Surgery Partners Inc

NASDAQ:SGRY

Earnings Call Analysis

Company Sees Mid-Teens EBITDA Growth, Sets $3B Revenue Target

The company closed 2023 with strong results, driven by growth strategies that yielded a 15% increase in adjusted EBITDA, totaling $438 million. This was facilitated by resilient performance amidst macroeconomic challenges, including inflation and the pandemic, and was characterized by a 210 basis point margin expansion over four years. A robust case volume growth of 4% led to an 8% rise in net revenue to $2.74 billion. The company's disciplined acquisition strategy added a sub-8x multiple on 15 deals worth $165 million. The 2024 outlook is optimistic, with a targeted net revenue of at least $3 billion and a reaffirmed adjusted EBITDA of over $495 million, anticipating continued margin expansion and double-digit EBITDA growth.

Substantial Progress and Growth Algorithm Success

The company has demonstrated a solid performance in 2023, with strategic initiatives propelling growth as it heads into 2024. Adjusted EBITDA soared to over $438 million, marking a 15% increase from the previous year. Despite industry-wide challenges such as inflation and the global pandemic, the company maintained a robust 14% compound annual growth rate and expanded margins by 210 basis points. They performed 4% more cases compared to 2022 across all specialties. Net revenue spiked by 8% to $2.74 billion, and adjusted EBITDA margins rose by 100 basis points, thanks to cost discipline, acuity mix, and enhanced rates.

Balanced Growth and Acquisitions

Revenue growth was balanced with a more than 11% increase in the same facility revenue, attributable to case volume upsurges and rate improvements driven by acuity mix. Investments in strategic acquisitions continued, with $165 million deployed on 15 transactions at favorable multiples and an additional $60 million in deals carried over to early January. This disciplined growth strategy and the robust pipeline underpin expectations for 2024's tailwind earnings.

Debt Management and Financial Strategy

The company successfully refinanced its term loan to extend the majority of its debt maturity to 2030, achieving a credit agreement defined leverage of 3.5x. The move to increase the revolving credit facility to $700 million reflects confidence in their growth algorithm and balance sheet strength.

2024 Guidance and Optimism

For 2024, the company anticipates that net revenue, adjusted EBITDA, and margin growth will align with their long-term growth algorithm. They have set a 2024 revenue guidance of over $3 billion and forecast an adjusted EBITDA exceeding $495 million, signifying at least 13% growth. Management's confidence is high, driven by a balanced optimism for the company's growth trajectory.

Operational Efficiency and Physician Partnership Model

The company's partnership model emphasizes physician independence and local community reputation, playing a significant role in the success of its safe and cost-effective facilities. This approach results in consistent, high-quality care delivery, benefiting partners, payers, and patients alike.

Organic Growth and Physician Recruitment

Same-facility cases saw an increase of 3.9% in 2023, and rates expanded by 7.1%. Emphasis on physician recruitment, especially those specializing in higher-acuity procedures, has paid off with a 50% boost in total joint procedures in the ASC facilities. Physician recruiting is pivotal, targeting long-term value creation and bringing in strategically important capabilities for sustainable growth.

Future Prospects and Free Cash Flow

The outlook for the near and future term remains positive, with significant growth opportunities in migrating total joint procedures to high-value settings. With free cash flow turning positive for the first time in a sustainable manner, the 2024 projection is set between $140 million to $160 million, further strengthening the company's liquidity position.

Robust M&A Pipeline and Margin Expansion

With a strong M&A pipeline, over $200 million is already under LOI, predominantly in consolidating entities. Business growth is expected to continue with accretive procurement and revenue cycle advances, recent acquisition integrations, and contributions from new developments. The proven growth algorithm allows for confident guidance of double-digit adjusted EBITDA growth and margin expansion in 2024 and beyond.

Earnings Call Transcript 2023-Q4

[Operator]

Greetings, and welcome to the Surgery Partners Fourth Quarter 2023 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dave Doherty, Chief Financial Officer of Surgery Partners. Thank you. You may begin.

[David Doherty, executive]

Good morning. My name is Dave Doherty, CFO of Surgery Partners. I'm joined today by Eric Evans, CEO; and Wayne DeVeydt, 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. My remarks this morning will focus on our full year 2023 results and the positive catalyst we see as we head into 2024. I'll then turn the call over to Eric to provide further insights into our operating environment, along with details for the quarter. Finally, Dave will conclude with additional color on the quarter and an updated view related to the strength of our balance sheet and full year guidance associated with calendar year 2024.

Starting with our 2023 results. We are extremely pleased with the substantial progress we achieved related to our strategic initiatives and how these initiatives further catalyze our growth engine as we enter into 2024. Specifically, our growth algorithm continues to deliver mid-teens growth with full year adjusted EBITDA exceeding $438 million, representing 15% growth over the previous year. Despite the macro headwinds faced by our industry over the past 4 years, including the inflationary impact on labor and supply costs and the global pandemic, the company has grown adjusted EBITDA at a compound annual growth rate of over 14% per annum and expanded margins by 210 basis points. These headwinds have slowly abated throughout 2023.

Digging deeper into our results. The combination of our consolidated and unconsolidated facilities performed approximately 707,000 cases in 2023, 4% more than 2022, with all specialties growing in line or in excess of our expectations. When combined with our targeted increased acuity and contributions from recent acquisitions, net revenue grew 8% to $2.74 billion, inclusive of approximately $100 million of revenue divested early in the year and adjusted EBITDA margins improved by 100 basis points, reflecting our cost discipline, acuity mix and enhanced rates. We anticipate our 2023 cost initiatives and pricing to represent tailwinds for 2024 as we continue to recognize the run rate benefits associated with our scale.

