UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________________
Form 10-K
OR
Commission file number: 001-37576
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices and zip code)
(615 ) 234-5900
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company (each as defined in Exchange Act Rule 12b-2).
Accelerated filer ☐ | Non-accelerated filer ☐ | |||||||||||||
Smaller reporting company | Emerging growth company | |||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant based on the closing price of the shares of common stock on The Nasdaq Stock Market on June 30, 2021, was $2.1 billion. As of February 22, 2022, there were 89,356,551 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
SURGERY PARTNERS, INC.
FORM 10-K
TABLE OF CONTENTS
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Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K (this "Annual Report") contains forward-looking statements based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report, including statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. The words "projections," "believe," "continue," "drive," "estimate," "expect," "intend," "may," "plan," "will," "could," "would" and similar expressions are generally intended to identify forward-looking statements.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those described in the "Risk Factors" section of this Annual Report, which include but are not limited to the following:
•the social and economic impact of the ongoing COVID-19 pandemic on our business;
•the impact of future legislation and other health care regulatory reform actions, and the effect of that legislation and other regulatory actions on our business;
•our ability to comply with current health care laws and regulations;
•reductions in payments from government health care programs and private insurance payors, such as health maintenance organizations ("HMOs"), preferred provider organizations ("PPOs"), and other managed care organizations and employers;
•our ability to contract with private insurance payors;
•changes in our payor mix or surgical case mix;
•failure to maintain or develop relationships with physicians on beneficial or favorable terms, or at all;
•the impact of payor controls designed to reduce the number of surgical procedures;
•our efforts to integrate operations of acquired businesses and surgical facilities, attract new physician partners, or acquire additional surgical facilities;
•supply chain issues, including shortages or quality control issues with surgery-related products, equipment and medical supplies;
•competition for physicians, nurses, strategic relationships, acquisitions and managed care contracts;
•our ability to attract and retain qualified health care professionals;
•our ability to enforce non-compete restrictions against our physicians;
•our ability to manage material liabilities whether known or unknown incurred as a result of acquiring surgical facilities;
•economic and competitive conditions;
•the outcome of legal and regulatory proceedings that have been or may be brought against us;
•changes in the regulatory, economic and other conditions of the states where our surgical facilities are located;
•payments we are required to make under the tax receivable agreement; and
•our indebtedness.
Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this Annual Report. We have based these forward-looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They can be affected by known or unknown risks, uncertainties and assumptions, including, among other things, the risks, uncertainties and assumptions described in Item 1A. "Risk Factors."
Any forward-looking statements and other information set forth in this Annual Report speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, press releases, investor presentations and our website.
PART I
Item 1. Business
Overview
Surgery Partners, Inc., a Delaware corporation, acting through its subsidiaries, owns and operates a national network of surgical facilities and ancillary services. Unless the context otherwise indicates, Surgery Partners, Inc. and its subsidiaries are referred to herein as "Surgery Partners," "we," "us," "our" or the "Company."
As of December 31, 2021, we owned or operated primarily in partnership with physicians, a portfolio of 126 surgical facilities in the United States ("U.S.") comprised of 108 ambulatory surgical centers ("ASCs") and 18 surgical hospitals ("surgical hospitals," and together with ASCs referred to as "surgical facilities" or "facilities") across 31 states, including a majority interest in 88 of the surgical facilities. During 2021, patient services provided in our surgical facilities generated approximately $2.1 billion in revenue.
Our Growth Strategies
Our differentiated operating model employs a multifaceted strategy to grow revenue, earnings and cash flow. We believe the following are key components to this strategy:
•Deliver outstanding patient care and clinical outcomes;
•Continue to execute and expand upon our physician engagement strategy in attractive markets;
•Become the partner of choice for physicians seeking to become or stay independent;
•Drive organic growth at existing facilities through targeted physician recruitment, service line expansion and implementing our efficient operating model;
•Seek partnership opportunities with payors to make health care more affordable for their members;
•Seek partnership opportunities with health systems looking to develop and/or enhance their ambulatory surgery footprint to better meet the needs of the patients and medical staff;
•Continue our disciplined acquisition strategy;
•Offer new services to provide a more comprehensive continuum of care; and
•Enhance operational efficiencies and productivity by delivering on integration.
In addition, we believe favorable industry trends such as an aging population and advancements in medical technology will further drive growth.
Total Addressable Market
Based on management estimates, we believe that the total U.S. surgical facility market represents approximately $90 billion in annual revenue, including approximately $55 billion of hospital outpatient department procedures and $35 billion of ambulatory surgical center procedures, and we believe that ambulatory surgical centers are capturing an increasing share of the total surgical procedure market. We estimate that as a result of this trend, total annual procedure volume is expected to grow over the next few years by approximately 2% in hospital outpatient departments and by approximately 6% in ambulatory surgery centers, while inpatient procedures will decline by approximately 2% during the same period. In addition, we believe that approximately $60 billion of inpatient surgical cases have the potential to move to outpatient surgery centers, which, together with procedures performed at hospital outpatient departments and ambulatory surgical centers, represents what we believe is a total addressable market of approximately $150 billion.
Patient and Physician Satisfaction
We are leveraging our growth strategies to capture market share by providing high quality service. According to a 2019 survey of health and life safety tags, our ASCs averaged 25% fewer deficiencies compared with the total market, with 6.3 deficiencies at our ASCs compared to 8.4 in other ASCs. Similarly, our surgical hospitals averaged 48% fewer deficiencies per survey compared to all other hospitals surveyed, with 17.6 deficiencies for our surgical hospitals compared with 33.7 deficiencies at other hospitals according to a 2019 industry survey. In addition, 71% of our surgical hospitals in 2019 were rated five star in the CMS star rating, with the remaining 29% rated four star. This has resulted in an average patient net promoter score of 94, based on patient satisfaction surveys conducted from December 2019 to May 2020.
Impact of COVID-19
The COVID-19 pandemic has significantly affected our facilities, employees, patients, communities, business operations and financial performance, as well as the U.S. economy and financial markets. The COVID-19 pandemic materially impacted our financial performance for the year ended December 31, 2020, and has continued to impact our financial performance during the year ended December 31, 2021.The impact of the COVID-19 pandemic on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures typically performed. Although we cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, which is difficult to predict and is dependent on factors beyond our control, we saw improvement in
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surgical case volumes as states re-opened and allowed for non-emergent procedures. We cannot predict if or when utilization may return to pre-pandemic levels.
The Company continues to monitor legislative actions at federal and state levels, including the impact of the CARES Act and other governmental assistance that might be available.
Operations
During 2021, we operated in two reporting segments: Surgical Facility Services and Ancillary Services. Prior to 2021, we also operated in the Optical Services reporting segment.
•Our Surgical Facility Services segment consisted of the operation of ASCs and surgical hospitals and includes our anesthesia services. Our surgical facilities primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics and pain management, ophthalmology, gastroenterology ("GI") and general surgery.
•Our Ancillary Services segment consisted of a diagnostic laboratory and multi-specialty physician practices, including physician practices owned and operated pursuant to long-term management service agreements. During the third quarter of 2020, we closed our diagnostic laboratory.
•Our Optical Services segment consisted of an optical products group purchasing organization, which was divested on December 31, 2020. Our Optical Services segment was not a material component of our total revenue, contributing less than 1% in each of 2020 and 2019.
Surgical Facility Services Segment
Surgical Facility Operations
As of December 31, 2021, we owned or operated primarily in partnership with physicians, 126 surgical facilities, including 108 ASCs and 18 licensed surgical hospitals. Our Surgical Facility Services segment contributed approximately 97%, 96% and 95% of our total revenue in 2021, 2020 and 2019, respectively.
Our typical ASC is a free-standing facility that performs planned surgical procedures on an outpatient basis for patients not requiring hospitalization and for whom an overnight stay is not expected after surgery. Each center typically has one to four operating or procedure rooms with areas for reception, pre-operative care, recovery and administration. The staff of our ASCs generally includes a center administrator, registered nurses, operating room technicians, as well as other administrative staff.
Our surgical hospitals are generally larger than our ASCs and include inpatient hospital rooms and, in certain cases, emergency departments. Our surgical hospitals also provide services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care.
We operate both multi-specialty and single-specialty facilities. In multi-specialty facilities, a variety of surgical procedures are performed, including, among others, orthopedics and pain management, ophthalmology, GI and general surgery. We have diversified the mix of procedures performed at our facilities by strategically introducing select specialties that will complement existing services. In many cases, we keep certain facilities as single-specialty where it suits an individual facility or market demand.
Our surgical facilities are generally located in close proximity to physicians’ offices. We provide each of our surgical facilities with a full range of financial, marketing and operating services. For example, our regional managed care directors assist the local management team at each of our surgical facilities in developing relationships with private insurance payors and negotiating private insurance contracts.
Surgical Facility Ownership Structure
We own and operate our surgical facilities through partnerships or limited liability companies with physicians, physician groups and health care systems. One of our wholly-owned subsidiaries typically serves as the general partner or managing member of our surgical facilities. We generally seek to own a majority interest in our surgical facilities or otherwise have sufficient control over the facilities in order to consolidate the financial results. In some instances, we will acquire ownership in a surgical facility with the prior owners retaining ownership, and, in some cases, we offer new ownership to other physicians or health care systems. We hold majority ownership in 88 of the 126 surgical facilities in which we own an interest. We provide intercompany loans to some of the surgical facilities which often are secured by a pledge of assets of the facility. We also provide day-to-day management services for a majority of our surgical facilities pursuant to a management agreement and receive a management fee that is typically equal to a percentage of the facility revenue.
Strategic Relationships
When attractive opportunities arise, we may develop, acquire or operate surgical facilities through strategic relationships with payors, health care systems, and other health care providers. We believe that forming such strategic relationships can enhance our ability to attract physicians and access favorable private insurance contracts for our surgical facilities in that market.
The strategic relationships through which we own and operate surgical facilities are governed by partnership and operating agreements that are generally comparable to the partnership and operating agreements of the other surgical facilities in which we own an interest. The primary difference between the structure of these strategic relationships and the other surgical facilities in which we hold ownership is that,
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in these strategic relationships, a health care system holds ownership in the surgical facility in addition to physician investors. In each of these strategic relationships, we also have entered into a management agreement under which we provide day-to-day management services for a management fee equal to a percentage of the revenues of the surgical facility. The terms of those management agreements are comparable to the terms of our management agreements with other surgical facilities in which we own an interest.
Sources of Revenue
Revenue from our surgical facilities is earned from facility fees related to health care services performed in our surgical facilities and is included in our patient service revenues. The fee charged for surgical services varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, supplies, nursing staff and/or medications. Our fees do not typically include professional fees charged by the patient's surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians.
We are dependent upon government and private insurance sources of payment for the services we provide. The amounts that our surgical facilities receive in payment for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid and state regulations, cost containment and utilization decisions and reduced reimbursement schedules of private insurance payors.
The following table sets forth the percentage of total patient service revenues for our consolidated surgical facilities by type of payor for the periods indicated:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Private Insurance | 50.6 | % | 53.9 | % | 53.8 | % | ||||||||||||||
| Government | 43.3 | % | 38.6 | % | 38.9 | % | ||||||||||||||
| Self-pay | 2.8 | % | 3.2 | % | 2.6 | % | ||||||||||||||
| Other | 3.3 | % | 4.3 | % | 4.7 | % | ||||||||||||||
| Total patient service revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
We receive reimbursement from Medicare for surgical services based on three different payment systems depending on the site of service: hospital inpatient surgical services, hospital outpatient surgical services and outpatient surgical services generally provided in our ASCs.
Medicare Reimbursement - Hospital Inpatient Services
Eighteen of our surgical facilities are licensed as hospitals. Most inpatient services provided by hospitals are reimbursed by Medicare under the inpatient prospective payment system ("IPPS"). Under the IPPS, a hospital receives a fixed amount for inpatient hospital services based on each patient's final assigned Medicare-severity diagnosis related group ("MS-DRG"). Each MS-DRG is assigned a payment rate that is prospectively set by the Centers for Medicare and Medicaid Services ("CMS") using national average resources used per case for treating a patient with a particular diagnosis. This assignment also affects the prospectively determined capital rate paid with each MS-DRG. MS-DRG and capital payments are adjusted by a predetermined geographic adjustment factor assigned to the geographic area in which the hospital is located. The index used to adjust the MS-DRG rates, known as the "hospital market basket index," gives consideration to the inflation experienced by hospitals in purchasing goods and services.
On August 2, 2021, CMS published the IPPS final rule for federal fiscal year ("FFY") 2022, which began on October 1, 2021. Under the FFY 2022 final rule, rates for inpatient stays in hospitals paid under the IPPS that successfully report certain quality data under the Hospital Inpatient Quality Reporting ("IQR") Program and demonstrate meaningful use of certified electronic health record ("EHR") technology will be increased by 2.5%. Those hospitals that do not successfully report quality data under the IQR Program (but are meaningful EHR users) may receive a payment rate increase of only 1.87%. In addition to the IQR Program, hospitals will be subject to payment adjustments under the Value Based Purchasing Program, Readmissions Reduction Program and Hospital Acquired Conditions Reduction Programs that have been implemented by the Department of Health and Human Services ("HHS").
Medicare Reimbursement - Hospital Outpatient Departments
Surgical services that are provided in hospital outpatient departments ("HOPDs") generally are reimbursed by CMS using the Outpatient Prospective Payment System (the "OPPS"). The OPPS, established by the Secretary of HHS, determines payment amounts prospectively (generally the following calendar year) for various categories of medical services performed in HOPDs. On December 2, 2021, CMS published its OPPS final rule for 2022. The final rule provides for a payment rate increase of 2.0%. Hospitals that do not meet the reporting requirements of the Medicare Hospital Outpatient Quality Reporting Program will be subject to a 2.0% payment rate decrease.
Additionally, as a result of legislative changes related to off-campus HOPDs, certain off-campus HOPDs that began billing under the OPPS (or underwent certain changes) on or after November 2, 2015 are no longer paid for most services under the OPPS. Instead, these facilities are paid under the Medicare Physician Fee Schedule ("MPFS"), which typically results in lower reimbursements. Services
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provided in a dedicated emergency department are still paid under the OPPS. This change has not significantly affected reimbursement to any of our HOPDs, but we cannot assure you that our HOPDs will not be impacted in the future.
Medicare Reimbursement - ASCs
Payments under the Medicare program to ASCs are also made based on the OPPS. However, the payment received from CMS is a percentage of the payment to HOPDs. Reimbursement rates for ASCs are updated annually based on changes in the consumer price index offset by multifactor productivity adjustments. Based on the OPPS Final Rule, ASC reimbursement rates will increase by 2.0% for 2022. CMS has established the Ambulatory Surgical Center for Quality Reporting ("ASCQR") Program as a pay-for-reporting, quality data program. Our ASCs that participate in the ASCQR Program receive the full annual update to the ASC payment rate. Those ASCs that do not successfully report quality data under the ASCQR Program may receive a payment reduction.
Annual Cost Reports
Hospitals participating in Medicare and Medicaid programs, whether paid on a reasonable cost basis or under a prospective payment system, may be required to meet certain financial reporting requirements. Federal and, where applicable, state regulations require submission of annual cost reports identifying medical costs and expenses associated with the services provided by each hospital to Medicare beneficiaries and Medicaid recipients. Annual cost reports required under the Medicare and Medicaid programs are subject to routine governmental audits. These audits may result in adjustments to the amounts ultimately determined to be payable to us under these reimbursement programs. Finalization of these audits often takes several years. Providers may appeal any final determination made in connection with an audit. While ASCs are not currently subject to federal cost reporting requirements, it is possible that such requirements, which could be costly for us, will be implemented by CMS in the future.
Ancillary Services Segment
Ancillary Services
Our portfolio of outpatient surgical facilities is complemented by a suite of ancillary services that we provide to support physicians in providing high quality and cost-efficient patient care. This segment includes multi-specialty physician practices, urgent care facilities and anesthesia services. The Company, physicians and patients benefit from these services through improved clinical efficiency and scheduling, and from incremental revenue associated with retaining fees for these services. Our Ancillary Services segment contributed approximately 3% of our total revenue in both 2021 and 2020 and 4% of our total revenue in 2019 and inlcuded the following:
•Until it was closed in the third quarter of 2020, we offered physicians toxicology testing services through our wholly-owned diagnostic laboratory based in Tampa, Florida.
•We employ two models in our network of multi-specialty physician practices. In one model, we wholly own and operate physician practices. For example, in the state of Florida, where the law does not preclude a business corporation from employing physicians, we wholly-own and operate physician practices in several locations throughout Florida. In the other model, we operate physician practices pursuant to long-term management service agreements with separate professional corporations that are wholly-owned by physicians.
Sources of Revenue - Ancillary Services Segment
The fees charged for services in our Ancillary Services segment depend on a variety of factors, including the type of service provided, the location in which the service is provided and the provider of the service. Service fees are received from both government and private insurance payors. The amounts that we receive in payment for the provision of ancillary services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid and state regulations, cost containment and utilization decisions and reduced reimbursement schedules of private insurance payors.
Acquisition and Development Programs
Acquisition Program. In addition to our corporate strategy, we continuously evaluate opportunities to expand our presence in the surgical facility market by making strategic acquisitions of existing surgical facilities and by developing new surgical facilities in cooperation with local physician partners and, when appropriate, health care systems and other strategic partners. We generally structure our partnerships where either we are a majority owner partnered with physicians or we are a minority owner with buy-up rights. These buy-up rights give us the option to own a controlling interest at some point in the future. Alternatively, we may choose to pursue a strategic relationship with physicians and a health care system.
We employ a dedicated acquisition team with experience in health care services. Our team seeks to acquire surgical facilities that meet our criteria, including prominence and quality of physician partners, specialty mix, opportunities for growth, level of competition in the local market, level of private insurance penetration and our ability to access private insurance contracts. We carefully evaluate each of our acquisition opportunities through an extensive due diligence process to determine which facilities have the greatest potential for growth and profitability improvements under our operating structure. Our team may also identify opportunities to attract additional physicians to increase the acquired facility’s revenues and profitability.
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Development Program. We develop surgical facilities in markets that we identify as having substantial interest by physicians and payors. We have experience in developing both single and multi-specialty surgical facilities. When we develop a new surgical facility, we generally provide all of the services necessary to complete the project. We offer in-house capabilities for structuring partnerships and financing facilities and work with architects and construction firms in the design and development of surgical facilities. Before and during the development phase of a new surgical facility, we analyze the competitive environment in the local market, review market data to identify appropriate services to provide, prepare and analyze financial forecasts, evaluate regulatory and licensing issues and assist in designing the surgical facility and identifying appropriate equipment to purchase or lease. After a surgical facility is developed, we typically provide general startup operational support, including information systems, equipment procurement and financing.
Marketing
We primarily direct our sales and marketing efforts at physicians who would utilize our surgical facilities. Marketing activities directed at physicians and other health care providers are coordinated locally by the individual surgical facility and are supplemented by dedicated corporate personnel. These activities generally emphasize the benefits offered by our surgical facilities compared to other facilities in the market, such as the proximity of our surgical facilities to physicians’ offices, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the efficient turnaround time between cases, our advanced surgical equipment and our simplified administrative procedures. Although the facility administrator is the primary point of contact, physicians who utilize our surgical facilities are important sources of recommendations to other physicians regarding the benefits of using our surgical facilities. Recruiting teams develop a target list of physicians, and we continually review our progress in successfully recruiting additional local physicians.
We also market our surgical facilities directly to private insurance payors. Payor marketing activities conducted by our corporate office management and facility administrators emphasize the high quality of care, cost advantages and convenience of our surgical facilities, and are focused on making each surgical facility an approved provider under local managed care plans.
Competition
In each market in which we operate a surgical facility, we compete with hospitals and operators of other surgical facilities to attract physicians and patients. We believe that the competitive factors that affect our surgical facilities’ ability to compete for physicians are convenience of location of the surgical facilities, quality of care offered, convenience of scheduling, professionalism and cleanliness of facilities, access to capital and participation in private insurance programs. In addition, we believe the national prominence, scale and reputation of our company are instrumental in attracting physicians. We believe that our surgical facilities attract patients based upon our quality of care, the specialties and reputations of the physicians who operate in our surgical facilities, participation in managed care programs, ease of access and convenient scheduling and registration procedures.
In developing or acquiring existing surgical facilities, we compete with other public and private surgical facility and hospital companies. Several large national companies own and/or manage surgical facilities, in some cases in connection with other lines of business with which we do not compete, including HCA Healthcare, Inc., Envision Healthcare Corporation, Tenet Healthcare Corporation, Surgical Care Affiliates, Inc. and Optum, Inc. We also face competition from local hospitals, physicians and other providers who may compete with us in the ownership and operation of surgical facilities, as well as the trend of physicians choosing to perform procedures in an office-based setting rather than in a surgical facility.
Seasonality
Our revenue fluctuates based on the number of business days in each calendar quarter, because the majority of services provided by physicians in our surgical facilities consist of scheduled procedures and office visits that occur during business hours. In addition, revenue in the fourth quarter could also be impacted by an increased utilization of services due to annual deductibles which are not usually met until later in the year and also as patients utilize their health care benefits before they expire at year-end.
Human Capital Resources
At December 31, 2021, we had approximately 10,900 employees, including approximately 2,600 part-time employees. None of our employees are represented by a collective bargaining agreement. We appreciate that our colleagues are key to creating value and believe that we have a good relationship with them. We are subject to various state and federal laws that regulate wages, hours, benefits and other terms and conditions relating to employment. In several markets, nurse and medical support personnel availability has become a significant operating issue to healthcare providers. To address this challenge, we have implemented several initiatives to improve engagement, retention, recruiting, compensation programs and productivity.
Our surgical facilities are staffed by licensed physicians. Our mission is to enhance patient quality of life through partnership. We generally do not enter into contracts with physicians who use our surgical facilities, other than partnership and operating agreements with physicians who own interests in our surgical facilities, agreements for anesthesiology services and medical director agreements. Most physicians are not employees of our surgical facilities and are not contractually required to use our facilities. Physicians who use our surgical facilities also use other facilities or hospitals and may choose to perform procedures in an office-based setting that might otherwise be performed at our surgical facilities. Our operations are dependent on the efforts, abilities and experience of our physicians and clinical personnel. We compete with other health care providers, primarily hospitals and other surgical facilities, in attracting physicians to utilize
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our surgical facilities, nurses and medical staff to support our surgical facilities, recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our facilities.
Our surgical facilities, like most healthcare providers, have experienced rising labor costs. We may be required to continue to enhance wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary or contract personnel. As a result, our labor costs could continue to increase. We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate.
We believe that our employees are vital contributors to our success, and we devote significant resources to recruit and retain our workforce. We strive to recruit and retain a diverse population of employees at all stages of their careers that are reflective of the communities we serve. We are committed to promoting an inclusive culture through diversity of thoughts and backgrounds, recognizing the value these experiences bring to our colleagues, physicians, patients and the communities in which we reside. One of our core values is to promote a culture of diversity and inclusion. We have a Diversity, Equity, Inclusion & Community Impact Council comprised of employees with diverse backgrounds, experiences or characteristics who share a common interest in improving corporate culture and delivering sustained business results. Our workforce is comprised of approximately 81% female and 30% people of color. Our policies prohibit discrimination on the basis of race, sex, religion, color, national or ethnic origin, age, disability, sexual orientation, gender identity, gender expression, military service, pregnancy, physical or mental disabilities, genetic information, or any other class protected by applicable law in its administration of policies, programs or employment.
We have established, and continue to enhance and refine, a comprehensive set of practices for engagement, recruiting, developing, managing and optimizing the human resources of our organization. In general, we seek to attract, develop and retain an engaged workforce and improve talent management processes accordingly. We offer a competitive range of compensation and benefit programs. In light of the ongoing COVID-19 pandemic and CMS COVID Vaccination Regulations, we have implemented changes to address the safety and interests of our patients, employees, and medical staff, including the implementation of additional safety measures. Our code of conduct promotes integrity, accountability and transparency, among other high ethical standards and a focus on employee welfare.
Environmental
We are subject to various federal, state and local laws and regulations relating to the protection of the environment and human health and safety, including those governing the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the maintenance of a safe workplace. Our operations include the use, generation and disposal of hazardous materials. We may, in the future, incur liability under environmental statutes and regulations with respect to contamination of sites we own or operate (including contamination caused by prior owners or operators of such sites, adjoining properties or other persons) and the off-site disposal of hazardous substances. We believe that we have been and are in substantial compliance with the terms of all applicable environmental laws and regulations and that we have no liabilities under environmental requirements that we would expect to have a material adverse effect on our business, results of operations or financial condition (including our capital expenditures, earnings and competitive position).
Insurance
We maintain liability insurance in amounts that we believe are appropriate for our operations. Currently, we maintain professional, general and workers' compensation liability insurance in excess of self-insured retentions through third party commercial insurance carriers. We also maintain cyber insurance, business interruption insurance and property damage insurance. Coverage under certain of these policies is contingent upon the policy being in effect when a claim is made regardless of when the events which caused the claim occurred.
In addition, physicians who provide professional services in our surgical facilities are required to maintain separate malpractice coverage with defined minimum coverage limits. While we believe that our insurance policies are adequate in amount and coverage for our operations, we make no assurances that the insurance coverage is sufficient to cover all future claims or will continue to be available in adequate amounts or at a reasonable cost.
Private Insurance Payors
Most private third-party payors reimburse us for services pursuant to written contracts. These contracts generally require that we offer discounts from our established charges. Some of our payments come from private insurance payors with which we do not have written contracts. In those situations, commonly known as "out-of-network" services, we generally charge the patients the same co-payment or other patient responsibility amounts that we would have charged had we had a contract with the private insurance payor. We also submit a claim for the services to the private insurance payor along with full disclosure that we have charged the patient an in-network patient responsibility amount.
Governmental Regulation
General
Our businesses are subject to federal, state and local laws dealing with issues such as occupational safety, employment, medical leave, insurance regulations, civil rights, discrimination, building codes and medical waste and other environmental issues. Federal, state and local governments are expanding the regulatory requirements on businesses like ours. The imposition of these regulatory requirements may have the effect of increasing operating costs and reducing the profitability of our operations.
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Regulatory Development in Response to COVID-19
Numerous recent legislative and regulatory actions have been taken in an attempt to provide businesses, including health care providers, with relief from the negative impacts of the COVID-19 pandemic. The legislative and regulatory responses to the COVID-19 pandemic generally impact many of the statutes, regulations and policies summarized or discussed throughout this Annual Report.
CARES Act and Other Stimulus Legislation
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law on March 27, 2020. Among other things, the CARES Act contains a number of provisions that are intended to assist health care providers as they combat the effects of the COVID-19 public health emergency. The healthcare-specific provisions include:
•the temporary suspension of Medicare sequestration from May 1, 2020, to December 31, 2021;
•an appropriation of $100 billion to the Public Health and Social Services Emergency Fund for a new program to reimburse, through grants or other mechanisms, eligible health care providers and other approved entities for COVID-19-related expenses or lost revenues;
•the expansion of CMS’ Accelerated and Advance Payment Program; and
•waivers or temporary suspension of certain regulatory requirements.
On December 27, 2020, the COVID-19 Economic Relief Bill (the "Bill") was enacted, which among other significant matters, revised previous guidance on how grant funds distributed under the CARES Act may be utilized. These changes included greater clarity on the measurement of lost revenues eligible to be claimed against grant funds received through the CARES Act as well as how funds can be allocated among consolidated facilities.
HHS’ interpretation of the underlying terms and conditions of grant funds received through the CARES Act, the Bill and other governmental assistance programs, including auditing and reporting requirements, continues to evolve. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in our inability to recognize certain payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, including the amount estimated and included in our consolidated statement of operations for the year ended December 31, 2021 provided herein. Such changes may be material.
