Surgery Partners Inc

NASDAQ:SGRY

Earnings Call Analysis

Surgery Partners Reports Robust Growth Amid Challenges

In the third quarter, Surgery Partners reported a net revenue of $770 million, up over 14% year-on-year. Adjusted EBITDA grew 22% to $128.6 million, marking a margin increase to 16.7%. Surgical case volume rose 3.7%, with total joint replacements soaring by 53%. Despite disruptions from two hurricanes, all facilities are operational again. The company is optimistic about future growth, targeting full-year revenues exceeding $3.075 billion and adjusted EBITDA of $508 million, reflecting at least 13% and 16% growth, respectively. Ongoing strategic acquisitions and a strong recruitment drive are key to sustaining this momentum.

Strong Financial Performance Amid Challenges

In the third quarter of 2024, Surgery Partners showcased robust financial health by reporting net revenues of $770 million, marking a growth of over 14% compared to the same quarter last year. This growth was driven by a surgical case volume increase of 3.7%, with same-facility net revenue rising by 4.2%. The adjusted EBITDA reached $128.6 million, representing a 22% increase, and yielding adjusted EBITDA margins of 16.7%, an improvement of 100 basis points year-over-year. Despite facing operational challenges due to Hurricanes Helene and Milton, which impacted Florida, Georgia, and North Carolina facilities, all operations have since resumed, contributing to the overall financial stability.

Expansion in Total Joint Replacements

A notable highlight from the quarter was the remarkable growth in total joint replacements within Surgery Partners’ Ambulatory Surgery Centers (ASCs), which skyrocketed by 53% year-over-year. This growth aligns with a five-year compounded annual growth rate (CAGR) of over 80%. The favorable shift towards ASCs for joint replacement surgeries signals an increasing preference among healthcare providers and patients for high-quality care in lower-cost settings. This trend is projected to continue as the company is well-positioned to capitalize on evolving care models.

Strategic M&A and Growth Initiatives

Surgery Partners actively pursued growth through mergers and acquisitions (M&A), investing $24 million in five end-market transactions during the quarter. Notably, the acquisition of two multi-specialty orthopedic ASCs in Chicago was accomplished in collaboration with Duly Health. This partnership enhances their operational capabilities in a high-growth market and aims to reinforce their footprint in Florida, Texas, California, New York, and Illinois. The company's proactive approach to expansion is evidenced by their successful team integration and sourcing of a robust pipeline for future investments.

Positive Forward Guidance

With the optimistic results in hand, Surgery Partners reaffirmed its full-year projections, anticipating greater than $3.075 billion in net revenue and $508 million in adjusted EBITDA. This outlook translates into a minimum growth of 13% in net revenue and 16% in adjusted EBITDA compared to the previous year, indicating confidence in ongoing operational efficiency and market expansion. The management remains committed to delivering sustained profitability and growth, banking on strategic investments and operational excellence.

Strong Physician Recruitment Driving Growth

The company continues to strengthen its operational backbone through significant physician recruitment, onboarding over 230 new doctors in the third quarter alone. With a total of more than 640 new recruits year-to-date, the company's efforts to attract top-tier medical professionals in specialties such as orthopedics, spine, and cardiology are proving successful. This consistent influx of skilled physicians is expected to yield substantial revenue contributions, thus fueling compounding growth as noted in previous classes, where recruits generated 126% more revenue in 2024 compared to the prior year.

Robust Balance Sheet and Cash Flow Management

Surgery Partners ended the quarter with $222 million in cash, bolstered by an additional $815 million in total liquidity when combined with available revolving credit. The firm reported operating cash flows of $65 million, which were marginally affected by the timing of collections affected by the recent hurricanes. Despite facing challenges, including higher transaction-related costs, the company remains assured in its cash generation capabilities to fund both current and future growth initiatives.

Long-Term Growth Prospects Remain Strong

As surgery continues to shift towards high-acuity, elective procedures, Surgery Partners is set to benefit significantly from this transformative trend. The management emphasized their expectations for operational improvements, maintaining upward trajectories in both net revenues and margins. They project that their debt-to-EBITDA ratio could stabilize below 3.0x, further enhancing their financial flexibility to seize growth opportunities in the future.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings, and welcome to the Surgery Partners Third Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I would like to turn the call over to Dave Doherty. Please go ahead.

[David Doherty, executive]

Good morning. My name is Dave Doherty, CFO of Surgery Partners. I'm joined today by Eric Evans, our CEO; and Wayne DeVeydt, our Executive Chairman. 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. These risk factors are described in this morning's press release and the reports we file with the SEC, each of which are available on our website, surgerypartners.com.