Our 2023 growth was balanced with same facility revenue growing more than 11%, representing case volume of approximately 4% and rate improvement of 7%, driven by acuity mix and enhanced managed care rates.

Rounding out our growth story, we continued our disciplined approach to sourcing and executing on strategically important acquisitions at attractive multiples. In 2023, we deployed approximately $165 million associated with 15 transactions at an aggregate sub-8x multiple on a pre-synergized basis. While this number is below our targeted goal of at least $200 million per year, we also closed an additional $60 million in transactions in early January that we had anticipated closing in the fourth quarter. The timing of our acquisitions had a nominal impact on our 2023 results, as Dave will discuss and serve as a tailwind to 2024 earnings.

Our business development team continues to manage a robust pipeline of attractive opportunities, and we remain committed to deploying at least $200 million annually. As of this morning's call, our team has a strong pipeline of transactions under LOI, and we continue to source new deals. Similar to 2023, the timing of acquisitions and related activity can be difficult to predict, and we continue to use a mid-year convention when providing our outlook for 2024.

All in, we are pleased with the balanced approach to growth with all pillars of our long-term growth algorithm, either meeting or exceeding our expectations. Before I turn the call over to Eric, I want to highlight some additional accomplishments related to our balance sheet. The company was able to effectively refinance our term loan late in the year at favorable terms and pricing, extending the maturity of the majority of our outstanding debt to 2030. Associated with this refinancing with support from our banking syndicate, we were also able to increase our revolving credit facility to $700 million, reflecting the continued strength of our business model and confidence in our growth algorithm. Dave will elaborate further. But with this new term loan, our credit agreement defined leverage was 3.5x at the end of the year.

Together with my fellow board members, we are encouraged by the continued focus of this management team to capture the benefits of the strong industry and company-specific tailwinds. Based on the recently completed 2024 budgeting process, we expect net revenue, adjusted EBITDA and margin growth in line with our long-term growth algorithm. Specifically, we are providing initial guidance for net revenue of at least $3 billion and are reaffirming our previously provided adjusted EBITDA of greater than $495 million.

We strive to provide you with guidance that balances our optimism for the company's growth with an appropriate amount of conservatism. We look forward to updating you on our progress as the year unfolds. With that, let me turn the call over to Eric to highlight some of our operational initiatives, industry trends and recent investment activities. Eric?

[J. Evans, executive]

Thanks, Wayne, and good morning, everyone. I will echo Wayne's pride in the results for 2023 and our initial outlook for 2024. Importantly, for our investors and per my past comments, our performance remains consistent and predictable. Our unique partnership model and our approach to enabling our physician partners independence and strong community reputation allows us to naturally benefit from the continued site of care shift to our safe, high-quality and cost-effective facilities. .

We work every day to bring the benefits of a professional scaled management company while keeping the invaluable local feeling connection that differentiate our surgical facilities. This approach preserves the strong reputation our partners have earned allowing them to focus on their patients knowing their preferences and input will remain an integral part of the facility they help build. Together, our partners win, our payers win and most importantly, our patients get the best care possible for their surgical care needs. When this happens, we deliver consistent high-quality results as we have done over the past 4 years despite managing COVID global pandemic and a challenging inflationary macro environment.

As we finish 2023 and begin 2024, let me provide some highlights. Our organic growth initiatives translated into a strong full year 2023 top line same-facility growth of just over 11%. Our same-facility cases grew 3.9% in 2023 and rates grew 7.1%.

As we consistently demonstrated the rate improvements we are seeing in our existing facilities are benefiting from the strategic focus on recruiting physicians, specializing in higher acuity procedures such as total joints. We now perform orthopedic procedures in over 70% of our short-stay surgical facilities and total joint procedures in over 35% of our ASCs. In our ASC facilities alone, we've seen a 50% increase in total joint procedures in 2023, which is a contributing factor in our same facility rate growth. As recent acquisitions and de novos are fully integrated into our portfolio, the majority of which are orthopedic based, we expect to see this rate improvement remain at or above our long-term growth assumptions in 2024.

Net revenue of $2.74 billion grew 8% in 2023 with our organic same-facility growth, de novos and consolidating acquisitions combining to overcome the impact of divestitures. In addition, in 2023, nearly half of our acquisitions were in facilities that do not consolidate under accounting rules, but generate significant revenue on a deconsolidated basis. Revenue growth in our nonconsolidated entities exceeded 60% in 2023 as compared to the prior year, and we expect continued growth in 2024.

Our underlying growth story remains consistent and we continue to position our portfolio of assets to earn market share in each of our core specialties.

Moving to our physician recruiting efforts. Our recruiting team had another banner year of new recruits with an increased focus on physicians that perform MSK related procedures. Their efforts are a core competency helping our facilities create long-term value by recruiting physicians that are interested in a long-term relationship with our facilities and those that bring strategically important capabilities to our portfolio. We added nearly 700 new positions in 2023 across all specialties and the average net revenue per case of these recruited positions is 27% higher than those physicians recruited in the prior year and 44% higher than the 2021 recruiting class.

Based on our experience, there is a compounding multiyear growth factor that recently recruited physicians bring giving us increased confidence in our 2024 growth.

As you know, we are in the early innings regarding migration of total joints into the highest value settings, our short-stay surgical facilities. Such cases initially started with the transition of total knees in 2020 and total hips in 2021. Since being removed from the inpatient-only list, these procedures have experienced a 3-year CAGR of 77%. We do not see this growth slowing nor are we seeing cases returning to the inpatient setting. In 2024, we're working with our orthopedic surgeons who are excited to bring additional joint programs to our ASCs with new focus on Medicare total shoulder and ankle surgeries that are now permitted to be done in an ASC setting for the first time. These procedures have been done safely in our ASCs for commercial patients for a number of years, and we're excited about the growth opportunities in both the near and future term as additional procedures continue to be removed from the inpatient-only list.