We continue to closely monitor legislative actions and regulatory guidance at the federal, state and local levels with respect to the CARES Act as other governmental assistance might become available to us. For more information, please refer to Note 1. "Organization and Summary of Accounting Policies - COVID-19 Pandemic" to our audited consolidated financial statements for the year ended December 31, 2021 included elsewhere herein.
Waivers or Temporary Suspension of Certain Regulatory Requirements
In addition to the financial and other relief that has been provided by the federal government through the CARES Act and other legislation that has been passed by Congress, CMS and many state governments have also issued a number of waivers and temporary suspensions of health care facility licensure, certification, and reimbursement requirements in order to provide hospitals, ambulatory surgery centers, physicians, and other health care providers with increased flexibility to meet the challenges presented by the COVID-19 public health emergency. For example, CMS has temporarily waived the enforcement of certain requirements of the Medicare conditions of participation and implemented a "hospitals without walls" program that would enable hospitals to treat patients in temporary locations and enable ASCs to temporarily enroll in Medicare as hospitals. CMS has also temporarily waived many provisions of the federal physician self-referral law, or Stark Law, including those provisions of the Stark Law that prohibit our hospitals with physician ownership from expanding capacity. Many states have also suspended the enforcement of certain regulatory requirements to ensure that health care providers have sufficient capacity to treat COVID-19 patients. These regulatory changes are temporary, and we anticipate substantially all requirements will be reinstated in all material respects at the conclusion of the public health emergency.
Certificates of Need, Licensure and Accreditation
Capital expenditures for the construction of new health care facilities, the addition of beds or new health care services or the acquisition of existing health care facilities may be reviewable by state regulators under statutory programs that are sometimes referred to as certificate of need laws. States with certificate of need laws place limits on the construction and acquisition of health care facilities and the expansion of existing facilities and services. In these states, approvals, generally known as certificates of need, are required for capital expenditures exceeding certain preset monetary thresholds for the development, acquisition and/or expansion of certain facilities or services, including, in certain of these states, surgical facilities. Certificate of need laws are being challenged in many states across the country and any future changes could have positive and negative impacts on our business. We currently operate in 21 states that have certificate of need laws.
Our surgical facilities also are subject to state licensing requirements for medical providers. Our ASCs have licenses to operate as required in the states in which they operate and must meet all applicable requirements for ASCs. In addition, even though our surgical facilities that are licensed as hospitals primarily provide surgical services, they must meet all applicable requirements for general hospital licensure. To assure continued compliance with these regulations, governmental and other authorities periodically inspect our surgical
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facilities. The failure to comply with these regulations could result in the suspension or revocation of a facility’s license. In addition, based on the specific operations of our surgical facilities, some of these facilities maintain a pharmacy license, a controlled substance registration, a clinical laboratory certification waiver, and environmental protection permits for biohazards and/or radioactive materials, as required by applicable law.
As of December 31, 2021, the majority of our facilities were accredited by either The Joint Commission or the Accreditation Association for Ambulatory Health Care, two of the major national organizations that establish standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of various types of health care facilities. The effect of accreditation by these organizations is to exempt the facilities from routine surveys by state agencies to determine compliance with CMS requirements. These accredited facilities are subject to periodic surveys by the accrediting organization to ensure that they are in compliance with the applicable standards. Many private insurance health plans require our facilities to be accredited by one or both of these organizations in order to be participating providers. Failure to maintain accreditation would cause a facility to become subject to state survey agency oversight and potentially subject to increased scrutiny by CMS, and could result in a loss of payment from private insurance health plans.
Executive Order
On July 9, 2021, President Biden issued an executive order that is intended to promote competition in the U.S. economy. Among other things, the executive order encourages the Federal Trade Commission ("FTC") to ban or limit non-compete agreements, encourages the U.S. Department of Justice ("DOJ") and the FTC to review and revise their merger guidelines to ensure that patients are not harmed by healthcare mergers, and instructs HHS to support existing price transparency rules and implement the legislation that was recently adopted to address surprise billing. We cannot predict how, if at all, the various initiatives set forth in the executive order will be implemented by the regulatory agencies involved or the impact that the executive order will have on operations.
Affordable Care Act Repeal Efforts
Initiatives to repeal or modify the Patient Protection and Affordable Care Act (the "Affordable Care Act") have been persistent over the past several years. As of December 31, 2021, legislative efforts to repeal and replace the Affordable Care Act in full have not been successful. However, as a result of the enactment of the Tax and Jobs Act of 2017, the tax penalty associated with the so-called "individual mandate," which requires most individuals to obtain qualifying health insurance coverage or pay a tax penalty, was reduced to zero starting in 2019. The effective repeal of the individual mandate tax penalty and any other future repeal or replacement of the Affordable Care Act may have significant impact on the reimbursement for health care services generally, and may cause more individuals to become uninsured, rendering them unable to afford our health care services. In 2021, the U.S. Supreme Court dismissed a case that sought to invalidate the Affordable Care Act. However, the Affordable Care Act remains subject to various lawsuits challenging its enforcement and constitutionality. Accordingly, there can be no assurance that the adoption of any future federal or state health care reform legislation, or any ruling by a court with respect to the Affordable Care Act, will not have a negative financial impact on the Company.
Medicare and Medicaid Private Contractor Audits
CMS has implemented a number of programs that use private contractors that contract with CMS to identify overpayments and underpayments and other potential sources of billing fraud. These contractors, known as Recovery Audit Contractors ("RACs") and Zone Program Integrity Contractors ("ZPICs") conduct both post-payment and pre-payment review of claims submitted by Medicare providers. In addition, CMS employs Medicaid Integrity Contractors ("MICs") to perform post-payment audits of Medicaid claims and identify overpayments. Our facilities and providers periodically receive letters from auditors such as RACs and ZPICs requesting repayment of alleged overpayments for services and incur expenses associated with responding to and appealing these determinations, as well as the costs of repaying any overpayments. Moreover, in recent years, the increase in Medicare payment appeals has created a backlog such that resolving appeals often takes multiple years.
Although all other repayments requested to date as a result of RAC, MIC and ZPIC audits have not been material to our Company, we are unable to quantify the aggregate financial impact of these audits on our facilities given the pending appeals and uncertainty about the extent of future audits.
Medicare and Medicaid Participation
The majority of our revenue is expected to continue to be received from third-party payors, including federal and state programs, such as Medicare and Medicaid, and private insurance payors. To participate in the Medicare program and receive Medicare payment, our surgical facilities must comply with regulations promulgated by HHS. Among other things, these regulations, known as "conditions for coverage" or "conditions of participation," impose numerous requirements on our facilities, their equipment, their personnel and their standards of medical care, as well as compliance with all applicable state and local laws and regulations. In 2007, CMS issued a policy memorandum (the "2007 CMS Policy Memorandum") that reaffirmed its prior interpretation of its conditions of participation that all hospitals (other than critical access hospitals) participating in the Medicare program are required to provide basic emergency care interventions regardless of whether or not the hospital maintains an emergency department. Our facilities licensed as hospitals are required to meet this requirement to maintain their participating provider status in the Medicare program. Our hospitals that do not have an emergency room, maintain a protocol for the transfer of patients requiring emergency treatment. While we believe such protocols satisfy CMS requirements, CMS could interpret such protocols to be inconsistent with the 2007 CMS Policy Memorandum, which could jeopardize each facility's participation in the Medicare program. Our surgical facilities must also satisfy the conditions of participation to be eligible to participate in the various state Medicaid programs. The requirements for certification under Medicare and Medicaid are subject
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to change and, in order to remain qualified for these programs, we may have to make changes from time to time in our facilities, equipment, personnel or services. Although we intend to continue to participate in these reimbursement programs, we cannot ensure that our surgical facilities will continue to qualify for participation.
The Affordable Care Act and its associated regulations require a hospital to provide written disclosure of physician ownership interests to the hospital’s patients and on the hospital’s website and in any advertising, along with annual reports to the government detailing such interests. Additionally, hospitals that do not have 24/7 physician coverage are required to inform patients of this fact and receive signed acknowledgment from the patients of the disclosure. A hospital’s provider agreement may be terminated if it fails to provide the required notices.
Utilization Review
Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards, are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations, which review the appropriateness of patient admissions and discharges, the quality of care provided, the validity of MS-DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided or assess fines and also have the authority to recommend to HHS that a provider which is in substantial noncompliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Utilization review is also a requirement of most non-governmental managed care organizations.
Federal Anti-Kickback Statute and Medicare Fraud and Abuse Laws
The Social Security Act of 1935 includes provisions addressing false statements, illegal remuneration and other instances of fraud and abuse in federal health care programs. These provisions include the statute commonly known as the federal Anti-Kickback statute (the "Anti-Kickback Statute"). The Anti-Kickback Statute prohibits providers and others from, among other things, soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for, or ordering or arranging for, or recommending the order of, any item or service covered by a federal health care program, including, but not limited to, the Medicare and Medicaid programs. Violations of the Anti-Kickback Statute are criminal offenses punishable by imprisonment and fines of up to $25,000 for each violation. Civil violations are punishable by fines of up to $50,000 for each violation, as well as damages of up to three times the total amount of remuneration received from the government for health care claims.
Because physician-owners of our surgical facilities are in a position to generate referrals to the facilities, the distribution of available cash to those investors could come under scrutiny under the Anti-Kickback Statute. Some courts have held that the Anti-Kickback Statute is violated if one purpose (as opposed to a primary or the sole purpose) of a payment to a provider is to induce referrals. Further, Section 6402(f)(2) of the Affordable Care Act amends the Anti-Kickback Statute by adding a provision to clarify that a person need not have actual knowledge of such section or specific intent to commit a violation of the Anti-Kickback Statute. Because none of these cases involved a joint venture such as those owning and operating our surgical facilities, it is not clear how a court would apply these holdings to our activities. It is clear, however, that a physician’s investment income from a surgical facility may not vary with the number of his or her referrals to the surgical facility.
Under regulations issued by the Office of the Inspector General of HHS (the "OIG"), certain categories of activities are deemed not to violate the Anti-Kickback Statute (commonly referred to as the safe harbors). According to the preamble to these safe harbor regulations, the failure of a particular business arrangement to comply with the regulations does not determine whether the arrangement violates the Anti-Kickback Statute. The safe harbor regulations outline standards that, if complied with, protect conduct that might otherwise be deemed in violation of the Anti-Kickback Statute. When a transaction or relationship does not fit within a safe harbor, it does not mean that an Anti-Kickback Statute violation has occurred; rather, it means that the facts and circumstances as well as the intent of the parties related to a specific transaction or relationship must be examined to determine whether or not any illegal conduct has occurred.
We believe the ownership and operations of our surgical facilities do not fit wholly within any of the safe harbors, but we attempt to structure our ASCs to fit as closely as possible within the safe harbor designed to protect distributions to physician-investors in ASCs who directly refer patients to the ASC and personally perform the procedures at the center as an extension of their practice (the "ASC Safe Harbor"). The ASC Safe Harbor protects four categories of investors, including ASCs owned by (1) general surgeons, (2) single-specialty physicians, (3) multi-specialty physicians and (4) hospital/physician joint ventures, provided that certain requirements are satisfied. These requirements include the following:
•The ASC must be certified to participate in the Medicare program, and its operating and recovery room space must be dedicated exclusively to the center and not a part of a hospital (although such space may be leased from a hospital if such lease meets the requirements of the safe harbor for space rental).
•Each investor must be either (a) a physician who derived at least one-third of his or her medical practice income for the previous fiscal year or 12-month period from performing procedures on the list of Medicare-covered procedures for ASCs, (b) a hospital, or (c) a person or entity not in a position to make or influence referrals to the center, nor to provide items or services to the center, nor employed by the center or any investor.
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•Unless all physician-investors are members of a single specialty, each physician-investor must perform at least one-third of his or her procedures at the ASC each year. This requirement is in addition to the requirement that the physician-investor has derived at least one-third of his or her medical practice income for the past year from performing procedures.
•Physician-investors must have fully informed their referred patients of the physician’s investment.
•The terms on which an investment interest is offered to an investor are not related to the previous or expected volume of referrals, services furnished or the amount of business otherwise generated from that investor to the entity.
•Neither the ASC nor any other investor nor any person acting on their behalf may loan funds to or guarantee a loan for an investor if the investor uses any part of such loan to obtain the investment interest.
•The amount of payment to an investor in return for the investment interest is directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor.
•All physician-investors, any hospital-investor and the center agree to treat patients receiving benefits or assistance under a federal health care program in a non-discriminatory manner.
•All ancillary services performed at the ASC for beneficiaries of federal health care programs must be directly and integrally related to primary procedures performed at the center and may not be billed separately.
•No hospital-investor may include on its cost report or any claim for payment from a federal health care program any costs associated with the ASC.
•The ASC may not use equipment owned by or services provided by a hospital-investor unless such equipment is leased in accordance with a lease that complies with the Anti-Kickback Statute equipment rental safe harbor and such services are provided in accordance with a contract that complies with the Anti-Kickback Statute personal services and management contract safe harbor.
•No hospital-investor may be in a position to make or influence referrals directly or indirectly to any other investor or the center.
We believe that the ownership and operations of our surgical facilities will not fully satisfy the ASC Safe Harbor requirements for investment interests in ASCs because, among other things, we or one of our subsidiaries will generally be an investor in and provide management services to each ASC. While we believe our ASCs would nonetheless be found to be compliant with the Anti-Kickback Statute, we cannot assure you that the OIG would view our activities favorably even though we strive to achieve compliance with the remaining elements of this safe harbor.
In addition, although we expect each physician-investor to utilize the ASCs as an extension of his or her practice and ask each physician-investor to certify this practice, we cannot assure you that all physician-investors will derive at least one-third of their medical practice income from performing Medicare-covered ASC procedures, perform one-third of their procedures at the centers or inform their referred patients of their investment interests. Interests in our ASC joint ventures are purchased at what we believe to be fair market value. Investors who purchase at a later time generally pay more for a given percentage interest than founding investors. The result is that while all investors are paid distributions in accordance with their ownership interests, for ASCs where there are later purchases, we cannot meet the safe harbor requirement that return on investment is directly proportional to the amount of capital investment. The OIG has on several occasions reviewed investments relating to ASCs, and in Advisory Opinion No. 07-05 (June 19, 2007), raised concerns that (a) purchases of interests from physicians might yield gains on investment rather than capital infusion to the ASCs, (b) such purchases could be meant to reward or influence the selling physicians’ referrals to the ASC or the hospital, and (c) such returns might not be directly proportional to the amount of capital invested.
In OIG Advisory Opinion No. 09-09 (July 29, 2009), the OIG concluded that an arrangement involving an ASC joint venture between a hospital and physicians involving the combination of their two ASCs into a single, larger ASC presented minimal risk of fraud or abuse, despite the fact that it did not fit within any applicable Anti-Kickback safe harbors. Additionally, the OIG stated that fair market value should be determined based only on the tangible assets of each ASC since the physician investors are referral sources for the ASC. The OIG stated that a cash flow-based valuation of the business contributed by the physician investors potentially would include the value of the physician investors’ referrals over the time that their ASC was in existence prior to the merger with the hospital’s ASC. The OIG went on to note that a valuation involving intangible assets would not necessarily result in a violation of the Anti-Kickback Statute, but would require a review of all the facts and circumstances. It is not clear whether the OIG is concerned about using a cash flow-based valuation in most health care transactions involving referral sources, or just transactions where the parties’ contributions would be valued differently for contributing the same assets if only one party’s contribution is valued as a going concern based on cash flow. Also, the OIG appears to be focused on historical cash flow rather than a projected, discounted cash flow, which is a commonly used valuation methodology.
Our hospital investments do not fit wholly within the safe harbor for investments in small entities because more than 40.0% of the investment interests are held by investors who are either in a position to refer to the hospital or who provide services to the hospital and more than 40.0% of the hospital’s gross revenue last year were derived from referrals generated by investors. However, we believe we comply with the remaining elements of the safe harbor.
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In addition to the physician ownership in our surgical facilities, other financial relationships of ours with potential referral sources could potentially be scrutinized under the Anti-Kickback Statute. We have entered into management agreements to manage the majority of our surgical facilities and physician practices. Most of these agreements call for our subsidiary to be paid a percentage of revenue-based management fee. Although there is a safe harbor for personal services and management contracts (the "Personal Services and Management Safe Harbor"), the Personal Services and Management Safe Harbor requires, among other things, that the amount of the aggregate compensation paid to the manager over the term of the agreement be set in advance. Because our management fees are generally based on a percentage of revenue, our management agreements do not typically meet this requirement. We do, however, believe that our management arrangements satisfy the other requirements of the Personal Services and Management Safe Harbor for personal services and management contracts. The OIG has taken the position in several advisory opinions that percentage-based management agreements are not protected by a safe harbor, and consequently, may violate the Anti-Kickback Statute. We have implemented formal compliance programs designed to safeguard against overbilling and believe that our management agreements comply with the requirements of the Anti-Kickback Statute. However, we cannot assure you that the OIG would find our compliance programs to be adequate or that our management agreements would be found to comply with the Anti-Kickback Statute.
Certain of our ASCs have entered into arrangements for professional services, including arrangements for anesthesia services. In a Special Advisory Bulletin issued in April 2003, the OIG focused on "questionable" contractual arrangements where a health care provider in one line of business (the "Owner") expands into a related health care business by contracting with an existing provider of a related item or service (the "Manager/Supplier") to provide the new item or service to the Owner’s existing patient population, including federal health care program patients (so called "suspect Contractual Joint Ventures"). The Manager/Supplier not only manages the new line of business, but may also supply it with inventory, employees, space, billing, and other services. In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager/Supplier-otherwise a potential competitor-receiving in return the profits of the business as remuneration for its referrals. Through an Advisory Opinion, the OIG extended this suspect contractual joint venture analysis to arrangements between anesthesiologists and physician owners of ASCs. In Advisory Opinion No. 12-06 (May 25, 2012), the OIG concluded that certain proposed arrangements between anesthesia groups and physician-owned ASCs could result in prohibited remuneration under the federal Anti-Kickback Statute. We believe our arrangements for anesthesia services are distinguishable from those described in Advisory Opinion 12-06 (May 25, 2012) and are in compliance with the requirements of the federal Anti-Kickback Statute. However, we cannot assure you that regulatory authorities would agree with that position.
We also may guarantee a surgical facility’s third-party debt financing and certain lease obligations as part of our obligations under a management agreement. Physician investors are generally not required to enter into similar guarantees. The OIG might take the position that the failure of the physician investors to enter into similar guarantees represents a special benefit to the physician investors given to induce patient referrals and that such failure constitutes a violation of the Anti-Kickback Statute. We believe that the management fees (and in some cases guarantee fees) are adequate compensation to us for the credit risk associated with the guarantees and that the failure of the physician investors to enter into similar guarantees does not create a material risk of violating the Anti-Kickback Statute. However, the OIG has not issued any guidance in this regard.
The OIG is authorized to issue advisory opinions regarding the interpretation and applicability of the Anti-Kickback Statute, including whether an activity constitutes grounds for the imposition of civil or criminal sanctions. We have not, however, sought such an opinion regarding any of our arrangements. If it were determined that our activities, or those of our surgical facilities or hospitals, violate the Anti-Kickback Statute, we, our subsidiaries, our officers, our directors and each surgical facility and hospital investor could be subject, individually, to substantial monetary liability, prison sentences and/or exclusion from participation in any health care program funded in whole or in part by the U.S. government, including Medicare, Medicaid, TRICARE or state health care programs.
Evolving interpretations of current, or the adoption of new, federal or state laws or regulations, such as the Eliminating Kickbacks in Recovery Act (discussed below), could affect many of our arrangements. Law enforcement authorities, including the OIG, the courts and Congress, are increasing their scrutiny of arrangements between health care providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals or opportunities. Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purposes of payments between health care providers and potential referral sources.
On November 20, 2020, CMS and the OIG issued final rules that modify the federal physician self-referral law, or Stark Law, regulations and the federal anti-kickback and civil monetary penalty for beneficiary inducement statutes and regulations. The intent of the final rules is to reduce over-burdensome and unnecessary regulatory barriers to value-based compensation models and accelerate the transformation of the health care system into one that better promotes the coordination of care among providers. Among other things, the final rules create new anti-kickback and beneficiary inducement statute safe harbors and Stark Law exceptions for certain value based arrangements and arrangements that involve the donation of cybersecurity technology. In addition, the final rules provide additional guidance on several key compliance requirements, including fair market value and commercial reasonableness, that must be met in order for physicians and health care providers to comply with the Stark Law. We cannot yet predict the impact that the final rules will have on our surgery centers and hospitals.
Eliminating Kickbacks in Recovery Act
In addition to the Anti-Kickback Statute, the U.S. recently enacted a new law known as the Eliminating Kickbacks in Recovery Act (the "EKRA"). The EKRA is contained within the broader Substance Use Disorder Prevention that Promotes Opioid Recovery and
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Treatment for Patients and Communities Act (the "SUPPORT Act"). The EKRA creates a new federal crime for knowingly and willfully: (1) soliciting or receiving any remuneration in return for referring a patient to a recovery home, clinical treatment facility, or laboratory; or (2) paying or offering any remuneration to induce such a referral or in exchange for an individual using the services of a recovery home, clinical treatment facility, or laboratory. Each conviction under the EKRA is punishable by up to $200,000 in monetary damages, imprisonment for up to ten (10) years, or both. Unlike the Anti-Kickback Statute, the EKRA is not limited to services reimbursable under a government health care program. While the SUPPORT Act targets substance abuse disorder prevention and recovery, the scope of EKRA is not limited to substance abuse drug testing (only one service line of a multitude provided by labs), and therefore it appears to prohibit payment for any patient referral to any laboratory for any service, unless an exception applies. While the EKRA does contain certain exceptions similar to the Anti-Kickback Statute Safe Harbors, those exceptions are more narrow than the Anti-Kickback Statute Safe Harbors.
Federal Physician Self-Referral Law
The Stark Law prohibits certain self-referrals for health care services. The Stark Law prohibits a practitioner, including a physician, dentist or podiatrist, from referring patients to an entity with which the practitioner or a member of his or her immediate family has a "financial relationship" for the provision of certain "designated health services" that are paid for in whole or in part by Medicare or Medicaid unless an exception applies. "Designated health services" include inpatient and outpatient hospital services, clinical laboratory services and radiology services. The term "financial relationship" is broadly defined and includes most types of ownership and compensation relationships. The Stark Law also prohibits the entity from seeking payment from Medicare or Medicaid for services that are rendered through a prohibited referral. If an entity is paid for services provided through a prohibited referral, it may be required to refund the payments. Violations of the Stark Law may also result in the imposition of damages equal to three times the amount improperly claimed and civil monetary penalties of up to $15,000 per prohibited claim and $100,000 per prohibited circumvention scheme and exclusion from participation in the Medicare and Medicaid programs.
Notably, "designated health services" does not include surgical services that are provided in an ASC. Furthermore, Stark Law regulations specifically define the term "designated health services" to not include services that are reimbursed by Medicare as part of a composite rate, such as services that are provided in an ASC. However, if designated health services are provided by an ASC and separately billed, referrals to the ASC by a physician-investor would be prohibited by the Stark Law. Because our facilities that are licensed as ASCs do not have independent laboratories and do not provide designated health services apart from surgical services, we do not believe referrals to these facilities by physician-investors are prohibited. If legislation or regulations are implemented that prohibit physicians from referring patients to surgical facilities in which the physician has a beneficial interest, our business and financial results could be materially adversely affected.
The Stark Law currently includes the Whole Hospital Exception, which applies to physician ownership of a hospital, provided such ownership is in the whole hospital and the physician is authorized to perform services at the hospital. We believe that physician investments in our facilities licensed as hospitals meet this requirement. However, certain changes to the Whole Hospital Exception were made by the Affordable Care Act including:
•a prohibition on hospitals from having any physician ownership unless the hospital already had physician ownership and a Medicare provider agreement in effect as of December 31, 2010;
•a limitation on the percentage of total physician ownership or investment interests in the hospital or entity whose assets include the hospital to the percentage of physician ownership or investment as of March 23, 2010;
•a prohibition from expanding the number of beds, operating rooms, and procedure rooms for which it is licensed after March 23, 2010, unless the hospital obtains an exception from the Secretary of the Department of Health & Human Services (the "Secretary");
•a requirement that return on investment be proportionate to the investment by each investor;
•restrictions on preferential treatment of physician versus non-physician investors;
•a requirement for written disclosures of physician ownership interests to the hospital’s patients and on the hospital’s website and in any advertising, along with annual reports to the government detailing such interests;
•a prohibition on the hospital or other investors from providing financing to physician investors;
•a requirement that any hospital that does not have 24/7 physician coverage inform patients of this fact and receive signed acknowledgments from the patients of the disclosure; and
•a prohibition on "grandfathered" status for any physician owned hospital that converted from an ASC to a hospital on or after March 23, 2010.
We cannot predict whether other proposed amendments to the Whole Hospital Exception will be included in any future legislation, including a repeal of the Affordable Care Act, or if Congress will adopt any similar provisions that would prohibit or otherwise restrict physicians from holding ownership interests in hospitals. Any such changes could have an adverse effect on our financial condition and results of operations.
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In 2010, CMS issued a "self-referral disclosure protocol" for hospitals and other providers that wish to self-disclose potential violations of the Stark Law to CMS and to attempt to resolve those potential violations and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute.
In addition to the physician ownership in our surgical facilities, we have other financial relationships with potential referral sources that potentially could be scrutinized under the Stark Law. We have entered into personal service agreements, such as medical director agreements, with physicians at our surgical hospitals and physician owners within our physician practices may make referrals for certain designated health services within their physician practices. We believe that our agreements with referral sources satisfy the requirements of the personal service arrangements exception and that our physician practices satisfy the physician services and in-office ancillary services exceptions to the Stark Law and have implemented formal compliance programs designed to ensure continued compliance. However, we cannot assure you that the OIG or CMS would find our compliance programs to be adequate or that our agreements with referral sources would be found to comply with the Stark Law.
Other Fraud and Abuse Laws
The Medicare Patient and Program Protection Act of 1987, as amended by the Health Insurance Portability and Accountability Act of 1996, ("HIPAA"), and the Balanced Budget Act of 1997, impose civil monetary penalties and exclusion from state and federal health care programs on providers who commit violations of fraud and abuse laws. HIPAA authorizes the Secretary, and in some cases requires the Secretary, to exclude individuals and entities that the Secretary determines have "committed an act" in violation of applicable fraud and abuse laws or improperly filed claims in violation of such laws from participating in any federal health care program. HIPAA also expanded the Secretary’s authority to exclude a person involved in fraudulent activity from participating in a program providing health benefits, whether directly or indirectly, in whole or in part, by the U.S. government. Additionally, under HIPAA, individuals who hold a direct or indirect ownership or controlling interest in an entity that is found to violate these laws may also be excluded from Medicare and Medicaid and other federal and state health care programs if the individual knew or should have known, or acted with deliberate ignorance or reckless disregard of, the truth or falsity of the information of the activity leading to the conviction or exclusion of the entity, or where the individual is an officer or managing employee of such entity. This standard does not require that specific intent to defraud be proven by OIG. Under HIPAA it is also a crime to defraud any commercial health care benefit program.
