Surgery Partners Inc

NASDAQ:SGRY

Earnings Call Transcript 2022-Q4

[Operator]

Greetings, and welcome to the Surgery Partners, Inc. Fourth Quarter 2022 Earnings Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Dave Doherty. Please go ahead, sir.

[Dave Doherty]

Good morning, and welcome to Surgery Partners' fourth quarter 2022 earnings call. I'm Dave Doherty, the company's CFO. With me today is Eric Evans, CEO; and Wayne DeVeydt, our Executive Chairman. During this call, we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call, we will discuss certain non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of these measures can be found in this morning's press release, which is posted on our website at surgerypartners.com and in our most recent annual report on Form 10-K when filed.

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

[Wayne DeVeydt, Executive Chairman]

Thank you, Dave. Good morning and thank you all for joining us today. This morning, we are pleased to report full year 2022 adjusted EBITDA of $380.2 million, 12% higher than the prior year, and over 20% year-over-year growth when adjusting for the non-recurring benefit of grants. Including our non-consolidating joint ventures, we performed approximately 680,000 cases in 2022, nearly 12% more than 2021, with all specialties growing in line or in excess of our expectations, despite the early 2022 impact from the Omicron variant.

This strong case growth, combined with improved rates and contributions from our recent acquisitions, resulted in net revenue of $2.54 billion, 14% higher than 2021. The algorithm for our long-term double-digit adjusted EBITDA growth story relies on top-line growth, organic margin expansion and targeted capital deployment, and each of these growth levers continue to contribute as expected in 2022. The combination of our top-line growth and focus on controllable costs allowed us to report an adjusted EBITDA margin of 15%, representing an 80 basis point improvement over 2021 when adjusting for grants. Dave will go into these results in greater detail in a few minutes.

Our fourth quarter results continue to affirm the power of our business model and the value proposition we provide to our stakeholders. Net revenues increased 16% from the prior year to $707 million with same facility revenues increasing nearly 11% compared to 2021. Physician recruiting efforts yielded over 150 new surgeons in the fourth quarter, bringing our overall new recruits in 2022 to almost 575. The 2022 recruiting class spans all of our core high-growth specialties and is bringing a higher volume of cases and generating more revenue than prior recruiting cohorts.

For example, the first year net revenue contribution from our 2022 cohort was 40% higher than the year one revenue contributions from last year's cohort. Based on our experience as the recruiting cohorts mature, there is an earnings compounding effect for multiple years. As evidenced, the class recruited in 2021 delivered 143% more cases and 156% more revenue growth in 2022. We have high confidence that both 2021 and 2022 cohorts will continue to grow in 2023.

Finally, we continue to benefit from the transition of procedures out of the traditional acute care in-patient setting, and we are not seeing those cases return to the hospital setting as we exit the pandemic. Joint replacements in our ASCs for the fourth quarter were up 100% from the prior year and almost 80% for the full year 2022 compared to 2021. We will continue to focus on this significant shift in site of care in our recruiting efforts, acquisitions and de novo investments.

Our management team, which has a tenacious focus on execution, coupled with the infrastructure we've built over the past five years, has positioned us to capture the significant shift of care moving to the outpatient setting within the $150 billion total addressable market. Rounding out our growth story, our M&A team continues its disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples, and finished 2022 deploying just shy of $250 million at a sub 8x multiple. And our M&A engine isn't slowing down.

Our team is currently managing a robust pipeline of potential targets in excess of $250 million. With the incredible support of existing and new investors, in November we raised over $850 million in a primary offering of our equity. Dave will provide greater detail on the use of proceeds from the offering, but by repaying a significant portion of our long-term debt, we reduced our annual cash interest costs by north of $40 million. Combined with strong operational execution and cash flow conversion, we expect to generate over $140 million in free cash flow in 2023 and to exceed $200 million in annual free cash flow by 2025.

In addition to our projected operating cash flow, we start 2023 with over $820 million in liquidity. This liquidity position gives us further conviction into the continued long-term growth of the company. On behalf of the Board, I'd like to emphasize that point. We have high confidence in the long-term growth prospects of Surgery Partners. This management team continues to demonstrate their ability to successfully navigate the challenges of our current macroeconomic environment, as it executes on organic and inorganic growth strategies to provide significant year-over-year growth. Off the strength of our fourth quarter reported results and continued investments, we anticipate 2023 adjusted EBITDA to be greater than $425 million and with net revenue exceeding $2.75 billion. This outlook is inclusive of the anticipated headwinds and tailwinds that Dave will discuss in more detail.

Let me conclude with an observation as to the journey the company has been on for the past five years. Despite a challenging macro backdrop, the company has experienced compound aggregate growth of 18% in adjusted EBITDA and improved margins by 270 basis points. The cultural shift that started in 2018 has demonstrated the results we believe our company was capable of achieving.

More importantly, our team is brimming with confidence and with the grit and determination to continue this strong double-digit growth over the next five years. Our leadership team and our physician partners are all aligned on the opportunity that this industry shift presents for our business and remain prepared and excited for the future.

With that, let me turn the call over to Eric. Eric?

[Eric Evans, Chief Executive Officer]

Thanks, Wayne. And good morning, everyone. I will echo Wayne's pleasure with our fourth quarter results as we continued our multiyear positive trajectory and execution that will extend into 2023 and beyond.

Our continuously refined facility-level operating system supported by corporate growth leaders, empowers our physician partners to focus on delivering the best clinical care with the convenience and cost efficiency our patients expect, all while delivering strong financial results for all of our stakeholders. From an operational perspective, our specialty case mix is right where we want it to be, and volume was in line with our expectations with over 155,000 surgical cases in the quarter, 7.3% more than last year.

On a same facility basis, net revenue grew by almost 11% in the fourth quarter. Our strong competitive position in the markets we serve, superior operational execution and broader macro tailwinds drove a healthy same-facility case growth of 4.3%, and our mix resulted in over 6% growth in revenue per case.

Our organic growth initiatives, coupled with the acquisitions completed over this past year have translated into a very strong top line growth of nearly 16%. Dave will talk about this in more detail, but our adjusted EBITDA of $120.8 million for the quarter and $388.2 million for the year both represent new all-time highs for our company.

Income recognized from CARES grants were not material in the fourth quarter or full year 2022 as they were in 2021. When looking at results purely without grants, the company's adjusted EBITDA grew by more than 20% in 2022.

Our proactive, disciplined and data-driven approach has enabled us to closely monitor and react accordingly to inflationary impacts in labor and supply costs. On the labor front, in the fourth quarter, we experienced an overall reduction of premium labor as a percentage of salaries, wages and benefits in most of our markets with the overall utilization of premium labor abating, as is the contract labor rates that the market is demanding. As a reminder, premium labor represents approximately 3% of our total salaries, wages and benefits, and we continue to be an employer of choice in this fluid labor environment.