Moving to the business development front. We are excited about our fast-growing de novo portfolio, of which 8 opened in 2023 and 12 are syndicated and currently under development, scheduled for openings in 2024 and early 2025. We remain selective in partnership opportunities with other health systems. While multiple opportunities exist, we are focused on forming long-term highly aligned partnerships with like-minded organizations that deliver high quality at a sustainable cost to the system and are accretive to our earnings. Last week, we announced a partnership with Parkview Health, a premier community-based health system as we look to expand our capabilities in my home state of Indiana. This partnership joined similar partnerships we announced last year as we accelerate our de novo capabilities with like-minded partners who will share in the development efforts with us.

In a similar vein, our integration with Intermountain Health's managed-only facilities in Utah is progressing as planned, and we are actively working with them on syndicated de novos. Although these won't be a material contributor to our 2024 growth, the long-term prospects are incredibly attractive. As we expand our focus on de novo opportunities, we are positioning our team to manage at least 10 de novo centers in development annually. In addition to our de novo as Wayne mentioned, we deployed approximately $225 million on 16 transactions in the past 13 months. These transactions were bought at attractive multiples, averaging less than 8x historical earnings. We continue to rapidly integrate our acquisitions into core operations, bringing the full benefit of our revenue cycle, procurement, managed care and physician recruiting teams to yield significant synergies within the first 18 months of ownership. We remain committed to our annual capital deployment goal of at least $200 million, which will be in addition to the $60 million deployed in January of this year.

In closing, I'm proud of our management team and our many talented physician partners and colleagues for effectively managing through inflationary labor and supply pressures over the past few years. Additionally, we have effectively managed challenges related to anesthesia costs which, as a reminder, is not a material expense within our structure. With inflationary pressures abating, coupled with how well our teams are effectively executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle and operations, we are confident that we will achieve our 2024 goals.

I've never been more optimistic regarding our future and the number of tailwinds impacting our business. The desire and need to move more procedures to purpose-built short-stay surgical facilities has never been greater, and our company is positioned to deliver industry-leading growth associated with these tailwinds. This coupled with an existing and growing M&A pipeline and a talented, deep and experienced leadership team provides further optimism for long-term sustainable mid-teens adjusted EBITDA growth. With that, I will now turn the call over to Dave Doherty to provide additional color on our financial results as well as the 2024 outlook. Dave?

[David Doherty, executive]

Thanks, Eric. I will first talk about our 2023 financial results and liquidity before providing detail on our outlook for 2024. Starting with the top line, we performed nearly 606,000 surgical cases in our consolidated facilities and over 153,000 in the fourth quarter alone. On a same-facility basis, we grew cases 1.4% in the quarter and 3.9% for the full year. This marks the 12th consecutive quarter of same-facility case growth and the third consecutive year, this growth has been above our long-term target growth rate. The combined case growth in higher-acuity specialties, specific managed care actions and the continued impact of acquisitions, supported consolidated revenue growth of 4% in the fourth quarter and 8% for the year, inclusive of approximately $100 million of revenue headwinds associated with facilities we divested in early 2023.

On a same-facility basis, total revenue increased 8.1% in the fourth quarter and 11.3% for the year. Same-facility rate growth was 6.7% and 7.1% for these periods, respectively. We have seen this rate growth all year, primarily driven by higher acuity procedures. Our strong revenue growth was equally reflected in our adjusted EBITDA growth, which was $142.3 million in the fourth quarter, 17.8% higher than last year. This gives us a margin of 19.4%, 230 basis points higher than 2022.

As Wayne and Eric mentioned, our full year adjusted EBITDA was $438.1 million, marking another year of mid-teens growth at just over 15%. [indiscernible] a margin that has expanded 100 basis points to 16.0%. Margins benefited from revenue growth, effective cost management and contributions from our equity method investments, which we sometimes reference as minority partnerships.

Moving to our balance sheet. As Wayne mentioned, we completed a significant refinancing of our term loan in December, extending the maturity to 2030 with more favorable terms. Concurrent with this refinancing, we increased and extended our revolving credit facility. We are fortunate to have a strong banking syndicate supporting a revolver that has a borrowing capacity in excess of $700 million. As we have demonstrated, we will be opportunistic in approaching the capital markets. We will have that same discipline as we manage the 2 relatively smaller notes that come due over the next 3 years, and look to hedge future interest rate exposures. I look forward to sharing more about our opportunities here in the coming quarters.

Our corporate debt at the end of 2023 was approximately $1.9 billion, with an average fixed interest rate of 6.7%. Our full year 2023 ratio of total net debt to EBITDA as calculated under our new credit agreement was 3.5x. Under the terms of the new credit agreement, there was a change in the definition of net debt used in that calculation. With asset-backed finance leases now treated consistently with other asset-backed operating leases and excluded from the calculation of net debt. This revised calculation is more reflective of the fundamental nature of assets and liabilities and conforms to market practice and definition as the prior language dated back to documents constructed over 6 years ago.

Relative to the former term loan definition, this change benefited the calculation by approximately 0.4 turns. With the earnings growth we expect, we are confident this ratio will continue to decline, although the timing of acquisitions could temporarily pressure this calculation.

