. With that, I will now turn the call over to Dave to provide additional color on our financial results as well as the 2026 outlook. Dave?

Thanks, Eric. Starting with the top line. We performed over 170,000 surgical cases in our consolidated facilities in the fourth quarter, bringing our full year case count to nearly 670,000, 2% higher than 2024. This growth overcame the loss of 41,000 surgical cases related to facilities that we have since divested, with roughly 11,000 surgical cases lost relative to fourth quarter. The continued shift to higher acuity procedures in orthopedic specialties and total joint replacements supported our fourth quarter revenue growth of 2.4% to $885 million. For the full year, revenue grew 6.2% to $3.3 billion. Same-facility total revenue increased 3.5% in the fourth quarter, with same-facility case growth of 1.3% and rate growth of 2.1%. Given our structure, most of our revenue is generated by commercial payers. However, as Eric mentioned in his remarks, our payer mix softened during the fourth quarter due to a continued relative decline in commercial patients versus our historical experience, a trend that we initially began to observe in the third quarter. We ended the quarter with 1.3% same-facility case growth, which was somewhat softer than we expected. We anticipate an improvement in both volume and payer mix as these newer physicians mature within our platform. Adjusted EBITDA was $156.9 million for the fourth quarter, giving us a margin of 17.7%. For the full year, we reported $526.2 million in adjusted EBITDA, 3.5% over 2024 and below our revised guidance expectation we provided on our last call. Turning to fourth quarter expenses. Salaries and wages were 28.7% of net revenue, nearly 100 basis points higher than the prior year, reflecting both pressure from the change in payer mix and marginally higher health benefit costs. Supply costs were 27% of net revenue, up 120 basis points from last year, again, reflecting the pressure associated with the shift in payer mix. G&A expenses were 2.7% of revenue, down from 4.2% in the prior year period, primarily reflecting lower incentive-based compensation related to our year-to-date performance. As Eric outlined, the margin compression that we saw during the fourth quarter resulted from a convergence of discrete headwinds at 3 of our larger surgical hospitals. We saw unfavorable payer mix and had to make unanticipated payments to anesthesiologists who faced similar reimbursement pressure. In a couple of our larger facilities, we also experienced specific cost pressures as they were unable to adjust quickly enough to the changing payer mix to preserve margin. Finally, although we deployed $182 million on acquisitions, our M&A activity skewed later in the year, providing relatively lower in-year impact than usual. This convergence of near-term addressable events drove the earnings miss during the fourth quarter. We fully acknowledge that margin improvement represents a significant opportunity to drive growth going forward, and we recognize the need to step up our execution in 2026. I'll speak to the bridge to 2026 shortly to provide further color on how we anticipate these headwinds will play out this year and what we are doing to mitigate and address those factors. We ended the quarter with $240 million of cash and revolver capacity of $693 million, which comes out to $933 million of available liquidity. We reported operating cash flows of $274 million in 2025, distributed $226 million to our physician partners and deployed $33 million for maintenance-related capital expenditures. Operating cash flows in 2025 were lower than 2024, primarily due to higher overall interest costs on corporate debt. This interest cost reflected a year-over-year increase of approximately $42 million as the previous interest rate swaps expired in the first quarter of 2025 and increased interest related to incremental unsecured senior notes raised last year. Operating cash flows were also somewhat lower than our expectations due to the slower-than-anticipated earnings growth. Controllable spending, including transaction and integration costs, was lower in 2025, with the second half spending levels in line with our long-term expectations. Moving to the balance sheet. We have $2.6 billion in outstanding corporate debt with no maturity until 2030. As previously mentioned, during the third quarter, we completed a repricing of our loan and revolving credit facility, reducing our rates to SOFR plus 250 basis points. This action positions us to achieve meaningful interest expense savings and improved cash flows going forward. The current floating rate is 4%, and interest payments for the quarter increased $7 million compared to the fourth quarter of 2024. Our capital structure remains well positioned to support sustainable long-term growth while providing flexibility for future capital deployment. At quarter end, our net leverage ratio under the credit agreement was 4.3x and is 4.9x on a balance sheet net debt to EBITDA basis. This level is consistent with our expectations, reflecting