Our favorable workplace environment allows us to recruit faster and is a key enabler to maintaining the high clinical quality and exceptional patient experience we are known for in the communities we serve. When we do experience turnover in our facilities, we are able to fill the jobs posted in approximately 30 days on average.

As it relates to supply costs, we continue to work with our group purchasing organization and key suppliers to mitigate inflationary risk factors that could impact our businesses. In the fourth quarter, supplies were approximately 27.1% of net revenue, 80 basis points better than the third quarter and 100 basis points lower than last year. At this point, we are not seeing any unusual large price increases in commodities, endpoint costs or deliveries, but we remain vigilant in managing this risk to have active initiatives underway to proactively address it.

Moving on to our organic growth levers. We continue to benefit from our relentless focus on physician recruitment and targeted facility level and service line expansions. As Wayne alluded to, these efforts contribute to higher overall revenue per case rates as well as generate the highest contribution margin for our portfolio. Our physician recruitment team has been meeting the increased demand for new physicians by targeting the highest quality physicians. As part of our value proposition to new recruits, we have demonstrated a unique ability to predictably consistently and cost-effectively staff our facilities with high-quality front office and clinical teams, and capabilities that often contrast with and separates us in the eyes of our physician partners from alternatives in our industry.

In the fourth quarter, we added over 150 new physicians spanning our key specialties, bringing our 2022 total to nearly 575 new surgeons using our facilities. As Wayne highlighted, each of our recruiting cohorts continues to drive strong year-over-year growth, and we are encouraged by the strength of our current year recruiting class. As a point of reference, the average net revenue per physician in the 2022 cohort is already 53% more than the very strong 2021 cohort that we recruited last year.

All of this has helped fuel our growth in MSK procedures, particularly total joint cases in our ASCs. We performed over 28,000 orthopedic procedures this quarter, almost 13% more than prior year. We do not see this growth slowing, nor are we seeing cases returning to the inpatient setting. And as we have discussed, we are preparing for the next wave of cardiac procedures that we expect to migrate to outpatient settings starting in earnest over the next 5 years.

With an increase in the share of orthopedic and cardiac procedures moving into lower cost, high-quality, short-stay surgical facilities, we are considering all options to capture our fair share, including sourcing and managing a robust M&A pipeline, as well as investments in robotic equipment, expanding existing facilities and leveraging our partnerships with value health and select health systems, as well as the ongoing development of de novo facilities. These investments often require minimal spend, are financed at the facility level and are only authorized when we determine that the ROI is strong in the near term. We look forward to updating you on the efforts to build upon hospital system partnerships as the year progresses.

Our 2022 capital deployment of nearly $250 million for acquisitions exceeded our annual commitment of $200 million. Since 2018, we have deployed $870 million on acquisitions with an average multiple of less than 8x earnings, expanding our footprints in California, Texas and New York. We have selectively optimized our portfolio to unlock capital for redeployment with high-growth, short-stay surgical assets. This approach to optimizing our portfolio will continue in 2023, but does introduce complications for us as we develop our projections for revenue growth, which is affected by both the timing of acquisitions and divestitures, as well as the number of facilities in which we purchased a consolidating interest versus a minority stake.

Despite the timing-related projection challenges on revenue, the team continues to prioritize bottom line growth and adjusted EBITDA for both 2023 and our long-term future. As Wayne mentioned, we continue to manage a robust pipeline of acquisition targets, and our approach to capital deployment will provide meaningful contributions to future earnings in 2023 and beyond.

Our 2023 guidance that Wayne laid out and Dave will discuss in more detail shortly, prudently considers that we are still in a challenging macro environment and in a period of inflation that could pressure margins. As you can see from our results in 2022, we are confident we can effectively manage through these risks. Our teams are highly aligned, and we are executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle and operations to achieve our goals and continue to win in an increasing share of the rapidly shifting market.

In summary, I am proud of the team's accomplishments this quarter and for the full year of 2022. Our company provides a cost-efficient, high-quality and patient-centered environment in purpose-built, short-stay surgical facilities that provide meaningful value to all of our key stakeholders.

With that said, I will turn the call over to Dave to provide additional color on our financial results as well as our 2023 outlook. Dave?

[Dave Doherty]

Thanks, Eric. I will first talk about our fourth quarter financial results and liquidity before providing detail on our outlook for 2023. Starting with the top line, we performed over 155,000 surgical cases in the fourth quarter, 7.3% more than the same period last year. These are only cases that are included in our consolidated revenue. But if I include cases performed at nonconsolidated facilities, we performed 182,000 cases. These cases spanned across all our specialties, with an increasing focus in orthopedics where we grew by 12.7% versus prior year.

Largely attributed to this case growth, we saw revenues rise 15.9% over last year to $707 million. This growth is a combination of the organic growth factors Wayne and Eric described, and contributions from our current and prior year acquisitions in consolidated facilities. As a reminder in 2022, many of our acquisitions were in non-consolidating facilities that provide us the opportunity to enhance performance through operational excellence and to buy up over time. So these acquisitions, we do not include their revenue in our consolidated net revenue.

We will continue to be agnostic to the accounting treatment of the assets we acquired since our focus is to acquire high-growth, high-quality assets aligned with our targeted specialties at the most favorable multiple possible.

On a same-facility basis, which we report on a day’s adjusted basis, total revenue increased 10.7% in the fourth quarter with case growth at 4.3%. Net revenue per case was 6.1% higher than last year, primarily driven by higher acuity procedures. For the year, same-facility total revenue growth was 7.7%, with strong contributions from both volume and rate.

Adjusted EBITDA was $120.8 million in the fourth quarter, giving us a margin of 17.1%. Adjusted EBITDA for the full year was $380.2 million with a 15% margin, in line with our expectations. Excluding the impact of income from CARES Act grants, margins expanded by 20 basis points in the fourth quarter and 80 basis points for the year. We continue to proactively manage inflationary pressures affecting our labor and supply costs. Although we are not immune, these factors were not material to the results we are reporting this morning.

As Eric mentioned, our salaries, wages and benefit costs, as well as our medical supply costs, were both lower as a percentage of revenue compared to the fourth quarter of 2021, with 50 basis points of improvement in salaries, wages and benefits, and 100 basis points of improvement in supply costs. Given the market dynamics, we will continue to carefully monitor these cost factors, proactively deploying cost mitigation tactics to help offset potential pressure.

As you know, in late November we completed our primary equity offering that generated net cash proceeds of approximately $860 million. This transaction was immediately deleveraging, taking almost two turns off our ratio of total net debt to EBITDA. We utilized approximately $585 million of these proceeds to repay long-term debt and finalized the acquisition of Kansas Pine and Specialty Hospital, with the remaining proceeds included in our consolidated cash balance.