In the fourth quarter, we generated free cash flow of approximately $19 million, giving us full year free cash flow of $110 million. Although we are incredibly proud to have turned this company into a positive cash flow position, I must acknowledge that this amount is lower than we previously messaged. The difference is primarily due to 2 timing related matters. The first was the timing of collections for paper-based billings and related insurance recoveries associated with the cyber threat we experienced in Idaho in 2023. And the second being amounts we earned in 2023 related to certain new state-based government programs that will settle in 2024. Neither of these factors affect the positive trajectory that we are experiencing, but our original projections did not reflect the delayed collections on these items.

Having said that, our pride comes from the fact that this is the company's first year turning our free cash flow positive in a sustainable way. This growth in free cash flow was closely linked to the growth in our adjusted EBITDA, a trend we expect to continue to meaningfully enhance the company's liquidity position.

Our updated view for 2024 free cash flow is in the range of $140 million to $160 million. This view reflects a more conservative view to reflect our core value of setting and exceeding expectations. We ended the quarter with $195.9 million in consolidated cash and an untapped revolver of $704 million. When combined with the free cash flow we are projecting, we believe our current and future liquidity positions us well, while giving us flexibility to maintain our long-term acquisition posture of deploying at least $200 million annually for M&A.

We are carrying the momentum of the strong finish to 2023 into 2024 with all of our growth engines operating effectively. As a result, we are reaffirming our guidance for 2024 adjusted EBITDA to greater than $495 million, representing at least 13% growth over 2023. Additionally, we are setting 2024 revenue guidance to be greater than $3 billion. We expect to deploy at least $200 million of capital and M&A in addition to the $60 million we deployed in January, with additional spend depending on the timing of any portfolio management opportunities underway.

There are always puts and takes to our early guidance with risks we track and opportunities we pursue. Generally, we feel we have built a conservative outlook for 2024, subject to the timing of our capital deployment. As Wayne mentioned, the pipeline is strong with over $200 million already under LOI with the majority of the transactions representing consolidating entities. As a reminder, we are agnostic to the accounting treatment if the deal is right for the company and our shareholders.

Our guidance implies continued margin expansion, reflecting our ongoing and accretive progress in procurement and revenue cycle as well as the integration benefits from recent acquisitions and contributions from de novos we expect to open this year. We have high confidence in these growth levers based on our historical experience and the compounding effect of activity that has already occurred in areas like physician recruiting and managed care contracting.

Once again, our well-established and proven growth algorithm is firing on all cylinders and enables the company to confidently guide to double-digit adjusted EBITDA growth and margin expansion in 2024 and beyond. With that, I would like to turn the call back over to the operator for questions. Operator?

[Operator]

[Operator Instructions] Our first question comes from the line of Brian Tanquilut with Jefferies.

[Brian Tanquilut, analyst]

Congrats on the solid year. I guess my first question, maybe Wayne or Eric, the comment you made about ankles and shoulders -- anything you can share with us in terms of understanding the economics of that business and also the relative sizing of that opportunity because obviously, when you added knees and hips, it was a little different from the legacy businesses in terms of the margin profile and the contribution to the P&L. So just curious what you can share with us on ankles and shoulders?

[Wayne DeVeydt, executive]

I'm going to have Eric give a few more details on this. One thing I do want to highlight for all of our investors -- and 1 of the reasons we enjoy seeing these continued programs expand from the inpatient-only list is while we consistently talk about the total joint programs. And in this case, the total joints that we will get from ankles and shoulders, -- what it's important to recognize is that it also expands kind of the ecosystem of other procedures in which we get to capitalize on.

So as an example, if you were just to look at total orthopedic growth, [indiscernible] joints, I conclude joints, but what other growth comes with those surgeons that bring their joints over we've got over the last 3 years a CAGR of over 8% in just absolute orthopedic procedures. And so from our perspective, first and foremost, the joints are going to obviously bring a great economic value to us. Eric can talk about that. But what's even more important is it actually opens up our facilities to additional surgeons that historically may not have even considered us due to the lack of the ability of doing the total joints. But Eric, anything you want to elaborate on regarding that?

[J. Evans, executive]

Sure. And thanks for the question, Brian, and the comments. We're really excited about ankles and shoulders getting taken off the inpatient-only list. As you probably remember, we talked about this during COVID, we had a hospital without walls, ASCs they were able to safely do these procedures. And so the evidence has been apparent for a while that we're the best place to do these. There are thousands of cases amongst our existing surgeons they can't bring today. So it's a meaningful opportunity.

As Wayne mentioned, too, when surgeons have to schedule those cases at a hospital, they tend to take their day, right? And so that's -- we see that as a real opportunity just for convenience. And again, our existing doctors who use us have a lot of cases, we know exactly where those cases are going. We're already working to move those over in January. -- in February. We've been working hard on that. And then there's obviously shoulder specialists in our markets that now fall right into our recruitment pipeline. So we were excited about the opportunity and certainly reinforces our confidence in total joint growth. And just 1 more example is as things get added to the ASC list, the opportunity to create value for the system and to create value for Surgery Partners shareholders is tremendous.

[Brian Tanquilut, analyst]

That's awesome. And then maybe my follow-up, Eric, so for Dave. As I think about the remaining debt thesis out there that are -- you can either call or refinance as I think about the opportunities there and then in terms of what that does to your cash flow outlook for 2025, I know in the past, you've talked about a goal of getting $200 million of free cash in $25 million just maybe anything -- any thoughts you can share with us on those things?