The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain financial measures that are considered non-GAAP, which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. These measures are reconciled to the most applicable GAAP measure in this morning's press release.

With that, I will turn the call over to Wayne. Wayne?

[Wayne DeVeydt, executive]

Thank you, Dave. Good morning, and thank you all for joining us today. Before turning the call over to my colleagues, I would like to share highlights of our third quarter financial results and our outlook for the balance of the year. This morning, we reported net revenue of $770 million, representing growth of greater than 14% over the prior year quarter. On a same-facility basis, net revenues grew 4.2% with surgical case volume growth in the quarter at 3.7%. Adjusted EBITDA grew 22% to $128.6 million, generating adjusted EBITDA margins of 16.7%, expanding 100 basis points as compared to the prior year quarter. Our results were marginally affected by Hurricane Helene, which impacted several of our facilities and operations in Florida, Georgia and North Carolina as many took precautionary measures in the last week of September. This storm and Hurricane Milton that followed, largely only affected the scheduling of cases, but we did have several facilities that sustained damage. At this point, all of our facilities are reopened, but some are only performing limited volume.

In the third quarter, we continue to see growth in total joint replacements in our ASCs, increasing 53% in the quarter when compared to last year and a 5-year CAGR that's greater than 80%. We continue to experience strong and sustained growth in this area as physicians, payers and patients increasingly see the value of performing these procedures in an ASC environment, and we are well positioned to capture this ongoing shift into our sites of care. Eric will provide additional insights into our physician recruitment and expansion of our total joint programs in his remarks.

Moving to M&A. While we continue to focus on expanding our footprint in existing markets, we've been pleased with our team's ability to enter and grow in those markets that represent the largest commercial and Medicare footprint opportunity, specifically Florida, Texas, California, New York and Illinois. In the quarter, we deployed $24 million on five end market transactions. On a year-to-date basis, three of our acquisitions were in our targeted high-growth markets of New York and Texas. In addition, last week, we completed an acquisition of two leading multi-specialty orthopedic focused ASCs in the Chicago market in partnership with Duly Health, the largest independent multispecialty physician-directed medical group in the nation. These ASCs have a demonstrated history of strong operating and financial performance and have a very favorable outlook for high acuity growth moving forward.

These new ASCs will join two other ASCs we operate in the Chicago market. We're excited about the growth potential of this market, fueled by a strong network Duly's reputation providing an excellent patient experience and high-quality clinical care and execution on our proven growth and efficiency capabilities. Our business development team continues to source a robust pipeline of acquisitions and de novo investment opportunities, and we believe the capital deployment aspects of our growth algorithm remain achievable.

On the strength of these results, we continue to project full year net revenue and adjusted EBITDA outlook of greater than $3.075 billion and $508 million, respectively. This outlook represents at least 13% and 16% growth in net revenue and adjusted EBITDA, respectively, as compared to the prior year.

With that, let me turn the call over to Eric to provide additional highlights for the quarter. Eric?

[J. Evans, executive]

Thanks, Wayne, and good morning, everyone. We are pleased with our third quarter results with consistent and predictable growth across all our core service lines. Once again, all elements of our long-term growth algorithm contributed to double-digit top line and bottom line growth.

Diving deeper into our results. Same facility net revenue growth was 4.2% in the third quarter, comprised of 3.7% growth in our surgical case volume and 0.5% rate improvement. As we mentioned on our last call, we anticipated net revenue being more balanced between rate and volume on an annualized basis with rate playing a smaller role and volume playing a larger role in the second half of the year, which our results to date demonstrated. On a year-to-date basis, we have reported same-facility net revenue growth of just under 9%, with growth balanced between both volume and rate.

On a consolidated basis, our specialty case mix and volumes were mostly in line with our expectations with 163,000 consolidated surgical cases in the quarter with particular focus in our high acuity business lines. Continuing the wave of strong recruiting we've been experiencing this year, over 230 new physicians started utilizing our facilities in the third quarter with a continued focus on recruiting in high acuity areas such as orthopedics, spine and cardiology. This brings our total recruits for the first 3 quarters of the year to just over 640, on pace to exceed last year's total. The initial volume and average rate per case performed by the 2024 recruited positions exceed the volume and rates from last year's recruiting cohort. As a reminder, each of our recruiting cohorts continue to drive strong compounding year-over-year growth with our 2023 class generating 126% more revenue in 2024 as compared to the comparable period in 2023. Our recruitment activities, accelerating de novo development and acquisitions have continued to fuel our growth, especially in musculoskeletal, with nearly 194,000 MSK-related procedures performed year-to-date in 2024, representing 21% growth over last year. More importantly, total joint cases in our ASCs continue to grow at a disproportionate rate with just over 50% increase in case volume in the quarter. We do not see this growth slowing in the mid- to long term as hip, knee and shoulder surgeries continue to transition into the ASC setting. That shift in site of care is in the early innings, and we are well positioned with our recruiting team and our portfolio facilities to continue growth in this high acuity space.