These transactions resulted in a fourth quarter ratio of total net debt-to-EBITDA as calculated under the company's credit agreement being 4.3x, a $40 million reduction to our annual cash interest cost, and the elimination of a springing maturity in our term loan that would have brought it due in 2025.

Further, to enhance our liquidity position in January, we worked with our banking syndicate, along with new members joining the syndicate to expand the borrowing capacity under our revolving credit facility, bringing the total capacity under that instrument to just over $550 million, which remains undrawn.

We ended the quarter with $283 million of cash. As we enter 2023, our liquidity position is greater than $820 million, enhancing our confidence in our ability to navigate this current macroeconomic environment, and continue to fund accretive M&A.

We reported negative free cash flows in the fourth quarter, which was due to the timing of spend on growth initiatives, a $20 million payment for the tax receivable agreement, $11 million for the payment of accrued interest in connection with the early retirement of portions of our long-term debt, and $9 million for deferred payroll tax payments. For the year 2022, we generated negative free cash flow of $10 million, consistent with our expectations.

With the exception of spend on growth initiatives, which we will isolate for you going forward, we do not expect these significant unusual outflows to impact our free cash flows in the future. We remain confident in our ability to deliver greater than $140 million in free cash flow in 2023, and lower net debt leverage as we progress to our target of mid 3x by the end of 2025.

In 2022, excluding our de novo investments, we have deployed $246 million on 13 transactions at a sub 8 times multiple. These centers are primarily focused on MSK procedures and are well-positioned to support and strengthen our same-facility growth trends in future years.

Additionally, as mentioned in prior calls, we continually refresh our asset portfolio to align with long-term market growth trends. Proceeds from any divestiture activity will be redeployed as incremental M&A, as we intend to sell certain assets at a relatively high multiple and then redeploy the capital at a relatively low multiple with stronger future growth prospects.

While the timing of divestiture and related M&A activity can be challenging to predict, we believe our 2023 full year revenue outlook reflects our conservative view. On the debt front, we ended the year with less than $1.9 billion in gross debt at the corporate level. All of this debt is effectively fixed at 6.7% as a result of the favorable benefit of the interest rate swaps we entered into in prior years, leaving us with no exposure to incremental interest rate fluctuations.

In connection with the $150 million pay down of our term loan, in January we terminated the corresponding amount of our interest rate caps. We have no material debt maturing until 2026. With today’s interest rate environment, we are not exposed to significant rate risks, which is another factor, giving us confidence in our free cash flow growth.

We are carrying the momentum of the strong finish to 2022 into 2023. And we are setting our initial guidance for 2023 adjusted EBITDA to greater than $425 million, representing 12% growth over 2022. On the top line, we expect 2023 revenue to be greater than $2.75 billion. We expect to deploy at least $200 million of capital on M&A, with additional spend depending on the timing of any portfolio management opportunities underway.

Our adjusted EBITDA and revenue guidance is informed by a balance of case growth and rate growth as a results of organic growth efforts from investments we’ve made in physician recruitment, revenue cycle, supply chain and managed care initiatives.

The annualization of our 2022 acquisitions, in addition to projected 2023 acquisition activity and contributions from our in-process de novos, including the continued maturation of a community hospital we opened in Idaho during the pandemic.

While we are optimistic about 2023 and these fundamentals that will be driving growth, we believe our initial adjusted EBITDA and revenue guide are prudent, given the macroeconomic environment and headwinds related to the elimination of government programs related to the pandemic, the end of sequestration, and the impact of further pressures from today’s economic environment.

We have been managing these headwinds for the past few years and remain confident our teams have the right line of sight to mitigate these risks, but feel it is appropriate at this time to remain prudently conservative in our guidance.

As a reminder, our business has a natural seasonal pattern largely driven by annual deductibles resetting for commercial payers that tend to skew our results lower in the first quarter and higher in the fourth, relatively speaking.

We are projecting 2023 will have a seasonality pattern consistent with 2022, with first quarter adjusted EBITDA and revenue, representing an estimated 20% and 24%, respectively, of our full year guidance.

We have stated for years now that we believe we have a powerful and unique business model that benefits from favorable organic trends, demographics and a fragmented marketplace that provides ample opportunity for consolidation. Our 2022 results speak to the strength of our operations and our business model. And we believe that in 2023, we will continue to capitalize on that momentum.

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

[Operator]

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Jason Cassorla from Citigroup. Please proceed with your question, Jason.

[Ben Rossi, Citigroup]

Hey, good morning. Thanks for taking my question. You actually have Ben Rossi on here for Jason. So thinking about 2023 volumes, when looking at your guidance of $2.75 billion in revenue, how should we think about volume demand across your facilities in 2023?

You previously suggested volume growth of about 2% to 3% on a normalized basis, but in the context of about 8% organic growth for 2022. Should we see some acceleration above that target for 2023? Are there some nuances that we should be mindful of, including a difficult comp?

[Wayne DeVeydt, Executive Chairman]

Hey, Ben, good morning, and thank you for the question. Let me start by saying we have always talked about the simplicity of the algorithm that we pursue, which is the 2% to 3% volume and 2% to 3% rate, which from a same-store basis, we’ve always concluded that would put us closer to the high end of that range, if not better. And as you know, in 2022, we exceeded that for the full year.

And a big portion of that was the fact that our volume on a full year basis was closer to 3.9%. As we built our plans for the upcoming year, we will continue from an algorithm standpoint, remain conservative on our posture. But we do believe our outlook would support us being at the high end of that 2% to 3% in volume, if not better. Again, it’s early in the year. We’ll see how it progresses, but we are encouraged by what we’ve seen through January already.

[Ben Rossi, Citigroup]

Got it. Thank you. Just as a quick follow-up on demand for some of your value-based arrangements. Just turning to commercial contracting. Any color you can share on what you’re seeing in terms of demand for those value-based arrangements? And what are you seeing more from the managed care side or primary care practices?

[Eric Evans, Chief Executive Officer]

Yes. Appreciate the questions. This is Eric. I would say a couple of things. First of all, I always remind everyone we start to talk about value-based care that we are a value-based care player in the fee-for-service world. So just moving cases to our side of care tends to stay 40% to 60%. So before we start about anything else, I always why it might take risk when you can drive the savings that way? I would say that there’s continued interest. As you know, we have a partnership with Value Health. We have some facilities that are gaining traction in that area.

It’s early innings, but I do believe there’s, again, continued interest. I do expect that over the next several years, you’re going to see more of our revenue flow through that. That tends to be a good thing for us just because we are set to cost savings. It allows us and our physician partners to participate in the savings we create.