[David Doherty, executive]

Yes. Thanks, Brian. You're right. I'll just give you a reminder of kind of where we sit on our balance sheet. First off, we did mention the term loan refinance in December, which took that debt out to 2030. And as you can see with our leverage gave us some pretty favorable terms as we modernize that for current situations. The rates, I think, were also pretty well. But as you know, we do have to address the interest rate that will -- that's currently protected by the hedges, which we'll do over the course of this year. We also have 2 senior notes that sit out there. They're both small. One is about $180 million due in 2025, carries a very favorable coupon rate of 6.75%. So that 1 looks better than rates you can get in the market right now. So you're probably going to hold on to that until we -- until it makes sense for us to look at that again. .

The other is $320 million related to a 2027 note that carries a coupon of 10%. That 1 steps down to par in middle of April. That does represent a fantastic opportunity for us to create interest savings on that. But in both of those 2 things, they're relatively small in our balance sheet, easy for us to kind of address, so we will remain opportunistic when we address both the interest rate hedge for the term loan and the refinancing of that 10% coupon note. And I think as you've seen us do over the past several years, Brian, we'll be judicious about when we enter the market and really try to take advantage of the best environment that we possibly can. But that will be an area of focus that I look forward to talking to you about as we go through the year.

[Operator]

Our next question comes from the line of Kevin Fischbeck with Bank of America.

[Kevin Fischbeck, analyst]

I wanted to focus on the revenue per case in the quarter, which was strong again. I think you mentioned as far as a cash flow dynamic, the state supplemental payments. I was wondering if you could maybe flesh out how much that was as far as a revenue benefit in the quarter? And then, I guess, also as far as the cash flow drag for the year. And then just trying to understand if you think about breaking out that revenue per case, how much is mix versus rate? .

[Wayne DeVeydt, executive]

Thanks for the question. I'm going to let Dave and Eric a little bit deeper on the specifics. But just at a very high level, I want to remind everyone that these upper payment limit programs are fairly de minimis to our operating earnings as a whole and happen throughout the year. But we've got more and more state programs that are actually expanding to these, and we continue to try to capture these. So in terms of the specifics of the quarter, not an overall material impact, but rather a reflection of many of the initiatives that the company has been doing throughout the year to continue to just expand. And as you know, fourth quarter is a very heavy commercial quarter for us typically due to deductible. So you continue to get that.

And then the last thing I would highlight is that we had these investments we've made in these non majority-owned non-consolidating facilities. And if we did the run rate of those to start to ramp up, get more of an impact of that in the fourth quarter. You'll start to see that smooth out more though as we go into the new year because now we'll start getting the run rate impact of that in Q1 and Q2 as well. But Dave or Eric, anything you want to elaborate on?

[J. Evans, executive]

Yes. Before I hand it over to Dave to kind of talk about that program a little more specifically, I would just -- on the mix and rate question, it's primarily mix. Like we've had success, obviously, in rate, but most of what drives that is our increased acuity and focus around recruitment and higher acuity service lines. But Dave, I'll turn it over to you on this specific question.

[David Doherty, executive]

Yes. Yes. And thank you. First off, I get it is good to reiterate that point on the rate growth really coming from the change in acuity, and that's what we've seen all year. Kevin, I know you've -- we've talked about this before, and the impact of those nonconsolidating is pretty significant as we've been really focusing that de novo engine on those high acuity procedures, which is going to obviously, be a big benefit to us as we go through that going forward. So that is, by far, the biggest driver that kind of sits inside there.

As Wayne mentioned, the state-based programs. It's something that we've always kind of had in our portfolio. There was a new program that came through in 1 of the states that we operate in this year. That 1 did create some issues with us in terms of projecting cash flow, the reimbursement rates and when those -- the timing of when those reimbursements happened, was more in '24 and a little bit in '25. And it wasn't what we expected. And we expect that to come through or I think a little bit earlier in the process. As Wayne mentioned, the driver of rate was not coming through exclusively from there. In fact, we've seen those rate base programs over the course of the year. We're only talking about that because of the pressure it created for us on the cash flow piece.

[Kevin Fischbeck, analyst]

And how much was that in the cash flow?

[David Doherty, executive]

About half of the mix, maybe a little bit -- somewhere around half of that [indiscernible] versus the $140 million we've been talking about before. And again, just to reiterate, I don't want to leave any doubt on this. This is just timing of when those cash flows are coming in. There's no concern about the recovery of that.

[Kevin Fischbeck, analyst]

Okay. And then maybe just a second question. You guys have seen some margin expansion looking for margin expansion again this year. Can you just talk a little bit about where exactly you think that's coming from? And then -- can you just remind us with the growth in Orthopedics. And is that a headwind to margin that you're overcoming -- or is that a tailwind to margin and part of the reason why we should be seeing margin expansion? .

[Wayne DeVeydt, executive]

Let me elaborate. Yes, go ahead, Dave.

[David Doherty, executive]

Yes. Thank you. So margin expansion is going to come naturally to us for a couple of kind of key reasons. One, if we're doing our job right on the rate side of the equation, that should naturally create margin as we really try to focus on cost control, which we've done pretty effectively over the past couple of years. You can look at those kind of high-level metrics that we've continued to improve upon -- so if you look back over this past year, plus 50 basis points of improvement on both the supply and -- I'm sorry, and on the SWB salaries, wages and benefits. So you're going to get a driver of that, which is what you should -- which you should count on.

We get margin expansion also from the acquisitions that we've done and being able to take a turn off of those things as we integrate those into our facilities. And importantly, the equity method investments, those minority interest holding don't come with revenue. So a lot of that growth will just come through as pure margin for us. And when you look at the rate on the change in acuity, you're going to see some of that acuity coming through those minority interest holders. So you're not actually going to see the pressure on margin that you were referring to. But where those come through on our consolidated cases, you're 100% right. There is margin pressure. And the margin pressure is not as you would think. It really just arrest the rate of growth a little bit. It doesn't take our margins backwards as we have modeled them as this mix kind of changes. So we're still able to outgrow that with the revenue growth that we see and the contributions from our minority interest partners.