Federal and State Privacy and Security Requirements
We are subject to HIPAA, including the Health Information Technology for Economic and Clinical Health Act (the "HITECH Act"), which was enacted as part of The American Recovery and Reinvestment Act of 2009. The HITECH Act strengthened the requirements and significantly increased the penalties for violations of the HIPAA privacy and security regulations. In 2013, HHS issued the HIPAA Omnibus Rule, which became effective on March 26, 2013. The HIPAA Omnibus Rule requires us to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured protected health information in all situations except those in which we can demonstrate that there is a low probability that the protected health information has been compromised. We have the burden of demonstrating through a risk assessment that a breach of protected health information has not occurred.
The HIPAA privacy standards apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally. These standards impose extensive administrative requirements on us. These standards require our compliance with rules governing the use and disclosure of this health information. They create rights for patients in their health information, such as the right to amend their health information, and they require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf.
The HIPAA security standards require us to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic protected health and related financial information. Although the security standards do not reference or advocate a specific technology, and covered health care providers, plans and clearinghouses have the flexibility to choose their own technical solutions, the security standards have required us to implement significant new systems, business procedures and training programs.
Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties. The HITECH Act strengthened the requirements of the HIPAA privacy and security regulations and significantly increased the penalties for violations by introducing a tiered penalty system, with penalties of up to $50,000 per violation with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. However, a single breach incident can result in violations of multiple requirements, resulting in possible penalties well in excess of $1.5 million. Under the HITECH Act, HHS is required to conduct periodic compliance audits of covered entities and their business associates. The HITECH Act and the HIPAA Omnibus Rule also extend the application of certain provisions of the security and privacy regulations to business associates and subjects business associates to civil and criminal penalties for violation of the regulations.
The HITECH Act authorizes State Attorneys General to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations or the new data breach law that affects the privacy of their state residents. We expect vigorous enforcement of the HITECH Act’s requirements by HHS and State Attorneys General. HHS has allocated increased funding towards HIPAA enforcement activity and such enforcement activity has seen a marked increase over recent years. We cannot predict whether our surgical facilities will be able to comply with the final rules and the financial impact to our surgical facilities in implementing
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the requirements under the final rules when they take effect, or whether our surgical hospitals will be selected for an audit, or the results of such an audit.
Our facilities also remain subject to any state laws that relate to privacy or the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving certain personal information, such as social security numbers, dates of birth and credit card information.
HIPAA Administrative Simplification Requirements
The HIPAA transaction regulations were issued to encourage electronic commerce in the health care industry. These regulations include standards that health care providers must follow when electronically transmitting certain health care transactions, such as health care claims.
Emergency Medical Treatment and Active Labor Act
Our hospitals are subject to the Emergency Medical Treatment and Active Labor Act ("EMTALA"). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions or transfer exists regardless of a patient’s ability to pay for treatment. Off-campus facilities such as surgery centers that lack emergency departments or otherwise do not treat emergency medical conditions generally are not subject to EMTALA. They must, however, have policies in place that explain how the location should proceed in an emergency situation, such as transferring the patient to the closest hospital with an emergency department. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay, including civil monetary penalties and exclusion from participation in the government health care programs. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against that other hospital. CMS has actively enforced EMTALA and has indicated that it will continue to do so in the future. We believe that our surgical hospitals comply with EMTALA.
State Regulation
Many of the states in which our surgical facilities operate have adopted statutes and/or regulations that prohibit the payment of kickbacks or any type of remuneration in exchange for patient referrals and that prohibit health care providers from, in certain circumstances, referring a patient to a health care facility in which the provider has an ownership or investment interest. While these statutes generally mirror the federal Anti-Kickback Statute and Stark Law, they vary widely in their scope and application. Some are specifically limited to health care services that are paid for in whole or in part by the Medicaid program; others apply to all health care services regardless of payor; and others apply only to state-defined designated services, which may differ from the designated health services under the Stark Law. In addition, many states have adopted statutes that mirror the False Claims Act and that prohibit the filing of a false or fraudulent claim with a state governmental agency. We intend to comply with all applicable state health care laws, rules and regulations. However, these laws, rules and regulations have typically been the subject of limited judicial and regulatory interpretation. As a result, we cannot assure you that our surgical facilities will not be investigated or scrutinized by the governmental authorities empowered to do so or, if challenged, that their activities would be found to be lawful. A determination of non-compliance with the applicable state health care laws, rules, and regulations could subject our surgical facilities to civil and criminal penalties and could have a material adverse effect on our operations.
We are also subject to various state insurance statutes and regulations that prohibit us from submitting inaccurate, incorrect or misleading claims. Many state insurance laws and regulations are broadly worded and could be implicated, for example, if our surgical facilities were to adjust an out-of-network co-payment or other patient responsibility amounts without fully disclosing the adjustment on the claim submitted to the payor. While some of our surgical facilities adjust the out-of-network costs of patient co-payment and deductible amounts to reflect in-network co-payment costs when providing services to patients whose health insurance is covered by a payor with which the surgical facilities are not contracted, our policy is to fully disclose adjustments in the claims submitted to the payors. We believe that our surgical facilities are in compliance with all applicable state insurance laws and regulations regarding the submission of claims. We cannot assure you, however, that none of our surgical facilities’ insurance claims will ever be challenged. If we were found to be in violation of a state’s insurance laws or regulations, we could be forced to discontinue the violative practice, which could have an adverse effect on our financial position and results of operations, and we could be subject to fines and criminal penalties.
Fee Splitting; Corporate Practice of Medicine
The laws of many states prohibit physicians from splitting fees with non-physicians (i.e., sharing in a percentage of professional fees), prohibit non-physician entities (such as us) from practicing medicine and exercising control over or employing physicians and prohibit referrals to facilities in which physicians have a financial interest. The existence, interpretation and enforcement of these laws vary significantly from state to state. In light of these restrictions, in certain states we facilitate the provision of physician services by maintaining long-term management services agreements through our subsidiaries with affiliated professional contractors, which employ or contract with physicians and other health care professionals to provide physician professional services. Under these arrangements, our subsidiaries perform only non-medical administrative services, do not represent that they offer medical services and do not exercise
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influence or control over the practice of medicine by the physicians employed by the affiliated professional contractors. Although we believe that the fees we receive from affiliated professional contractors have been structured in a manner that is compliant with applicable fee-splitting laws, it is possible that a government regulator could interpret such fee arrangements to be in violation of certain fee-splitting laws. Future interpretations of, or changes in, these laws might require structural and organizational modifications of our existing relationships, and we cannot assure you that we would be able to appropriately modify such relationships. In addition, statutes in some states could restrict our expansion into those states.
Clinical Laboratory Regulation
Our clinical laboratories are subject to federal oversight under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") which extends federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories also must undergo proficiency testing and are subject to inspections. Standards for testing under CLIA are based on the complexity of the tests performed by the laboratory, with tests classified as "high complexity," "moderate complexity," or "waived." Laboratories performing high complexity testing are required to meet more stringent requirements than moderate complexity laboratories. Laboratories performing only waived tests, which are tests determined by the Food and Drug Administration to have a low potential for error and requiring little oversight, may apply for a certificate of waiver exempting them from most of the requirements of CLIA. Our operations also subject to state and local laboratory regulation. CLIA provides that a state may adopt laboratory regulations different from or more stringent than those under federal law, and a number of states have implemented their own laboratory regulatory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain quality controls, or require maintenance of certain records. We believe that we are in material compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future licensure or certification inspections.
Regulatory Compliance Program
We have in place and continue to enhance a company-wide compliance program that focuses on all areas of regulatory compliance including billing, reimbursement, cost reporting practices and contractual arrangements with referral sources.
This regulatory compliance program is intended to help ensure that high standards of conduct are maintained in the operation of our business and that policies and procedures are implemented so that employees act in compliance with applicable laws, regulations and company policies. Under the regulatory compliance program, every employee and certain contractors involved in patient care, and coding and billing, receive initial and periodic legal compliance and ethics training. In addition, we regularly monitor our ongoing compliance efforts and develop and implement policies and procedures designed to foster compliance with the law. The program also includes a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors, designated compliance officers in our facilities, our compliance hotline or directly to our corporate compliance office. We believe our compliance program is consistent with standard industry practices. However, we cannot provide any assurances that our compliance program will detect all violations of law or protect against qui tam suits or government enforcement actions.
Where You Can Find More Information
We make available on or through the "Investors-SEC Filings" page of our website at www.surgerypartners.com, free of charge, copies of reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports (along with certain other Company filings with the SEC), as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the SEC. The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this Annual Report or any other document that we file with the SEC.
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Item 1A. Risk Factors
Risk Factors Summary
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. A discussion of the risks we face can be found below under the heading "Risk Factors" and should be carefully considered, together with other information in this Annual Report and our other filings with the SEC, before making an investment decision regarding our common stock.
COVID-19 and Other Potential Pandemic Risks
•The COVID-19 pandemic continues to significantly affect our operations, business and financial condition.
Business and Operational Risks
•We depend on payments from third-party payors, including government health care programs and private insurance organizations. If these payments are reduced or eliminated, our revenue and profitability could be materially and adversely affected.
•If we are unable to negotiate and enter into favorable contracts or maintain satisfactory relationships and renew existing contracts on favorable terms with private insurance payors, our revenue and profitability may decrease.
•Significant changes in our payor mix or surgical case mix resulting from fluctuations in the types of cases performed at our facilities could have a material adverse effect on our business, prospects, results of operations and financial condition.
•Our ability to provide medical services at our facilities would be impaired and our revenue reduced if we are not able to maintain good relationships with affiliated physicians who utilize our surgical facilities.
•Physician treatment methodologies and governmental or private insurance controls designed to reduce the number of surgical procedures may reduce our revenue and profitability.
•Our growth strategy depends in part on our ability to integrate operations of acquired surgical facilities, attract new physician partners, and to acquire and develop additional surgical facilities on favorable terms. If we are unable to achieve any of these goals, our future growth could be limited and our operating results could be adversely affected.
•Shortages of surgery-related products, equipment and medical supplies and quality control issues with such products, equipment and medical supplies could disrupt our operations and adversely affect our case volume, surgical case mix and profitability.
•We face competition from other health care facilities and providers.
•Competition for physicians and clinical personnel, including nurses, shortages of qualified personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows.
•If any of our existing health care facilities lose their accreditation status or any of our new facilities fail to receive accreditation, such facilities could become ineligible to receive reimbursement under Medicare or Medicaid or other third-party payors.
•Growth of patient receivables or deterioration in the ability to collect on these accounts, due to changes in economic conditions or otherwise, could have a material adverse effect on our business, prospects, results of operations and financial condition.
•If we are unable to integrate and operate our information systems effectively or implement new systems and processes, our operations could be disrupted.
Financial and Accounting Risks
•We have a history of net losses and may not achieve or sustain profitability in the future.
•Our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our outstanding indebtedness.
•To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations may adversely affect our business, financial condition and results of operations.
•Despite our current indebtedness levels, we and our subsidiaries may still be able to incur more debt, which could further exacerbate the risks associated with our leverage.
•We make significant loans to, and are generally liable for debts and other obligations of, the partnerships and limited liability companies that own and operate some of our surgical facilities.
•We may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability.
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•We entered into a tax receivable agreement that will require us to make payments to the pre-IPO owners of Surgery Center Holdings, LLC (the "Pre-IPO Owners"), which amounts are expected to be material.
Cybersecurity and Data Risks
•Cybersecurity attacks or intrusions could adversely impact our businesses.
•Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
Legal and Regulatory Risks
•If we fail to comply with or otherwise incur liabilities under the numerous federal and state laws and regulations relating to the operation of our facilities, we could incur significant penalties or other costs or be required to make significant changes to our operations.
•Our surgical facilities do not satisfy the requirements for any of the safe harbors under the federal Anti-Kickback Statute. If a federal or state agency asserts a different position or enacts new laws in this regard, we could be subject to criminal and civil penalties, loss of licenses and exclusion from governmental programs, which may result in a substantial loss of revenue.
•If we fail to comply with physician self-referral laws as they are currently interpreted or may be interpreted in the future, or if other legislative restrictions are issued, we could incur substantial monetary penalties and a significant loss of revenue.
•Federal law restricts the ability of our surgical hospitals to expand surgical capacity.
•Companies within the health care industry continue to be the subject of federal and state audits and investigations, including actions for false and other improper claims.
•If we become subject to large malpractice or other legal claims, we could be required to pay significant damages, which may not be covered by insurance.
•Failure to comply with Medicare’s conditions for coverage and conditions of participation may result in loss of program payment or other governmental sanctions.
•Our facilities could face decreased Medicare payments if they fail to report and meet various quality metrics.
•If antitrust enforcement authorities conclude that our market share in any particular market is too concentrated, that our or our health system partners’ commercial payor contract negotiating practices are illegal, or that we otherwise violate antitrust laws, we could be subject to enforcement actions that could have a material adverse effect on our business, prospects, results of operations and financial condition.
Governance Risks
•We are a "controlled company" within the meaning of Nasdaq rules and, therefore, we qualify for, and currently rely on, exemptions from certain corporate governance requirements.
•Our controlling stockholder has significant influence over us, including control over decisions that require the approval of stockholders, which could limit our stockholders’ ability to influence the outcome of key transactions, including a change of control.
•Provisions in the certificate of designation governing our preferred stock and in our charter documents and Delaware law may deter takeover efforts that could be beneficial to stockholder value.
•Our amended and restated certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Risk Factors
We are subject to risks and uncertainties that could cause our actual financial condition, results of operations, business and prospects to differ materially from those described in the forward-looking statements contained in this report or in our other filings with the SEC. Some of these risks and uncertainties are discussed below. If any of the following risks, or other risks and uncertainties, actually occurred, our business, financial condition and operating results could suffer.
COVID-19 and Other Potential Pandemic Risks
The COVID-19 pandemic continues to significantly affect our operations, business and financial condition.
The COVID-19 pandemic has significantly affected our facilities, employees, patients, communities, business operations and financial performance, as well as the U.S. economy and financial markets. The COVID-19 pandemic materially impacted our financial performance
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for the years ended December 31, 2021 and 2020 and potentially could negatively impact our financial performance in 2022. We cannot provide any certainty regarding the continuing effects of the impact of the COVID-19 pandemic, which is difficult to predict and is dependent on factors beyond our control.
The impact of the COVID-19 pandemic on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed. Our facilities experienced significantly lower surgical case volume in 2020 and parts of 2021. It is difficult to predict the duration of this lower surgical case volume and, while governmental restrictions are continuing to ease in certain areas of the U.S., other areas are experiencing a surge in COVID-19 cases and variants of the virus and have imposed or may impose restrictions in response. Our case volume, financial condition and results of operations may be adversely affected by existing or future federal or state laws, regulations, orders, or other governmental or regulatory actions addressing the current COVID-19 pandemic or the U.S. health care system, including federal and state vaccine mandates or other requirements or restrictions.
We experienced, and in the future could experience, supply chain disruptions, including shortages and delays, and could experience significant price increases, in equipment, pharmaceuticals and medical supplies. Staffing, equipment, and pharmaceutical and medical supplies shortages, including vaccine mandates, may also impact our ability to serve patients at our facilities.
Broad economic factors resulting from the current COVID-19 pandemic, including increased unemployment rates and reduced consumer spending, could also negatively affect our payor mix, increase the relative proportion of lower margin services we provide and reduce patient volumes, as well as diminish our ability to collect outstanding receivables. Business closings and layoffs in the areas in which we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of patients and other payors to pay for services as rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable may adversely affect our cash flows and results of operations, requiring an increased level of working capital. If general economic conditions continue to deteriorate or remain uncertain or diminished for an extended period of time, our liquidity and ability to repay our outstanding debt may be harmed.
The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic (including the potential for additional resurgences of COVID-19 or its variants) have had and may to continue to have a material adverse effect on our business and may have a material adverse effect on our results of operations, financial condition, cash flows and our ability to service our indebtedness.
Although we have received grants and accelerated payments under the CARES Act, we are reviewing and may seek any additional available benefits in the future under the CARES Act, the COVID-19 Economic Relief Bill (together, the "Relief Bills") or other existing or any future legislation passed that could benefit us. We cannot predict the manner in which such future benefits will be allocated or administered, and we cannot assure you that we will be able to access such benefits in a timely manner or at all. Certain of the programs we seek to access under the Relief Bills have not previously been administered on the present scale or at all. Government or third party program administrators may be unable to cope with the volume of applications in the near term. There can be no assurance that the implementation or interpretation of the provisions of the Relief Bills or other legislation will not change in ways that affect our funding or eligibility to participate, or that changes to the guidance on the recognition and certification of payments received will not result in government recoupment of funds that were initially released to us as grants. Additionally, accessing these programs and our response to the COVID-19 pandemic have required our management team to devote extensive resources and is likely to continue to do so in the near future, which may negatively affect our ability to implement our business plan and respond to opportunities.
A pandemic, epidemic or outbreak of a contagious disease in the markets in which we operate or that otherwise impacts our facilities could adversely impact our business.
If a pandemic, epidemic or outbreak of an infectious disease, including the recent outbreak of respiratory illness caused by a novel coronavirus known as COVID-19, or other public health crisis were to affect the areas in which we operate, our business, including our revenue, profitability and cash flows, could be adversely affected. If any of our facilities were involved, or perceived to be involved, in treating patients with a highly contagious disease, or there was an outbreak of a highly contagious disease in areas in which our surgical centers are located, our patients might cancel or defer elective procedures or otherwise avoid medical treatment. This could result in reduced patient volumes and operating revenues, potentially over an extended period. Further, a pandemic, epidemic or outbreak of an infectious disease might adversely impact our business by causing temporary shutdowns of our facilities or diversion of patients or by causing staffing shortages in our facilities. We may be unable to locate replacement supplies, and ongoing delays could require us to reduce procedure volume or cause temporary shutdowns of our facilities. Although we have disaster plans in place and operate pursuant to infectious disease protocols, the extent to which COVID-19 or other public health crisis will impact our business is difficult to predict and will depend on many factors beyond our control, including the speed of contagion, the development and implementation of effective preventative measures and possible treatments, the scope of governmental and other restrictions on travel and other activity, and public reactions to these factors.
Business and Operational Risks
We depend on payments from third-party payors, including government health care programs and private insurance organizations. If these payments are reduced or eliminated, our revenue and profitability could be materially and adversely affected.
We depend upon private and governmental third-party sources of payment for the services provided by physicians in our physician network and to patients in our surgical facilities, including surgical hospitals. We derived approximately 43% in 2021 and 39% in both
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2020 and 2019, of our revenue from government payors, including Medicare and Medicaid programs. The amounts that we receive from the Medicare and Medicaid programs for our services are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, among other things; refinements to the Medicare Ambulatory Surgery Center payment system and refinements made by CMS to Medicare’s reimbursement policies; requirements for utilization review; and federal and state funding restrictions; any of which could materially adversely affect payments we receive from these government programs, as well as affect the timing of payments to our facilities.
During the past several years, health care payors, such as federal and state governments, insurance companies and employers, have undertaken initiatives to revise payment methodologies and monitor health care costs. As part of their efforts to contain health care costs, payors increasingly are demanding discounted fee structures or the assumption by health care providers of all or a portion of the financial risk relating to paying for care provided, often in exchange for exclusive or preferred participation in their benefit plans. We expect efforts to impose greater discounts and more stringent cost controls by government and other payors to continue, thereby reducing the payments we receive for our services. Similarly, private third-party payors may be successful in negotiating reduced reimbursement schedules with our facilities.
Fixed fee schedules, capitation payment arrangements, exclusion from participation in or inability to reach agreements with private insurance organizations, reduction or elimination of payments or an increase in the payments at a rate that is less than the increase in our costs, or other factors affecting payments for health care services over which we have no control could have a material adverse effect on our business, prospects, results of operations and financial condition.
If we are unable to negotiate and enter into favorable contracts or maintain satisfactory relationships and renew existing contracts on favorable terms with private insurance payors, our revenue and profitability may decrease.
Payments from private insurance payors, including state workers’ compensation programs and managed care organizations, represented approximately 51% in 2021 and 54% in both 2020 and 2019, of our patient service revenue. Most of these payments came from private insurance payors with which our facilities have contracts. Managed care companies such as HMOs and PPOs, which offer prepaid and discounted medical service packages, represent a growing segment of private insurance payors. If we fail to enter into favorable contracts or maintain satisfactory relationships with private insurance organizations, our revenue may decrease. Our competitive position has been, and will continue to be, affected by initiatives undertaken during the past several years by major purchasers of health care services, including insurance companies and employers, to revise payment methods and monitor health care expenditures in an effort to contain health care costs. For instance, private insurance payors may lower reimbursement rates in response to increased obligations on payors imposed by the Affordable Care Act or future reductions in Medicare reimbursement rates. Further, private insurance payors may narrow their provider networks in response to the need to negotiate lower reimbursement rates with providers. If we are unable to maintain strong relationships with these payors, we may not be able to participate in these narrow provider networks.
Some of our payments from private insurance payors come from payors with which our facilities or subsidiaries do not have a contract. If we provide services to a patient that does not use a private insurance payor with which we have contracted, commonly known as "out-of-network" services, we generally charge the patient the same co-payment or other patient responsibility amounts that we would have charged had our facilities had a contract with the payor. In accordance with insurance laws and regulations, we submit a claim for the services to the payor along with full disclosure that our surgical facility has charged the patient an in-network patient responsibility amount. Historically, it was typical for those private insurance payors who do not have contracts with our surgical facilities to pay our claims at higher than comparable contracted rates. However, in recent years we have observed an increase in private insurance payors adopting out-of-network fee schedules that are more comparable to our contracted rates or to take other steps to discourage their enrollees from seeking treatment at out-of-network surgical facilities. If the proportion of our services subject to out-of-network fee schedules increases, we may experience a decrease in volume at our ASCs or other facilities due to fewer referrals of out-of-network patients.
Additionally, payments from workers’ compensation payors represented approximately 5% of our patient service revenue in 2021, and approximately 6% of our patient service revenues in both 2020 and 2019. A majority of states have implemented workers’ compensation provider fee schedules. In some cases, the fee schedule rates contain lower rates than the rates our surgical facilities have historically been paid for the same services. If states reduce the amounts paid to providers under the workers’ compensation fee schedules, it could have an adverse impact on our operating results.
Significant changes in our payor mix or surgical case mix resulting from fluctuations in the types of cases performed at our facilities could have a material adverse effect on our business, prospects, results of operations and financial condition.
Our results may change from period to period due to fluctuations in payor mix or case mix or other factors relating to the type of cases performed at our facilities. Payor mix refers to the relative share of total cases provided to patients with no insurance, private insurance, Medicare coverage and Medicaid coverage. Since, generally speaking, we receive relatively higher payment rates from private insurers than Medicare, Medicaid and other government-funded programs, a significant shift in our payor mix toward a higher percentage of Medicare and Medicaid cases, which could occur for reasons beyond our control, could have an adverse effect on our business, prospects, results of operations and financial condition.
Case mix refers to the relative share of total cases performed by specialty, such as GI, general surgery, ophthalmology, orthopedic and pain management. Generally speaking, certain types of our cases, such as orthopedic cases, generate relatively higher revenue than other types of cases, such as pain management and GI cases. Therefore, a significant shift in our case mix toward a higher percentage of lower
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revenue cases, which could occur for reasons beyond our control, could result in a material adverse effect on our business, prospects, results of operations and financial condition.
Our case volume and surgical case mix may be adversely affected by patients’ unwillingness to pay for procedures in our facilities. Higher numbers of unemployed individuals generally translates into more individuals without health care insurance to help pay for procedures, thereby increasing the potential for persons to elect not to have procedures performed. Even procedures normally thought to be non-elective may be delayed or may not be performed if the patient cannot afford the procedure due to a lack of insurance or money to pay their portion of our facilities’ fee. It is difficult to predict the degree to which our business will continue to be impacted by economic conditions in the future.
As we operate in multiple markets, each with a different competitive landscape, shifts within our payor mix or case mix may not be uniform across all of our affiliated facilities. Rather, these shifts may be concentrated within certain markets due to local competitive factors. Therefore, the results of our individual affiliated facilities, including facilities that are material to our results, may be volatile, which could result in a material adverse effect on our business, prospects, results of operations and financial condition.
Our ability to provide medical services at our facilities would be impaired and our revenue reduced if we are not able to maintain good relationships with affiliated physicians who utilize our surgical facilities.
Our business depends, among other things, upon the efforts and success of affiliated physicians who provide medical services at our surgical facilities and the strength of our relationships with these physicians. We generally do not enter into contracts with physicians who use our surgical facilities, other than partnership and operating agreements with physicians who own interests in our surgical facilities, agreements for anesthesiology services and medical director agreements. Most physicians are not employees of our surgical facilities and are not contractually required to use our facilities. Physicians who use our surgical facilities also use other facilities or hospitals and may choose to perform procedures in an office-based setting that might otherwise be performed at our surgical facilities. In recent years, pain management and gastrointestinal procedures have been performed increasingly in an office-based setting because of potential cost savings or better access for patients and physicians. Although physicians who own interests in our surgical facilities are subject to agreements restricting ownership of competing facilities, these agreements may not restrict procedures performed in a physician office or in other unrelated facilities. Also, these agreements restricting ownership of competing facilities are difficult to enforce, and we may be unsuccessful in preventing physicians who own interests in our surgical facilities from acquiring interests in competing facilities.
The financial success of our facilities is in part dependent upon the volume of procedures performed by the physicians who use our facilities, which can be affected by the economy, health care reform efforts, increases in patient co-payments and deductibles and other factors outside our or their control. The physicians who use our surgical facilities may choose not to accept patients who pay for services through certain third-party payors, which could reduce our revenue. From time to time, we may have disputes with physicians who use our surgical facilities and/or own interests in our surgical facilities or our Company. Our revenue and profitability could be significantly reduced if we lost our relationship with one or more key physicians or groups of physicians, or if such key physician or group of physicians reduce their use of any of our surgical facilities. In addition, any damage to the reputation of a key physician or group of physicians or the failure of these physicians to provide quality medical care or adhere to professional guidelines at our surgical facilities could damage our reputation, subject us to liability and significantly reduce our revenue.
Physician treatment methodologies and governmental or private insurance controls designed to reduce the number of surgical procedures may reduce our revenue and profitability.
Controls imposed by Medicare, Medicaid and private insurance payors designed to reduce surgical and other procedure volumes, in some instances referred to as "utilization review," could adversely affect our facilities. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees may reduce our revenue and profitability. Additionally, trends in physician treatment protocols and private insurance plan design, such as plans that shift increased costs and accountability for care to patients, could reduce our surgical and other procedure volumes in favor of lower intensity and lower cost treatment methodologies, each of which could, in turn, have a material adverse effect on our business, prospects, results of operations and financial condition.
Our growth strategy depends in part on our ability to integrate operations of acquired surgical facilities, attract new physician partners, and to acquire and develop additional surgical facilities on favorable terms. If we are unable to achieve any of these goals, our future growth could be limited and our operating results could be adversely affected.
We believe that an important component of our financial performance and growth is our ability to provide physicians who use our surgical facilities with the opportunity to purchase ownership interests in our facilities. We may not be successful in attracting new physician investment in our surgical facilities, and that failure could result in a reduction in the quality, efficiency and profitability of our facilities. Based on competitive factors and market conditions, physicians may be able to negotiate relatively higher levels of equity ownership in our facilities, consequently limiting or reducing our share of the profits from these facilities. In addition, physician ownership in our facilities is subject to certain regulatory restrictions.
In addition, our growth strategy includes the acquisition and development of existing surgical facilities and the development of new surgical facilities jointly with local physicians and, in some cases, health care systems and other strategic partners. We are currently evaluating potential acquisitions and development projects and expect to continue to evaluate acquisitions and development projects in the foreseeable future. If we are unable to successfully execute on this strategy in the future, our future growth could be limited. We may be
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unable to identify suitable acquisition and development opportunities, or to complete acquisitions and new projects in a timely manner and on favorable terms. Further, the businesses or assets we acquire in the future may not ultimately produce returns that justify our related investment.