So we were a natural catchers in it for whether that be payers that are interested in driving value-based care or whether that be, as you mentioned, large primary care groups or providers that are interested in that. We tend to be – because we are an independent pure-play kind of – sort of surgical provider, we tend to be the right hedges mid for that. So I would not say it’s overwhelming at the moment, but there’s a lot of interest and continues to be, I think, a slow steady migration.

[Ben Rossi, Citigroup]

Okay. Great. Really appreciate the color there.

[Operator]

Thank you. The next question comes from Kevin Fischbeck from Bank of America. Please proceed with your question, Kevin.

[Kevin Fischbeck, Bank of America]

Great, thanks. I would love just to get a little bit of color on your view about the competitive backdrop right now. It seems that there’s a number of companies looking to buy surgery centers and open up new centers and things like that. Have you seen anything change there from a multiple perspective, from an ability to source a physician’s perspective? And I guess, how do you differentiate your story when you go to market?

[Wayne DeVeydt, Executive Chairman]

Hey. Thanks, Kevin. Good to hear your voice. Let me first start by saying that we are seeing no slowdown at all in the number of facilities available, the quality of the facilities available or any changes in the multiples. So from that perspective, I would say, even though, to your question, it sounds like others are engaging. The one thing I would highlight is there’s a huge difference between acquiring the surgery center versus actually knowing how to run, bring value, create both on the quality side around the medicinal aspects of running the business and more importantly, the clinical aspects. But more importantly than really getting the advantages of scale.

And I highlight that simply to say that probably the biggest moat that we have is that it took 20 years for this asset to get to the size of scale that it is at today. And in the last five years, a real intentional effort of building a true platform so that through acquisitions you could do a plug-and-play and really bring that value to our Surgery Partners and our patients immediately.

So I would say, not concerned at all by those that are pursuing assets. There’s a nice self-selection process. Eric always reminds us, there’s great self-selection. Those that are looking to simply sell their facilities to get their retirement funds or knock those that we’re looking to pursue. But rather, we’re more interested in those facilities that are aligned with really changing the health care dynamic and the quality dynamic. And more importantly, really removing costs from the system. And those are the ones that really want to align with us for the long-term. But in general, I don’t see our pipeline slowing down at all.

[Eric Evans, Chief Executive Officer]

Yes, Kevin, I would only add on the value proposition question. I mean we differentiate ourselves in competitive situation for centers by being that independent operator that doesn’t come with any conflicts. We’re not owned by a health system. We’re not owned by a health plan. These physicians that have created very successful independent centers. They did that for a reason. They didn’t want conflicts. And so that allows us to move quickly on adding any service line we want, moving to create the most value we can without any other kind of reasons not to do that.

So I think that’s a differentiator for us. We’re also very quick in our ability to move on opportunities. And I think all those things play well for us. But I would agree with Wayne’s comments wholeheartedly that if anything, the pipeline is a bit better. And I would say that we’re probably as well positioned as we’ve ever been to continue to win a majority of the centers we want.

[Kevin Fischbeck, Bank of America]

All right. Great. And then I guess just on the pricing side of things, you mentioned inflation that’s something that you’re keeping an eye on and managing pretty well. What is the rate outlook going forward? And I guess, an update on the re-contracting dynamics that you guys have spoken about over the last few years. Thanks.

[Wayne DeVeydt, Executive Chairman]

So first and foremost, as we go back to the simplicity of the algorithm of the 2% to 3% volume and then 2% to 3% rate, we clearly expect to be north of the 2% to 3% on rate. I think we would tell you that what we’re seeing both on the Medicare side and the final rates that came through, and more importantly, coupled with our initiatives on the commercial front give us high confidence. I – Dave, I’m going to let you chime in. I think you just shared the stat with our board the other day, the idea that what percentage that we currently have under contract as we go into this year to give our shareholders some high confidence in why we believe we will be north of that 2% to 3% on the same-store.

[Dave Doherty]

Yes, happy to. And this does go into the confidence that we speak to going into 2023. Our managed care initiatives constantly underway. As you know, Kevin we do, generally speaking, every three years, and then we’ll pop in, in an off-cycle. It’s – we find that we’re way outside of market and there’s opportunities that kind of exist. And so that component of our rate environment, we’re 97% locked in as we head into 2023. In other words, our rate environment and what we kind of project going forward is, for the most part, locked in. Now the difference, obviously, there’s some additional opportunity that we’ll see as we acquire new companies and we bring that managed care sector to bear for those.

And on the other side of the P&L, on the supply chain side and on the labor side, of course, we’ve talked about labor every quarter last year. I think you know what our story is there. But on the supply chain side, we have the similar dynamic in that most of our cost is protected by the GPO, which has proven to be very favorable for us.

And inside that GPO, similar to our managed care contract, they generally follow a three-year cycle. And again, our relationship with HPG has given us an enormous amount of visibility so we can predict with a high degree of certainty where we’re seeing inflation. Generally, it’s going to be in contracts that are up for renewal inside the HPG contract, and then those contracts that are outside of the GPO.

And so you can isolate pretty clearly which of those supply costs may be subject to a higher rate increase than normal cost of living. And a large majority of our spend, in fact, is already locked in for 2023. So again, good strong visibility out to the supply chain side and our forward look on inflation. Although not as high as the managed care rate side is still very strong on the supply cost side.

[Eric Evans, Chief Executive Officer]

Yes, David, I might just add just to get a little more color there. A couple of things on the managed care side that are favorable for us. Number one is just the pricing transparency rules. As that data gets kind of bedded through a more public – in almost every market, that’s a winner for us, right? It gives us an opportunity to talk about our value story to push for appropriate rate increases for the value we’re creating.

We always balance with payers the volume versus rate discussion. We want to be a value player. We’re never going to be the price leader, but we certainly want to be a place they want to steer business to and want to find ways to grow with us.

And then the last thing I would point out that’s really changed, I think, the dynamic the last three or four years for the ASC space is as we continue to add higher acuity service lines: Joint, spine, cardiac, it provides us the opportunity to show the difference in the value creation for payers and for the health system.

So those opportunities allow us to come in with a very favorable non-trended rate, just pure savings, and work to make sure we capture our fair share of the value. That also applies to our de novo facility. So all of those things affect that rate dynamic, but we’re very confident, as Wayne said that that 2% to 3% that we use in our algorithm is conservative.

[Kevin Fischbeck, Bank of America]

All right. Great. Thank you.

[Operator]

Thank you. The next question comes from Tao Qiu from Stifel. Please proceed with your question, Tao.

[Tao Qiu, Stifel]

Thank you. Good morning. I think I heard you contemplated a little bit more divestitures in 2023. Any additional color you could provide there in terms of the specialty focus and what kind of multiples you’re catching in the market?