timing on capital deployment. We deployed $182 million in 2025, adding several facilities at attractive multiples that have robust growth potential. In 2025, we divested 5 ASCs and sold down interest in the surgical hospital to a minority position, generating cash proceeds of $50 million and a reduction in debt of $31 million. As mentioned, these proceeds were not redeployed, which impacted the net benefit we originally expected in our guidance for 2025. M&A remains a priority growth initiative, and we have a strong and active pipeline. De novo development and openings position us for meaningful and sustainable growth. In 2025, we opened 8 facilities, bringing our total de novos opened since 2022 to 27. Of these, 2 turned profitable in 2025 and more are expected to contribute to growth in 2026. We currently have 5 additional de novos under construction and more than a dozen currently in the development pipeline. We're excited about the future of these investments. We continue to be pleased with our disciplined management of capital deployed for maintenance-related purchases and with cost management controls for transaction and integration costs, with our second half levels consistent with 2023 and materially below the elevated activity we saw in the second half of 2024. As Eric already walked through during his earlier remarks, we are taking a measured stance on our preliminary full year 2026 guidance as we continue to assess the longevity of several near-term market dynamics and our ongoing portfolio optimization process. Our 2026 revenue guidance is a range of $3.35 billion to $3.45 billion, driven by same-facility revenue growth for the full year of 3% to 5%. Key drivers of this growth include moderate organic growth, contributions from our recent acquisitions, partially offset by abating pressure on our payer mix. Our initial guidance for adjusted EBITDA is at least $530 million, which accounts for several known contributing factors and headwinds that we have clear visibility into, as Eric mentioned and is summarized in our supplemental financial disclosures. Our guidance framework for 2026 includes an additional layer of granularity that is an evolution from our historical practice as part of our efforts to provide a transparent outlook on our business. This includes the $9 million estimated contributions from last year's M&A activity, a line that is usually rolled up into our full year guidance, with this making the first time we are separately calling out the direct anticipated impact of annualized M&A. Several of the other headwinds that Eric discussed, namely the $8 million estimated impact from state-specific hospital provider taxes and a $4 million estimated impact from tariffs, represent new and discrete inputs that have not been included in our historical guidance framework. This further underscores the rapidly evolving landscape in which we operate and the steps we have taken to be comprehensive in our assessment of the near-term market dynamics. Our guidance implies a slight margin compression in 2026. However, we remain focused on driving operational efficiency across the business through improving supply chain, revenue cycle operations and targeted cost reduction plans that will enable us to overcome near-term headwinds and return to steady margin expansion. In line with our historical targets, we expect to deploy at least $200 million of capital towards M&A, but are not including the impact of earnings of this assumption in our preliminary guidance. Integration benefits from our acquisitions and contributions from our de novo facilities will continue to be a core element of our long-term growth trajectory. However, we expect continued cost discipline in these expenses. We expect capital expenditures related to maintenance activities to be roughly in line with 2025 spend. Distributions to our partners should grow in line with our underlying earnings growth. Lastly, we expect cash flow from operations to increase in 2026 based on our forecasted adjusted EBITDA growth and continued working capital management activities, partially offset by increased interest costs as we annualize the interest costs on our increased corporate debt. Our guidance does not include the potential impact of ongoing portfolio optimization efforts. We remain focused on actions that will accelerate leverage reduction, improve cash flows and focus the enterprise on the short-stay ambulatory surgical business. As we prepare to navigate for the upcoming year, we remain disciplined and confident in our ability to improve the business and return to the consistent and predictable growth the market has come to expect from us, supported by strong fundamentals and a solid long-term growth strategy. We believe the framework we have outlined today appropriately balances caution with the long-term opportunities in the business, and we have clear paths towards repositioning Surgery Partners for the long-term sustainable growth that we believe this business is capable of. Before getting to Q&A, I'm going to turn the call back over to Eric one more time.