Our acquisition and development activities, require substantial capital resources, and we may need to obtain additional capital or financing, from time to time, to fund these activities. Historically, we have funded acquisition and development activities through our credit facilities. As a result, we may take actions to fund future acquisitions and development activities that could have a material adverse effect on our business, prospects, results of operations and financial condition, including incurring substantial debt with certain restrictive terms. Further, sufficient capital or financing may not be available to us on satisfactory terms, if at all. In addition, our ability to acquire and develop additional surgical facilities may be limited by state certificate of need programs, licensure requirements, antitrust laws, and other regulatory restrictions on expansion. We also face significant competition from local, regional and national health systems and other owners of surgical facilities in pursuing attractive acquisition candidates. The limited number of surgical facilities we develop typically incur losses in their early months of operation (more so in the case of surgical hospitals) and, until their caseloads grow, they generally experience lower total revenue and operating margins than established surgical facilities, and we expect this trend to continue.
If we are not successful in integrating the operations and personnel of newly acquired surgical facilities in a timely and efficient manner, then the potential benefits of the transaction may not be realized and our operations and earnings could be materially adversely impacted. If we experience the loss of key personnel or if the effort devoted to the integration of acquired facilities diverts significant management or other resources from other operational activities, our operations could be impaired. Additionally, in some acquisitions, we may have to renegotiate, or risk losing, one or more of the facility’s private insurance contracts. We may also be unable to immediately collect the accounts receivable of an acquired facility while we align the payors’ payment systems and accounts with our own systems. Finally, certain transactions can require licensure changes which, in turn, result in disruptions in payment for services.
In addition, although we conduct extensive due diligence prior to the acquisition of surgical facilities and seek indemnification from prospective sellers covering unknown or contingent liabilities, we may acquire facilities with unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations for which we do not have sufficient insurance or indemnification rights.
Our rapid growth has placed, and will continue to place, increased demands on our management, operational and financial information systems and other resources. Furthermore, expansions into new geographic markets and services may require us to comply with new and unfamiliar legal and regulatory requirements, which could impose substantial obligations on us and our management, cause us to expend additional time and resources, and increase our exposure to penalties or fines for non-compliance with such requirements. To accommodate our past and anticipated future growth, and to compete effectively, we will need to continue to improve our management, operational and financial information systems and to expand, train, manage and motivate our workforce. Our personnel, systems, procedures or controls may not be adequate to support our operations in the future. Further, focusing our financial resources and management attention on the expansion of our operations may negatively impact our financial results. Any failure to improve our management, operational and financial information systems, or to expand, train, manage or motivate our workforce, could reduce or prevent our growth.
Shortages of surgery-related products, equipment and medical supplies and quality control issues with such products, equipment and medical supplies could disrupt our operations and adversely affect our case volume, surgical case mix and profitability.
Our operations depend significantly upon our ability to obtain sufficient surgery-related products, drugs, equipment and medical supplies from suppliers on a timely and cost-effective basis. If we are unable to obtain such necessary products, or if we fail to properly manage existing inventory levels, the surgical facilities may be unable to perform certain surgeries, which could adversely affect case volume or result in a negative shift in surgical case mix. In addition, as a result of shortages, we could suffer, among other things, operational disruptions, disruptions in cash flows, increased costs and reductions in profitability. At times, supply shortages have occurred in our industry, and such shortages may be expected to recur from time to time.
Medical supplies and services can also be subject to supplier product quality control incidents and recalls. In addition to contributing to materials shortages, product quality can affect patient care and safety. Material quality control incidents have occurred in the past and may occur again in the future, for reasons beyond our control, and such incidents can negatively impact case volume, product costs and our reputation. In addition, we may have to incur costs to resolve quality control incidents related to medical supplies and services regardless of whether they were caused by us. Our inability to obtain the necessary amount and quality of surgery-related products, equipment and medical supplies due to a quality control incident or recall could have a material adverse effect on our business, prospects, results of operations and financial condition.
We face competition from other health care facilities and providers.
The health care business is highly competitive and each of the individual geographic areas in which we operate has a different competitive landscape. In each of our markets we compete with other health care providers for patients and in contracting with private insurance payors. In addition, because the number of physicians available to utilize and invest in our facilities is finite, we face intense competition from other surgery centers, hospitals, health systems and other health care providers in recruiting physicians to utilize and invest in our facilities. We are in competition with other surgery centers, hospitals and health care systems in the communities we serve to attract patients and provide them with the care they need.
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There are also unaffiliated hospitals in each market in which we operate. These hospitals have established relationships with physicians and payors. In addition, other companies either currently are in the same or similar business of developing, acquiring and operating surgical facilities or may decide to enter our business. Many of these companies have greater resources than we do, including financial, marketing, staff and capital resources. We also may compete with some of these companies for entry into strategic relationships with health care systems and health care professionals. In addition, many physician groups develop surgical facilities without a corporate partner. In recent years, more physicians are choosing to perform procedures, including pain management and gastrointestinal procedures, in an office-based setting rather than in a surgical facility. If we are unable to compete effectively with any of these entities or groups, we may be unable to implement our business strategies successfully and our financial position and results of operations could be adversely affected.
Competition for physicians and clinical personnel, including nurses, shortages of qualified personnel or other factors could increase our labor costs and adversely affect our revenue, profitability and cash flows.
Our operations are dependent on the efforts, abilities and experience of our physicians and clinical personnel. We compete with other health care providers, primarily hospitals and other surgical facilities, in attracting physicians to utilize our surgical facilities, nurses and medical staff to support our surgical facilities, recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our facilities and in contracting with private insurance payors in each of our markets. In some markets, the lack of availability of clinical personnel, such as nurses, has become a significant operating issue facing all health care providers. This shortage may require us to continue to enhance wages and benefits to recruit and retain qualified personnel or to contract for more expensive temporary personnel. For the year-ended December 31, 2021, our salary and benefit expenses represented approximately 29% of our revenue. We also depend on the available labor pool of semi-skilled and unskilled workers in each of the markets in which we operate.
If our labor costs increase, we may not be able to raise rates to offset these increased costs. Because a significant percentage of our revenue consists of fixed, prospective payments, our ability to pass along increased labor costs is limited. In particular, if labor costs rise at an annual rate greater than our net annual consumer price index basket update from Medicare, our results of operations and cash flows will likely be adversely affected. Any union activity at our facilities that may occur in the future could contribute to increased labor costs. Certain proposed changes in federal labor laws and the National Labor Relations Board’s modification of its election procedures could increase the likelihood of employee unionization attempts. Although none of our employees are currently represented by a collective bargaining agreement, to the extent a significant portion of our employee base unionizes, it is possible our labor costs could increase materially. Our failure to recruit and retain qualified management and medical personnel, or to control our labor costs, could have a material adverse effect on our business, prospects, results of operations and financial condition.
Some jurisdictions preclude us from entering into non-compete agreements with our physicians, and other non-compete agreements and restrictive covenants applicable to certain physicians and other clinical employees may not be enforceable.
We have contracts with physicians and other health professionals in many states. Some of our physician services contracts, as well as many of our physician services contracts with hospitals, include provisions preventing these physicians and other health professionals from competing with us both during and after the term of our contract with them. The law governing non-compete agreements and other forms of restrictive covenants varies from state to state. Some jurisdictions prohibit us from entering into non-compete agreements with our professional staff. Other states are reluctant to strictly enforce non-compete agreements and restrictive covenants against physicians and other health care professionals. Therefore, there can be no assurance that our non-compete agreements related to employed or otherwise contracted physicians and other health professionals will be enforceable if challenged in certain states. In such event, we would be unable to prevent former employed or otherwise contracted physicians and other health professionals from competing with us, potentially resulting in the loss of some of our hospital contracts and other business. Additionally, certain facilities have the right to employ or engage our providers after the termination or expiration of our contract with those facilities and cause us not to enforce our non-compete provisions related to those providers.
Our surgical facilities are sensitive to regulatory, economic and other conditions in the states where they are located.
Our revenue is particularly sensitive to regulatory, economic and other conditions in the state of Texas. As of December 31, 2021, we owned and operated nine consolidated surgical facilities in Texas. The Texas facilities represented approximately 13% of our revenue in fiscal 2021.
In addition, we own and operate three consolidated surgical facilities in Idaho, representing approximately 26% of our revenue during fiscal 2021. These surgical facilities also provide ancillary services, including physician practices, radiation oncology and anesthesia services. If there were an adverse regulatory, economic or other development in any of the states in which we have a higher concentration of facilities, including Idaho, our case volumes could decline in such states or there could be other unanticipated adverse impacts on our business in those states, which could have a material adverse effect on our business, prospects, results of operations and financial condition.
If any of our existing health care facilities lose their accreditation status or any of our new facilities fail to receive accreditation, such facilities could become ineligible to receive reimbursement under Medicare or Medicaid or other third-party payors.
The construction and operation of health care facilities are subject to extensive federal, state and local regulation relating to, among other things, the adequacy of medical care, equipment, personnel, operating policies and procedures, fire prevention, rate-setting and compliance with building codes and environmental protection. Additionally, such facilities are subject to periodic inspection by government authorities and accreditation organizations to assure their continued compliance with these various standards.
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All of our facilities are deemed certified, meaning that they are accredited, properly licensed under the relevant state laws and regulations and certified under the Medicare program or are in the process of applying for such accreditation, licensing or certification. The effect of maintaining certified facilities is to allow such facilities to participate in the Medicare and Medicaid programs. We believe that all of our facilities are in material compliance with applicable federal, state, local and other relevant accreditation and certification regulations and standards. However, should any of our health care facilities lose their deemed certified status and thereby lose certification under the Medicare or Medicaid programs, such facilities would be unable to receive reimbursement from either or both of those programs, and possibly from other third-party payors, and our business could be materially adversely affected.
Certain of our partnership and operating agreements contain provisions giving rights to our partners and other members that may be adverse to our interests.
Certain of the agreements governing the limited partnerships ("LPs"), general partnerships ("GPs") and limited liability companies ("LLCs") through which we own and operate our facilities contain provisions that give our partners or other members rights that may, in certain circumstances, be adverse to our interests. These rights include, but are not limited to, rights to purchase our interest in the partnership or LLC, rights to require us to purchase the interests of our partners or other members, or rights requiring the consent of our partners and other members prior to our transferring our ownership interest in a facility or prior to a change in control of us or certain of our subsidiaries. With respect to these purchase rights, the agreements generally include a specified formula or methodology to determine the applicable purchase price, which may or may not reflect fair market value.
Additionally, many of our partnership and operating agreements contain restrictions on actions that we can take, even though we may be the general partner or the managing member. Examples of these restrictions include the rights of our partners and other members to approve the sale of substantially all of the assets of the partnership or LLC, to dissolve the partnership or LLC, to appoint a new or additional general partner or managing member and to amend the partnership or operating agreements. Many of our agreements also restrict our ability in certain instances to compete with our existing facilities or with our partners. Where we hold only a limited partner or a non-managing member interest, the general partner or managing member may take certain actions without our consent, although we typically have certain protective rights to approve major decisions such as the sale of substantially all of the assets of the entity, dissolution of the partnership or LLC and the amendment of the partnership or operating agreement. These management and governance rights held by our partners and other members limit and restrict our ability to make unilateral decisions about the management and operation of the facilities without the approval of our partners and other members.
We may have a special legal responsibility to the holders of ownership interests in the entities through which we own our facilities, which may conflict with, and prevent us from acting solely in, our own best interests or the interests of our stockholders.
We generally hold our ownership interests in facilities through LPs, GPs, LLCs or limited liability partnerships ("LLPs") in which we maintain an ownership interest along with physicians and, in some cases, both physicians and health systems. As general partner and manager of most of these entities, we may have a fiduciary duty, to manage these entities in the best interests of the other owners. We also have a duty to operate our business for the benefit of our stockholders. As a result, we may encounter conflicts between our responsibility to the other owners and our responsibility to our stockholders. For example, we have entered into some management agreements to provide management services to our surgical facilities in exchange for a fee. Disputes may arise as to the nature of the services to be provided or the amount of the fee to be paid. In these cases, we may be obligated to exercise reasonable, good faith judgment to resolve the disputes and may not be free to act solely in our own best interests or the stockholders best interest. Disputes may also arise between us and our physician investors with respect to a particular business decision or regarding the interpretation of the provisions of the applicable partnership or limited liability company agreement. We seek to avoid these disputes but have not implemented any measures to resolve these conflicts if they arise. If we are unable to resolve a dispute on terms favorable or satisfactory to us, it could have a material adverse effect on our business, prospects, results of operations and financial condition.
Growth of patient receivables or deterioration in the ability to collect on these accounts, due to changes in economic conditions or otherwise, could have a material adverse effect on our business, prospects, results of operations and financial condition.
The current practice of providing medical services in advance of payment or, in many cases, prior to assessment of ability to pay for such services, may have significant negative impact on our revenue and cash flow. We bill numerous and varied payors, such as self-pay patients, private insurance payors and Medicare and Medicaid. These different payors typically have different billing requirements that must be satisfied prior to receiving payment for services rendered. Reimbursement is typically conditioned on our documenting medical necessity and correctly applying diagnosis codes. Incorrect or incomplete documentation and billing information could result in non-payment for services rendered. The primary collection risks with respect to our patient receivables relate to patient accounts for which the primary third-party payor has paid the amounts covered by the applicable agreement, but patient responsibility amounts (deductibles and co-payments) remain outstanding.
Additional factors that could complicate our billing include:
•disputes between payors as to which party is responsible for payment;
•failure of information systems and processes to submit and collect claims in a timely manner;
•variation in coverage for similar services among various payors;
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•the difficulty of adherence to specific compliance requirements, diagnosis coding and other procedures mandated by various payors; and
•failure to obtain proper physician credentialing and documentation in order to bill various payors.
Due to the difficulty in assessing future trends, including the effects of changes in economic conditions, an increase in the amount of patient receivables or a deterioration in the collectability of these receivables could have a material adverse effect on our business, prospects, results of operations and financial condition.
If we are unable to integrate and operate our information systems effectively or implement new systems and processes, our operations could be disrupted.
Our operations depend significantly on effective information systems, which require continual maintenance, upgrading and enhancement to meet our operational needs. Any system failure or integration delay that causes an interruption in service or availability of our systems could adversely affect operations or delay the collection of revenue. Moreover, we use the development and implementation of sophisticated and specialized technology to improve our profitability, and our acquired surgical centers and hospitals will require frequent transitions and integration of various information systems. If we are unable to properly integrate other information systems or expand our current information systems it may have an adverse effect on our ability to obtain new business, retain existing business and maintain or increase our profit margins and we could suffer, among other things, operational disruptions, disruptions in cash flows and increases in administrative expenses.
Financial and Accounting Risks
We have a history of net losses and may not achieve or sustain profitability in the future.
We had net losses attributable to Surgery Partners, Inc. of $70.9 million, $116.1 million and $74.8 million, in 2021, 2020 and 2019, respectively. We cannot assure you that our revenue will grow or that we will achieve or maintain profitability in the future. Growth of our revenue may slow or revenue may decline and expenses may increase for a number of possible reasons, including reduced demand for our services, regulatory shifts and other risks and uncertainties. Our ability to achieve profitability will be affected by the other risks and uncertainties described in this section and in "Management’s Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Annual Report. All of these factors could contribute to future net losses and, if we are unable to meet these risks and challenges as we encounter them, our business may suffer. If we are not able to achieve, sustain or increase profitability, our business will be adversely affected and our stock price may decline.
Our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our obligations under our outstanding indebtedness.
As of December 31, 2021, we and our subsidiaries had approximately $3.0 billion aggregate principal amount of indebtedness outstanding, which includes approximately $1.5 billion principal amount of senior secured term loans (the "Term Loan") outstanding, $370.0 million senior unsecured notes due 2025 (the "2025 Unsecured Notes") and $545.0 million senior unsecured notes due 2027 (the "2027 Unsecured Notes"). As of December 31, 2021, we had no outstanding borrowings under our $210.0 million senior secured revolving credit facility (the "Revolver" and, together with the Term Loan, the "Senior Secured Credit Facilities" and, together with the 2025 Unsecured Notes and the 2027 Unsecured Notes, the "Senior Indebtedness"). After giving effect to the $7.0 million principal amount of outstanding letters of credit issued under our Revolver, we had $203.0 million of unused commitments available to be borrowed under the Revolver. In addition to the Senior Indebtedness, our aggregate principal amount of indebtedness outstanding includes approximately $509.6 million of notes payable and finance lease obligations primarily related to property and equipment for operations. Our level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. In addition, subject to applicable restrictions under our Senior Indebtedness, we may incur significant additional indebtedness, which may be secured, from time to time, which could have important consequences, including:
•making it more difficult for us to satisfy our obligations with respect to our indebtedness;
•making us more vulnerable to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation;
•requiring us to dedicate a substantial portion of our cash flow to making payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
•limiting our flexibility in reacting to competitive and other changes in our industry and economic conditions generally; and
•limiting our ability to raise additional capital for working capital, capital expenditures, acquisitions, debt service requirements, execution of our business strategy or other general corporate purposes.
To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations may adversely affect our business, financial condition and results of operations.
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Our ability to pay or to refinance our indebtedness and to fund working capital needs and planned capital expenditures will depend upon our future operating performance and our ability to generate cash, which, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, business and other factors that are beyond our control.
If our business does not generate sufficient cash flow or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations. In addition, we may not be able to affect any of these actions, if necessary, on commercially-reasonable terms or at all. Our history of net losses may impair our ability to service our indebtedness or repay outstanding amounts when they become due. In addition, our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, and also might include incurring additional fees in connection with refinancing, which could further restrict our business operations. The terms of existing or future debt instruments may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially-reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, may adversely affect our business, financial condition and results of operations.
Restrictive covenants in our debt instruments may adversely affect us.
The Senior Indebtedness imposes significant operating and financial restrictions and limit the ability of us and our restricted subsidiaries to, among other things:
•incur additional indebtedness and guarantee indebtedness;
•pay dividends or make other distributions in respect of, or repurchase or redeem, capital stock;
•prepay, redeem or repurchase certain debt;
•make loans and investments;
•sell or otherwise dispose of assets;
•sell stock of our subsidiaries;
•incur liens;
•enter into transactions with affiliates;
•enter into agreements restricting certain of our subsidiaries’ ability to pay dividends; and
•consolidate, merge or sell all or substantially all of our assets.
As a result of these and other covenants and restrictions, we are and will be limited in how we conduct our business, and we may be unable to raise additional capital to compete effectively or to take advantage of new business opportunities. In addition, we may be required to maintain specified financial maintenance ratios and satisfy other financial condition tests in connection with the Senior Indebtedness. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. Our failure to comply with the restrictive covenants described above as well as others contained in our future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their maturity. If we are forced to refinance these borrowings on less favorable terms, our results of operations and financial condition could be adversely affected.
We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated revenue growth and operating improvements will be realized or that future borrowings will be available to us under the Term Loan and Revolver in amounts sufficient to enable us to pay our indebtedness, or to fund our other liquidity needs. If we are unable to meet our debt service obligations or fund our other liquidity needs, we could attempt to restructure or refinance our indebtedness or seek additional equity capital. We cannot assure you that we will be able to accomplish those actions on satisfactory terms, if at all.
Despite our current indebtedness levels, we and our subsidiaries may still be able to incur more debt, which could further exacerbate the risks associated with our leverage.
We and our subsidiaries may be able to incur additional indebtedness in the future, including secured indebtedness. Although the credit agreement governing the Senior Secured Credit Facilities and the indentures governing each of the 2025 Unsecured Notes and 2027 Unsecured Notes, respectively, contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial.
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In addition, as of December 31, 2021, we had approximately $203.0 million available for additional borrowings under the Revolver (after giving effect to the $7.0 million aggregate principal amount of outstanding letters of credit issued under our Revolver at such time). If new debt is added to our or our subsidiaries’ current debt levels, the related risks that we face would be increased.
We are a holding company with no operations of our own.
We are a holding company, and our ability to service our debt is dependent upon the earnings from the business conducted by our subsidiaries that operate the surgical facilities. The effect of this structure is that we depend on the earnings of our subsidiaries, and the distribution or payment to us of a portion of these earnings to meet our obligations, including those under the Term Loans and Revolving Facility and any of our other debt obligations. The distributions of those earnings, advances or other distributions of funds by these entities to us, all of which are contingent upon our subsidiaries’ earnings, are subject to various business considerations. In addition, distributions by our subsidiaries could be subject to statutory restrictions, including state laws requiring that such subsidiaries be solvent, or contractual restrictions. Some of our subsidiaries may become subject to agreements that restrict the sale of assets and significantly restrict or prohibit the payment of dividends or the making of distributions, loans or other payments to stockholders, partners or members.
We make significant loans to, and are generally liable for debts and other obligations of, the partnerships and limited liability companies that own and operate some of our surgical facilities.
We own and operate our surgical facilities through limited partnerships and limited liability companies. Local physicians, physician groups and health care systems also own an interest many of these partnerships and limited liability companies. In the partnerships in which we are the general partner, we are liable for 100% of the debts and other obligations of the partnership, even if we do not own all of the partnership interests. For some of our surgical facilities, indebtedness at the partnership level is funded through intercompany loans that we provide. At December 31, 2021, our intercompany loans totaled $35.0 million. Through these loans we may have a security interest in the partnership’s or limited liability company’s assets, depending upon the terms thereof in each instance. However, our financial condition and results of operations would be materially adversely affected if our surgical facilities are unable to repay these intercompany loans, or such loans are challenged under certain health care laws. Additionally, at December 31, 2021, our global intercompany note, which we use to transfer debt balances between our subsidiaries, had a zero balance.
Although most of our intercompany loans are secured by the assets of the partnership or limited liability company, the physicians and physician groups that own an interest in these partnerships and limited liability companies generally do not guarantee a pro rata amount of this debt or the other obligations of these partnerships and limited liability companies.
From time to time, we may guarantee our pro-rata share of the third-party debts and other obligations of our non-wholly owned non-consolidated partnerships and limited liability companies in which we own an interest in an amount proportionate to our pro rata share of the equity interests issued by such entity. In such instances, the physicians and/or physician groups typically also guarantee their pro-rata share of such indebtedness.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Borrowings under the Senior Secured Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. We periodically enter into interest rate swap agreements and interest rate cap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements and interest rate cap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap and cap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities.
Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.
The Senior Secured Credit Facilities bear interest at a rate per annum equal to (x) the London Interbank Offered Rate ("LIBOR") plus a margin ranging from 3.00% to 3.25% per annum, depending on the Company’s first lien net leverage ratio or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.50% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (solely with respect to the Term Loan, the alternate base rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00% to 2.25% per annum. In addition, the Company is required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver. The 2020 incremental term loans bear interest at a rate per annum equal to (x) LIBOR plus a margin of 8.00% per annum or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate, (iii) one-month LIBOR plus 1.00% per annum and (iv) 2.00% per annum) plus a margin of 7.00% per annum.
Discontinuation, reform or replacement of LIBOR may adversely affect our business.
The credit agreement governing the Senior Secured Credit Facilities permits interest on borrowings to be calculated based on LIBOR. LIBOR and certain other interest "benchmarks" may be subject to regulatory guidance and/or reform that could cause interest rates under our current or future debt agreements to perform differently than in the past or cause other unanticipated consequences. The United Kingdom’s Financial Conduct Authority, which regulates LIBOR, has announced that it intends to phase out LIBOR by June 2023. If the phase out occurs as planned, the interest rate applicable to our variable rate debt may be calculated based on an alternative, comparable or
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successor rate which may have a material adverse impact on the cost of the variable rate portion of our indebtedness. The timing and result of the phase out of LIBOR are unclear, and efforts of industry groups to develop a suitable successor are not guaranteed to result in a viable or widely adopted replacement for LIBOR. If LIBOR becomes unavailable before a suitable replacement is widely adopted, it could have a material adverse impact on the availability of variable rate financing.
As of December 31, 2021, we also had interest rate swap agreements based on LIBOR. If LIBOR becomes unavailable, it is unclear how payments under those agreements would be calculated. Relevant industry groups are seeking to create a standard protocol addressing the expected discontinuation of LIBOR, but there can be no assurance that such a protocol will be developed or implemented with respect to our swap agreements.
We may be limited in our ability to utilize, or may not be able to utilize, net operating loss carryforwards to reduce our future tax liability.
As of December 31, 2021, we had U.S. federal net operating loss ("NOL") carryforwards of approximately $573.0 million and state NOL carryforwards of approximately $594.9 million, which may be limited annually due to certain change in ownership provisions of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"). In addition, as a result of the Symbion acquisition, approximately $146.9 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million, and, as a result of the Novamed acquisition, approximately $11.0 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million. As a result of our acquisition of NSH Holdco, Inc. ("NSH") on August 31, 2017, approximately $24.7 million in NOL carryforwards are subject to an annual Section 382 base limitation of $2.8 million. Further, the sale of H.I.G. Surgery Centers, LLC's ("H.I.G.") shares to Bain Capital in connection with the Transactions resulted in an ownership change as defined in Section 382. As a result, we will not be able to use our pre-ownership-change NOLs in excess of the limitation imposed by Section 382. These limitations, when combined with amounts allowable due to net unrecognized built in gains, are not expected to impact the realization of the deferred tax assets associated with these NOLs. The Company has $478.3 million of federal NOL carryforwards that will begin to expire in 2029 and will completely expire in 2037. The remaining federal NOL carryforwards, which were generated after 2017, do not expire. Our state NOL carryforwards will expire between 2022 and 2041. Future ownership changes may subject our NOL carryforwards to further annual limitations, which could restrict our ability to use them to offset our taxable income in periods following the ownership changes.
We entered into a tax receivable agreement that will require us to make payments to the pre-IPO owners of Surgery Center Holdings, LLC (the "Pre-IPO Owners"), which amounts are expected to be material.
On September 30, 2015, Surgery Partners, Inc. became the direct parent and sole member of Surgery Center Holdings, LLC (the "Reorganization"). We indirectly acquired favorable tax attributes in connection with the Reorganization. These tax attributes would not be available to us in the absence of the consummation of the Reorganization. As part of the Reorganization, we entered into a tax receivable agreement with the Pre-IPO Owners. In connection with the Transactions completed in in August 2017, we entered into an agreement to amend the tax receivable agreement (as amended, the "TRA"), which became effective on August 31, 2017.
Pursuant the TRA, we agreed to make annual payments to H.I.G. in its capacity as the stockholders representative on behalf of the other pre-Reorganization stockholders pursuant to a fixed payment schedule. The final payment is scheduled to be made in 2024. The amounts payable under the TRA are calculated to equal the product of (i) an annual base amount and (ii) the sum of (x) the maximum corporate federal income tax rate for the applicable year and (y) three percent. The amounts payable under the TRA are related to our projected realized tax savings over the next five years and are not dependent on our actual tax savings over the next five years. The calculations of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that we are unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of credit agreements and other debt documents cause us to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid. We estimate that the total remaining amounts payable under the TRA as of December 31, 2021 may be as high as $22.0 million, but the ultimate amounts payable are likely to vary if there are further changes in law as to the income tax rates applicable to domestic corporations.
Our stock price could be volatile, and, as a result, our stockholders may not be able to resell their shares at or above the price paid for them.