[Wayne DeVeydt, Executive Chairman]

Tao, thanks for the comment and question. Yes, one thing I want to highlight is we believe that part of our core business every year is to look out over the next several years and understand what facilities we think have appropriate growth drivers or further opportunity around physician recruitment or ecosystems that we build.

And so every year, we are doing a pruning analysis, with the idea that we would prune assets that we think have hit their multiple growth and generally at a multiple higher than we would in turn acquire assets in new markets that have high growth and high physician recruitment opportunities.

We talked about this a lot more in 2018 and 2019, and again, continue to start doing this again last year. And then this year, you’ll see and hear more about it. 2020, there was not much focus on it simply because that was the initial year of COVID and all of our efforts and energy were really around making sure the business has not only stabilized but that we continue to invest during that difficult time.

But I would tell you that we have three to four facilities every year that we put into that category. We generally will sell for multiples that are north of the 7x or 8x EBITDA, and then we will turn around and redeploy it generally at that 7x to 8x trailing 12 months pre-synergy EBITDA.

So these end up being ultimately not only value-added, but reposition the portfolio every year to be in the highest growth facility. So the thing, as you know, though, with M&A on the acquisition side also applies on the divestiture side. It’s lumpy. We don’t need to sell these assets. They are generally quality assets. But we do really look at them with how much runway they have from a growth trajectory.

And if we can find a better owner that recognizes the value that we brought to the facility and can get that higher multiple you will see us transact more of those throughout the year. The important point to take away, though, from your question is this; we are committed to deploying at least $200 million for M&A this year, exclusive of redeployment of anything we divest. So to the extent we divest something, that would be additive to the $200 million to replenish the EBITDA that we sold.

[Tao Qiu, Stifel]

Got you. That’s very helpful. Just to follow up on the investment comment. I think now you paid down your debt and you have very strong operating cash flow forecast on $40 million for this year and going to $200 million by 2025, does that change your view in terms of how you look at your investment pipeline? I know that you did a little bit more minority investment in 2022. What’s your thoughts on minority business kind of straight acquisitions at this point? Thank you.

[Wayne DeVeydt, Executive Chairman]

It doesn’t necessarily change our outlook. One of the things we like about these minority investments today and will probably continue not only into 2023, but in the 2024, is that many of these are in very attractive specialties and generally very large facilities. And as a reminder, we do not take a minority investment unless we become the managers of the facilities, right, the operators of the facilities.

So we basically get to bring our synergies to these. We get to bring our processes towards quality and clinical procedurals. And more importantly, we have buy-up opportunities over time to move these into a majority position potentially. So I would say we view these as highly attractive. We view them as not necessarily mutually exclusive from our broader M&A. But really just another tool in the toolbox that gives us real flexibility on attractive multiples and opportunities to penetrate new markets.

[Tao Qiu, Stifel]

Great. Thank you.

[Operator]

Thank you. The next question comes from Ben Hendrix from RBC Capital Markets. Please go ahead with your question, Ben.

[Ben Hendrix, RBC Capital Markets]

Great. Thank you. I was wondering if you could give us a little more detail about the CapEx outlook for the year. You’ve talked in the past about investments in robotics and other capabilities to support recruiting. And I’m wondering kind of how you’re viewing that for 2023?

[Eric Evans, Chief Executive Officer]

Ben thanks for the question. I’ll start, and then I’ll hand it to Dave. Our general CapEx across kind of the existing portfolio is really capital light. And even if you think about the robotics programs, most of those are funded locally or on a lease basis with really strong ROI. So I don’t see any difference in kind of the core capital. We will occasionally look, if we can add a service line and expand and add a couple of ORs where it makes sense in the near term, we do that all the time. But that’s kind of normal course for us outside of the de novos that we talk about.

So if you think about just general CapEx, pretty CapEx-light compared to health care services in the industry. But certainly, we continue to be very opportunistic on adding technology or adding ORs where we have capacity constraints. And Dave, maybe you can talk a bit about kind of how that plays out in specifics.

[Dave Doherty]

Yes, sure. Thanks, Eric. So as we ended the year, we ended the year with just under $81 million of CapEx over the course of the year. And what we like to think is -- and we’ll update this number as we go into next year, that roughly $40 million to $50 million of that is normal maintenance CapEx, and the remaining portion of that is growth CapEx. Growth CapEx for us includes robotics, but it also includes kind of almost like the easiest form of de novos: An existing facility for which we know the market really well; we know all of the physicians. We know the growth trajectory. If we if we have the opportunity to expand our existing footprint, either with the building that we have or adjacent properties to it, we’ll make that investment, again applying the normal disciplined approach to any investment dollars going out the door that you have known us to do.

And in the coming year, I think we will have a couple of those that are a little bit more noteworthy that we’ll talk about going forward. So, we’ll split that out as we head into 2023, just so we have good visibility to that. But the way you would normally think about this in a steady-state portfolio, somewhere between $40 million and $50 million of maintenance CapEx. That’s it.

[Ben Hendrix, RBC Capital Markets]

Great. Appreciate that. Just a quick follow-up on the prior question. How much of an increase should we expect this year in equity method income related to that ValueHealth partnership in minority interest there? Thanks.

[Wayne DeVeydt, Executive Chairman]

Yes, Ben, I think at this point, I couldn’t give you an exact number. I know what our pipeline is and how many additional facilities we’re looking at now. Consistent with our past practice though we will call out each quarter what acquisitions we did, and we will highlight for you what is minority versus majority since we recognize that effects kind of how you build top-line revenue because of the non-consolidating aspects. But I would tell you the pipeline is there. It’s real. We have many under LOI already on the minority facilities, but we’re in the midst of due diligence right now.

[Dave Doherty]

Yes, I might, if I don’t -- I hope if you don’t mind we come over the top a little bit there. Last year, about a quarter of our asset acquisitions were in minority interest owned assets. And as I mentioned earlier in the prepared remarks, we’re agnostic to whether they’re consolidating or not.

We like the underlying growth story of each one of these assets. And the potential that it provides for us in the future, which may include a buy opportunity to get to a consolidated position. So the pipeline that Wayne is mentioning does include both forms of that. It is the reason why our guide for revenue might be that with a little bit of cautiousness in it because that’s the one that you will see potentially no revenue, but all equity earnings. And so it’s worth noting that there’s a possibility of that. But as Wayne mentioned, we will provide that visibility as we complete acquisitions going forward into 2023.

[Ben Hendrix, RBC Capital Markets]

Thank you.

[Operator]

Thank you. The next question comes from Bill Sutherland from Benchmark. Please proceed with your question, Bill.