The year closed out against a challenging backdrop, with several headwinds impacting our business in ways we didn't anticipate. While some of the pressures we outlined were outside of our control, how we respond is entirely within it. We're taking deliberate actions to strengthen our resiliency through tightening execution and protecting margins, and we're entering 2026 with renewed focus. Lastly, before I hand it back to the operator, I want to take a moment to express my deep appreciation for the dedication and commitment of our colleagues and physician partners. Their unwavering focus on delivering exceptional high-value patient care and operational excellence is the true foundation of our long-term success. With that, I'll now turn the call back to the operator for questions. Operator?

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

Eric, maybe as I just think through the challenges of the headwinds here, right? On one hand, I think there is a call on conservatism or a little bit of a muted tone on volumes. But the other, you're saying that you don't think that the fundamentals or the demand equation changes. I'm just curious how you'd want us to think through that kind of like dynamic. And then the other side of it is the payer mix situation. You have a volume headwind, mostly commercial, I think, is what you called out in Q3, but then I think there's a payer mix dynamic here now that is more Medicare. So just curious how that all plays out. And then the last piece there is just these 3 specific markets that you called out. So how do we think through what's the weighting maybe of the issues and how fixable you think these are?

Okay. Brian, I got a lot of things there. Let me -- appreciate the questions. I'll start with kind of just the outlook on the growth of the business. I mean I think fundamentally, just -- I'll remind everyone, we are in a space where we create a ton of value. Maybe one of the true value-based care creators within the fee-for-service system patients, physicians and payers prefer us. So we sit in that position and when I think about the growth opportunities with technology and what needs to come out of hospitals, how we add value to the health care system, I think -- you think about our growth algorithm. We still have strong belief in our ability to go get that. And we think we're well positioned to get that. You kind of balance that this year, as you said, we are kind of hitting 2 points. One is our core organic growth that we're guiding to is 4% or more. That is at the lower end of our guidance range. But I think prudent given the situation we find ourselves in coming out of the year, clearly, we don't want to be in the situation again. We haven't been here before. But I think we all, in this business, still believe deeply in the core value we're creating and the need and ability to continue to transition patients. So from that perspective, we didn't put M&A in this year. So that obviously makes the number look considerably lower when you think about historical, but we're excited about where the business is going. We do have some tailwinds that we called out that are, I think, mostly onetime in nature. We get the payer mix, I think it's a great question, and I would level set a little to say this business has been incredibly steady on payer mix. And when I say that, demographics naturally put some pressure on our commercial mix. We've been able to go out and earn more than our fair share over time and we've had a very balanced payer mix. I think our value proposition in the marketplace, being lower cost and great service and high-quality, positions us to effectively compete for commercial payers. We've had some very, I think, unique things that have happened to us in this quarter. But I would not say, given this is my -- I'm entering my seventh year, it's not something that I've seen before and not something I expect necessarily to repeat. You went on and just talk about the kind of the 3 markets we called out. And I think those are all good examples of things that happened to us in the fourth quarter and second half of the year that are a little bit unique. Maybe I'll just spend a moment talking about those 3 markets. And I wish there was one common story I could tell you, but these are distinct in individual markets at 3 of the larger surgical hospitals. I think we did call out in the script that most of our pressure on the managed care side of the business was in the national group. ASCs were very, very steady, and it was concentrated in a few places. So let's talk about those 3 markets. I won't talk about geography, but I will talk about the dynamics. In one of those markets, we have a couple of major competitors only that have either