Moving to operating margins, which improved in the quarter by 100 basis points over prior year quarter to 16.7%. This improvement reflects both our ongoing procurement and operating efficiency initiatives that continue to benefit from our increasing scale along with synergies achieved on our previously acquired facilities. Finally, diving deeper into our capital deployment activities I am very pleased with the progress that we have made on the M&A front this year, including the acquisitions Wayne just spoke about. These acquisitions accelerate our company's growth. And together with the de novos in process continue to position us with an increasing number of short-stay surgical facilities that are focused on sustainable, long-term and high acuity growth.

In closing, I'm proud of our Surgery Partners' colleagues and our many talented physician partners for their relentless focus on delivering a superior patient experience with high clinical quality. With the benefit of our collaborative, growth-oriented corporate team supporting our unique physician partnership model, I remain highly confident in our long-term growth outlook.

With that said, I'll now turn the call over to Dave to provide additional color on our financial results. Dave?

[David Doherty, executive]

Thanks, Eric. Starting with the top line, we performed nearly 163,000 consolidated surgical cases and 189,000 total surgical cases in the third quarter. These cases spanned across all our specialties with an increasing focus on higher acuity procedures, which is reflected in our double-digit growth in MSK-related surgical cases. The combined case growth in higher-acuity specialties, specific managed care actions and the continued impact of acquisitions supported revenue growth of 14.3% over last year to $770.4 million. As Eric and Wayne mentioned, our same-facility total revenue increased 4.2% in the third quarter. We continue to forecast our same-facility net revenue growth to exceed our growth algorithm target of 4% to 6% in 2024, with full year same facility revenue finishing in the high single-digit range. Year-to-date, our same facility net revenue was 8.7%.

Our forecast anticipates net revenue being more balanced between rate and volume on an annualized basis, with rate playing a smaller role and volume playing a larger role in the fourth quarter. Adjusted EBITDA was $128.6 million for the third quarter, giving us a margin of 16.7%, in line with our expectations of continued margin expansion. We continue to believe annualized margins will improve by at least 50 basis points over full year 2023.

We ended the quarter with $222 million in cash. When combined with the available revolver capacity, we had over $815 million in total liquidity. We reported operating cash flows of $65 million in the third quarter. This amount was impacted by the timing of routine transactions involving working capital as well as a marginal impact on collections due to Hurricane Helene. We remain confident in our working capital management efforts and the underlying cash generation from our portfolio.

Moving to the balance sheet. We have $2.2 billion in outstanding corporate debt with no maturities until 2030. The effective interest rate on our corporate debt is fixed at approximately 6% through March 31, 2025. And after that, we have interest rate caps in place that limit the variable rate component of our $1.4 billion term loan to 5%. In the event, the interest rate environment becomes more favorable in the future, we will capitalize on such improvements. Our third quarter ratio of total net debt-to-EBITDA as calculated under our credit agreement was 3.8x consistent with prior quarter end. As a reminder, this ratio will be impacted in the short term based on the timing of acquisitions, but over time, we project this leverage ratio will be below 3.0x.

Carrying the momentum of our year-to-date results, we remain optimistic and confident about the company's growth. We continue to project full year 2024 net revenue and adjusted EBITDA greater than $3.075 billion and $508 million, respectively. This guidance implies continued year-over-year margin expansion, consistent with our long-term guidance.

With that, I'd like to turn the call back over to the operator for questions. Operator?

[Operator]

[Operator Instructions] Our first question is from Brian Tanquilut with Jefferies.

[Unknown Analyst]

You've got Jack on for Brian. Just to kick off on the free cash front. I just want to make sure I caught all the details there correctly, Dave. So as we understand, I know you're sort of pulling back from some of the framework that you had laid out on free cash before. But if you just think about your broader expectations on cash generation, would you say most of the movement or the weakness in the quarter is due to working capital events that are going to swing back some point in the next couple of quarters? Or if you could just unpack sort of the moving pieces on the free cash piece, both in the quarter and over the next couple, that would be great.