[Bill Sutherland, Benchmark]

Thank you. Good morning guys. That case volume growth caught my eye in the fourth quarter as it compares to the market that I’ve seen. What would you rank order the factors there for your really strong case growth in the quarter?

[Wayne DeVeydt, Executive Chairman]

Bill, I would say the first thing that I would say is keep in mind the compounding effect that we talk about with recruiting efforts. And so as you know, while we added a large number of docs, around 150-plus just in Q4, many of those docs though, throughout the year, the 500-plus that we had throughout the entire year came in, in January, February, March and May. And ultimately, you get them more comfortable throughout the year with what your facilities can do for them. You get their block time more aligned with where they want to get out.

And so you start getting that really high compound effect by Q4. And that’s all organic for us. And of course, add to that the compounding effect of the previous year cohort, and you heard how much the volume was up on that cohort from 2021, coming into 2022 north of 140-plus percent. And so I would say, first and foremost, the recruiting engine is working at optimal level and continues to produce the results that we would expect. And we are not seeing that slowdown in 2023.

The second thing I would highlight is keep in mind that clearly, our de novos that we’ve been putting up each year, we’re putting two or three small de novos. We have our Idaho Falls Community Hospital. All of those are going to add an extra point or two over what I would call normal trends. And so those, of course, continue to grow, and we continue to elevate from there.

As we’ve said, while the algorithm supports a 2% to 3% volume, we really do think we have an opportunity to either be behind that or exceed that on a consistent basis going forward. And I would like to see those trends continue into the current year, and I think that is the expectation of the Board of Directors as well.

[Eric Evans, Chief Executive Officer]

Yes. And Bill, I’d just say, look, you guys -- again, I can’t speak to why the market is where it is or other companies are where they are. This was our expectation. I mean we kind of built -- we knew what we had, what we expect to do in the fourth quarter, it matched our expectations based on all the different programs, whether it’s recruitment or new service lines. This came in where we expected it to be and kind of continues that long-term trend of real consistency on how we build that growth into our operating system. So, we expect to continue to execute on this. We were happy with the fourth quarter. Obviously, it’s always seasonally a big quarter. We had some new service lines. But in general, it is just continued execution on the long-term strategy.

[Bill Sutherland, Benchmark]

Got it. And as you look at your pipeline of investments, the majority and otherwise, is the -- is it largely a mix of MSK and Cardiac at this point?

[Wayne DeVeydt, Executive Chairman]

Heavily weighted yes. Heavily weighted.

[Eric Evans, Chief Executive Officer]

I mean we’ll certainly look at other service lines where we can expand into those higher acuity with an existing facility. So, I won’t say it’s all we’ll buy. But if you wanted to weight them, it’s absolutely MSK, cardio weighted.

[Bill Sutherland, Benchmark]

Okay, thanks guys.

[Operator]

Thank you. The next question comes from Lisa Gill from JPMorgan. Please proceed with your question, Lisa.

[Lisa Gill, JPMorgan]

Great. Thanks very much and good morning. I just wanted to go back to your early comments. Wayne you talked about hospital partnerships, can you talk about how to think about the economic model and how that flows through the income statement for Surgery Partners?

[Wayne DeVeydt, Executive Chairman]

Hi, Lisa. So let me talk about first and foremost, when we talk about a hospital partnership, what that means to us. And I actually feel optimistic that we will be announcing some partnerships being signed this year. Again, we’re close on a number of items. So hopefully we’ll be able to talk about that in the very near term. But first and foremost, we have to be like-minded. And what like-minded means to us at Surgery Partners is that we are aligned around supporting the ecosystems where we have patients’ needs a quality metrics that need to be met and continuing to be a unique value play to the market. Two is we have to be able to not only have ownership in those facilities that those health systems have today, but we have to be the operators of those facilities.

So when we talk about partnerships, view it as us most likely taking a minority ownership in existing facilities within health systems, but becoming the operator of choice for those facilities. And then finally, we want to know that there’s a growth trajectory here to expand into new markets with those health systems. And that is the last piece that I would highlight. And I would tell you that all of those, as we go through this, we waste time and energy and effort versus what alternatives are available to us. And so – but in many cases, we view these as very attractive relationships when we align on those three kind of like-minded scenarios. And again, I’m optimistic. I think Eric, you would – he’s nodding as we’re saying this, I think Eric would say the same that we will be announcing some partnerships this year.

[Lisa Gill, JPMorgan]

And if I’m listening to you correctly, Wayne, it sounds like you’re saying that the – from an economic standpoint, it would be similar to what we see today when you’re running a facility, it wouldn’t be materially different, is that correct?

[Eric Evans, Chief Executive Officer]

So I would say that’s generally correct. I mean, obviously, we’re not going to do these at anything that’s not accretive to the company, and they are attractive partnerships. Clearly they’ll be more minority weighted than what we are today. So I would say that’s a bit different. So it’ll be margin accretive and typically like-minded partners that allow us to enter markets that might otherwise be difficult are certainly ways we think about health system partners. Again, this will never be the majority of our business. One thing I talk about a lot here is our advantage being this kind of independent, no conflict provider. But there are markets and there are partners who are not trying just to play defense there. They want to go play offense. And in those places, as Wayne mentioned, we think it can be very helpful. I would tell you we’d expect that any economics we have in those centers to be at least as good as our current economics.

[Lisa Gill, JPMorgan]

Okay. And then just one last follow-up would just be when I look at the guidance for 2023, it looks like there’s about 30 basis points of improvement in the EBITDA margin. Is that mixed? Is that now that you have more visibility around labor and costs, which you spend a lot of time talking about today, like how do I think about your level of visibility around that improvement in margin in 2023?

[Wayne DeVeydt, Executive Chairman]

Yes, look, I’ll let Dave comment on it. I think he’ll tell you it’s mostly mix. The one thing I would tell you though is we have said that over time we really believe our margins can migrate to high teens. And obviously, the last two years have put some unusual headwinds against the broader industry. And so the true kind of value create of a lot of the things we’ve been putting forward hasn’t really been able to shine completely. And I think you’re going to continue to see some of those come through. Especially as Dave mentioned, because we know that much of our pricing has now fully locked in for the year, and we already know our underlying cost structure. And so we can get pretty good line sight of that. But Dave, anything you want to highlight on that comment, Lisa?

[Dave Doherty]

Yes, maybe just a couple things, right. Just to emphasize that point you made Wayne, but this company still does talk about margin expansion in its core DNA. So we do fundamentally believe that there is more opportunity there available to us more specifically entire 2023. You’re right in a way that we do expect margin enhancement just through our normal growth levers in terms of managing supply cost and managing better rates at the top of the house [ph]. But also the impact of last year’s acquisitions and minority interest held entities, which are now flowing through from a full year perspective, which will again, those just are pure margin enhancement opportunities. So you should see elements of both of those things impacting that 30 basis point increase in margin that you cited.