canceled or pushed away MA patients. Made the conscious choice to not really add access to that business. And it's allowed them to really improve their ability to cater to commercial patients in a way they hadn't historically. We obviously -- fortunately, we're in a position in our business where we have a margin on MA and Medicare and commercial. Commercial, obviously, a lot better. I think in this particular market where the dynamics changed in the market, the access points really catered to commercial. And in many cases, did not allow for Medicare Advantage access. I think we found ourselves probably a little bit flat-footed on reacting to that. We haven't seen that dramatically in the past. But it's certainly something when we think about our ability to compete with our private physician partners who are very agile, great physicians. Our ability to go earn that business back and make sure that we're appropriately driving the commercial business to our facilities, we think is quite high. We've got focus on that in that particular market, that market is really about making sure we -- particularly in some of the high acuity areas like spine that we are very focused on creating easy paths to use our facilities, which are higher value in that marketplace, lower cost and greater patient experience. So I don't see that as a long-term thing, did get caught a little bit there. The second market I would call out was -- really, we had fantastic growth. It was almost all in government patients. And so when we start the year, we typically look at very closely at where we expect physician additions, where we expect program expansion. And historically, when we think about our new physician cohort and growth, we have seen their mix very much mirror our overall mix. So if I look back at our physician cohorts the last several years, just have not seen a huge dichotomy and mix. This year, we did see the difference between retiring and exiting positions and new physicians, that payer mix difference was a little bit more pronounced. So the second market -- all the growth primarily, we had great growth, but it was all in Medicare. No real position issues there. It's a great group of physicians that have a fantastic market share, just tremendous Medicare growth. And what I'd say in that market, we have to do is we have to adjust our cost basis. We have to adjust our costs and how we staff, how we become a little bit sharper on managing supply costs. And I would say, as Dave pointed out in the call, one of the things that happens when you have this kind of mix change, as you invariably get pressure on anesthesia coverage. And you guys know that that's been a -- it's been a real issue in our industry in many, many places. We think, in general, it's kind of reached a bottom point. But I would say in markets where you have dramatic change, it's probably a 3x or 4x different in the payment anesthesiologists receive. And so it's kind of a double whammy when you see this kind of quick shift. But in that particular market, we've got great market share. We have to remain very focused. I think we'll take the same lessons learned about making sure that we prioritize commercial access, especially in a place where we had so much growth, all in the government side. So that's the second market. And the third market really was the case going back to what we talked about physician recruitment where we -- it is more of a rural market. We have a pretty good sized position there and we had some physician departures that were replaced initially with physicians that picked up Medicare business before commercial. We don't expect that to be the long-term play, but the mix was considerably different. We also, in that particular market, had a couple of physicians unexpectedly out. And in the rural market with big service lines, being on a call of the $3.3 billion company and talking about a few positions seem strange, but that market access for some of our critical service lines, larger service lines like cardiology do make a difference. So 3 discrete issues in those markets explain our entire gap. And we -- I will say, for each one of those markets, we have robust plans. We have built the kind of the situation we're in into our guidance, and we do not expect a repeat of that. Just to go back to payer mix again, I think it's a tough thing to talk about because it's a little amorphous. I look at our company, we've had very, very steady payer mix, with the exception of the second half of this year. We expect to return to that. We've identified the issues that have pressured that. And our goal is to continue to go out and effectively win the commercial patient, which we have every right to do given our value position.