[Operator]

Our next question comes from the line of Jason Cassorla with Citi.

[Jason Cassorla, analyst]

Great I just wanted to follow up on the free cash flow commentary. Dave, just to be clear on this, the total dollar value of those 2 items that you flagged, the insurance plus the state program [indiscernible] miss there, was that the $30 million difference between your $140 million free cash flow target? And would you expect to recoup those 2 items kind of completely in '24? And then maybe just kind of from that point, help us bridge to that $150 million midpoint for free cash flow for [indiscernible] -- just any more color there would be great to start?

[David Doherty, executive]

Yes, happy to. So first off, let me -- let me just say this company, it's worth noting, this company has never generated free cash flow before, right? This is our first year doing so. And we went from negative last year to $110 million. But the year-over-year change that we see is remarkable, kind of worth a pause as we look through this.

Most of that comes from, hey, the lack of some unusual items and just pure growth of the underlying operations of the company. So this is a strong, repeatable foundation that we have out there. But I must acknowledge, as you pointed out, that we missed how collections were going to come through, particularly in this fourth quarter revenue that was there. And as a result of the cyber event that took place at the beginning of the year and just the complexity of doing paper-based billings and how that impacts our payers as we go through those. We attribute a large majority predominant majority of that miss to the $140 million that we had talked about before to those 2 items. We do expect the majority of that to come back within 2024, but some of those state programs could take as long as '25. Again, we're trying to be prudent as we give our guidance going into next year.

So certainly, you're going to see a benefit from those collections going through. But as we mentioned earlier, the state-based programs continue for us. They're part of just the natural underlying source of business that we have. So those cash flows won't come in. So there will be some natural offsetting that happens on that piece of the [indiscernible] doing that metric last year, we're going to be prudent in what we include in our outlook for 2024. And so I look forward to kind of giving an updated guidance as we go through the year. I would say in answer to your question more specifically, on what's driving that year-over-year growth? It's the growth in the underlying operations of the organization implied in our guide of $495 million, right? This company will now have a predictable path on converting earnings into cash flows.

[Jason Cassorla, analyst]

Great. And maybe just want to hop over to the hospital partnerships, right? Could you just get a bit more on those partnerships? You flagged that those would be kind of minimal contribution for '24 -- but maybe just how you're thinking about the timing of development and attribution, if there's any way to help size or frame the opportunity within these partnerships would be helpful. .

[Wayne DeVeydt, executive]

Eric, do you want to elaborate on that? I know you recently just finished the fourth partnership with Parkview last week. But this would probably be a good way to highlight kind of how you see the maturity of these partnerships evolving, some of which I know like Intermountain, which are occurring rapidly in terms of us taking over the management of existing facilities, but other of these that are more of the de novo focus.

[J. Evans, executive]

Sure. Happy to talk about that. And we're excited about our health system partners. I should reiterate, we have a lot of inbound on health system partnerships. We're very selective on choosing like-minded partners or choosing markets where otherwise our entry has either been constrained or it's been states that have been hard to enter. All of those partnerships are actually moving along quite nicely. When we think about the partnerships that we have entered we're looking for partners that will allow us to get to double-digit ASCs over a 3- to 5-year period. So these are meaningful partnerships. .

The timing of that, we've got -- we obviously have within our guidance this year, the timing we expect for 2024. But because so much of this is de novo, there will be some acquisitions. I think it's hard to say when exactly this timing will happen over a 3- to 5-year period, but I think you should be thinking sign a health system partner, our goal is to get to double-digit centers with that partner within a 3- to 5-year window. And we're super excited about each of our 4 partners we've announced, and they are long-term strategic partners who are like-minded with us on the transition of surgical cases to the right side of care to create value for the system.

[Operator]

Our next question comes from the line of Lisa Gill with JPMorgan.

[Lisa Gill, analyst]

I just want to go back to your 2024 guidance. I'm just wondering if you can maybe just give us a little more color on what you're expecting for case growth in 2024? And you start with the first question talking about ankle and shoulders. I'm just also wondering if maybe you can talk about the type of cases that you're expecting as we think about '24?

[Wayne DeVeydt, executive]

So let me start with -- as the team builds the plan annually, we generally target our base growth algorithm, which is the 2% to 3% in volume that we believe is kind of table stakes, like from our perspective, if you just look at the normal growth that you should be able to expect a GI, ophthalmology -- and of course, what we've seen with orthopedics, we generally create baselines of 2 to 3. And we do it at the facility level, so we really understand if there's any unique changes in the markets or its demographics.

That being said, then we obviously will pursue these higher acuity procedures first. As you know, due to the higher acuity these procedures in many cases have a great rate with them, but they require a little more of the OR time that's there. Of course, they're still a better converter per minute of OR time in terms of cash flow. But what I would say is at an aggregate level think about the volume of -- we still target 2% to 3%. The goal is always to kind of outperform the high end of that range as we've done the last several years. And so ultimately, the budget says we ought to be able to do at least the high end, maybe slightly better than that. Dave, anything you want to add to that in terms of how we're building our outlook?

[David Doherty, executive]

Yes. I mean I would reiterate everything that you said, right? -- the budget is built at the facility level. So we have good line of sight as we kind of sit through there. Case growth is fairly predictable for a couple of reasons for us. One, as we saw all year. And as we've been talking about, quite frankly, for the past 2 solid years, the business doesn't change rapidly. So there's no -- unless you have a COVID pandemic, which we've long since passed in our business.