[Lisa Gill, JPMorgan]

Okay, great. Thank you.

[Operator]

Thank you. The next question comes from Gary Taylor from Cowen and Company. Please proceed with your question, Gary.

[Gary Taylor, Cowen and Company]

Hey, good morning guys. I just had a few. One was I appreciate your comments about seeing some of the labor environment easing and remaining employer of choice. Just wondering, could you give us a sense about wage growth, either per FTE or per case, or how you kind of saw that wrapping in 2022 versus what you’re thinking in 2023?

[Wayne DeVeydt, Executive Chairman]

Let me first start by highlighting Gary that we generally see premium labor, which has been, I think probably the topic de jure in 2022 represents 2% to 3% of our volume in – of our total SWB. And so first and foremost, it’s just not a material component. In fact, you’ll notice that it was around 3% in Q4 versus historically 2%, but that’s because we take advantage of the fourth quarter to stay open on some weekends and all that and really fill a big need. And so I would highlight that to say that one though, that it’s a really small portion for us when it comes to the premium labor that has really been cutting some distortions in the provider’s side.

A couple examples though, of how much it has abated. And if you were to look at earlier in the year and I’ll use a state like California, you would’ve seen premium wages more in that $85, $95 an hour. They got to north to $200 an hour during the peak timeframe. And it’s migrated closer to this 115 range. So not fully abated yet, but clearly migrating to the levels that you would want to see.

And so from our perspective, we continue to track and we monitor it. But we only use it when we feel like it really can be a differentiator in how we’re doing our growth like we did in Q4. Relative to broader wage structure, I don’t know Dave anything you want to add or Eric you want to add out there. But I would say that clearly we’re paying our nurses a little more than we have in the past. But it’s important to recognize because we’re a preferred facility to work at. And as Eric mentioned in his prepared remarks, we can – between data posting and filling we're filling within 30 days.

I would say the equilibrium hasn't distortedly balanced to one side versus the other when it comes to compensating our associates at the facility level. We're generally open Monday through Friday only, hours are highly predictable. Our nurses can be focused on exactly the specialties they want to do in those facilities and the surgeons they want to work with. And that really does create a much more favorable environment versus somebody who simply wants to earn a higher wage and move on.

But I don't know anything else you want to add?

[Eric Evans, Chief Executive Officer]

Yes. I would just maybe add a couple of things. So first of all, I totally agree with Wayne's comments. Clearly, we've seen some improvement. I will say for our guidance purposes, we've assumed similar pressures in this year. And the reason we've done that is just because there are still certain markets where we see kind of things pop-up or we have to be relatively quick to match. But in general, what I would say is we believe that what the leverage we typically get as we expand and scale has been – we've done a good job of managing it, but has covered up some of that margin expansion. I think for this year, you can assume – we'd assume that that pressure is going to remain.

But if you think about our kind of operating system, we will get leverage on that over time. The question is just how quickly that abates. And I think we've taken an appropriately conservative posture that says we'll manage it as well as we have, which we did quite well in 2022. I think there's opportunity there to have that move in a positive direction even more so than it has which would be an upside to the way we're looking at the business today.

I don't know, Dave, if there's anything else you'd want to add?

[Dave Doherty]

No, maybe just one point, right? And again, we've talked about this in the past. We saw this coming back in 2021, and we started to react in advance. And one thing you should know about the culture of Surgery Partners is this is – this is a partnership all the way down to the facility level, where everybody is kind of watching out for each other. And so there is this kind of philosophy that we're going to make sure that everybody is protected inside the system that we have. So we started picking up this and started acting less defensive and more proactively. In 2021 we saw that trend continuing in 2022, and as we just kind of ported out we have a little bit more hedging just in case we have some opportunities there.

[Gary Taylor, Cowen and Company]

If I could add one more quick one. On your Class A 2022 that you've been appropriately bragging on how well they've done. Is that primarily a function of specialists in their case mix, why that revenue is trending so much higher? Or is there something else you'd location or that you'd point to because obviously, you'd hope to replicate that?

[Eric Evans, Chief Executive Officer]

Yes. So I would just say, every year we continue to refine how we target our recruitment team. We use data. We use it in all kinds of ways to understand exactly where people are in the pipeline? How quickly we convert them into our facilities. I think we get better at it every year. Clearly, as we grow acuity we have more higher acuity positions that we can go attract to our facilities. So as we add service clients, we add orthopedics or cardiology that opens up a whole new window of physicians with a unique value proposition. So I think it's really about targeting. It is definitely targeting that higher acuity mix as we think about growing our facilities, and that's showing up in our recruitment numbers, and it's certainly a database approach that we will continue to refine moving forward.

[Gary Taylor, Cowen and Company]

Thank you.

[Operator]

Thank you. The next question comes from Whit Mayo from SVB Securities. Please proceed with your question, Whit.

[Whit Mayo, SVB Securities]

Hey. Thanks. Just wanted to follow up on that on Gary's last question. Is there any way to frame the percentage of cases that were generated in 2022 from either the class of 2022 or 2021? I hear you on the 140% growth, which is very, very high. But I don't have a sense of the denominator on this. So I'm just trying to get an idea of how much that may have driven the overall systemwide case growth for the year?

[Wayne DeVeydt, Executive Chairman]

Yes. That's I'm trying to see if I can pull it up real quick while we're sitting here, if I can – just trying to see if I can find it for you real quick. So 2021 cohort was 15,000-plus cases was the starting point from last year. And then how those actually grew into 2022. You can just put the percentage on there, and you'll be obviously more in the 37,000, 38,000 range. So this gives you a little bit of a flavor or feel for it, but obviously each cohort is going to vary year-to-year. But I'll just give you kind of an example of one of how that plays out?

[Whit Mayo, SVB Securities]

Yes. That's really helpful. The second question is just for Dave. I'm trying to keep up with all of the items influencing cash flow this year. Can you just remind me the items that we should be adding back to 2022 that are non-recurring into this year? And then what the separate non-recurring items are in 2023? I get the $40 million of lower cash interest. I'm just trying to make sure I can bridge the cash flow a little bit easier here?

[Dave Doherty]

Yes. Yes. No, I appreciate that. I mean the good news is next year you won't have any of this noise. So hopefully, next year, we have this conversation; you won't have to ask that question because this has been a long run where we've had some things that have affected us.

In 2022, the things you think about and I'll start in the fourth quarter, we had a – we had the last of our largest TRA payment, the tax receivable agreement that we entered into back in 2017. That was just north of $20 million. We had a couple of CARES Act things that were happening. Most notably in the quarter was about $9 million related to the deferred payroll taxes. The second tranche of that was repaid in the – second and final tranches repaid in December.