[Wayne DeVeydt, executive]

Jack, I'm going to have Dave elaborate on some of the details you asked about. But maybe just to start, we continue to be pleased with our cash flow generation and our opportunities for deployment. But to make sure that we're all aligned, when we think about our cash flow modeling, it's based on a static environment and includes anticipated diligence and integration costs at our commitment to deploy the $150 million to $200 million M&A. So think about it as it's a static model that assumes that. But we're a growth company. And so the pace and size of our acquisitions can impact our cash flow from quarter-to-quarter or year-to-year. But we continue to feel good about the cash generated and available to fund both our de novos and our future acquisitions. But to get more specific on kind of the starting point, which is you start with operating and you kind of go from there. Dave, do you want to elaborate further?

[David Doherty, executive]

Yes. Yes. Thanks, Jack. So as you can see, our operating cash flow this quarter or -- sorry, on a year-to-date basis now approaches $190 million compared to $230 million last year. The components of that, we did distribute roughly $122 million of that to our partners and our maintenance CapEx remained relatively consistent with what we've been reporting in the past roughly $30 million or so of that. So the cash flow, the biggest driver of our cash flow change year-over-year is what Wayne was just mentioning related to the variable spending on our transaction-related costs, which include both the execution costs associated with deals that we executed this year. And integration of prior acquisitions that are rolling into our business model going forward. So those variable costs are directly related to the level of spend. And you can see that in our reconciliation of adjusted earnings. That level of spend is a little bit less than 2x what our historical norm is. But having said that, our M&A spend is more than 2x so far year-to-date this year. But as you did point out, there are typical working capital-related activities inside the quarter that will fluctuate from time to time. So those would include things like the timing of when payroll occurs and other accrued liabilities. But we are also experiencing some of those industry-related issues that others have talked about related to payer dynamics. Of course, it's a more muted effect on our business because of the way our business runs being primarily scheduled services, which enables us to communicate with payers in advance. Nonetheless, that has an impact -- marginal impact inside the quarter. And then finally, as we mentioned earlier, the hurricane did impact us in a way, the timing of that hurricane and the geography where it hit happens to be an area where a lot of our cash and billing experts reside, which is down in the Florida and Southeast part of the country. So -- we did lose a little bit of cash collection activity just in that last week of September, which puts some pressure on it. Some of that, we should expect to return. But as I mentioned, the transaction and integration-related costs is perhaps one of those variable things that we haven't anticipated. Thanks, Jack.

[Unknown Analyst]

Okay. Got it. That's really helpful. And then just a quick follow-up, maybe taking a step back further. One of the things that we've been perceiving a little bit of misunderstanding in the market around the surgical hospital strategy. And so I guess I just wanted to ask maybe taking -- taking step back and it's probably for Eric or Wayne. As you think about sort of what the strategy is with the surgical or physician-owned hospitals, why you like that side of service and how that business has tracked relative to to the broader overall consolidated Surgery Partners business? Would love to get a little bit of color on where you stand on those things.

[J. Evans, executive]

Sure, Jack. I appreciate the question. First of all, I would differentiate our surgical hospitals from traditional acute care. I mean our median hospital has a of five has either 0 or next to 0 ER visits. And so these are very much elective-focused facilities. We really like them in our strategy because they are ultimately the basis of an ecosystem. So if you think about whether it's orthopedics or cardiology or any number of specialists, it allows physicians to partner with us across the entirety of the acuity spectrum. And so you look at our markets where we have those assets, we build ASCs around them, which allows us to really, again, cover that full surgical perspective, gives physicians increased autonomy to treat all their patients within our partnerships. And it's been a powerful tool for us. But they are really -- again, I want to go back to, they are a basis to really grow our ASC footprint. They are also a basis to allow us to partner and physicians in a more in a deeper way that allows them to cover their entire patient population.

[Operator]

Our next question is from Joanna Gajuk with Bank of America.

[Joanna Gajuk, analyst]

You mentioned impacted some of the collections. And I know there was an add-back for less than $1 million to get to adjusted EBITDA for hurricanes, but was there any impact to volumes in third quarter and fourth quarter for that matter?

[David Doherty, executive]

Yes, the impact to -- from the hurricanes was somewhat marginal, but it did affect a large swath of the Southeast, as you know, and the timing of that, that was not really good for us. It all happened in the last week of the quarter. So there was an impact clearly inside the third quarter. Some of that will impact our facilities into the fourth quarter. There was only one of our facilities sustained damage and the community was fairly significantly impacted. So we are tracking that one pretty carefully as we go into the second quarter. The facility itself is open, but it's on a partial schedule right now. All of our other facilities have reopened and is back to business as normal, but marginal impact on revenue and cases.