Our relationships with our physicians is long-standing. They're block time, their practices are very strong. So we have an underlying base that we think is fairly predictable. Our recruiting pipeline from 2023 has been really strong, as you guys know, that compounds in a very predictable pattern for us. And so you will see confidence in that underlying rate growth -- I'm sorry, case growth that's at least in line with that guide that Wayne mentioned. It will be across all of our specialties because we focus very hard on those. However, you will see us try to take advantage of ankles and shoulders, particularly in those where we already have relationships. And as our minority interest partnerships continue to mature, you'll see kind of a continued upward pressure on there. So those cases should continue to be positive. Those are relatively small number of cases that have a very large impact on revenue, so we're pretty bullish on how that's going to look for next year.

[Lisa Gill, analyst]

And then I'm sorry -- go ahead.

[Wayne DeVeydt, executive]

No, Lisa, the only thing I was going to say to the extent as has been our track record, that we exceed those expectations, then we'll raise guidance as we move throughout the year. So I think we like to try to create a conservative thoughtful baseline. But then again, as we've done historically, if we continue to outperform that baseline, you'll see that reflected in our outlook each quarter.

[Lisa Gill, analyst]

That's very helpful. Just staying on the 2024 guidance just for 1 more minute. I just want to make sure I also understand what you have in there as far as acquisitions go. I think, Dave, in your comment, you talked about some slipping from '23 into '24, but if you can talk about how much you have in the revenue guidance for acquisitions. .

[Wayne DeVeydt, executive]

Dave, I'm sorry, let me just start with this, and I want to flip this to you. Just a reminder, the $60 million that we got done in early January, we view that as just finalizing what we were doing in '23. And so that is going to move forward. So everything that Dave is going to talk about is the incremental $200 million, we believe we would get done this year. I'm sorry, Dave, go ahead. .

[David Doherty, executive]

Yes. Yes. So our guide right now implies that we're going to do another $200 million. Just as we've talked about before, using a midyear convention, that is exclusive of the $60 million that Wayne just mentioned that we completed in early January. The lesson learned from the past, and I would just encourage us all to Think about this as we do our models, is how much of that is going to come through and consolidate it as that converts to revenue versus nonconsolidated. Now as we look at the pipeline right now, a majority of those are in consolidated facilities. But we manage a very strong pipeline that goes deeper than the $200 million that's currently under LOI. And so we'll look to see how those ultimately manifest. That's what we will continue to kind of guide to as we look through the year. .

As we're looking at the divestiture side, which is the other point that gave us some pressure points last year, we're not looking at anything as significant as we did last year that will create that type of headwind at least as we're talking at our portfolio level at this point.

[Operator]

Our next question comes from the line of Bill Sutherland with The Benchmark Company.

[William Sutherland, analyst]

I wanted to look a little bit harder at case growth in the quarter. I'm assuming that's just a matter of the mix into the higher acuity procedures taking more OR time. Is that why it was below 2%.

[Wayne DeVeydt, executive]

No, Bill, actually, I'm really glad you asked this question, and I want to provide a little clarity. So first and foremost, remember that the last two 4th quarters, we generated 4% case volume growth. So we can continue to compound off of a very large growth rate in Q4. And the reason that's important to note is that the fourth quarter of this year, which was aligned with our expectations, had a very unique anomaly occur, which was that Christmas fell on a Monday. And as you know, for the vast majority of our procedures, while we are open Monday through Friday, the majority of them actually occur on Mondays and Tuesdays. And so in this particular year, many of our facilities were not only closing on the Monday, but we're actually closed for the Tuesday as well. And so you get this year-over-year unique comp dynamic. As we move into 2024, it actually becomes a tailwind for us, because we have a leap year, Christmas is actually getting pushed to a Wednesday, which means we'll get the Monday, Tuesday back. And in addition to that, we have 1 additional day in the fourth quarter of this upcoming year. So it creates a little bit of an odd anomaly in terms of comps of last year and the year before versus this year, but no concerns in terms of what we think is the basic algorithm and achieving that 2% to 3% plus.

[William Sutherland, analyst]

Got it. And then I was also curious if you could look at the de novos and what's the cadence of them impacting the top line as they come on? .

[Wayne DeVeydt, executive]

Dave, do you want to highlight that?

[David Doherty, executive]

Yes. Yes, happy to. And it's a great question, Bill, because again, [indiscernible] could be somewhat confusing. Most de novos as they kind of start up in their process are going to come through as minority interest partnerships, -- especially those that are coming through with our new partners that we've announced over the past year. And at some point in time, we'll look for the opportunity to kind of buy up to a consolidating level. So the impact on revenue should be somewhat muted in the short run. Now that's not an exclusive statement. There are some of our de novos that we look at that out of the gate, we will be consolidating. And in that case, you won't see a huge impact in 2024.

When it becomes something that's a material contributor to our revenue guide, we'll probably give you a heads up on that. But the gestation period for de novos is a relatively long ramp. So the seeds we planted last year and the seeds we're planting this year will take another year or 2 before you start to see them provide the meaningful growth that we'll be talking about. As we sit here today, we're just excited about managing about 10 or so a year.

[Operator]

Our next question comes from the line of Sarah James with Cantor Fitzgerald.

[Sarah James, analyst]

I wanted to go back to margins. I appreciate the mechanics of the minority interest assets lifting margins. But can you clarify if '24, you would also be guiding to margin expansion on your core book. And then on the drivers of that, you have been talking about improving RCM for a while. How much runway is left on that? And also G&A came in well below consensus. So anything you can point to as the driver there in the quarter and if that would continue into '24?