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

Yes. Brian, I might take that one. So just on the share buyback, it's a great question. I would say that we are focused on maximizing shareholder value. And when we think about capital allocation, I think the approval of this $200 million just shows the Board's thoughtful and kind of measured approach to thinking about how we best use funds, funds that may -- would likely be coming in from our portfolio optimization efforts. Access to capital, we have lots of leverage at our disposal, right? There's M&A. There's paying down debt, which is obviously a focus. And there's the opportunity to buy back shares of the company. I think given where prices are and the pressure on the company, clearly, that becomes a lot more of an attractive option when you kind of look at where we sit today and starts to look very attractive even relative to those other layers. So we wanted to make sure we had the flexibility to react if there was an opportunity here to find really accretive opportunity to buy back shares. But you should see that as a very measured approach. The Board is thinking about this as we've got a number of different options. We're going to look at the ones that are most accretive to creating shareholder value. Being very mindful, let's be clear, being very mindful that we know we need to delever. And you can probably read a little bit into this, too, that the fact that we approve this, we do have some increasing confidence in what's happening in our portfolio optimization efforts.

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

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

It's roughly even.

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

Yes, it's a great question. I mean, obviously, one of the things we're going to have to do is be very, very coordinated. We've done this pretty well in the past with our physician scheduling, how they think about their business. That's -- those are conversations that are obviously ongoing coming out of Q4. I can say, obviously, quarter 1 is historically a very high Medicare quarter. So it's not going to be the quarter where you necessarily see a big influx of commercial patients. This is going to be something that as we put our strategies in place, working with our physician partners to make sure we're set up in an ideal fashion to be the path of least resistance for commercial patients, we'll see those benefits as we head towards the back half of the year where you start to see kind of the commercial patient pressure. But yes, to answer your question, the great news about our business or the great thing about our business is we do get to sit with our partners as owners. We have insights into what they're seeing, and we're certainly taking this moment to reinforce the opportunity to sharpen our processes around access for commercial patients, making sure commercial patients don't get crowded out, and making sure we're competing for what really should be, I mean, in many ways, again, I go back to -- you guys all know the whole thesis of our company is the value proposition we add, which is we provide a lower cost service that allows physicians to stay independent and also provides great value to payers and the patients. So we need to make sure we're pushing on all angles. That's from health system -- or health plan conversations to physician conversations, to ease of access. And those are all part of our objectives this year to make sure we return to kind of our commercial mix expectations.

And moving on to Matthew Gillmor with KeyBanc Capital Markets.

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

Sure. And let me step back too and just frame surgical hospitals. So I do want to be very careful here because surgical hospitals and even the mix we're talking about is dramatically -- it's a dramatically stronger commercial mix than you see in traditional hospitals. So I want to be clear that our surgical hospitals very much mirror what we have happened in our ASCs in general. So we like the business a lot. We're not getting out of the surgical hospital business. I know we do have some, as you know, targeted portfolio optimization efforts. But these are businesses that very much mirror kind of the payer mix and expectations you'd have in the ASCs. So I want to start there on a positive note. As far as what we've allowed -- obviously, we've allowed some of the pressure from this year to come into our numbers, which we think is appropriate as we work to address some of the challenges we saw. But we're not assuming nor should we assume that you're going to see a repeat of the kind of degradation that we saw this year. So it's -- I think we've taken a balanced approach of what we've allowed to come into the forecast. But in general, I would be really clear that the surgical hospitals are fantastic assets. And while there is some pressure, the difference between their mix and the traditional hospital mix is quite different. The other thing I would point out is we are really focused on these assets in our turnaround plan. So we have new leadership in a couple of these facilities. We have a new Chief Operating Officer who will probably bring on to future calls, Justin Oppenheimer, who's leading a lot of our efforts there. We don't expect this to be a long-term headwind, but we've appropriately allowed some of that pressure into our guidance this year.

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

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

And moving next to Andrew Mok with Barclays.

I'm still trying to better understand the scope and nature of the issue. So first, is the fourth quarter issue an extension of what you saw in the third quarter or is this a new dynamic? Because I don't remember hearing any of these issues identified today on the last call? And second, you framed the issue is being concentrated in 3 surgical hospital markets. Is this exclusively a surgical hospital issue? Or are the surrounding ASCs also being impacted? And if it's the latter, can you help us understand how many total facilities across both surgical and ASCs -- surgical hospitals and ASCs are affected by the issue?

Thanks, Andrew. Appreciate the questions. Let me start with kind of high level, what we saw in the third quarter coming into the fourth quarter was, as we talked about, slightly softer volume and a softer mix. So we pointed a pressure going into the fourth quarter at about $7.5 million, and largely, what we saw was in line with what we projected. The difference is what is a little bit -- the way back up to, that pressure, as we've looked at it across the fourth quarter, it's evident that the payer mix pressure really is in the national group, which is our surgical hospitals. So if you think about how we talk about that. So our surgical hospitals is where we saw the most pressure on payer mix. And that makes sense because honestly, our ASCs don't have the same level of seasonality. And so as we head into the fourth quarter, you typically see a pretty big uptick in the national -- or in the surgical hospitals. We did not see that this year. And so to any extent -- and it was more concentrated when you get to this, where we kind of went out off of the guidance we gave in the third quarter were these 3 markets that had particular market pressures that we're addressing. Overall, I'm going to go back to my point. If you look at the whole year, we're 120 basis points lower on commercial. That number was 370 basis points in the fourth quarter, which is quite unusual. We think it's highly concentrated. We do have plans around it. And I would just look at that historically, we have had very, very consistent performance here. We're working to get back to that. We understand the issues in those 3 markets. And in total, it really is the surgical hospitals that saw the pressure. Our ASC business was very much in line with history.