Since our initial public offering, the price of our common stock as reported on The Nasdaq Global Select Market has ranged from a low of $4.00 on March 18, 2020 to a high of $69.58 on June 25, 2021. The price of our common stock could be subject to fluctuations in response to a number of factors, including those described elsewhere in this report and others such as:
•variations in our operating performance and the performance of our competitors;
•actual or anticipated fluctuations in our quarterly or annual operating results;
•publication of research reports by securities analysts about us or our competitors or our industry;
•announcements by us, our competitors or our vendors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
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•our failure or the failure of our competitors to meet analysts’ projections or guidance that we or our competitors may give to the market;
•strategic decisions by us or our competitors, such as acquisitions, divestitures, spin-offs, joint ventures, strategic investments or changes in business strategy;
•the passage of legislation or other regulatory developments affecting us or our industry;
•speculation in the press or investment community;
•changes in accounting principles;
•terrorist acts, acts of war or periods of widespread civil unrest;
•natural disasters and other calamities; and
•changes in general market and economic conditions.
Securities class action litigation is often initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation. For example, see Note 14. "Commitments and Contingencies - Stockholder Litigation" to our consolidated financial statements included elsewhere in this report.
Cybersecurity and Data Risks
Cybersecurity attacks or intrusions could adversely impact our businesses.
We, independently and through third-party vendors, collect and store on our networks and devices sensitive information, including intellectual property, proprietary business information and personally identifiable information of our patients and employees. Information security risks have generally increased in recent years because of threats from malicious persons and groups, new vulnerabilities, the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. A failure in or breach of our operational or information security systems as a result of cyber-attacks or information security breaches could disrupt our business, result in the loss, disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs or lead to fines and financial losses. As a result, cybersecurity and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us.
We and our third-party vendors have been and likely will continue to be subject to attempted cybersecurity attacks. While there has been no material impact on our business or operations from these attempted attacks. There can be no assurance that we or our third-party vendors will not be subject to cybersecurity incidents that bypass our security measures, impact the integrity, availability or privacy of personal health information or other data subject to privacy laws or disrupt our information systems, devices or business, including our ability to provide various health care services.
The market for cybersecurity insurance is relatively new and coverage available for cybersecurity events may evolve as the industry matures. While we maintain insurance relating to cybersecurity events, such insurance is subject to a number of exclusions and may be insufficient to offset any losses, costs or damage we experience. As cyber threats continue to evolve, we will be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities.
Our use and disclosure of personally identifiable information, including health information, is subject to federal and state privacy and security regulations, and our failure to comply with those regulations or to adequately secure the information we hold could result in significant liability or reputational harm.
HIPAA as well as numerous other federal and state laws and regulations, govern the collection, dissemination, use, privacy, security, confidentiality, integrity and availability of personally identifiable information ("PII"), including protected health information ("PHI") by covered entities such as us. Ongoing implementation of administrative, physical and technical safeguards, maintenance of policies and procedures governing use and disclosure of PHI, and oversight of compliance with HIPAA requirements involves significant time, effort and expense. While we undertake substantial efforts to secure the PHI we maintain, use and disclose in electronic form, a cyber-attack or other intrusion that bypasses our information security systems causing an information security breach, loss of protected health information or other data subject to privacy laws or a material disruption of our operational systems could result in a material adverse impact on our business, along with potentially substantial fines and penalties.
HIPAA also requires our surgical facilities to use standard transaction code sets and identifiers for certain standardized health care transactions, including billing and other claim transactions. We have undertaken significant efforts involving substantial time and expense to implement these requirements, and we anticipate that continual time and expense will be required to submit standardized transactions and to ensure that any newly acquired facilities can submit HIPAA-compliant transactions.
HIPAA requires covered entities to report breaches of unsecured protected health information to affected individuals without unreasonable delay and in no case later than 60 days after the discovery of the breach by the covered entity or its agents. Notification must also be made to HHS and, in certain situations involving large breaches, to the media. The HIPAA rules created a presumption that all non-
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permitted uses or disclosures of unsecured protected health information are breaches. HIPAA imposes mandatory civil and criminal penalties for violations of its requirements ranging up to $50,000 per violation, with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. However, a single breach incident can result in violations of multiple requirements, resulting in possible penalties well in excess of $1.5 million. In addition, the HITECH Act authorized state attorneys general to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents.
HIPAA also authorizes state attorneys general to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA’s requirements, its standards have been used as a basis for the duty of care in state civil suits, such as those for negligence or recklessness in the handling of PHI. In addition, HIPAA mandates that the Secretary of HHS conduct periodic compliance audits of HIPAA covered entities such as us.
In addition, many states in which we operate may impose laws that are more protective of the privacy and security of PII than HIPAA. Where these state laws are more protective than HIPAA, we have to comply with their stricter provisions. Only some of these state laws impose fines and penalties upon violators, but some may afford private rights of action to individuals who believe their PII has been misused. California’s patient privacy laws, for example, provide for penalties of up to $250,000 and permit injured parties to sue for damages. Both state and federal laws are subject to modification or enhancement of privacy protection at any time. Our facilities will continue to remain subject to any federal or state privacy-related laws that are more restrictive than the privacy regulations issued under HIPAA. These statutes vary and could impose additional requirements on us and more severe penalties for disclosures of confidential health information. New health information standards could have a significant effect on the manner in which we do business, and the cost of complying with new standards could be significant. We may not remain in compliance with the diverse privacy requirements in all of the jurisdictions in which we do business. If we fail to comply with HIPAA or similar state laws, we could incur substantial civil monetary or criminal penalties.
Legal and Regulatory Risks
If we fail to comply with or otherwise incur liabilities under the numerous federal and state laws and regulations relating to the operation of our facilities, we could incur significant penalties or other costs or be required to make significant changes to our operations.
The health care industry is heavily regulated and we are subject to many laws and regulations at the federal, state and local government levels in the markets in which we operate. These laws and regulations require that our facilities meet various licensing, accreditation, certification and other requirements, including, but not limited to, those relating to:
•ownership and control of our facilities;
•operating policies and procedures;
•qualification, training and supervision of medical and support persons;
•pricing of, billing for and coding of services and properly handling overpayments, debt collection practices and the submission of false statements or claims;
•the necessity, appropriateness and adequacy of medical care, equipment, personnel, operating policies and procedures; maintenance and preservation of medical records;
•financial arrangements between referral sources and our facilities;
•the protection of privacy, including patient and credit card information;
•screening, stabilization and transfer of individuals who have emergency medical conditions and provision of emergency services;
•antitrust;
•building codes;
•workplace health and safety;
•licensure, certification and accreditation;
•fee-splitting and the corporate practice of medicine;
•handling of medication;
•confidentiality, data breach, identity theft and maintenance and protection of health-related and other personal information and medical records; and
•environmental protection, health and safety.
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If we fail to comply with applicable laws and regulations, we could subject ourselves to administrative, civil or criminal penalties, cease and desist orders, forfeiture of amounts owed and recoupment of amounts paid to us by governmental or commercial payors, loss of licenses necessary to operate and disqualification from Medicare, Medicaid and other government-sponsored health care programs.
Many of these laws and regulations have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or require us to make changes in our operations, facilities, equipment, personnel, services, capital expenditure programs or operating expenses to comply with the evolving rules. Any enforcement action against us, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
A number of initiatives have been proposed during the past several years to reform various aspects of the health care system in the U.S. In the future, different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or could require us to make changes in our facilities, equipment, personnel, services, capital expenditure programs and operating expenses. In addition, some of the governmental and regulatory bodies that regulate us are considering or may in the future consider enhanced or new regulatory requirements. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could detrimentally affect the way we conduct our business and manage our capital, either of which, in turn, could have a material adverse effect on our business, prospects, results of operations and financial condition.
We cannot predict the effect that health care reform and other changes in government programs may have on our business, financial condition or results of operations.
The Affordable Care Act has changed and continues to change how health care services are covered, delivered and reimbursed through, among other things, expanded coverage of uninsured individuals, reduced growth in Medicare program spending and the establishment and expansion of programs tying reimbursement to quality and clinical integration. The Affordable Care Act also reforms certain aspects of health insurance, quality of care and fraud and abuse enforcement.
The Affordable Care Act continues to be the subject of legal and legislative challenges. Depending on how the Affordable Care Act continues to be interpreted, implemented or changed, it could have a material adverse effect on our business, prospects, results of operations and financial condition.
If laws governing the corporate practice of medicine or fee-splitting change, we may be required to restructure some of our relationships, which may result in a significant loss of revenue and divert other resources.
The laws of various states in which we operate or may operate in the future do not permit business corporations to practice medicine, to exercise control over or employ physicians who practice medicine or to engage in various business practices, such as fee-splitting with physicians (i.e., sharing in a percentage of professional fees). The interpretation and enforcement of these laws vary significantly from state to state. We provide management services to a network of physicians. If our arrangements with this network were deemed to violate state corporate practice of medicine, fee-splitting or similar laws, or if new laws are enacted rendering our arrangements illegal, we may be subject to civil and/or criminal penalties and could be required to restructure or terminate these arrangements, any of which may result in a significant loss of revenue and divert management and business resources.
If regulations change, we may be obligated to purchase some or all of the ownership of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with surgical facilities.
Upon the occurrence of various fundamental regulatory changes or changes in the interpretation of existing regulations, we may be obligated to purchase all of the ownership of the physician investors in most of the partnerships or limited liability companies that own and operate our surgical facilities and/or hospitals. The purchase price that we would be required to pay for the ownership is specified in our partnership agreements and is typically based on either a multiple of the surgical facility’s EBITDA, as defined in our partnership and operating agreements with these surgical facilities and hospitals, or the fair market value of the ownership as determined by a third-party appraisal. The physician investors in some of our surgical facilities and hospitals can require us to purchase their interests in exchange for cash or shares of our common stock if these regulatory changes occur. In addition, some of our partnership agreements with our physician partners and management agreements with surgical facilities and hospitals require us to attempt to renegotiate the agreements upon the occurrence of various fundamental regulatory changes or changes in the interpretation of existing regulations and provide for termination of the agreements if renegotiations are not successful.
Regulatory changes that could create purchase or renegotiation obligations include changes that:
•make illegal the referral of Medicare or other patients to our surgical facilities and hospitals by physician investors;
•create a substantial likelihood that cash distributions to physician investors from the partnerships or LLCs through which we operate our surgical facilities and hospitals would be illegal;
•make illegal the ownership by the physician investors of interests in the partnerships or LLCs through which we own and operate our surgical facilities and hospitals; or
•require us to reduce the aggregate percentage of physician investor ownership in our hospitals.
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We do not control whether or when any of these regulatory events might occur. In the event we are required to purchase all of the physicians’ ownership, our existing capital resources would not be sufficient for us to meet this obligation. These obligations and the possible termination of our partnership and management agreements would have a material adverse effect on our financial condition and results of operations.
Our surgical facilities do not satisfy the requirements for any of the safe harbors under the federal Anti-Kickback Statute. If a federal or state agency asserts a different position or enacts new laws in this regard, we could be subject to criminal and civil penalties, loss of licenses and exclusion from governmental programs, which may result in a substantial loss of revenue.
The Anti-Kickback Statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referrals for items or services payable by Medicare, Medicaid, or any other federally funded health care program. Our exclusion from participation in all federally funded health care programs as a result of a violation of the Anti-Kickback Statute would have a material adverse effect on our business, prospects, results of operations and financial condition. In addition, many of the states in which we operate have also adopted laws, similar to the Anti-Kickback Statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care. These statutes typically impose criminal and civil penalties, including the loss of a license to do business in the state.
The "Investment Interest" safe harbor and the "Personal Services and Management Contracts" safe harbor apply to business arrangements similar to those used in connection with our surgical facilities. However, the structure of the partnerships and limited liability companies operating our surgery centers and surgical hospitals, as well as our various business arrangements involving physician group practices, do not satisfy all of the requirements of either safe harbor. We have entered into management agreements to manage the majority of our surgical facilities. Most of these agreements call for our subsidiary to be paid a percentage-based management fee. Because our management fees are generally based on a percentage of revenue, our management agreements do not typically meet the Personal Services and Management Contracts safe harbor. We have implemented formal compliance programs designed to safeguard against overbilling and believe that our management agreements comply with the requirements of the Anti-Kickback Statute. However, we cannot assure you that the OIG would find our compliance programs to be adequate or that our management agreements would be found to comply with the Anti-Kickback Statute.
The surgery center safe harbor protects four types of investment arrangements: (1) surgeon owned surgery centers; (2) single specialty surgery centers; (3) multi-specialty surgery centers; and (4) hospital/physician surgery centers. In addition to the physician investor, the categories permit an "unrelated" investor, who is a person or entity that is not in a position to provide items or services related to the surgery center or its investors. Our business arrangements with our surgical facilities typically consist of one of our subsidiaries being an investor in each partnership or limited liability company that owns the facility, in addition to providing management and other services to the facility. Therefore, our business arrangements with our surgery centers, surgical hospitals and physician groups do not qualify for the expanded safe harbor protection from government review or prosecution under the Anti-Kickback Statute. However, we believe that we are in compliance with the requirements of the Anti-Kickback Statute.
We employ dedicated marketing personnel whose job functions include the recruitment of physicians to perform surgery at our facilities. These employees are paid a base salary plus a productivity bonus. We believe our employment arrangements with these employees are consistent with a safe harbor provision designed to protect payments made to employees. However, a government agency or private party may assert a contrary position.
We also enter into lease agreements with physicians from time to time for the rental of space for our surgical facilities. We seek to structure these lease agreements so that they are in compliance with the Anti-Kickback Statute safe harbor provision regarding real estate leases. However, a government agency or private party may assert a contrary position.
If any of our business arrangements with physicians or sales and marketing personnel were alleged or deemed to violate the Anti-Kickback Statute or similar laws, or if new federal or state laws were enacted rendering these arrangements illegal, it could have a material adverse effect on our business, prospects, results of operations and financial condition.
In addition to the physician ownership in our surgical facilities, other financial relationships of ours with potential referral sources could potentially be scrutinized under the Anti-Kickback Statute.
Certain of our ASCs have entered into arrangements for professional services, including arrangements for anesthesia services. The OIG scrutinizes certain arrangements it deems to be “suspect Contractual Joint Ventures,” including arrangements between anesthesiologists and physician owners of ASCs. We believe our arrangements for anesthesia services are distinguishable from those described in Advisory Opinion 12-06 (May 25, 2012) and are in compliance with the requirements of the federal Anti-Kickback Statute. However, we cannot assure you that regulatory authorities would agree with that position.
The Eliminating Kickbacks in Recovery Act may affect our financial relationships with referral sources utilizing our clinical laboratories
In addition to the Anti-Kickback Statute, the U.S. recently enacted a new law known as the Eliminating Kickbacks in Recovery Act, or the EKRA, discussed in greater detail above. While the EKRA does contain certain exceptions similar to the Anti-Kickback Statute Safe Harbors, those exceptions are more narrow than the Anti-Kickback Statute Safe Harbors. As a result, the operations at our clinical laboratories may be impacted by the EKRA.
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If we fail to comply with physician self-referral laws as they are currently interpreted or may be interpreted in the future, or if other legislative restrictions are issued, we could incur substantial monetary penalties and a significant loss of revenue.
The Stark Law prohibits certain self-referrals for health care services unless an exception applies. Under the current Stark Law and related regulations, services provided at an ASC are not covered by the statute, even if those services include imaging, laboratory services or other Stark designated health services, provided that (i) the ASC does not bill for these services separately, or (ii) if the center is permitted to bill separately for these services, they are specifically exempted from Stark Law prohibitions. These are generally radiology and other imaging services integral to performance of surgical procedures that meet certain requirements and certain outpatient prescription drugs. Services provided at our facilities licensed as hospitals are covered by the Stark Law. We attempt to structure our relationship with physicians who refer to our hospitals to meet an exception to the Stark Law where required, but the regulations implementing the exceptions are detailed and complex, and we cannot guarantee that every relationship complies fully with the Stark Law. We also believe that certain services provided by our managed physician network are covered by the Stark Law, but referrals for those services are exempt from the Stark Law under its "in-office ancillary services exception," among others.
Violations of these self-referral laws may result in substantial civil or criminal penalties, including treble damages for amounts improperly claimed, civil monetary penalties of up to $15,000 per prohibited service billed, up to $100,000 per prohibited circumvention scheme and exclusion from participation in the Medicare and Medicaid and other federal and state health care programs. Violations of the Stark Law will also create liability under the federal False Claims Act. Exclusion of our ASCs or hospitals from these programs through judicial or agency interpretation of existing laws or additional legislative restrictions on physician ownership or investments in health care entities could result in a significant loss of reimbursement revenue. We cannot provide assurances that CMS will not undertake other rulemaking to address additional revisions to or interpretations of the Stark Law regulations. If future rules modify the provisions of the Stark Law regulations that are applicable to our business, our revenue and profitability could be materially adversely affected and could require us to modify our relationships with our physician and health care system partners.
Federal law restricts the ability of our surgical hospitals to expand surgical capacity.
The Affordable Care Act dramatically curtailed the Whole Hospital Exception and prohibits physician ownership in hospitals that did not have a Medicare provider agreement by December 31, 2010. As a result, the law effectively prevents the formation of new physician-owned hospitals that participate in Medicare and Medicaid after December 31, 2010. Each of our surgical hospitals had a Medicare provider agreement in place prior to December 31, 2010 and is therefore able to continue operating with the ownership structure that was in place prior to December 30, 2010. However, the Affordable Care Act prohibits "grandfathered" hospitals from increasing their percentage of physician ownership, and it limits to a certain extent their ability to grow, because it prohibits such hospitals from increasing the aggregate number of inpatient beds, operating rooms and procedure rooms.
Companies within the health care industry, including us, continue to be the subject of federal and state audits and investigations, including actions for false and other improper claims.
Federal and state government agencies, as well as commercial payors, have increased their auditing and administrative, civil and criminal enforcement efforts as part of numerous ongoing investigations of health care organizations. These audits and investigations relate to a wide variety of topics, including the following: cost reporting and billing practices; quality of care; financial reporting; financial relationships with referral sources; and medical necessity of services provided. In addition, the OIG and the DOJ have, from time to time, undertaken national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. In its 2013 Work Plan, the OIG stated its intention to review the safety and quality of care for Medicare beneficiaries having surgeries and procedures in ASCs and hospital outpatient departments.
The federal government may impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs and other federal and state health care programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes, as well as penalties under the anti-fraud provisions of the HIPAA. While the criminal statutes are generally reserved for instances of fraudulent intent, the federal government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances, including claiming payment for unnecessary services if the claimant merely should have known the services were unnecessary and claiming payment for low-quality services if the claimant should have known that the care was substandard. In addition, a violation of the Stark Law or the Anti-Kickback Statute can result in liability under the federal False Claims Act (the "FCA").
Over the past several years, the federal government has investigated an increasing number of health care providers for potential FCA violations, which, among other things, prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the federal government. The statute defines "knowingly" to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim. Violators of the FCA are subject to severe financial penalties, including treble damages and per claim penalties in excess of $10,000. Because our facilities perform hundreds or thousands of similar procedures each year for which they are paid by Medicare, and since the statute of limitations for such claims extends for six years under normal circumstances (and possibly as long as ten years in the event of failure to discover material facts), a repetitive billing error or cost reporting error could result in significant, material repayments and civil or criminal penalties.
Moreover, another trend impacting health care providers is the increased use of the FCA, particularly by individuals who bring actions under that law. Under the "qui tam," or whistleblower, provisions of the FCA, private parties may bring actions on behalf of the federal
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government. If the government intervenes and prevails in the action, the defendant may be required to pay three times the actual damages sustained by the government, plus mandatory civil monetary penalties of between $11,803 and $23,607 for each false claim submitted to the government. These private parties, often referred to as relators, are entitled to share in any amounts recovered by the government through trial or settlement. Both direct enforcement activity by the government and whistleblower lawsuits under the FCA have increased significantly in recent years; thus, the risk that we will have to defend a false claims action, pay significant fines or be excluded from the Medicare and Medicaid programs has increased.
In addition, the Fraud Enforcement and Recovery Act of 2009 ("FERA") further expanded the scope of the FCA to create liability for knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government and FERA, along with statutory provisions found in the Acts, created federal False Claims Act liability for the knowing failure to report and return an overpayment within 60 days of the identification of the overpayment or, in certain cases, the date by which a corresponding cost report is due, whichever is later. Governmental authorities have and may continue to challenge or scrutinize our operations. An allegation or determination that we have violated the law could have a material adverse effect on our business, prospects, results of operations and financial condition.
HIPAA also created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a health care benefit program, willfully obstructing a criminal investigation of a health care offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
In addition, a person who offers or transfers to a Medicare or Medicaid beneficiary any remuneration, including waivers of co-payments and deductible amounts (or any part thereof), that the person knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services may be liable for civil monetary penalties of up to $10,000 for each wrongful act. Moreover, in certain cases, providers who routinely waive copayments and deductibles for Medicare and Medicaid beneficiaries can also be held liable under the Anti-Kickback Statute and civil False Claims Act, which can impose additional penalties associated with the wrongful act. Although this prohibition applies only to federal health care program beneficiaries, the routine waivers of copayments and deductibles offered to patients covered by commercial payors may implicate applicable state laws related to, among other things, unlawful schemes to defraud, excessive fees for services, tortious interference with patient contracts and statutory or common law fraud. To the extent our patient assistance programs or other discount policies are found to be inconsistent with applicable laws, we may be required to restructure or discontinue such programs, or be subject to other significant penalties.
To enforce compliance with the federal laws, the DOJ has increased its scrutiny of interactions between health care companies and health care providers, which has led to a number of investigations, prosecutions, convictions and settlements in the health care industry. Dealing with investigations can be time and resource consuming and can divert management’s attention from the business. In addition, settlements with the DOJ or other law enforcement agencies have forced health care providers to agree to additional compliance and reporting requirements as part of a consent decree or corporate integrity agreement. Any such investigation or settlement could increase our costs or otherwise have an adverse effect on our business.
We are also subject to various state laws and regulations, as well as contractual provisions with commercial payors that prohibit us from submitting inaccurate, incorrect or misleading claims. We cannot be sure that none of our surgical facilities’ claims will ever be challenged. If we were found to be in violation of a state’s laws or regulations, or of a commercial payor contract, we could be forced to discontinue the violative practice and be subject to recoupment actions, fines and criminal penalties, which could have a material adverse effect on our business, prospects, results of operations and financial condition.
All payors are increasingly conducting post-payment audits. For example, CMS has implemented the RAC program, involving Medicare claims audits nationwide, and employs MICs to perform post-payment audits of Medicaid claims and identify overpayments. In addition to RACs and MICs, the state Medicaid agencies and other contractors have increased their review activities. We are regularly subject to these external audits and we also perform both internal and third-party audits and monitoring.
Although all other repayments requested to date as a result of RAC, MIC and ZPIC audits have not been material to our Company, we are unable to quantify the suspended payments and aggregate financial impact of these audits on our facilities given the pending appeals and uncertainty about the extent of future audits and whether the underlying conduct could be considered systemic. As such, the resolution of these audits could have a material adverse effect on our business, prospects, results of operations and financial condition.
We may become involved in litigation which could negatively impact the value of our business.
From time-to-time we are involved in lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, billing and marketing practices, employment disputes and contractual claims. We may become subject to future lawsuits, claims, audits and investigations that could result in substantial costs and divert our attention and resources and adversely affect our business condition. In addition, since our current growth strategy includes acquisitions, among other things, we may become exposed to legal claims for the activities of an acquired business prior to our acquisition of such business. These lawsuits, claims, audits or investigations, regardless of their merit or outcome, may also adversely affect our reputation and ability to expand our business.
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In addition, from time to time we have received, and expect to continue to receive, correspondence from former employees terminated by us who threaten to bring claims against us alleging that we have violated one or more labor and employment regulations. In certain instances former employees have brought claims against us and we expect that we will encounter similar actions against us in the future. An adverse outcome in any such litigation could require us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs.
If we become subject to large malpractice or other legal claims, we could be required to pay significant damages, which may not be covered by insurance.
In recent years, physicians, hospitals and other health care providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories. Many of these actions involve large monetary claims and significant defense costs. We also owe certain defense and indemnity obligations to our officers and directors.
Our insurance coverage may not cover all claims against us, or insurance coverage may not continue to be available at a cost allowing us to maintain adequate levels of insurance. If one or more successful claims against us were not covered by or exceeded the coverage of our insurance, our financial condition and results of operations could be adversely affected. Our business, profitability and growth prospects could suffer if we face negative publicity or we pay damages or defense costs in connection with a claim that is outside the scope or limits of coverage of any applicable insurance coverage, including claims related to adverse patient events, contractual disputes, professional and general liability, and directors’ and officers’ duties.
In addition, market rates for insurance premiums and deductibles have been steadily increasing. Our earnings and cash flows could be materially and adversely affected by any of the following:
•the collapse or insolvency of our insurance carriers;
•further increases in premiums and deductibles;
•increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; or
•an inability to obtain one or more types of insurance on acceptable terms, if at all.
Failure to comply with Medicare’s conditions for coverage and conditions of participation may result in loss of program payment or other governmental sanctions.
To participate in and receive payment from the Medicare program, our facilities must comply with regulations promulgated by CMS. These regulations, known as "conditions for coverage" for ASCs and "conditions of participation" for hospitals, set forth specific requirements with respect to, among other things, the facility’s physical plant, equipment, personnel and standards of medical care. All of our surgery centers and surgical hospitals are certified to participate in the Medicare program. As such, these facilities are subject to on-site, unannounced surveys by state survey agencies working on behalf of CMS, which may lead to deficiency citations requiring remedy with appropriate action plans. Failure to comply with Medicare’s conditions for coverage or conditions of participation may result in loss of payment or other governmental sanctions, including termination from participation in the Medicare program. We have established ongoing quality assurance activities to monitor our facilities’ compliance with these conditions and respond to surveys, but we cannot be sure that our facilities are or will always remain in full compliance with the requirements. In addition, pending a determination regarding our compliance with these conditions, payment to us may be suspended and we may be required to devote significant time, effort and expense to demonstrate satisfactory compliance.
Our facilities could face decreased Medicare payments if they fail to report and meet various quality metrics.
The Medicare program presently requires hospitals and ASCs to report performance data on a variety of quality metrics. Facilities that fail to report are penalized with reduced Medicare payments. Additionally, payments to hospitals are adjusted based on the hospital’s performance on these quality measures. A substantial portion of hospital payment is at risk depending on its individual performance relative to benchmarks and other hospitals’ performance. There is a substantial risk that our Medicare payments could be reduced if our hospitals fail to perform adequately on these measures. Additionally, there is a risk that Medicare payments could be reduced if our facilities (hospitals and ASCs) fail to adequate report data as required by CMS. ASC payments are not yet adjusted based on performance against quality measures, but there is a substantial risk that Congress may soon link ASC Medicare payments to actual performance, in addition to reporting.
If the public performance data becomes a primary factor in determining where patients choose to receive care, and if competing hospitals and ASCs have better results than our facilities on those measures, our patient volumes could decline.
State efforts to regulate the construction, acquisition or expansion of health care facilities could prevent us from acquiring additional surgical facilities, renovating our existing facilities or expanding the breadth of services we offer.
Some states require prior approval for the construction, acquisition or expansion of health care facilities or expansion of the services the facilities offer. In giving approval, these states consider the need for additional or expanded health care facilities or services, as well as the financial resources and operational experience of the potential new owners of existing health care facilities. In many of the states in which we currently operate, certificates of need must be obtained for capital expenditures exceeding a prescribed amount, changes in capacity or services offered and various other matters. The remaining states in which we now or may in the future operate may adopt
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similar legislation. Our costs of obtaining a certificate of need could be significant, and we cannot assure you that we will be able to obtain the certificates of need or other required approvals for additional or expanded surgical facilities or services in the future. In addition, at the time we acquire a surgical facility, we may agree to replace or expand the acquired facility. If we are unable to obtain required approvals, we may not be able to acquire additional surgical facilities, expand health care services we provide at these facilities or replace or expand acquired facilities.