[Joanna Gajuk, analyst]

Okay. So it's too small to quantify?

[David Doherty, executive]

Yes.

[Joanna Gajuk, analyst]

Okay. So now I guess, on volumes, I guess, same-store cases, this adjusted, I guess, tracking around, call it, 4% year-to-date growth. So is this sort of how we should think about going into next year when it comes to same-store growth?

[David Doherty, executive]

Yes. Well, so first off, I think it's too early for us to talk about 2025. So I'll just reiterate how proud we are of what we've been able to produce so far this year. With our same facility rate growth now at 4% on a year-to-date basis, that exceeds our long-term growth algorithm that we often talk about of 2% to 3%. So great momentum, great support for our facilities, and great organic growth, that I'm proud that our facilities are able to kind of achieve. It is too soon for us to look at 2025. But if you look at our long-term history on case growth, you'll see, we've constantly been above that long-term growth algorithm.

[Joanna Gajuk, analyst]

Okay. I guess, somewhat helpful, but I understand you're not ready to talk about next year specifically. But I guess another question when it comes to -- your peers have talked about some headwinds from lower Medicaid and self-pay impacting outpatient surgeries. But I mean, your volume is still pretty solid. So presumably, that's not really impacting you as much, about those dynamics?

[J. Evans, executive]

Yes. Great question. So a reminder, and this goes back to my earlier comment on our surgical hospitals. We don't have much Medicaid business. We have very little ER business. We are an elective pretty much primarily almost all Medicare and commercial group. And so we have not felt that impact, and we have continued to grow at a rate that matches our algorithm and consistency we expect.

[Operator]

Our next question is from A.J. Rice with UBS.

[Albert Rice, analyst]

Just another thought on the volume and pricing question. As you see the shift to the higher acuity to joints and other things, how does that impact the trend for volume versus pricing? Do those procedures generally just take longer surgical time, but on the other hand, yield higher revenues. So that may just have a long-term impact on the metrics between pricing and volume. Any thoughts on that?

[Wayne DeVeydt, executive]

I would start with what you just said, which is, clearly, these are procedures that require more OR time, but have a higher dollar contribution per minute than other procedures. And so we prioritize those within our facilities where we can. And then obviously, we were able to fill in the time with other lower acuity procedures, but still nonetheless important high-margin ones. Relative to the growth algorithm, it's simple, right? It's 2% to 3% of volume and it's 2% to 3% of rate. We have a track record of consistently outperforming that. This year, we're close to 9% on the same-store basis. We don't see anything changing regarding the growth algorithm going forward. And we have generally seen our business model to be agnostic to who's in office because ultimately, this is really about a shift of higher acuity procedures into a lower-cost, higher-quality setting. So I would continue to expect to see it play games with the math from quarter-to-quarter, but I don't think it will play games with the math on a year-over-year basis.

[Albert Rice, analyst]

Okay. The only other question, I know we spent a little time talking about the hurricane impact. Some others are calling out the impact on the supply chain, IV bags, et cetera, et cetera. Did that -- any of that have an impact on you? Or do you expect it to in the fourth quarter?

[David Doherty, executive]

Yes. Thanks for that question. Clearly, it's something that we track. You're talking about the facility that Baxter had in North Carolina that did impact liquids. We Clearly -- I mean, I'm really proud of our procurement team. I got to say we were on top of it kind of right away. And I'm happy to say that we have not canceled any cases as a result of that shortage. We got on it pretty quickly, part of the benefit of us having a portfolio of companies across the country in a variety of different supply chain partners that kind of sit behind it. And as we sit here today, we're not anticipating having long-term pressure. We're starting to see that somewhat abate. So combination of the inventory that we had on hand, both at our facilities and as our backstop and our great partnership with with many of our providers has allowed us to kind of weather that storm as it were. So a great question. Thanks, A.J.

[Operator]

Our next question is from Andrew Mok with Barclays.

[Andrew Mok, analyst]

I just wanted to clarify expectations around free cash flow for the year. I think you said you're pleased with the cash flow generation, but also noted higher transaction costs. So it was less clear to me whether we should still be thinking about the $140 million to $160 million free cash flow target for the year. Is that still achievable?