[Wayne DeVeydt, executive]

Sarah, first and foremost, our core book will be expanding margins as well as the minority interest. So no changes from that perspective. I think we continue to get the benefits of scale -- and in many cases, we were overcoming headwinds that the industry was suffering over the last couple of years, both around labor and cost supply. And while we effectively managed it well, we've also been able to maintain a cost structure that means we'll get the benefits of that as we kind of return to a more normal environment. So I feel very good from that perspective.

On the RCM front, I am continually amazed at the work that Dave and the team have done and where the opportunities continue to exist. Dave, do you want to elaborate on a bit more of what we see as runway? And I don't think we see this slowing down anytime soon.

[David Doherty, executive]

Yes, right. Thank you. Rep cycle is something that's probably a multiyear journey for us as we continue to get better in that front. And it happens both from bringing in kind of the right teams and continuing to standardize across the portfolio as well as recent integrations as we bring the benefit of our rev cycle approach across the organization. So I think that there's still a long runway that kind of sits in there that will be a contributing factor for both cash conversion as well as enhanced revenue uptake.

Your question on G&A, Sarah, it's really just the flex of the business as we kind of go through the ups and downs of the quarter. Again, on that particular line, I would encourage folks to look at that on a longer-term basis. So 6 months to 12-month view will help you smooth out the impact of kind of some of the flexing that sits underneath that G&A line item. As you can imagine, probably the biggest piece inside there is on your incentive comp viewpoints.

[Operator]

Our next question comes from the line of Gary Taylor with TD Cowen.

[Gary Taylor, analyst]

Most of my questions answered. I did have a couple of questions just on the expense side, but maybe just following up on that G&A point. I guess, given how strong the fourth quarter usually is particularly with commercial, I guess, it wasn't my sense that it would be a quarter you'd be looking or needing to flex G&A lower. So I just wanted to understand that comment just a little bit better.

And then the other question was on other operating expense. -- went the other way that seasonally doesn't tend to increase as much. It was up a fair amount. So maybe there's a little bit of offset in terms of the impact between those 2 line items, but a little more color would be helpful.

[Wayne DeVeydt, executive]

Yes. Gary, I'm going to let Dave dive in. A couple of things though to keep in mind that as we divested certain fully consolidated facilities early in the year, obviously, you'll start seeing the full impact comparing Q4 this year versus last year in the fourth quarter. It's also important to recognize that our nonconsolidated entities of which we started making those investments throughout the year, those are obviously going to show up in a single line item, but you're not going to [indiscernible] see the consolidated growth associated with those on the G&A front. But Dave, you want to elaborate a little bit further as well on any other anomalies or anything to point out.

[David Doherty, executive]

Yes, yes, happy to. So you're right on kind of how you flex up and down the business based on kind of the overall strength inside the corporate G&A side, you will look at how this organization kind of thinks about incentivizing our teams and driving kind of strong performance. We have very, very high internal expectations. And so as a result of that, you'll see some movement inside that in any given quarter. Again, you got to look at that particular on a multi-quarter basis.

The other operating expense question you have is a great one. It relates to provider taxes for the most part. So taxes on some of the programs that exist at a state level in some of the states that we experienced in the latter part of the year.

[Operator]

Ladies and gentlemen, our final question comes from the line of Ben Hendrix with RBC Capital Markets.

[Benjamin Hendrix, analyst]

Just a quick question. We're hearing a lot of momentum on the med tech side about the robotics geared towards the shoulder opportunity. Just wanted to see kind of how that factors into your CapEx plans for the next couple of years. And kind of in general, how you're thinking about CapEx as we kind of look towards the $140 million to $160 million in the $200 million for 2025. .

[Wayne DeVeydt, executive]

Eric, do you want to highlight how you're seeing the robotics continue to evolve? And then Dave provide a little clarity around the numbers?

[J. Evans, executive]

Sure. Yes, happy to. We've grown our robotics our portfolio a lot. We've added quite a few in 2023, we're at nearly 50 robots. I would say this that related just to shoulders and ankles, there might be a little bit of demand for robotics. We have a lot of those well covered.

I would also say that when we add robotics, I remind you, those are financed locally. So not a huge CapEx impact. And actually, the ROI on those have been incredibly strong. And so we agree with the med tech enthusiasm on the opportunity to continue to grow robotics in our facilities. We do that offensively though. So you think about this, this is really to attract new opportunities and to go into new service lines, we'll do that. It's a little bit different than some of our peers who often are upgrading robotics just to kind of keep up with technology for the same book of business for us, it's really a great offensive play, and we would share Medtech's enthusiasm on that. Dave, I don't know if you want to add anything?

[David Doherty, executive]

Yes. I'll just say 1 thing, right? The -- what we've been able to kind of see on the procurement side of the world is a stronger partnership with very like-minded medtech suppliers out there who see the same opportunity that we see. So we've seen this since knees and hips came out where they're working with us to kind of capture this market shift. They see the growth in ASC is kind of following closely behind the availability of the right equipment. And so you're finding those favorable kind of financing or more opportunistic financing opportunities. Now financing eventually will come around to paying cash. But for the most part, we only enter those if they're properly asset-backed and the ROI is strong.

[Operator]

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Evans for final comments.

[J. Evans, executive]

Sure. Thank you. Before we wrap up, I would like to reiterate how proud I am of my colleagues and physician partners who collaborate to deliver on our mission to enhance patient quality of life through partnership. Their working contributions allow us to deliver consistent and predictable results and drive sustained growth for all of our stakeholders. Most importantly, they also continue to serve our communities with the highest clinical care in a low-cost setting with the convenience and professionalism all our facilities are known to provide.

Thank you all for joining our call this morning, and have a great day.

[Operator]

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

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