If antitrust enforcement authorities conclude that our market share in any particular market is too concentrated, that our or our health system partners’ commercial payor contract negotiating practices are illegal, or that we other violate antitrust laws, we could be subject to enforcement actions that could have a material adverse effect on our business, prospects, results of operations and financial condition.
The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the health care industry is currently a priority of the FTC. We believe we are in compliance with federal and state antitrust laws, but courts or regulatory authorities may reach a determination in the future that could have a material adverse effect on our business, prospects, results of operations and financial condition.
Governance Risks
We are a "controlled company" within the meaning of Nasdaq rules and, therefore, we qualify for, and currently rely on, exemptions from certain corporate governance requirements. Our stockholders do not have the same protections afforded to stockholders of companies that are subject to such requirements.
As of December 31, 2021, Bain Capital controlled a majority of the voting power of our outstanding common stock. As a result, we are a "controlled company" within the meaning of the corporate governance standards of Nasdaq. Under these rules, a company of which more than a majority of the voting power is held by an individual, group or another company is a "controlled company" and may elect not to comply with certain corporate governance requirements including:
1.the requirement that a majority of the board of directors consist of independent directors;
2.the requirement that we have a nominating/corporate governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
3.the requirement that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
As of December 31, 2021, we have availed ourselves of certain of these exemptions. For example, we did not have a majority of independent directors for the entire period covered by this report (and may, in the future, have less than a majority of independent directors) and we do not have a nominating and corporate governance committee. Accordingly, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of Nasdaq.
There can be no assurance as to the period of time during which we will remain a "controlled company".
Our controlling stockholder has significant influence over us, including control over decisions that require the approval of stockholders, which could limit our stockholders’ ability to influence the outcome of key transactions, including a change of control.
As of the date of this filing we were controlled by Bain Capital, which beneficially owned approximately 54.9% of our outstanding common stock. For as long as Bain Capital continues to control a majority of the voting power of our common stock, it will be able to direct the election of all of the members of our board of directors and could exercise a controlling influence over our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional common stock or other equity securities, the repurchase or redemption of common stock and the payment of dividends. Similarly, Bain Capital will have the power to determine matters submitted to a vote of our stockholders without the consent of our other stockholders, will have the power to prevent a change in our control and could take other actions that might be favorable to it. Even if Bain Capital ceases to beneficially own a majority of the voting power of our common stock, it will continue to be able to strongly influence or effectively control our decisions.
Provisions in our charter documents and Delaware law may deter takeover efforts that could be beneficial to stockholder value.
Our certificate of incorporation and by-laws and Delaware law contain provisions that could make it harder for a third party to acquire us, even if doing so might be beneficial to our stockholders. The provisions in our organizational documents include a classified board of directors and limitations on actions by our stockholders. In addition, our board of directors has the right to issue preferred stock without stockholder approval that could be used to dilute a potential hostile acquiror. Our certificate of incorporation also imposes some restrictions on mergers and other business combinations between us and any holder of 15.0% or more of our outstanding common stock other than
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affiliates of Bain Capital. As a result of these features, our stockholders may lose their ability to sell their stock for a price in excess of the prevailing market price, and efforts by stockholders to change the direction or management of the Company may be unsuccessful.
Our amended and restated certificate of incorporation designates courts in the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation (the "Certificate of Incorporation") provides that, subject to certain exceptions and to the fullest extent permitted by applicable law, the Court of Chancery of the State of Delaware (the "Court of Chancery") will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware, our Certificate of Incorporation or our amended and restated bylaws or (iv) any other action asserting a claim against us that is governed by the internal affairs doctrine (each, a "Covered Proceeding"). In addition, the Certificate of Incorporation states that this exclusive forum provision does not apply to actions in which the Court of Chancery concludes that an indispensable party is not subject to the jurisdiction of the Delaware courts and can be subject to the jurisdiction of another court within the U.S. Our Certificate of Incorporation also provides that if any action, the subject matter of which is a Covered Proceeding, is filed in a court other than the specified Delaware courts without the approval of our board of directors (each, a "Foreign Action"), the claiming party will be deemed to have consented to (i) the personal jurisdiction of the specified Delaware courts in connection with any action brought in any such courts to enforce the exclusive forum provision described above and (ii) having service of process made upon such claiming party in any such enforcement action by service upon such claiming party’s counsel in the Foreign Action as agent for such claiming party. It is our current view that in some circumstances, such as in respect of actions arising under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Court of Chancery may decline to exercise jurisdiction over such actions. Under such circumstances, our Certificate of Incorporation holds that such actions may properly be filed in a court other than the Court of Chancery. Any person or entity purchasing or otherwise acquiring any interest in shares of our stock shall be deemed to have notice of and to have consented to these provisions in our Certificate of Incorporation. These provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters is located in Brentwood, Tennessee, where we currently lease approximately 85,000 square feet of office space pursuant to an agreement with an initial term expiring December 31, 2027. Our surgical facilities typically are located on real estate leased by the partnership or limited liability company that operates the facility. Most of our ASC facilities range in size from 8,000 to 12,000 square feet, and are specifically tailored to meet the needs of physician-partners and their specialties. Of our 126 surgical facilities, 122 utilize leased real property. These leases generally have initial terms of 10 years, but range from 2 to 15 years. Most of the leases contain options to extend the lease period for up to 10 additional years. We generally guarantee the lease obligations of the partnerships and limited liability companies that own our surgical facilities. We expect to be able to renew or replace a substantial majority of these leases on substantially similar terms as they come due. We believe these spaces are sufficient and adequate for our needs at this time.
Item 3. Legal Proceedings
Stockholder Litigation. Please refer to the disclosure in Note 14. "Commitments and Contingencies - Stockholder Litigation" to our consolidated financial statements included elsewhere in this report, which is incorporated into this item by reference.
Other Litigation. In addition, we are, from time to time, subject to claims and suits, or threats of claims or suits, relating to our business, including claims for damages for personal injuries, breach of management contracts and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages, which may not be covered by insurance or may otherwise have a material adverse effect on our business or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information for Common Stock
Our common stock trades under the symbol "SGRY" on the Nasdaq Global Select Market.
Stockholders
As of February 22, 2022, there were 149 holders of record of our common stock. The actual number of common stockholders is greater than the number of record holders, and includes stockholders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust by other entities.
Dividends
We have never declared or paid a cash dividend on our common stock, and have no current plans to declare or pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of our existing and future outstanding indebtedness we or our subsidiaries incur, including our credit facility. Additionally, because we are a holding company, we would depend on distributions from our subsidiaries to fund any potential dividends.
Stock Performance Graph
The following graph compares the cumulative total stockholder return on our common stock with the cumulative total returns of the Nasdaq Composite Index and the Dow Jones U.S. Health Care Providers Index. The graph begins on December 31, 2016, and the comparison assumes $100 was invested in our common stock and in each of the indices on such date and assumes the reinvestment of dividends, if any.
| 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | |||||||||||||||||||||||||||||||||
| Surgery Partners, Inc. | $ | 100.00 | $ | 76.34 | $ | 61.77 | $ | 98.77 | $ | 183.03 | $ | 336.97 | ||||||||||||||||||||||||||
| Nasdaq Composite Index | $ | 100.00 | $ | 128.24 | $ | 123.26 | $ | 166.68 | $ | 239.42 | $ | 292.42 | ||||||||||||||||||||||||||
| Dow Jones U.S. Health Care Providers Index | $ | 100.00 | $ | 131.84 | $ | 142.54 | $ | 168.27 | $ | 188.36 | $ | 245.90 | ||||||||||||||||||||||||||
This graph is furnished and not filed with the SEC, is not soliciting material under the Exchange Act and shall not be incorporated by reference into any such filings, irrespective of any general incorporation contained in such filing. The stock performance shown on the graph represents historical stock performance and is not necessarily indicative of future stock price performance.
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Recent Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On December 15, 2017, our Board of Directors authorized a share repurchase program of up to $50.0 million of our issued and outstanding common stock from time to time. The timing and size of repurchases will be determined based on market conditions and other factors. The authorization does not obligate us to repurchase any shares, and we may repurchase shares of common stock at any time without prior notice. The share repurchases will be made in accordance with applicable securities laws in open market or privately negotiated transactions. The authorization does not have a specified expiration date, and the share repurchase program may be suspended, recommenced or discontinued at any time or from time to time without prior notice.
The Company did not repurchase any shares of common stock during the three months ended December 31, 2021. At December 31, 2021, the Company continued to have authority to repurchase up to $46.0 million of shares of common stock under the share repurchase program.
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Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding certain of the risks and uncertainties that affect our business and the industry in which we operate, please see Item 1A. "Risk Factors" and Item 9A. "Controls and Procedures" found elsewhere in this report. Unless the context otherwise indicates, the terms "Surgery Partners," "we," "us," "our" or the "Company," as used herein, refer to Surgery Partners, Inc. and its subsidiaries. Unless the context implies otherwise, the term "affiliates" means direct and indirect subsidiaries of Surgery Partners, Inc., and partnerships and joint ventures in which such subsidiaries are partners. The terms "facilities" or "hospitals" refer to entities owned and operated by affiliates of Surgery Partners, Inc. and the term "employees" refers to employees of affiliates of Surgery Partners, Inc.
Executive Overview
As of December 31, 2021, we owned or operated, primarily in partnership with physicians, a portfolio of 126 surgical facilities comprised of 108 ASCs and 18 surgical hospitals across 31 states. We owned a majority interest in 88 of the surgical facilities and consolidated 109 of these facilities for financial reporting purposes.
Total revenues for 2021 increased 19.6% to $2.2 billion from $1.9 billion in 2020. Days adjusted same-facility revenues for 2021 increased 18.1% from 2020, with a 0.5% increase in revenue per case and a 17.6% increase in same-facility cases. Additionally, for 2021, Adjusted EBITDA increased 32.3% to $339.6 million compared to $256.6 million for 2020. The increase in days adjusted same-facility revenues and Adjusted EBITDA is primarily attributable to the Company's recovery from the negative impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020 and acquisitions completed in 2021 and 2020. For 2021, the net loss attributable to common stockholders was $81.2 million compared to $155.6 million for 2020. A reconciliation of non-GAAP financial measures appears below under "Certain Non-GAAP Measures."
We continue to focus on improving our same-facility performance, selectively acquiring established facilities and developing new facilities. During 2021, we acquired controlling interests in eight surgical facilities, including a surgical hospital, and two physician practices for aggregate cash consideration of $285.8 million, net of cash acquired. Two of the surgical facilities were in existing markets and were merged into existing facilities. The cash consideration was funded through available resources.
During 2021, we sold our interests in three surgery centers, one physician practice and certain other assets for combined net cash proceeds of $6.0 million.
We had cash and cash equivalents of $389.9 million and $203.0 million of borrowing capacity under our revolving credit facility at December 31, 2021. Operating cash flows were $87.1 million in 2021, a decrease of $159.8 million compared to the prior year, primarily attributable to Medicare accelerated payments and other funds received under the CARES Act and actions taken to significantly reduce operating expenses and defer non-essential capital expenditures during 2020 and the repayment of Medicare accelerated payments in 2021. Net operating cash outflows, including operating cash flows less distributions to non-controlling interests, were $43.9 million for 2021.
Impact of COVID-19
The COVID-19 pandemic has significantly affected our facilities, employees, patients, communities, business operations and financial performance, as well as the U.S. economy and financial markets. The COVID-19 pandemic materially impacted our financial performance for the year ended December 31, 2020, and continued to impact our financial performance during the year ended December, 31, 2021. The impact of the COVID-19 pandemic on our surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures typically performed. Although we cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, which is difficult to predict and is dependent on factors beyond our control, we saw improvement in surgical case volumes as states re-opened and allowed for non-emergent procedures. We cannot predict if or when utilization may return to pre-pandemic levels.
Executive Order
On July 9, 2021, President Biden issued an executive order that is intended to promote competition in the U.S. economy. Among other things, the executive order encourages the Federal Trade Commission (“FTC”) to ban or limit non-compete agreements, encourages the DOJ and the FTC to review and revise their merger guidelines to ensure that patients are not harmed by healthcare mergers, and instructs HHS to support existing price transparency rules and implement the legislation that was recently adopted to address surprise billing. We cannot predict how, if at all, the various initiatives set forth in the executive order will be implemented by the regulatory agencies involved or the impact that the executive order will have on operations.
Revenues
Our revenues consist of patient service revenues and other service revenues. Patient service revenues consist of revenue from our Surgical Facility Services and Ancillary Services segments. Specifically, patient service revenues include fees for surgical or diagnostic
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procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians. Other service revenues include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets. For the years ended December 31, 2020 and 2019, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of our optical products purchasing organization, which was sold on December 31, 2020.
The following table summarizes revenues by service type as a percentage of total revenues:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Patient service revenues: | ||||||||||||||||||||
| Surgical facilities revenues | 95.7 | % | 95.3 | % | 94.1 | % | ||||||||||||||
| Ancillary services revenues | 3.0 | % | 3.4 | % | 4.3 | % | ||||||||||||||
| Total patient service revenues | 98.7 | % | 98.7 | % | 98.4 | % | ||||||||||||||
| Other service revenues | 1.3 | % | 1.3 | % | 1.6 | % | ||||||||||||||
| Total revenues | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
Payor Mix
The following table sets forth by type of payor the percentage of our patient service revenues generated at the surgical facilities that we consolidate for financial reporting purposes:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Private insurance payors | 50.6 | % | 53.9 | % | 53.8 | % | ||||||||||||||
| Government payors | 43.3 | % | 38.6 | % | 38.9 | % | ||||||||||||||
| Self-pay payors | 2.8 | % | 3.2 | % | 2.6 | % | ||||||||||||||
Other payors (1) | 3.3 | % | 4.3 | % | 4.7 | % | ||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
(1)Other is comprised of anesthesia service agreements, auto liability, letters of protection and other payor types.
Surgical Case Mix
We primarily operate multi-specialty surgical facilities where physicians perform a variety of procedures in various specialties. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.
The following table sets forth the percentage of cases in each specialty performed at the surgical facilities that we consolidate for financial reporting purposes for the periods indicated:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Orthopedics and pain management | 35.7 | % | 39.3 | % | 38.3 | % | ||||||||||||||
| Ophthalmology | 26.3 | % | 25.3 | % | 24.8 | % | ||||||||||||||
| Gastrointestinal | 22.3 | % | 19.4 | % | 20.9 | % | ||||||||||||||
| General surgery | 3.0 | % | 3.1 | % | 3.2 | % | ||||||||||||||
| Other | 12.7 | % | 12.9 | % | 12.8 | % | ||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||
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Segment Information
Our business is currently comprised of two segments: (1) Surgical Facility Services and (2) Ancillary Services. On December 31, 2020, we sold the remaining assets of the Optical Services segment. For more information about the components of each segment, please see Part I, Item 1. Business-Operations included elsewhere in this Annual Report. The "All other" line item below primarily consists of amounts attributable to the Company's corporate general and administrative functions.
The following tables present financial information for each reportable segment (in millions):
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Surgical Facility Services | $ | 2,157.8 | $ | 1,793.4 | $ | 1,748.2 | ||||||||||||||
| Ancillary Services | 67.3 | 63.6 | 79.4 | |||||||||||||||||
| Optical Services | — | 3.1 | 3.8 | |||||||||||||||||
| Total revenues | $ | 2,225.1 | $ | 1,860.1 | $ | 1,831.4 | ||||||||||||||
| Adjusted EBITDA: | ||||||||||||||||||||
| Surgical Facility Services | $ | 422.0 | $ | 339.3 | $ | 328.9 | ||||||||||||||
| Ancillary Services | 1.7 | (3.4) | 2.6 | |||||||||||||||||
| Optical Services | — | 1.4 | 1.4 | |||||||||||||||||
| All other | (84.1) | (80.7) | (74.3) | |||||||||||||||||
Total Adjusted EBITDA (1) | $ | 339.6 | $ | 256.6 | $ | 258.6 | ||||||||||||||
| Supplemental Information: | ||||||||||||||||||||
| Cash purchases of property and equipment, net: | ||||||||||||||||||||
| Surgical Facility Services | $ | 55.0 | $ | 38.7 | $ | 65.9 | ||||||||||||||
| Ancillary Services | 0.5 | 0.4 | 1.1 | |||||||||||||||||
| All other | 2.1 | 3.8 | 6.6 | |||||||||||||||||
| Total cash purchases of property and equipment, net | $ | 57.6 | $ | 42.9 | $ | 73.6 | ||||||||||||||
(1)For a reconciliation of Adjusted EBITDA to income before income taxes as reflected in the audited consolidated statements of operations see "Certain Non-GAAP Measures" below.
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Assets: | ||||||||||||||
| Surgical Facility Services | $ | 5,552.8 | $ | 4,962.4 | ||||||||||
| Ancillary Services | 47.5 | 35.0 | ||||||||||||
| All other | 517.3 | 415.8 | ||||||||||||
| Total assets | $ | 6,117.6 | $ | 5,413.2 | ||||||||||
Critical Accounting Policies
In preparing our consolidated financial statements in conformity with U.S. Generally Accepted Accounting Principles ("GAAP"), we must use estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures and the reported amounts of revenue and expenses. In general, our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates.
We consider our critical accounting policies to be those that involve significant judgments and uncertainties, and may potentially result in materially different results under different assumptions and conditions.
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Revenue Recognition
Our patient service revenues are derived primarily from surgical procedures performed at our ASCs and surgical hospitals, patient visits to physician practices, anesthesia services provided to patients, pharmacy services and diagnostic screens ordered by our physicians. The fees for such services are billed either to the patient or a third-party payor, including Medicare and Medicaid. We recognize patient service revenues, net of contractual allowances, which we estimate based on existing contracts or the historical trend of our cash collections and contractual write-offs.
Prior to its sale on December 31, 2020, our optical products purchasing organization negotiated volume buying discounts with optical product manufacturers. The buying discounts and any handling charges billed to the members of the purchasing organization represented the revenues recognized for financial reporting purposes. Revenue is recognized as orders are shipped to members.
Other service revenues consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets. The fees we derive from these management arrangements are based on a predetermined percentage of the revenues of each surgical facility and physician network. We recognize other service revenues in the period in which services are rendered.
There were no material impacts on our financial condition or results of operations due to changes in assumptions or conditions related to revenue recognition during the years ended December 31, 2021, 2020 and 2019.
Accounts Receivable
Our patient service revenues and other receivables from third-party payors are recorded net of estimated implicit price concessions which are estimated based on the historical trend of our surgical hospitals’ cash collections and contractual write-offs, and for our surgical facilities in general, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.
Our collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The operating systems used to manage our patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient. We analyze accounts receivable at each of our surgical facilities to ensure the proper collection and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts. Collection efforts include direct contact with insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required. Our average days sales outstanding was 67 and 69 days for the years ended December 31, 2021 and 2020, respectively.
We recognize that final reimbursement of outstanding accounts receivable is subject to final approval by each third-party payor. However, because we have contracts with our third-party payors and we verify the insurance coverage of the patient before services are rendered, the amounts that are pending approval from third-party payors are minimal. Amounts are classified outside of self-pay if we have an agreement with the third-party payor or we have verified a patient’s coverage prior to services rendered. It is our policy to collect co-payments and deductibles prior to providing services, where possible. It is also our policy to verify a patient’s insurance 72 hours prior to the patient’s procedure. Because our services are primarily non-emergency, our surgical facilities have the ability to control these procedures.
There were no material impacts on our financial condition or results of operations due to changes in assumptions or conditions related to accounts receivable during the years ended December 31, 2021, 2020 and 2019.
Income Taxes
We use the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If a NOL and/or interest limitation ("163(j)") carryforward exists, we make a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future. A valuation allowance will be established for certain NOL and 163(j) carryforwards and other deferred tax assets where their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets is based upon estimates and assumptions related to our ability to generate sufficient future taxable income in certain tax jurisdictions. If these estimates and related assumptions change in the future, we will be required to adjust our deferred tax valuation allowances.
As of December 31, 2021, we had unused federal NOL carryforwards of approximately $573.0 million. Such losses expire in various amounts at varying times beginning in 2029. Unless they expire, these NOL carryforwards may be used to offset future taxable income and thereby reduce our income taxes otherwise payable.
We recorded a valuation allowance against our deferred tax assets at December 31, 2021 and 2020 totaling $113.0 million and $91.1 million, respectively. The valuation allowance has been established for certain deferred tax assets for which we believe it is more likely than not that the tax benefits will not be realized, which are primarily Section 163(j) interest carryforwards and certain state net operating losses and state credit carryforwards. If our expectations for future operating results on a consolidated basis or at the state jurisdiction level
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vary from actual results due to changes in health care regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets. Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on our future earnings.
Section 382 of the Internal Revenue Code of 1986 ("Section 382"), as amended (the "Code") imposes an annual limit on the ability of a corporation that undergoes an "ownership change" to use its NOLs to reduce its tax liability. An "ownership change" is generally defined as any change in ownership of more than 50.0% of a corporation’s "stock" by its "5-percent shareholders" (as defined in Section 382) over a rolling three-year period based upon each of those shareholder’s lowest percentage of stock owned during such period. As a result of the Symbion acquisition in 2014, approximately $146.9 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million, and, as a result of the NovaMed acquisition in 2011, approximately $11.0 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million. As a result of the acquisition of NSH, approximately $24.7 million in NOL carryforwards are subject to an annual Section 382 base limitation of $2.8 million. The acquisition of shares of the Company by Bain Capital in 2017 to become the controlling stockholder resulted in an ownership change as defined in Section 382. As a result, approximately $448.0 million in NOL carryforwards are subject to an annual Section 382 base limitation of $14.2 million. At this time, we do not believe this limitation, when combined with amounts allowable due to net unrecognized built in gains, will affect our ability to use any NOLs before they expire. However, no such assurances can be provided. If our ability to utilize our NOLs to offset taxable income generated in the future is subject to this limitation, it could have an adverse effect on our business, prospects, results of operations and financial condition.
There were no material impacts on our financial condition or results of operations due to changes in assumptions or conditions related to income taxes during the years ended December 31, 2021, 2020 and 2019.
Impairment of Goodwill
Goodwill represents the excess of the fair value of the consideration conveyed in the acquisition over the fair value of net assets acquired. Goodwill is reviewed for impairment at the reporting unit level, which is defined as one level below an operating segment, on an annual basis or sooner if the indicators of impairment arise. Our judgments regarding the existence of impairment indicators are based on market conditions and operational performance of each reporting unit. During 2021, the Company had identified two reporting units, which include the following: 1) Surgical Facilities and 2) Ancillary Services. Prior to 2021, the Company had a third reporting unit, Alliance, which was a component of the Optical Services operating segment.
The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, as of October 1, or more frequently if certain indicators arise. A detailed evaluation of potential impairment indicators was performed, which specifically considered the volatility observed in the prices of the Company’s outstanding debt securities and common stock, as well as the decline in surgical case volumes following the emergence of the COVID-19 pandemic, all of which improved in the second half of 2020 and throughout 2021 as states re-opened and allowed for non-emergent procedures.
As of October 1, 2021, all of the Company's goodwill was allocated to the Surgical Facilities reporting unit. As of the October 1, 2021 valuation, the fair value for the Surgical Facilities reporting unit was substantially in excess of its carrying value.
Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2021, macroeconomic, industry and market conditions, and other market indicators including its market capitalization. Based on its evaluation of all such factors, the Company concluded that an event had not occurred or circumstances had not changed that would more likely than not reduce the fair value of its reporting units below their carrying values.
In 2021 there were no non-cash impairment charges.
During the year ended December 31, 2020, as a result of its impairment testing, the Company recorded non-cash impairment charges of $28.6 million and $4.9 million related to the Ancillary Services and Alliance reporting units, respectively.
During the year ended December 31, 2019, as a result of its impairment testing, the Company recorded non-cash impairment charges of $2.5 million related to the Alliance reporting unit.
See Note 4. "Goodwill and Intangible Assets" to the consolidated financial statements elsewhere in this Annual Report for additional disclosure related to goodwill.
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Results of Operations
The following tables summarize certain results from the statements of operations for the periods indicated (dollars in millions):
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Revenues | $ | 2,225.1 | $ | 1,860.1 | $ | 1,831.4 | ||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Cost of revenues | 1,733.7 | 1,480.3 | 1,407.6 | |||||||||||||||||
| General and administrative expenses | 104.0 | 97.1 | 88.6 | |||||||||||||||||
| Depreciation and amortization | 98.8 | 94.8 | 76.5 | |||||||||||||||||
| Income from equity investments | (11.3) | (10.8) | (10.2) | |||||||||||||||||
| Loss (gain) on disposals, net | 2.2 | 5.7 | (4.4) | |||||||||||||||||
| Transaction and integration costs | 39.8 | 23.2 | 19.0 | |||||||||||||||||
| Impairment charges | — | 33.5 | 7.9 | |||||||||||||||||
| Grant funds | (37.9) | (46.2) | — | |||||||||||||||||
| Loss on debt extinguishment | 9.1 | — | 11.7 | |||||||||||||||||
| Litigation settlement | — | 1.2 | 0.2 | |||||||||||||||||
| Other income | (15.5) | (1.7) | (1.4) | |||||||||||||||||
| Total operating expenses | 1,922.9 | 1,677.1 | 1,595.5 | |||||||||||||||||
| Operating income | 302.2 | 183.0 | 235.9 | |||||||||||||||||
| Tax receivable agreement expense | — | — | (2.4) | |||||||||||||||||
| Interest expense, net | (221.0) | (201.8) | (178.9) | |||||||||||||||||
| Income (loss) before income taxes | 81.2 | (18.8) | 54.6 | |||||||||||||||||
| Income tax expense (benefit) | 10.5 | (20.1) | 9.5 | |||||||||||||||||
| Net income | 70.7 | 1.3 | 45.1 | |||||||||||||||||
| Less: Net income attributable to non-controlling interests | (141.6) | (117.4) | (119.9) | |||||||||||||||||
| Net loss attributable to Surgery Partners, Inc. | $ | (70.9) | $ | (116.1) | $ | (74.8) | ||||||||||||||
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Overview. During 2021, our revenues increased 19.6% to $2.2 billion compared to $1.9 billion in 2020. We incurred a net loss attributable to Surgery Partners, Inc. of $70.9 million in 2021, compared to $116.1 million in 2020. The increase in revenues was primarily attributable to increases in surgical case volumes as the Company recovered from the COVID-19 pandemic that began in the first quarter of 2020 and acquisitions completed in 2021 and 2020.
Revenues. Revenues for 2021 and 2020 were as follows (dollars in millions):
| Year Ended December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Patient service revenues | $ | 2,195.0 | $ | 1,836.1 | ||||||||||
| Other service revenues | 30.1 | 24.0 | ||||||||||||
| Total revenues | $ | 2,225.1 | $ | 1,860.1 | ||||||||||
Patient service revenues increased 19.5% to $2.2 billion in 2021 compared to $1.8 billion in 2020. The increase was driven by a 17.6% increase in days adjusted same-facility case volume, a 0.5% increase in same-facility revenue per case and acquisitions completed in 2021 and 2020. The increase in same-facility revenues was primarily driven by case count recovery from the impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020.
Cost of Revenues. Cost of revenues were $1.7 billion in 2021 compared to $1.5 billion in 2020. The increase was primarily driven by case count recovery from the impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020 and acquisitions completed in 2021 and 2020. As a percentage of revenues, cost of revenues was 77.9% and 79.6% for 2021 and 2020, respectively, as lower acuity procedures with lower cost of sales returned from COVID-19 pandemic-related lows experienced in 2020.