[Wayne DeVeydt, executive]

Andrew, thanks. I think the thing that we were trying to point out to folks is just to recognize that the static nature of our cash flow modeling does not reflect the dynamic nature of when capital is actually deployed, which is why we've moved away from that free cash flow metric. So in this current year, we're 2x on M&A deployment. And so ultimately, that means we're doing more integration and more diligence. So backing into a static model is one thing, but in a dynamic model, we're in a point where we're saying, look, providing that number to no longer provides value.

[Andrew Mok, analyst]

Got it. That's helpful. And then if I look at the G&A line in the quarter, it looks like it was down about $11 million or nearly 30% sequentially. Can you give us more color on what's driving that G&A lower. Was that planned or in response to some of the challenges from the hurricanes and things of that nature?

[David Doherty, executive]

Yes. So as a reminder, kind of our second quarter G&A did have a stock-based compensation true-up of about $8 million, we talked about in our call last quarter. So if you normalize for that amount on a full year basis, our Q3 G&A expenses in line with our expectations.

[Operator]

Our next question is from Tao Qiu with Stifel.

[Tao Qiu, analyst]

This is Tao Qiu from Macquarie. And I'm just wondering if you guys have any comments on the final Medicare ASC payment rule? In particular, we noticed that not many procedures were added to CPL this year. Any potential regulatory changes under the second Trump presidency? Remember, under his first time, CMS made the decision to phase out the IPO list, do you foresee kind of acceleration in terms of size shift in the second term?

[J. Evans, executive]

Yes. Thanks for the question. So there was -- you're right, there was not a lot of change to the list this year, although, again, the key growth drivers for us have been at it in recent years, and there's a long way to go on those. So I would just say, we're pretty pleased with the overall Medicare update. And certainly, that's been a nice thing well above our normal algorithm. So pricing has been nice. But as far as the list goes, no real surprises, and we've got tons of room within the procedures that are there. I would say to your election question, look, the good news about our space is in a favorite of both administrations because of the tremendous value we create. We don't expect that to change. You are right noting that last time the Trump administration was in, they wanted to eliminate the inpatient-only list. We'll see where that goes. But again, I would say the biggest opportunities for us are already within our realm and we're already executing on them.

[Tao Qiu, analyst]

Great. And second, a clarification question. So D&A expense stepped up $15 million from the quarter, I think it's probably largely related to the $220 million acquisition done in the second quarter. But anything else that's contributing to the higher step up this quarter?

[David Doherty, executive]

In the -- you're talking about G&A expense?

[Tao Qiu, analyst]

No, D&A, depreciation and amortization.

[David Doherty, executive]

Yes. That's the introduction of new assets that have joined our portfolio in the past 2 years. So that would be driving most of that increase.

[Operator]

Our next question is from Matthew Gillmor with KeyBanc.

[Unknown Analyst]

I wanted to ask on physician recruitment. It seems like you're maybe running a little bit faster this year in terms of just new doctors joining the platform. Curious if that was the case? And if you had any comments in terms of how we should think about the maturity of those physicians as they come on to the platform, how long it takes for them to migrate their business over to your facilities?

[J. Evans, executive]

Yes, Matthew, thanks for the question. Yes, we're very pleased with our recruitment this year. It is on pace to be a record year and ahead of last year. I would say, every year, we get a little bit more mature in this place. We use a lot of data to drive our targeting. And I'd also say those higher acuity specialists that can now use our facilities are more and more aware of the benefits and the great quality we can provide the opportunity for them to participate with us in saving -- creating value for the health system. So that does seem to be a place where we're continuing to gain momentum. Your question around as we recruit them, we mentioned in our prepared remarks how much the last cohort is up. We typically see after year 1, that group a double or more in the second year, and that growth continues through year 3 and 4. And so it is a compounding effect. So certainly, we're excited about this class. We're excited about how much of this class is high acuity. And we continue to be a very, very attractive place for physicians, specialty physicians who want to remain independent, but in particular, physicians who want more control, better lifestyle and the ability to create a lot of value for both their patients and the health system.

[Unknown Analyst]

Great. And then as a quick follow-up with the election last week, there's been, I think, some just focus with the acute care hospitals, at least on what happens with the exchanges and the enhanced subsidies there. I was curious if you could kind of characterize your exposure to exchanges. My sense was it was pretty limited, but just would be great to hear your perspective on that.

[J. Evans, executive]

Yes. No, it's a great question. It is relatively limited. But I would say that I think we're not going to predict where that's going to go with the administration, but it's relatively limited, but we are well positioned, obviously, in that place to deliver a high-value product, and wouldn't matter kind of how they structure. And so we'll be watching that carefully, but don't anticipate that's anything material.