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

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

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

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

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

Okay. Ben, let me try to take those questions. Thanks for the question. So I think, obviously, look, there's -- people are aware there's been weather across the country, there's weather every year. We have to manage through that, and certainly, it can affect facilities that can't be open for elective procedures. We're not in a business of emergent procedures. So we're always focused on safety in those situations. So that does have an impact. I would say that we still see and believe that there's ample demand for our services. We expect to -- again, in our projections, you can see we're expecting to grow cases in same-store revenue and organic growth at that 4% plus number. I think that if you look at the Q1, we're obviously not talking about Q1 today as far as numbers go. You should assume that every health care company was, in fact, every national health care company was impacted by weather in some way. Of course, our job is to hopefully never have to point at those things and outrun it and execute. So I don't have a lot of comments on that other than -- when I think about the general demand backdrop for our services, which if you think about the ASC side of the business, even the hospitals, we're anywhere from 30% to 60% cheaper, provide a great product. These are high demand services that are, while elective, are needed by lots of folks, provides a great difference for patients. We see no reason that that long-term trend of the industry, which is kind of a $40 billion space growing at 6%, plus the technology opportunities to move more stuff to our space, that hasn't changed at all. In the short run, quarter-to-quarter, there can be all kinds of things that impact it such as weather, but underlying that is a real strength of opportunity for our space.

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

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

Yes. I appreciate the question. Well, let me start with -- I think our company remains incredibly focused on the orthopedic opportunity, right? So you've seen -- you saw again this quarter what -- the one thing that allowed us to have the revenue we did was we had strong acuity growth. We had 15% growth in total joints for the quarter, 19% for the year. We will continue to focus on growing and expanding that effort. That's part of our de novo strategy. It's certainly part of our same-store growth strategy. I would add into that, from total joints, also spine. It's a place where we're spending a lot of time trying to make sure that we do our part and moving that to the right side of care. More recently, we have seen vascular opportunities that we're pretty excited about. So our most recent transaction was vascular based. And we do think there are a number of procedures that can be safely done and effectively done in ASCs that save the health system a lot of money are much better for patients. So we see that as a very exciting opportunity to grow time. But our core business of MSK being over half our revenues, GI and ophthalmology, we like all those businesses. We think they all have lots of room to run. And then on top of that, as you mentioned, I would point to things. The vascular EP are interesting, certainly general surgery, urology, there are a lot of spaces that give us levers in our multi-specialty centers that we're excited about, we'll continue to pursue.

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

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

Yes. Great questions. So let me start with the -- going back to payer mix. And again, the payer mix discussion is always one that you fundamentally have to go back to the core physicians to talk about. We did -- as you mentioned, we did change our guidance based on that and that largely came through the $11 million or so difference between our earnings outcome and where we guided to, really was those 3 facilities. Part of their story was payer mix. But in addition to that, the payer mix had an impact, as you know, on the expenses of the facility, right? So we talked about anesthesia pressure, some labor pressure that we'll have to adjust to. All of those things are underway as far as taking cost out of the business. On the payer mix side, I would just point back to what we're actively working on in those 3 markets to make sure we're positioned to go -- compete for the commercial patient. Again, we -- I'm not going to say that's going to recover right away, nor did we allow it to recover right away in our plans for next year. We certainly took this year's impact into account, as I said, but we also -- we don't expect a repeat of this. And so our job is to go back and compete for that commercial patient. We've been very consistently capable of doing that in the past. We think our value position is strong. And so going forward into 2026, that will be a huge focus. But there certainly is a little bit of that that's been in -- that's been allowed to go into the 2026 guide.