General and Administrative Expenses. General and administrative expenses were $104.0 million and $97.1 million in 2021 and 2020, respectively. As a percentage of revenues, general and administrative expenses were 4.7% in 2021 compared to 5.2% in 2020. The decrease
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as a percentage of revenues is primarily the result of increased revenues driven by the recovery in surgical case volume from the impacts of the COVID-19 pandemic that the Company began experiencing in the first quarter of 2020.
Depreciation and Amortization. Depreciation and amortization was $98.8 million and $94.8 million in 2021 and 2020, respectively. The increase is primarily due to acquisitions completed in 2021 and 2020. As a percentage of revenues, depreciation and amortization expenses were 4.4% in 2021 and 5.1% in 2020.
Loss (gain) on Disposals, Net. The net loss on disposals was $2.2 million in 2021, including a $4.0 million net gain on the sale of three surgery centers, a physician practice and certain other assets, offset by a net loss of $6.2 million related to disposals of other long-lived assets. The net loss on disposals was $5.7 million in 2020, including a $2.5 million net gain on the sale of three surgical facilities, certain assets related to the Company's anesthesia business, certain imaging assets, the Company's optical products purchasing organization and the closure of a diagnostic laboratory, offset by a net loss of $8.2 million primarily related to disposals of other long-lived assets.
Transaction and Integration Costs. We incurred $39.8 million of transaction and integration costs in 2021 compared to $23.2 million in 2020. The increase primarily relates to costs for ongoing development initiatives and the integration of acquisitions we completed in 2021 and 2020.
Impairment Charges. In 2020 we recorded non-cash impairment charges of $28.6 million and $4.9 million for goodwill assigned to the Ancillary Services and Alliance reporting units, respectively. See Note 4. "Goodwill and Intangibles" to our consolidated financial statements included elsewhere in this report for further discussion. There were no impairment charges in 2021.
Grant Funds. During 2021, the Company received approximately $27.0 million of additional grants from HHS. Based on guidance from HHS and other authorities, the Company updated its estimate of the amount of grant funds received that qualify for recognition, resulting in the recognition of $37.9 million during 2021. Grant funds recognized were $46.2 million in 2020. For further discussion, see Note 1. "Organization and Summary of Accounting Polices - COVID-19 Pandemic" to our consolidated financial statements included elsewhere in this report.
Loss on Debt Extinguishment. The net loss on debt extinguishment was $9.1 million for 2021. See Note 5. "Long-Term Debt" to our consolidated financial statements included elsewhere in this report.
Interest Expense, Net. Interest expense, net, was $221.0 million in 2021 compared to $201.8 million in 2020. The increase primarily relates to the 2020 Incremental Term Loans, which were fully drawn on April 22, 2020 and the issuance of additional 2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020. As a percentage of revenues, interest expense, net was 9.9% in 2021 compared to 10.8% in 2020.
Income Tax Expense (Benefit). The income tax expense was $10.5 million and income tax benefit was $20.1 million in 2021 and 2020, respectively. The effective tax rate was 12.9% for 2021 compared to 106.9% in 2020. The decrease from 2020 primarily relates to discrete items occurring in 2020. In 2020, the Company's effective tax rate was impacted by (i) the release of federal and state valuation allowances on the Company’s Internal Revenue Code Section 163(j) interest carryforwards as a result of the increase in deductible interest expense allowed under the CARES Act; (ii) the release of federal and state valuation allowances on the Company’s deferred tax assets related to debt financing costs as a result of the finalization of the Internal Revenue Code Section 163(j) interest regulations, for which the deductions of such debt financing costs that are incurred in years 2021 and forward are not considered interest expense for income tax purposes; and (iii) the Settlement Agreement, as discussed in Note 14. "Commitments and Contingencies" to our consolidated financial statements included elsewhere in this Annual Report, which provided that a portion of the final settlement amount was "restitution" for income tax purposes. For 2021, the effective tax rate is primarily impacted by income tax benefits related to (i) the 2021 vesting of certain restricted stock awards, and (ii) certain 2021 entity divestitures.
Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests was $141.6 million and $117.4 million in 2021 and 2020, respectively. As a percentage of revenues, net income attributable to non-controlling interests was 6.4% in 2021 and 6.3% for 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Our discussion regarding the comparison of the year ended December 31, 2020 compared to the year ended December 31, 2019 was previously disclosed beginning on page 47 in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed on March 10, 2021, under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Year Ended December 31, 2020 Compared to Year Ended December 31, 2019" and is hereby incorporated herein by reference.
Liquidity and Capital Resources
Operating Activities
The primary source of our operating cash flow is the collection of accounts receivable from federal and state agencies (under the Medicare and Medicaid programs), private insurance companies and individuals. Cash flow provided by operating activities was $87.1 million and $246.9 million in 2021 and 2020, respectively. The decrease is primarily due to the final DOJ settlement payment in the second quarter of 2021, receipts of government grants and Medicare advance payments provided through the CARES Act, as well as actions taken
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to significantly reduce cash operating expenses and defer non-essential expenditures during 2020 and the repayment of Medicare advance payments during 2021.
Investing Activities
Net cash used in investing activities in 2021 was $331.7 million, which included $57.6 million related to purchases of property and equipment. We paid $285.8 million in cash for acquisitions (net of cash acquired) which included a controlling interest in eight surgical facilities, including a surgical hospital, and two physician practices. Additionally, we received cash proceeds of $6.0 million related to the sale of interests in three surgery centers, a physician practice and certain other assets. Further, we received cash proceeds of $5.4 million related to the sale of interests in a non-consolidated surgical facility accounted for as an equity method investment.
Net cash used in investing activities in 2020 was $88.4 million, which included $42.9 million related to purchases of property and equipment. We paid $104.6 million in cash for acquisitions (net of cash acquired), which included a controlling interest in three surgical facilities, including a surgical hospital, a controlling interest in five surgical facilities in existing markets that were merged into existing facilities and a physician practice. Additionally, we received cash proceeds of $58.5 million related to the sale of interests in three surgery centers, certain assets related to our anesthesia business, certain imaging assets and an optical products purchasing organization
Financing Activities
Net cash provided by financing activities in 2021 was $316.3 million. During the year ended December 31, 2021, we made distributions to non-controlling interest holders of $131.0 million and payments related to ownership transactions with consolidated affiliates of $28.4 million. Further, we made repayments on our long-term debt of $343.2 million and paid debt issuance costs of $11.7 million, which were partially offset by borrowings of $299.4 million. We also received net proceeds of $554.2 million from two equity offerings during the year and paid a cash dividend of $5.1 million related to the Series A Preferred Stock. On May 17, 2021, we issued 22.609 million shares of our common stock, $0.01 par value per share, to Bain Capital, as a result of the conversion of all outstanding shares of our Series A Preferred Stock at a conversion price of $19.00 per share. As a result of such conversion, we currently have no shares of Series A Preferred Stock issued or outstanding.
Net cash provided by financing activities in 2020 was $66.7 million. During the year ended December 31, 2020, we made distributions to non-controlling interest holders of $109.6 million and payments related to ownership transactions with consolidated affiliates of $27.4 million. Further, we made repayments on our long-term debt of $216.3 million, which was offset by borrowings of $429.4 million. In connection with the 2020 Incremental Term Loans, which were fully drawn on April 22, 2020, and the issuance of additional 2027 Unsecured Notes in the amount of $115.0 million effective July 30, 2020, we paid debt issuance costs of $8.5 million.
Discussion of the operating, investing and financing activities for the year ended December 31, 2019 was previously disclosed beginning on page 49 in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed on March 10, 2021, under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and is hereby incorporated herein by reference.
Debt
As of December 31, 2021, the carrying value of our total indebtedness was $2.939 billion, which includes unamortized fair value discount of $3.0 million and unamortized deferred financing costs and issuance discount of $16.5 million.
Term Loan and Revolving Credit Facility
As of December 31, 2021, we had term loan borrowings with a carrying value of $1.531 billion, consisting of outstanding aggregate principal of $1.534 billion and unamortized fair value discount of $3.0 million (the "Term Loan"). The Term Loan matures on August 31, 2026 (or, if at least $185 million of the Borrower’s 6.750% senior unsecured notes due 2025 shall have not either been repaid, repurchased or redeemed or refinanced with indebtedness having a maturity date not earlier than 91 days after August 31, 2026 by no later than April 1, 2025, then April 1, 2025) and amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount.
We have a revolving credit facility providing for revolving borrowings of up to $210.0 million (the "Revolver" and, together with the Term Loan, the "Senior Secured Credit Facilities"). The Revolver will mature on February 1, 2026. As of December 31, 2021, our availability on the Revolver was $203.0 million (including outstanding letters of credit of $7.0 million).
The Revolver may be utilized for working capital, capital expenditures and general corporate purposes. Subject to certain conditions and requirements set forth in the credit agreement, we may request one or more additional incremental term loan facilities or one or more increases in the commitments on the Revolver.
The Senior Secured Credit Facilities bear interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75% per annum (LIBOR with respect to the Term Loan shall be subject to a floor of 0.75%) or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (the alternate base rate with respect to the Term Loan shall be subject to a floor of 1.75%)) plus a margin of 2.75% per annum. In addition, we are required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver.
See Note 5. "Long-Term Debt" to our consolidated financial statements included elsewhere in this report for a further discussion of the Senior Secured Credit Facilities.
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Senior Unsecured Notes
We have $545.0 million aggregate principal amount of senior unsecured notes due April 15, 2027, which bear interest at the rate of 10.000% per year, payable semi-annually on April 15 and October 15 of each year.
We have $370.0 million aggregate principal amount of senior unsecured notes due July 1, 2025, which bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year.
See Note 5. "Long-Term Debt" to our consolidated financial statements included elsewhere in this report for a further discussion of the senior unsecured notes.
Other Debt
We and certain of our subsidiaries have other debt consisting of outstanding bank indebtedness of $145.0 million, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made, and right-of-use finance lease obligations of $364.6 million for which we are liable to various vendors for several property and equipment leases classified as finance leases.
Material Cash Requirements
The following table summarizes our material cash requirements by period as of December 31, 2021 (in millions):
| Payments Due by Period | ||||||||||||||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 4-5 years | More than 5 years | ||||||||||||||||||||||||||||
Long-term debt obligations, including interest (1) | $ | 4,035.3 | $ | 244.1 | $ | 470.9 | $ | 2,214.9 | $ | 1,105.4 | ||||||||||||||||||||||
Operating lease obligations, including interest (2) | 532.3 | 71.5 | 133.0 | 109.1 | 218.7 | |||||||||||||||||||||||||||
Tax receivable agreement (3) | 22.0 | 20.2 | 1.8 | — | — | |||||||||||||||||||||||||||
| Total contractual obligations | $ | 4,589.6 | $ | 335.8 | $ | 605.7 | $ | 2,324.0 | $ | 1,324.1 | ||||||||||||||||||||||
(1)Included in long-term debt obligations are principal and interest owed on our outstanding debt obligations. These amounts exclude our unamortized fair value adjustments related non-cash amortization for the Term Loan. These obligations are explained further in Note 5. "Long-Term Debt" to our consolidated financial statements included elsewhere in this Annual Report. We used the applicable annual interest rate as of December 31, 2021 of 4.50%, based on LIBOR plus the applicable margin, for our $1.5 billion outstanding Term Loan to estimate interest payments on this variable rate debt instrument.
(2)This reflects our future operating lease payments. We enter into operating leases in the normal course of business. Substantially all of our operating lease agreements have fixed payment terms based on the passage of time. Some lease agreements provide us with the option to renew the lease. Our future operating lease obligations would change if we exercised these renewal options and if we entered into additional operating lease agreements. These obligations are explained further in Note 6. "Leases" to our consolidated financial statements included elsewhere in this Annual Report. Operating lease obligations do not include common area maintenance, insurance or tax payments for which we are also obligated to pay.
(3)This reflects payments made pursuant to the terms of the TRA, as described further in Note 14 to the consolidated financial statements included elsewhere in this report.
In addition to the cash requirements above, pursuant to the CARES Act, repayment of certain advanced payments and other deferrals received as part of relief during 2020 began in 2021. We received approximately $120 million of accelerated payments during the year ended December 31, 2020. During the year ended December 31, 2021, approximately $60 million was repaid. See Note 1. "Organization and Summary of Accounting Policies" to our consolidated financial statements included elsewhere in this report, for further discussion on the repayment terms related to certain relief previously received by us. In addition to the continued repayment of the advanced payments received under the CARES Act, we anticipate additional cash outflows during 2022 for the repayment of the remaining payroll taxes deferred in 2020 pursuant to the CARES Act (see Note 1. "Organization and Summary of Accounting Policies" for further discussion of the amounts deferred and repayment terms).
Capital Resources
In addition to cash flows from operations, available cash and capacity on our Revolver, other sources of capital available to the Company include funds received under the CARES Act and continued access to the capital markets.
As previously noted in Note 9. "Earning Per Share" to our consolidated financial statements included elsewhere in this report, in 2021, we completed two public offerings pursuant to which the Company sold 15,525,000 shares of common stock, resulting in net proceeds of $554.2 million.
As noted in Note 1. "Organization and Summary of Accounting Policies" to our consolidated financial statements included elsewhere in this report, the Company received approximately $27 million of the grant funds distributed under the CARES Act and other governmental assistance programs during the year ended December 31, 2021, which are not required to be repaid, subject to certain terms and conditions.
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Summary
The COVID-19 pandemic has resulted in, and may continue to result in, significant disruptions of financial and capital markets, which could reduce our ability to access capital and negatively affect our liquidity in the future. Additionally, while we have received grants and accelerated payments under the CARES Act and other government assistance programs and may receive additional amounts in the future, there is no assurance regarding the extent to which anticipated negative impacts arising from the COVID-19 pandemic will be offset by amounts and benefits received under the CARES Act or future legislation.
Although we have seen continued improvement in surgical case volumes as states re-opened and allowed for non-emergent procedures, broad economic factors resulting from the current COVID-19 pandemic, including increased unemployment rates and reduced consumer spending, could negatively affect our payor mix, increase the relative proportion of lower margin services we provide and reduce patient volumes, as well as diminish our ability to collect outstanding receivables. Business closings and layoffs in the areas in which we operate may lead to increases in the uninsured and underinsured populations and adversely affect demand for our services, as well as the ability of payors to pay for services as rendered. Any increase in the amount or deterioration in the collectability of patient accounts receivable will adversely affect our cash flows and results of operations, requiring an increased level of working capital. If general economic conditions continue to deteriorate or remain uncertain for an extended period of time, our liquidity and ability to repay our outstanding debt may be harmed.
Based on our current level of operations, we believe cash flows from operations, available cash, available capacity on our Revolver, funds we have received under the CARES Act, funds we may receive in the future and continued access to capital markets, will be adequate to meet our short-term (i.e., 12 months) and long-term (beyond 12 months) liquidity needs.
Certain Non-GAAP Measures
Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with GAAP. The items excluded from this non-GAAP metric are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies. We use Adjusted EBITDA and Adjusted EBITDA excluding grant funds as measures of financial performance. Adjusted EBITDA and Adjusted EBITDA excluding grant funds are key measures used by our management to assess operating performance, make business decisions and allocate resources.
The following table reconciles Adjusted EBITDA and Adjusted EBITDA excluding grant funds to income (loss) before income taxes, the most directly comparable GAAP financial measure (in millions and unaudited):
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||||||||||
| Income (loss) before income taxes | $ | 81.2 | $ | (18.8) | $ | 54.6 | ||||||||||||||
| Plus (minus): | ||||||||||||||||||||
| Net income attributable to non-controlling interests | (141.6) | (117.4) | (119.9) | |||||||||||||||||
| Depreciation and amortization | 98.8 | 94.8 | 76.5 | |||||||||||||||||
| Interest expense, net | 221.0 | 201.8 | 178.9 | |||||||||||||||||
| Equity-based compensation expense | 17.4 | 13.2 | 10.2 | |||||||||||||||||
Transaction and integration related costs (1) | 46.1 | 38.2 | 36.1 | |||||||||||||||||
| Impairment charges | — | 33.5 | 7.9 | |||||||||||||||||
| Loss (gain) on disposals, net | 2.2 | 5.7 | (4.4) | |||||||||||||||||
Litigation settlement and other litigation costs (2) | 5.6 | 6.4 | 4.6 | |||||||||||||||||
Gain on escrow release (3) | — | (0.8) | — | |||||||||||||||||
| Loss on debt extinguishment | 9.1 | — | 11.7 | |||||||||||||||||
Hurricane-related impacts (4) | (0.2) | — | — | |||||||||||||||||
| Tax receivable agreement expense | — | — | 2.4 | |||||||||||||||||
| Adjusted EBITDA | $ | 339.6 | $ | 256.6 | $ | 258.6 | ||||||||||||||
Less: Impact of grant funds (5) | (25.3) | (31.1) | — | |||||||||||||||||
| Adjusted EBITDA excluding grant funds | $ | 314.3 | $ | 225.5 | $ | 258.6 | ||||||||||||||
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(1)For the year ended December 31, 2021, this amount includes transaction and integration costs of $39.8 million and start-up costs related to a de novo surgical hospital of $6.3 million. For the year ended December 31, 2020, this amount includes transaction and integration costs of $23.2 million and start-up costs related to a de novo surgical hospital of $15.0 million. For the year ended December 31, 2019, this amount includes transaction and integration costs of $19.0 million and other acquisition costs and start-up costs related to a de novo surgical hospital of $17.1 million.
(2)This amount includes litigation settlement costs of $1.2 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively, with no comparable costs in 2021. This amount also includes other litigation costs of $5.6 million, $5.2 million and $4.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(3)Included in other income in the consolidated statement of operations for the year ended December 31, 2020, with no comparable gain in 2021 and 2019.
(4)Reflects the impact of insurance proceeds received net of operating losses incurred in the six months ended December 31, 2021, at a surgical facility that was closed following Hurricane Ida.
(5)Represents the impact of grant funds recognized, net of amounts attributable to non-controlling interests.
We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our credit facilities. Credit Agreement EBITDA is determined on a trailing twelve-month basis. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures. Credit Agreement EBITDA is not a measurement of liquidity under GAAP, and should not be considered in isolation or as a substitute for any other measure calculated in accordance with GAAP. The items excluded from Credit Agreement EBITDA are significant components in understanding and evaluating our liquidity. Our calculation of Credit Agreement EBITDA may not be comparable to similarly titled measures reported by other companies.
When we use the term "Credit Agreement EBITDA," we are referring to Adjusted EBITDA, as defined above, further adjusted for acquisitions and synergies. These adjustments do not relate to our historical financial performance and instead relate to estimates compiled by management and calculated in conformance with the definition of "Consolidated EBITDA" used in the credit agreements governing our credit facilities.
The following table reconciles Credit Agreement EBITDA to cash flows from operating activities, the most directly comparable GAAP financial measure (in millions and unaudited):
Year Ended December 31, 2021 | ||||||||
| Cash flows from operating activities | $ | 87.1 | ||||||
| Plus (minus): | ||||||||
| Non-cash interest income, net | (22.0) | |||||||
| Non-cash lease expense | (39.1) | |||||||
| Deferred income taxes | (8.9) | |||||||
| Income from equity investments, net of distributions received | (0.2) | |||||||
| Changes in operating assets and liabilities, net of acquisitions and divestitures | 75.5 | |||||||
| Medicare accelerated payments and deferred governmental grants | 73.6 | |||||||
| Income tax benefit | 10.5 | |||||||
| Net income attributable to non-controlling interests | (141.6) | |||||||
| Interest expense, net | 221.0 | |||||||
| Transaction and integration related costs | 46.1 | |||||||
| Litigation settlement and other litigation costs | 5.6 | |||||||
| DOJ settlement payment | 32.2 | |||||||
| Hurricane-related impacts | (0.2) | |||||||
Acquisitions and synergies (1) | 84.7 | |||||||
| Credit Agreement EBITDA | $ | 424.3 | ||||||
(1)Represents impact of acquisitions as if each acquisition had occurred on January 1, 2021. Further this includes revenue synergies from other business initiatives, de novo facilities and an adjustment for the effects of adopting the new lease accounting standard, as defined in the credit agreement governing the Senior Secured Credit Facilities.
Inflation
Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.
Recent Accounting Pronouncements
Please refer to Note 1. "Organization and Summary of Accounting Policies - Recent Accounting Pronouncements" to our consolidated financial statements included elsewhere in this Annual Report for a discussion of the impact of the adoption of recently issued accounting standards and accounting standards not yet adopted.
50
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities. We utilize a balanced mix of maturities along with both fixed rate and variable rate debt to manage our exposures to changes in interest rates. Additionally, we periodically enter into interest rate swap agreements to manage our exposure to interest rate fluctuations. Our interest rate swap agreements involve the exchange of fixed and variable rate interest payments between two parties, based on common notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these agreements is considered low because the swap agreements are with creditworthy financial institutions. The interest payments under these agreements are settled on a net basis. These derivatives have been recognized in the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are designated as cash flow hedges, are included in other comprehensive income.
Our variable rate debt instruments are primarily indexed to the prime rate or LIBOR. Without derivatives, interest rate changes would result in gains or losses in the market value of our fixed rate debt portfolio due to differences in market interest rates and the rates at the inception of the debt agreements. Based on our indebtedness and the effectiveness of our interest rate swap and cap agreements at December 31, 2021, we do not expect changes in interest rates to have a material effect on our net earnings or cash flows in 2022.
Item 8. Financial Statements and Supplementary Data
Information with respect to this Item is contained in our consolidated financial statements beginning on Page F-1 of this Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures and Limitations on the Effectiveness of Controls
An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on the evaluation of our disclosure controls and procedures conducted as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate "internal control over financial reporting" (as such term is defined in Rule 13a-15(f)) under the Exchange Act) for the Company. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions and disposition of assets; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures are made only in accordance with management and board authorizations; and providing reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements prepared for external purposes in accordance with GAAP. Because of the inherent limitations in any internal control, no matter how well designed, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2021. The assessment was based on criteria established in the framework Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, determined that our internal control over financial reporting was effective as of December 31, 2021.
Deloitte & Touche LLP, the Company's independent registered public accounting firm, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2021. Their attestation report is included below in this Item 9A.
51
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d‑15(d) of the Exchange Act that occurred during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Surgery Partners, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Surgery Partners, Inc. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of the Company and our report dated March 1, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Nashville, TN
March 1, 2022
March 1, 2022
53
Item 9B. Other Information
On February 25, 2022, George M. Goodwin, the Company’s American Group President, notified the Company of his intention to retire later this year. In recognition of his service to the Company and for potential consulting services that Mr. Goodwin may provide to the Company following his retirement, the Board approved a Retirement and Consulting Agreement between the Company and Mr. Goodwin (the “Retirement Agreement”). Pursuant to the terms of the Retirement Agreement, Mr. Goodwin is entitled to receive, among other consideration, $704,000 in cash paid beginning six months after his retirement, continued participation in the Company’s health plan for 12 months following retirement, a prorated portion of any annual cash incentive award earned by Mr. Goodwin for the calendar year 2022 determined in accordance with past Company practices, and partial vesting of equity awards. Additionally, Mr. Goodwin will be paid $300 per hour for consulting services requested by the Company following his retirement.
Pursuant to the Retirement Agreement, Mr. Goodwin agrees to be bound by certain restrictive covenants, including non-competition, interference with relationships, and non-solicitation restrictions for a period of 12 months following the date of his retirement. The Retirement Agreement includes certain other customary terms, including with respect to protection of confidential information.
The foregoing description of the Retirement Agreement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Retirement Agreement, which is incorporated into this Item 9B by reference to Exhibit 10.41 of this Annual Report on Form 10-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
54
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information called for by Item 10 is incorporated herein by reference to the definitive Proxy Statement of the Company relating to the 2022 Annual Meeting of Stockholders (the "Definitive Proxy Statement"), which the Company intends to file within 120 days after the close of its fiscal year ended December 31, 2021.
Item 11. Executive Compensation
The information called for by Item 11 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information called for by Item 12 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by Item 13 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.
Item 14. Principal Accounting Fees and Services
The information called for by Item 14 is incorporated herein by reference to the Definitive Proxy Statement referenced above in Item 10.
55
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements
Our Consolidated Financial Statements and Notes thereto are set forth starting on page F-1 of this Annual Report on Form 10-K.
(2) Financial Statement Schedules
All financial schedules have been omitted either because they are not applicable or because the required information is provided in our Consolidated Financial Statements and Notes thereto, starting on page F-1 of this Annual Report on Form 10-K.
(3) Exhibits:
| No. | Description | |||||||
| 2.1 | ||||||||
| 2.2 | ||||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 4.1 | ||||||||
| 4.2 | ||||||||
| 4.3 | ||||||||
| 4.4 | ||||||||
| 4.5 | ||||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 10.5 | ||||||||
| 10.6 | ||||||||
| 10.7 | ||||||||
| 10.8 | ||||||||
| 10.9 | ||||||||
56
| 10.10 | ||||||||
| 10.11 | ||||||||
| 10.12 | ||||||||
| 10.13 | ||||||||
| 10.14 | ||||||||
| 10.15 | ||||||||
| 10.16 (a) | ||||||||
| 10.17 (a) | ||||||||
| 10.18 (a) | ||||||||
| 10.19 (a) | ||||||||
| 10.20 (a) | ||||||||
| 10.21 (a) | ||||||||
| 10.22 (a) | ||||||||
| 10.23 (a) | ||||||||
| 10.24 (a) | ||||||||
| 10.25 (a) | ||||||||
| 10.26 (a) | ||||||||
| 10.27 (a) | ||||||||
| 10.28 (a) | ||||||||
| 10.29 (a) | ||||||||
| 10.30 (a) | ||||||||
| 10.31 (a) | ||||||||
| 10.32 (a) | ||||||||
| 10.33 (a) | ||||||||
| 10.34 (a) | ||||||||
| 10.35 (a) | ||||||||
| 10.36 (a) | ||||||||
57
| 10.37 (a) | ||||||||
| 10.38 | ||||||||
| 10.39 (a) | ||||||||
| 10.40 (a) | ||||||||
| 10.41 (a) | ||||||||
| 21.1 | ||||||||
| 23.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101.INS | Inline XBRL Taxonomy Extension Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, formatted in Inline XBRL (included in Exhibit 101). | |||||||
(a) Management Contract or Compensatory Plan or Arrangement.
* Schedules and/or Exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule or exhibit to the SEC upon request.
Item 16. Form 10-K Summary
None.
58
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Surgery Partners, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Surgery Partners, Inc. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounts Receivable — Refer to Note 1 to the financial statements
Critical Audit Matter Description
Accounts receivable are recorded net of estimated price concessions at both surgical hospitals and ambulatory surgical centers. At surgical hospitals, the estimation process is based on historical trend of cash collections and contractual write-offs. The inputs used to determine the estimated price concessions are based on objective data. Management’s determination of the estimate is complex and involves their assessment of the appropriateness and relevancy of the inputs and methodology to record accounts receivable at the net realizable value.
We identified surgical hospitals accounts receivable as a critical audit matter because of the significant estimates management makes to determine the price concession. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the methodology and application of the Company’s estimated price concessions for the surgical hospitals.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to Company’s estimated price concessions for the surgical hospitals included the following, among others:
•We tested the effectiveness of controls over accounts receivable, including management’s controls over the review of the price concessions and the verification of the accuracy and completeness of the data used in the assessment.
•We evaluated management’s methodology and related assumptions, including cash collections, used in recording price concessions, by comparing actual results to management’s historical estimates.