[Operator]

Our next question is from Sarah James with Cantor

[Sarah James, analyst]

You've talked a lot today about lumpiness and timing of cash used for growth and also general needs like payroll. And I'm wondering with that in mind, if we're thinking about the broader threshold of what level you can consistently operate at for free cash flow to self-fund growth? Is it really not the $200 million that I feel like the Street was have their mind at, but something higher like 250 or 300 just to account for this lumpiness in the use of cash?

[David Doherty, executive]

I'm not following Sarah the $200 million to $300 million. But I will tell you, based on everything that we've modeled and based on the strength of our balance sheet that we have no concern over our ability to fund M&A on a go-forward basis, even with the experiences that we've been seeing so far. So our modeling over the next 5 years would suggest that the use of our total balance sheet liquidity is sufficient such that at the end of that 5-year period, we end with a leverage below our our 3.0 target, nothing on the revolver and strong cash flow generation. So at this point, our growth algorithm does not need to change whatsoever. We feel really confident as we sit behind that. And that is inclusive of that inorganic growth lever that's out there.

[Sarah James, analyst]

Got it. And then if you could clarify, are there any moving pieces that impacted revenue per case this quarter?

[David Doherty, executive]

Yes. So as we mentioned, I think, on our last call, our same-facility rate growth was going to be impacted by the mathematical equation of how the same-facility growth. So I'm just going to remind you kind of -- and as we've talked about before, I don't want us -- any one of us to over-index on same-facility cases or rate in one particular quarter. So we tend to look at it on a longer-term basis, just so it normalizes for some of these unusual variances that the calendar can have on our calculation that kind of sits behind there. So I'll reiterate the fact that we're 9% or just about 9% on a year-to-date basis on our same facility with contributions coming from both sides of it. Now in the third quarter, our same-facility rate was exactly in line with our expectations. And if you remember, in line with what we had mentioned on our second quarter call. The case growth that we saw inside the quarter was strong, and it was from the predictable calendar that favored the return of higher volume, but relatively lower acuity procedures in GI and ophthalmology. So just the math of that. Sarah is going to drive some pressure on the rate side, which is how you can see that coming through. However, as we talked about at the very beginning of the call, we have seen a 50% growth in our total joint replacement procedures. Those are high acuity. So that kind of is underlying the rate that you're seeing. So you'll still be impressed when you look at the overall net revenue per case that the company is producing, but the way the same facility calendar works inside a quarter will just produce those kind of odd results. It will continue to do so in the fourth quarter, but again, that's nothing new. It's everything that we predicted, and it has come through. So on an underlying basis, we're very, very proud.

[Operator]

Our next question is from Bill Sutherland with The Benchmark Company.

[William Sutherland, analyst]

Eric, I wonder if you could touch on cardio for a second. I've been hearing about EP procedures picking up a lot. And just wondering how that's -- if you could provide some dimension on how that fits into your case mix now?

[J. Evans, executive]

Yes, Bill, thanks for the question. And you've heard me talk about cardio a couple of times. I would start with just saying we're excited about the future of cardio. It is cardiac procedures and their ability to move into the ASC safely. So that's stuff like you mentioned EP, cardiac rhythm management. Those procedures, in particular, are easier to move into our facilities don't require a cath lab, over 70% of our facilities have fluoroscopy to do those procedures today. And so we've talked a lot about we're trying to add 5 to 10 facilities a year that add that capability. Again, we see this as probably one of our fastest growing service lines, albeit on a small end. So we expect that to be a rapid growth. I do think there will come a time where it will turn the corner, much like we saw in orthopedics, but it's a highly employed specialty. And Bill, as you know, too, a lot of these docs, they haven't historically practiced in ASCs. And so there is a little bit of a learning curve, but we're working through that. We do have a lot of interest in the area, but again, small in, rapid growth, we expect it to be really kind of being a rapid curve over the next several years, but somewhat muted by the fact that it's the most heavily employed specialty and also certain states haven't caught up with CMS yet. But we're excited about it, Bill. We do see it as kind of the next big wave. If you think about after orthopedics, but we're still in the early innings there. So most opportunities are fantastic.

[David Doherty, executive]

Yes. Bill, let me just -- I'll add on to that real quick. So just another point of reference. Much like what we saw on the orthopedic side, we're getting ready for it as a company. So we know a lot about it. We know what's kind of driving it. But 70% of our facilities are capable now of doing cardiac opportunities. So we've been positioning the company for when this opportunity does manifest.