We still have Medicare advance repayments this year, that was a big number in total, it was $60 million. And in the fourth quarter, because we paid down that long-term debt, the accrued interest got accelerated from its normal payment in 2023. So that was another $11 million that came through inside the year. There's a handful of other kind of puts and takes, but those are the big ones that kind of factor into it, into our cash flow bridge.

[Whit Mayo, SVB Securities]

Okay. Any other items as we think of 2023 that won't recur that are separate from this reference other than the cash interest savings?

[Dave Doherty]

No. And by the way, in that cash interest will recur. So that's a permanent good guide for us.

[Whit Mayo, SVB Securities]

Correct, correct. And then you read on the EBITDA – any reason your cash flow wouldn't at least grow sort of in line with your adjusted EBITDA?

[Dave Doherty]

That's our plan.

[Whit Mayo, SVB Securities]

Okay, thanks guys.

[Operator]

Thank you. The last question comes from Christian Schuman from Jefferies. Please proceed with your question, Christian.

[Brian Tanquilut, Jefferies]

Hey guys. Brian Tanquilut from Jefferies. Good morning and congrats on the quarter. Wayne, I guess, as I think about recruitment, we've talked a lot about it today. I know you're very involved in that, right? So how do I think about what the pipeline looks like today? And what's your pitch that differentiates Surgery Partners that lets you win in that ball game, so to speak?

[Wayne DeVeydt, Executive Chairman]

Yes. So Brian, first of all, great to hear your voice. Look forward to hopefully getting together soon in Nashville. Couple of things I would highlight that I do think make us unique, some are sexier than others. But maybe just start with the most basic, we are data-driven and how we target physicians in markets that we want to pursue. So we know what each of our facilities can do. We know what rates we get reimbursed on facilities. We know what our commercial versus Medicare are.

And then we overlay all that data with the higher acuity procedures we want to follow. And then we outline what physicians are out there and what percentage of their business is commercial versus Medicare versus Medicaid.

And while in and of itself that may not seem all that special or unique or different, we believe it is truly a differentiator for us, though it is something we started five years ago. And when you start something that way using data, you actually just get better at it, more refined at it.

You start understanding ways to target the market differently in ways to actually have your recruiters target those surgeons that you're pursuing. The second thing, though, that I think has been a real difference maker for us, is we took some of our ASC leaders. In this case, Tony Taparo, who used to run about half of our ASCs as one of our EVPs over all of them? And we just said, Tony, we actually want to make sure too, that when we recruit and we pursue that these surgeons understand that they're actually interacting with somebody who actually knows how a facility runs, who actually has been part of it for over two decades, and is really integrated into the business.

And then the last thing I would tell you is we have really shifted to onboarding efforts and then really satisfaction efforts. So it's not just about how do we recruit the surgeon, how do we get them their scheduling, how do we get them on their block time. But Eric, when he came in really added a whole new level of kind of what I'll call creating the back-end aspects of this, which is ensuring that the provider satisfaction is high.

And when it's not high, why isn't it? And what can we do to impact that. And so I think what you're also seeing in our strong organic growth is the fact that we should talk about the leaky tub, right? And that every year, we're recruiting enough docs just to replenish those that were leaving us.

And those that are leaving us has diminished meaningfully in the last three to four years. And of course, what we're recruiting has grown exponentially during that period. And so it's simple though it's basic blocking and tackling. It's data-driven execution that we look at every week. Every week, not once a month, once a quarter, but every week. And it's having teams aligned with what those recruitment goals are and how they're compensated.

[Brian Tanquilut, Jefferies]

I appreciate that, Wayne. And yes, I hope to see us too in Nashville. I guess my follow-up, Eric, as I think about your excitement for cardio and we obviously share the same optimism about the cardio opportunity. But as I think about the catalyst for that to gain traction, it's just one of those things kind of like with Ortho, we need to see CMS approval? Or is there any interest that you're seeing now from the Medicare Advantage you guys saw the commercial payers to start reimbursing credits and get that ball rolling?

[Eric Evans, Chief Executive Officer]

Yes, it's a great question. I would say actually, CMS has approved the largest volume procedures; the PCI is the thing that I think should move. I think the kind of the slow pace here at the beginning is clearly tied to this is a very, very highly employed specialty. Not happily employed, but highly employed by health systems. There's a lot of interest from cardiologists. And what we're seeing initially is we started, I think it was five new cardiac rhythm management programs in our ASCs this year. So cardiologists coming over or checking us out, maybe even investing, starting to bring over devices.

But the really big wave here, Brian is as doctors figure out what they can have ownership of it, what they can move safely and at a really good value for their patients to the space. As they learn that, I think this is really – this is a flywheel. It's starting slow. We're going to see a nice growth off a small number, much like we did with Orthopedics.

I remain very optimistic just because the value in cost savings is so large for the health system, and the opportunity for cardiologists to control and be more independent is so large. I do believe it happens. It will be different paces. About half the states, a little less than half, still have restrictions on this that are more restrictive than Medicare. Almost all of those states, there is active legislation going on, active work going on to change that.

So all of these things kind of have to fall in line. And you and I both share this optimism; I definitely think it's a big opportunity. Some states will go faster than others. Once this starts to get a foothold and people realize the amount of value it creates for the health system, it will be a natural push. So I think it's going to be much like joints, you're going to see it kind of slowly tick up. It will be a nice growth percentage, but it will hit critical mass. The question of when that is within the next five years, always difficult to predict.

But I will tell you this, we will be prepared, and we are already having those conversations to build the foundation and starting on the cardiac rhythm management side.

[Brian Tanquilut, Jefferies]

Awesome. Thanks and congrats again guys.

[Eric Evans, Chief Executive Officer]

Thank you. Appreciate it Brian.

[Operator]

Thank you. This does conclude the question session. I'd now like to turn the call over to Eric Evans for closing remarks. Thank you, sir.

[Eric Evans, Chief Executive Officer]

Thank you. I appreciate everybody's time this morning. And before we all walk away, I would like to just take a moment to recognize all the efforts and commitment to excellence of our 12,000 colleagues and nearly 5,000 physicians.

Collectively, we take to heart the responsibility for providing the best environment for physicians to perform exceptional procedures of the highest clinical quality, and the privilege to serve over 600,000 patients in what is often their most vulnerable moments.

I'm so proud to work alongside these talented professionals as we work to more fully deliver on our mission to enhance patient quality of life through partnership. Thank you again for joining the call this morning, and I hope you all have a great day.

[Operator]

Thank you, sir. This concludes today's teleconference. You may disconnect your lines at this time and thank you very much for your participation.