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

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

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

Yes. So great questions. So yes, we are starting out at a 4-plus percent kind of organic growth rate expectation. And as you know, that's at the low end of our 4% to 6% range. That 4% to 6% same-store range has not changed. We still believe 2% to 3% case growth, 2% to 3% revenue growth is the right model long term. Again, there can be fluctuations. Obviously, we've got some near-term pressures we've called out, but that's how we got to that 4%. We still have a lot of confidence in our ability to drive organic growth. On the vascular side, I would say, I really, really like this service line in the ASC simply because it's a cheaper and more customer-friendly access point for lots of things, including renal access points that actually help dialysis patients, procedures that often are maybe not prioritized in the hospital setting just because of all the other things going on. We feel really well positioned to grow in the vascular space and excited about that going forward. In your last question -- I'm sorry.

Medicare.

Medicare, yes.

Medicare, yes.

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

[indiscernible]. So here's what I'd say about that. It is certainly a positive backdrop. And let me give you the broader -- it's not the immediate 500 procedures, although there are certainly some cases there. What starts to happen with Medicare, when you take away that inpatient-only list over time is you take away some of the, what I call, the friction that's created when you have half the procedures that might be approved for the ASC and the other half in the hospital. And what I would say is historically, Medicare -- and one of the reasons that the logic of getting rid of the inpatient-only list is Medicare has been well behind the commercial in capturing the savings that our site of care represents. So for example, cath lab procedures were done in ASCs commercially for years before Medicare actually approved in the ASC space, same with total joints. We were doing commercial total joints in the ASC well before Medicare approved it. And so I think the really big benefit of this is that it allows the doctor to make the decision. It allows Medicare to benefit from the savings of technology without having to wait years just based on the bureaucracy of a list. So we see that as a huge benefit. It's an underlying tailwind to the business that over time just allows our positions to -- as they find it safe to bring new procedures over to do it and not have to think about, gosh, is this one procedure? Is it something I have to do at the hospital? Because once you do that, the physicians hate to split their day, right? If they have a day of surgery and they have 2 hospital required patients and 4 that can go to the ASC, they're going to go to the place where they can do them all. So it's definitely a tailwind. Again, it's not so much about the 500 procedures. It is about the backdrop of allowing cases to move to the appropriate site of care at pace with technology and safety.

Our next question comes from Whit Mayo with Leerink Partners.

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

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

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

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

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

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

Michael, I appreciate the question. And yes, so again, we're actually -- we're thrilled, obviously, with the administration's decision to recognize that the choice should be in the physician's hands and if there's a high-value opportunity, say they should go to our facilities. I think cardiology is a specialty that there is real opportunity in. It is one of the harder ones to transition just because of the amount of physician employment and the fact that you probably know this, there are still, I think, 20 states that have restrictions that are above and beyond Medicare. With that said, I think in the coming years, it's such a big opportunity. One of the things that's made total joints and spine so attractive as they are procedures where for the payer, it's a 5-figure savings. And cardiology is another place where I do believe there's tremendous opportunities for savings. It will take a bit longer because it's going to be state by state. It's going to be physicians rehanging shingles in some cases. And/or it's going to be health systems, the ones that are brave enough to lead to the outpatient space dealing with the economics of that transition. But there's no doubt that cardiology is a place -- through the combination of what's happening with the inpatient-only list, as you know, a lot of EP procedures are coming over now. I think EP ablations. Not all of them, but certainly, that's a place where I do think you'll see faster movement. Clearly, we've seen cardiac rhythm management and vascular -- as I mentioned earlier, part of that cardiovascular service line that are fast growth. I think when you get into true interventional cardiology, it's happening a bit slower just again because of that physician transition and the complexities around some of the state rules. But if orthopedics ever does slow down, which right now, we think we're still -- the most in the middle innings, the cardiology opportunity with technology and with these changes certainly will be there going forward. I think that's it for the questions. Yes, do you have a follow-up? I'm sorry.

No, that was it.

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

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