[William Sutherland, analyst]

Great. And then I was looking back at my notes on the de novo, where you stand with fully syndicated launches. And maybe update us on where they fall into the calendar now and the mix of consolidated and minority interest partnerships. .

[David Doherty, executive]

Yes, Bill, great question. de novos for us is that lever that we're really excited about. It's been a growth lever for us with the target of doing 10 de novos over the course of -- or in any given year, I think we're going to have de novos kind of in the pipeline. And so far, since we've been doing de novos, we've opened 17, and over the past year, we've opened 5 this year with a couple more we think are going to happen in the next 6 months or so. Six by the end of 2025. Most of these de novos are going to be in minority interest. That's how they start. With an opportunity at some point in the future for us to move into a consolidated framework. But I will remind you the economics of a minority interest investment for us, even though they don't consolidate still favorable for us. They are the best use of capital relative to M&A, really low cost of capital for entry point. If you can kind of tolerate the amount of time for us to bring in. We'll get the minority interest earnings, but we'll also get management fees as that facility continues to grow. So the economics of these de novos are very favorable for us. No change right now in our long-term approach to doing 10 de novos every year.

[Operator]

Our next question is from Benjamin Rossi with JPMorgan.

[Benjamin Rossi, analyst]

On M&A, you mentioned the Chicago deal in the opening comments. Just curious how you're approaching capital deployment? Where you see the pipeline as we wrap up the year? And whether you consider yourself in a more opportunistic position at this point for targets that align strategically with your pursuit of higher acuity procedures?

[J. Evans, executive]

Ben, thanks for the question. I'll start with saying, as we've always said that M&A is fickle and the timing can be obviously difficult to predict. But as you mentioned, the Duly acquisition, we're very pleased with what we've added to our portfolio this year. It reflects a redeployment of capital for assets that we divested last year, along with over $200 million of incremental capital being deployed, which is consistent, obviously, with our growth profile. We're obviously not providing guidance on 2025 as far as the future outlook of what we're going to do with capital. So I'd caution getting ahead of that. But to your point, we've always been opportunistic. And so that continues to be our position. We're well positioned to continue to grow high acuity procedures.

[Benjamin Rossi, analyst]

Got it. And just on the buy-up opportunity, can you remind us of your buy-up opportunity on your current book? And then are you seeing any change in physician behavior regarding potential buy-ups on a stronger volume environment?

[J. Evans, executive]

So we always look for buy-up opportunities across our portfolio. There's not a ton of those, although they will grow as we grow our de novo pipeline is what Dave was talking about. There continues to be opportunities as those mature. We -- every year, we look at those opportunities. We have to balance that with having physician commitment and buying. And so we are always kind of opportunistic on that side as well. But it's not a huge opportunity in our current portfolio as we consolidate the majority of our facilities.

[David Doherty, executive]

Yes. I just -- I know it's frustrating for those that have to kind of model what a revenue looks like. But have mentioned before, we're kind of agnostic to whether it results in a consolidation criteria for us or not. As Eric mentioned, it's a -- we need to make sure there's a healthy mix between the physician ownership model. That's really what drives the natural business model that we have. And it's -- that syndication opportunity is ever present in every one of our deals, but it's not going to be driven off of a desire to get to consolidation. It's going to be driven off of the long-term sustainability of each one of our facilities.

[Operator]

Our last question is from Ryan Langston with TD Cowen.

[Unknown Analyst]

This is Will on for Ryan. Most of my questions have been asked, but I guess I would just ask kind of on the long-term outlook for physician recruitment. Are you seeing anything new in terms of shifting preferences for these physicians to work in your environment versus employed a hospital?

[J. Evans, executive]

Ryan, great question. I would say, in general, it's very stable. We continue to have strong interest, as you can see in our recruitment numbers, mostly because we provide an opportunity for them to be more efficient with their time, right? We provide more like a time machine that allows them to have consistent scheduling, allows them to get more procedures done and gives them a chance to have more say in their practice. I do think there's a lot of surgeons who are frustrated with the current system and how much time they end up having to spend on things that they don't see as efficient, and we're in answer to that, right? We continue to be an answer to that for independent physicians. And we haven't seen that kind of wane at all.

Okay. So I appreciate all the right questions. I think that was the last question. I'll go ahead and just wrap up. Before we conclude, I would like to say on behalf of our entire management team, thank you to our colleagues that partner with our physician partners each and every day to deliver on our mission to enhance patient quality of life through partnership. And I want to thank you all for joining our call this morning. Hope you have a great day.

[Operator]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.