•We tested the underlying data related to the recognition of patient level charges and the subsequent activities, including cash collections and contractual write-offs.
•We tested the mathematical accuracy of the estimates applied to period-end accounts receivable.
F-2
•We developed independent estimates of the price concessions and compared the independent estimates to the recorded balances.
•We considered industry, economic, and company factors to determine the appropriateness of the net realizable value of accounts receivable.
/s/ Deloitte & Touche LLP
March 1, 2022
We have served as the Company's auditor since 2018.
F-3
SURGERY PARTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid expenses | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property and equipment, net | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Investments in and advances to affiliates | ||||||||||||||
| Right-of-use operating lease assets | ||||||||||||||
| Long-term deferred tax assets | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued payroll and benefits | ||||||||||||||
| Medicare accelerated payments and deferred governmental grants | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Current maturities of long-term debt | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt, less current maturities | ||||||||||||||
| Right-of-use operating lease liabilities | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Non-controlling interests—redeemable | ||||||||||||||
Redeemable preferred stock - Series A; shares authorized - | ||||||||||||||
| Stockholders' equity: | ||||||||||||||
Preferred stock, $ | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Retained deficit | ( | ( | ||||||||||||
| Total Surgery Partners, Inc. stockholders' equity | ||||||||||||||
| Non-controlling interests—non-redeemable | ||||||||||||||
| Total stockholders' equity | ||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||||||||
See notes to consolidated financial statements.
F-4
SURGERY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share amounts; shares in thousands)
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Revenues | $ | $ | $ | |||||||||||||||||
| Operating expenses: | ||||||||||||||||||||
| Salaries and benefits | ||||||||||||||||||||
| Supplies | ||||||||||||||||||||
| Professional and medical fees | ||||||||||||||||||||
| Lease expense | ||||||||||||||||||||
| Other operating expenses | ||||||||||||||||||||
| Cost of revenues | ||||||||||||||||||||
| General and administrative expenses | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Income from equity investments | ( | ( | ( | |||||||||||||||||
| Loss (gain) on disposals, net | ( | |||||||||||||||||||
| Transaction and integration costs | ||||||||||||||||||||
| Impairment charges | ||||||||||||||||||||
| Grant funds | ( | ( | ||||||||||||||||||
| Loss on debt extinguishment | ||||||||||||||||||||
| Litigation settlement | ||||||||||||||||||||
| Other income | ( | ( | ( | |||||||||||||||||
| Total operating expenses | ||||||||||||||||||||
| Operating income | ||||||||||||||||||||
| Tax receivable agreement expense | ( | |||||||||||||||||||
| Interest expense, net | ( | ( | ( | |||||||||||||||||
| Income (loss) before income taxes | ( | |||||||||||||||||||
| Income tax expense (benefit) | ( | |||||||||||||||||||
| Net income | ||||||||||||||||||||
| Less: Net income attributable to non-controlling interests | ( | ( | ( | |||||||||||||||||
| Net loss attributable to Surgery Partners, Inc. | ( | ( | ( | |||||||||||||||||
| Less: Amounts attributable to participating securities | ( | ( | ( | |||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | ||||||||||||||
Net loss per share attributable to common stockholders - basic and diluted (1) | $ | ( | $ | ( | $ | ( | ||||||||||||||
Weighted average common shares outstanding - basic and diluted (1) | ||||||||||||||||||||
(1)The impact of potentially dilutive securities for all periods were not considered because the effect would be anti-dilutive in those periods.
See notes to consolidated financial statements.
F-5
SURGERY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in millions)
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Net income | $ | $ | $ | |||||||||||||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||||||||||
| Derivative activity | ( | ( | ||||||||||||||||||
| Comprehensive income (loss) | ( | |||||||||||||||||||
| Less: Comprehensive income attributable to non-controlling interests | ( | ( | ( | |||||||||||||||||
| Comprehensive loss attributable to Surgery Partners, Inc. | $ | ( | $ | ( | $ | ( | ||||||||||||||
See notes to consolidated financial statements.
F-6
SURGERY PARTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions; shares in thousands)
| Common Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Retained Deficit | Non-Controlling Interests— Non-Redeemable | Total | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Preferred dividends | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Acquisition and disposal of shares of non-controlling interests, net | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests—non-redeemable holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Preferred dividends | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Acquisition and disposal of shares of non-controlling interests, net | — | — | ( | — | — | ||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests—non-redeemable holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Preferred dividends | — | — | ( | — | — | — | ( | ||||||||||||||||||||||||||||||||||
| Preferred share conversion | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Equity offering | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
| Acquisition and disposal of shares of non-controlling interests, net | — | — | — | — | |||||||||||||||||||||||||||||||||||||
| Distributions to non-controlling interests—non-redeemable holders | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||
See notes to consolidated financial statements.
F-7
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Cash flows from operating activities: | ||||||||||||||||||||
| Net income | $ | $ | $ | |||||||||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Non-cash interest expense, net | ||||||||||||||||||||
| Equity-based compensation expense | ||||||||||||||||||||
| Loss (gain) on disposals, net | ( | |||||||||||||||||||
| Impairment charges | ||||||||||||||||||||
| Loss on debt extinguishment | ||||||||||||||||||||
| Deferred income taxes | ( | |||||||||||||||||||
| Income from equity investments, net of distributions received | ||||||||||||||||||||
| Non-cash lease expense | ||||||||||||||||||||
| Changes in operating assets and liabilities, net of acquisitions and divestitures: | ||||||||||||||||||||
| Accounts receivable | ( | ( | ( | |||||||||||||||||
| Medicare accelerated payments and deferred governmental grants | ( | |||||||||||||||||||
| DOJ settlement payments | ( | ( | ||||||||||||||||||
| Other operating assets and liabilities | ( | ( | ( | |||||||||||||||||
| Net cash provided by operating activities | ||||||||||||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Purchases of property and equipment | ( | ( | ( | |||||||||||||||||
| Payments for acquisitions, net of cash acquired | ( | ( | ( | |||||||||||||||||
| Proceeds from disposals of facilities and other assets | ||||||||||||||||||||
| Sale (purchase) of equity investments | ( | |||||||||||||||||||
| Other investing activities | ( | |||||||||||||||||||
| Net cash used in investing activities | ( | ( | ( | |||||||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Principal payments on long-term debt | ( | ( | ( | |||||||||||||||||
| Borrowings of long-term debt | ||||||||||||||||||||
| Payments of debt issuance costs | ( | ( | ( | |||||||||||||||||
| Proceeds from equity offerings | ||||||||||||||||||||
| Payments of equity offering costs | ( | |||||||||||||||||||
| Payment of premium on debt extinguishment | ( | |||||||||||||||||||
| Distributions to non-controlling interest holders | ( | ( | ( | |||||||||||||||||
| Payments related to ownership transactions with non-controlling interest holders | ( | ( | ( | |||||||||||||||||
| Payments of preferred dividends | ( | |||||||||||||||||||
| Other financing activities | ( | ( | ( | |||||||||||||||||
| Net cash provided by (used in) financing activities | ( | |||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | ( | |||||||||||||||||||
| Cash, cash equivalents and restricted cash at beginning of period | ||||||||||||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | $ | |||||||||||||||||
Supplemental cash flow information: | ||||||||||||||||||||
| Interest paid, net of interest income received | ||||||||||||||||||||
| Cash paid for income taxes | ||||||||||||||||||||
| Non-cash purchases of property and equipment | ||||||||||||||||||||
See notes to consolidated financial statements.
F-8
1. Organization and Summary of Accounting Policies
Organization
Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the "Company"), acting through its subsidiaries, owns and operates a national network of surgical facilities and ancillary services. The surgical facilities, which include ambulatory surgery centers ("ASCs") and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, gastroenterology, general surgery, ophthalmology, orthopedics and pain management. The Company's surgical hospitals also provide services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care. Ancillary services are comprised of multi-specialty physician practices, urgent care facilities and anesthesia services. On August 31, 2017, a fund advised by an affiliate of Bain Capital Private Equity LP ("Bain Capital") became the controlling stockholder of the Company. As of December 31, 2021, Bain Capital held approximately 54.9 % of the voting power of all classes of capital stock of the Company.
As of December 31, 2021, the Company owned or operated a portfolio of 126 surgical facilities in 31 states, comprised of 108 ASCs and 18 surgical hospitals. The Company owns these facilities in partnership with physicians and, in some cases, health care systems in the markets and communities it serves. The Company owned a majority interest in 88 of the surgical facilities and consolidated 109 of the facilities for financial reporting purposes.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. Actual results could differ from those estimates.
COVID-19 Pandemic
The COVID-19 pandemic has significantly affected the Company's facilities, employees, patients, communities, business operations and financial performance, as well as the United States economy and financial markets. The impact of the COVID-19 pandemic on the Company's surgical facilities varies based on the market in which the facility operates, the type of surgical facility and the procedures that are typically performed. Although the Company cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes improved in 2021 as government restrictions eased and public sentiment changed. As a result of the COVID-19 pandemic, the Company has implemented new clinical safety measures to provide a safe environment for its patients, surgeons and employees.
CARES Act
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law to provide stimulus funding for the United States economy. As part of the CARES Act, the United States government announced that it would offer relief to eligible health care providers, including distribution of direct grants to hospitals, ASCs and other health care providers based on how much they bill Medicare. Payments received from these grants are not required to be repaid provided the recipients attest to and comply with certain terms and conditions, including limitations on balance billing and not using funds received from the grants to reimburse expenses or losses that other sources are obligated to reimburse. The Company has received approximately $86 million of the grant funds distributed under the CARES Act and other governmental assistance programs, including approximately $27 million during the year ended December 31, 2021. The recognition of amounts received is conditioned upon attestation with terms and conditions that funds will be used for COVID-19 related healthcare expenses or lost revenues.
The Company’s assessment of whether the terms and conditions for amounts received are reasonably assured of having been met considers, among other things, the CARES Act, the COVID-19 Economic Relief Bill, enacted on December 27, 2020, and all frequently asked questions and other interpretive guidance issued by the United States Department of Health and Human Services ("HHS"), including in the Provider Relief Fund Reporting Portal and associated user guides. This guidance sets forth the allowable methods for quantifying eligible healthcare related expenses and lost revenues. Only healthcare related expenses attributable to COVID-19 that another source has not reimbursed and is not obligated to reimburse are eligible to be claimed. Based on this guidance, the Company estimates approximately $37.9 million of grant funds received qualified for recognition as a reduction in operating expenses for the year ended December 31, 2021. During the year ended December 31, 2020, the Company recognized $46.2 million as a reduction in operating expenses.
Amounts received, but not recognized as a reduction to operating expenses, are reflected as a component of Medicare accelerated payments and deferred governmental grants in the consolidated balance sheets as of December 31, 2021 and 2020. Any unrecognized amounts may be recognized as a reduction in operating expenses in subsequent periods if the underlying conditions for recognition are met. Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in
F-9
the Company’s inability to recognize certain payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, which may be material.
As a way to increase cash flow to Medicare providers impacted by the COVID-19 pandemic, the CARES Act expanded the Medicare Accelerated and Advance Payment Program, which allowed for most providers and suppliers, including the Company’s surgical hospitals and ASCs to request an advance payment of anticipated Medicare revenues. The Company received approximately $120 million of accelerated payments during the year ended December 31, 2020. The payments received were deferred and included in the consolidated balance sheets. During the year ended December 31, 2021, approximately $60 million has been repaid in accordance with the terms of the program. These repayments are included as a component of the change in Medicare accelerated payments and deferred government grants in the consolidated statements of cash flows. Under these terms, repayment started one year after the initial funding by offsetting 25% of new claims paid by CMS. After 11 months of repayment at this level, the repayments will increase to 50% of new claims paid by CMS for a period of six months. Any outstanding amounts due at the end of the repayment period are subject to interest at a rate of 4%. As of December 31, 2021 and 2020, the current portion of deferred accelerated payments was approximately $60 million and $95 million, respectively, and is included as a component of Medicare accelerated payments and deferred governmental grants in the consolidated balance sheets. The long-term portion as of December 31, 2020 was included as a component of other long-term liabilities in the consolidated balance sheets. There was no remaining long-term portion as of December 31, 2021. The Company does not expect to receive additional Medicare accelerated payments.
The CARES Act also provided for the deferral of the Company's portion of social security payroll taxes during 2020. Under the CARES Act, half of the deferred amount was paid in December 2021 and the remaining portion will be paid in December 2022. As of December 31, 2021 and 2020, the Company had deferred approximately $8.5 million and $16.9 million, respectively. The current portion is included as a component of accrued payroll and benefits and the long term portion is included as a component of other long-term liabilities in the consolidated balance sheets. There was no remaining long-term portion as of December 31, 2021.
The Company is continuing to closely monitor legislative actions and regulatory guidance at the federal, state and local levels with respect to the CARES Act as other governmental assistance might become available to the Company.
Variable Interest Entities
The consolidated financial statements include the accounts of variable interest entities ("VIE") in which the Company is the primary beneficiary under the provisions of the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification 810, "Consolidation". The Company has the power to direct the activities that most significantly impact a VIE's economic performance. Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur. As of December 31, 2021, the Company's consolidated VIEs include five surgical facilities and four physician practices.
The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying consolidated balance sheets as of December 31, 2021 and 2020, were $48.1 million and $27.7 million, respectively, and the total liabilities of the consolidated VIEs were $20.1 million and $21.1 million, respectively.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on inputs classified into the following hierarchy:
•Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These may include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, depending on the nature of the item being valued.
The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values under Level 3 calculations.
A summary of the carrying amounts and estimated fair values of the Company's long-term debt follows (in millions):
| Carrying Amount | Fair Value | |||||||||||||||||||||||||
| December 31, | December 31, | |||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
| Senior secured term loan | $ | $ | $ | $ | ||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
F-10
Revenues
The Company's revenues generally relate to contracts with patients in which the performance obligations are to provide health care services. The Company recognizes revenues in the period in which our obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to receive. The contractual relationships with patients, in most cases, also involve a third-party payor (e.g., Medicare, Medicaid and private insurance organizations, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by or negotiated with the third-party payors. The payment arrangements with third-party payors for the services provided to the related patients typically specify payments at amounts less than the Company's standard charges. The Company continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals.
A summary of revenues by service type as a percentage of total revenues follows:
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Patient service revenues: | ||||||||||||||||||||
| Surgical facilities revenues | % | % | % | |||||||||||||||||
| Ancillary services revenues | % | % | % | |||||||||||||||||
| Total patient service revenues | % | % | % | |||||||||||||||||
| Other service revenues | % | % | % | |||||||||||||||||
| Total revenues | % | % | % | |||||||||||||||||
Patient service revenues. This revenue is related to charging facility fees in exchange for providing patient care. The fee charged for health care procedures performed in surgical facilities varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications. The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor. However, in several surgical facilities, the Company charges for anesthesia services. Ancillary service revenues include fees for patient visits to the Company's physician practices, pharmacy services and diagnostic tests ordered by physicians.
Patient service revenues are recognized as performance obligations are satisfied. Performance obligations are based on the nature of services provided. Typically, the Company recognizes revenue at a point in time in which services are rendered and the Company has no obligation to provide further patient services. As the Company primarily performs outpatient procedures, performance obligations are generally satisfied same day and revenue is recognized on the date of service.
The Company determines the transaction price based on gross charges for services provided, net of estimated contractual adjustments and discounts from third-party payors. The Company estimates its contractual adjustments and discounts based on contractual agreements, its discount policies and historical experience. Changes in estimated contractual adjustments and discounts are recorded in the period of change.
Other service revenues. Other service revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, and management services provided to physician practices for which the Company is not required to provide capital or additional assets. These agreements typically require the Company to provide recurring management services over a multi-year period, which are billed and collected on a monthly basis. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each facility or practice and are recognized in the period in which management services are rendered and billed. For the years ended December 31, 2020 and 2019, other service revenues also includes optical service revenues, which consisted of handling charges billed to the members of the Company's optical products purchasing organization. The Company sold its optical products purchasing organization on December 31, 2020.
F-11
The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities (dollars in millions):
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||
| Patient service revenues: | ||||||||||||||||||||||||||||||||||||||
| Private insurance | $ | % | $ | % | $ | % | ||||||||||||||||||||||||||||||||
| Government | % | % | % | |||||||||||||||||||||||||||||||||||
| Self-pay | % | % | % | |||||||||||||||||||||||||||||||||||
Other (1) | % | % | % | |||||||||||||||||||||||||||||||||||
| Total patient service revenues | % | % | % | |||||||||||||||||||||||||||||||||||
| Other service revenues | ||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | $ | $ | |||||||||||||||||||||||||||||||||||
(1)Other is comprised of anesthesia service agreements, auto liability, letters of protection and other payor types.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.
At December 31, 2020, cash, cash equivalents and restricted cash reported within the consolidated statement of cash flows includes $0.3 million of restricted investments, which are reflected in other long-term assets in the consolidated balance sheets. These restricted investments represented restricted cash held in accordance with the provisions of a long-term operating lease agreement held as security for performance under the Company's covenants and obligations within the agreement. The restrictions were released during the year ended December 31, 2021.
Accounts Receivable
Accounts receivable from third-party payors are recorded net of estimated implicit price concessions, which are estimated based on the historical trend of the Company's surgical hospitals’ cash collections and contractual write-offs, and for the Company's surgical facilities in general, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, the Company expects that any such changes would be minimal and, therefore, would not have a material effect on its financial condition or results of operations.
Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), private insurance organizations, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors.
The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor. However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not considered significant. Amounts are classified outside of self-pay if the Company has an agreement with the third-party payor or has verified a patient’s coverage prior to services rendered. The Company's policy is to collect co-payments and deductibles prior to providing medical services. Patient services of the Company are primarily non-emergency, which allows the surgical facilities to control the procedures for which third-party reimbursement is sought and obtained. The Company does not require collateral from self-pay patients.
The Company's collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The Company analyzes accounts receivable at each of its surgical facilities to ensure the proper collection and aged category. Collection efforts include direct contact with third-party payors or patients, written correspondence and the use of legal or collection agency assistance, as required.
Impairment of Long-Lived Assets, Goodwill and Intangible Assets
The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. For discussion on impairment for goodwill and indefinite-lived intangible assets, refer to Note 4. "Goodwill and Intangible Assets."
F-12
Professional and General and Workers' Compensation Insurance
The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional liability insurance coverage is on a claims-made basis and the general liability insurance is on an occurrence basis. The Company also maintains workers' compensation insurance, subject to a self-insured retention.
Derivative Instruments and Hedging Activities
The Company records all derivatives on the balance sheet at fair value and any financing elements treated as debt instruments are recorded at amortized cost. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates in which the Company exerts significant influence but does not control or otherwise consolidate are accounted for using the equity method. Equity method investments are initially recorded at cost, unless the investments are a result of the Company losing control of a previously controlled entity, but still retaining a non-controlling interest. The Company did not have any such deconsolidations during the years ended December 31, 2021 and 2020. These investments are included as investments in and advances to affiliates in the accompanying consolidated balance sheets. The Company’s share of the profits and losses from these investments is reported in income from equity investments in the accompanying consolidated statements of operations. The Company monitors its investments for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the investees and records reductions in carrying values when necessary.
Non-Controlling Interests
The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.
Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the consolidated financial statements within the equity section but separate from the Company's equity. However, in instances in which certain redemption features that are not solely within the control of the Company are present, classification of non-controlling interests outside of permanent equity is required. Consolidated net income attributable to the Company and to the non-controlling interests are identified and presented on the consolidated statements of operations; changes in ownership interests in which the Company retains a controlling interest are accounted for as equity transactions assuming the Company continues to consolidate related entities. Certain transactions with non-controlling interests are classified within financing activities in the consolidated statements of cash flows.
The consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control.
Non-Controlling Interests — Redeemable. Each partnership and limited liability company through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement, respectively. In certain circumstances, the applicable partnership or operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physician limited partners’ or physician minority members’, as applicable, ownership if certain adverse regulatory events occur, such as it becoming illegal
F-13
A summary of activity related to the non-controlling interests—redeemable for the years ended December 31, 2021 and 2020 is as follows (in millions):
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Net income attributable to non-controlling interests—redeemable | ||||||||||||||
| Acquisition and disposal of shares of non-controlling interests, net—redeemable | ( | |||||||||||||
| Distributions to non-controlling interest —redeemable holders | ( | ( | ||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
Inventories
Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
Recent Accounting Pronouncements
In November 2021, the FASB issued Accounting Standards Update ("ASU") 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance. The ASU provides specific authoritative guidance for the disclosure of government assistance including the nature of assistance received, the accounting for and presentation of assistance received and the significant terms and conditions, including commitments and contingencies regarding such assistance. The ASU is effective for financial statements issued for annual periods beginning after December 15, 2021 and may be early adopted. The Company early adopted this ASU beginning with this Annual Report on Form 10-K for the year ended December 31, 2021.
2. Acquisitions and Disposals
The Company accounts for business combinations in accordance with the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer can be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control. The assets acquired, liabilities assumed and any non-controlling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. Any goodwill recognized is determined as the excess of the fair value of the consideration conveyed plus the fair value of any non-controlling interests in the acquisition over the fair value of the net assets acquired. Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.
Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and right-of-use leases. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. Fair value attributable to non-controlling interests is based on a Level 3 computation using significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of non-controlling interests, primarily from acquisitions of surgical facilities. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. Fair value attributable to the property and equipment acquired is based on Level 3 computations using key inputs such as cost trend data and comparable asset sales. Fair value attributable to the intangible assets acquired is based on Level 3 computations using key inputs such as the Company's internally-prepared financial projections. Fair values assigned to acquired working capital are based on carrying amounts reported by the acquiree at the date of acquisition, which approximate their fair values.
Acquisitions
During the year ended December 31, 2021, the Company acquired controlling interests in eight surgical facilities, including a surgical hospital, and two physician practices for aggregate cash consideration of $285.8 million, net of cash acquired. Two of the surgical facilities were in existing markets that were merged into existing facilities. The cash consideration was funded through available resources. The total consideration was allocated to the assets acquired and liabilities assumed based upon the respective acquisition date fair values.
During the year ended December 31, 2020, the Company acquired a controlling interest in three surgical facilities, including a surgical hospital, a controlling interest in five surgical facilities in existing markets that were merged into existing facilities and a physician practice for total aggregate consideration of $120.1 million, including cash consideration of $104.6 million, net of cash acquired, non-cash consideration of $8.7 million and contingent consideration of $0.7 million. The non-cash consideration consisted of non-controlling interests in the Company's existing surgical facilities. During the year ended December 31, 2021, no significant changes were made to the purchase price allocation of assets and liabilities, existing at the date of acquisition, related to individual acquisitions completed in 2020.
F-14
Preliminary or final amounts recognized for each major class of assets acquired and liabilities assumed for acquisitions completed during the years ended December 31, 2021 and 2020, including post acquisition date adjustments, are as follows (in millions):
| 2021 | 2020 | |||||||||||||
| Total consideration | $ | $ | ||||||||||||
| Fair value of non-controlling interests | ||||||||||||||
| Aggregate acquisition date fair value | $ | $ | ||||||||||||
| Net assets acquired: | ||||||||||||||
| Current Assets | $ | $ | ||||||||||||
| Property and equipment | ||||||||||||||
| Intangible assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Right-of-use operating lease assets | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Current liabilities | ( | ( | ||||||||||||
| Long-term debt | ( | ( | ||||||||||||
| Right-of-use operating lease liabilities | ( | ( | ||||||||||||
| Long-term liabilities | ( | |||||||||||||
| Aggregate acquisition date fair value | $ | $ | ||||||||||||
The fair values assigned to certain assets acquired and liabilities assumed by the Company in 2021 have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition. The goodwill acquired in connection with the 2021 acquisitions was allocated to the Company's Surgical Facility Services reportable segment. The results of operations of the 2021 acquisitions are included in the Company’s results of operations beginning on the dates of acquisition, and were not considered significant for the year ended December 31, 2021.
Disposals
During the year ended December 31, 2021, the Company sold its interests in three surgery centers, one physician practice and certain other assets for combined net cash proceeds of $6.0 million, and recognized a net pre-tax gain of $4.0 million included in loss on disposals, net in the consolidated statement of operations for the year ended December 31, 2021.
During the year ended December 31, 2020, the Company sold its interests in three surgery centers, one of which was previously accounted for as an equity method investment, sold certain assets related to its anesthesia business, certain imaging assets and its optical products purchasing organization for combined net cash proceeds of $58.5 million, and recognized a net pre-tax gain of $5.2 million included in loss on disposals, net in the consolidated statement of operations for the year ended December 31, 2020. Additionally, the Company closed its diagnostic laboratory and recognized a net pre-tax loss of $3.5 million included in loss on disposals, net in the consolidated statement of operations for the year ended December 31, 2020.
During the year ended December 31, 2019, the Company disposed of previously owned real property associated with one of its existing non-consolidated surgical facilities. In connection with the sale, the Company recognized a $10.9 million pretax gain included in loss (gain) on disposals, net in the accompanying consolidated statements of operations. The sale did not impact the Company's investment in the surgical facility, which continues to be accounted for as an equity method investment.
3. Property and Equipment
Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and building improvements, to five years for computers and software and to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized.
The Company also leases certain facilities and equipment under finance leases. Assets held under finance leases are stated at the present value of lease payments at the inception of the related lease. Such assets are amortized on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.
F-15
A summary of property and equipment follows (in millions):
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings and improvements | ||||||||||||||
| Furniture and equipment | ||||||||||||||
| Computer and software | ||||||||||||||
| Medical equipment | ||||||||||||||
| Right-of-use finance lease asset | ||||||||||||||
| Construction in progress | ||||||||||||||
| Property and equipment, at cost | ||||||||||||||
| Less: Accumulated depreciation | ( | ( | ||||||||||||
| Property and equipment, net | $ | $ | ||||||||||||
4. Goodwill and Intangible Assets
Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized. The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located, Medicare licenses and certain management rights agreements. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management rights agreements and customer relationships. Physician income guarantees are amortized into salaries and benefits costs in the consolidated statements of operations over the commitment period of the contract, generally to four years . Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the consolidated statements of operations over the service lives of the agreements, typically ranging from to five years for non-compete agreements and 15 years for the management rights agreements. Customer relationships are amortized into depreciation and amortization expense in the consolidated statements of operations over the estimated lives of the relationships, ranging from to ten years .
The Company tests its goodwill and indefinite-lived intangible assets for impairment at least annually, as of October 1, or more frequently if certain indicators arise. The Company tests for goodwill impairment at the reporting unit level, which is defined as one level below an operating segment. During 2021, the Company identified two
As of October 1, 2021, prior to its annual impairment testing, all of the Company's goodwill was allocated to the Surgical Facilities reporting unit. As of the October 1, 2021 valuation, the fair value for the Surgical Facilities reporting unit was substantially in excess of its carrying value. The fair value of the Surgical Facilities reporting unit as of October 1, 2021 was determined using the income and market approach as discussed above.
F-16
Subsequent to the date of our annual impairment test, the Company considered its operating results for the fourth quarter of 2021, macroeconomic, industry and market conditions, and other market indicators including its market capitalization. Based on its evaluation of all such factors, the Company concluded that an event had not occurred or circumstances had not changed that would more likely than not reduce the fair value of its reporting units below their carrying values.
In 2021, there were no non-cash impairment charges.
During the year ended December 31, 2020, as a result of its impairment testing, the Company recorded non-cash impairment charges of $28.6 million and $4.9 million related to the Ancillary Services and Alliance reporting units, respectively.
During the year ended December 31, 2019, as a result of its impairment testing, the Company recorded non-cash impairment charges of $2.5 million related to the Alliance reporting unit.
A summary of the changes in the carrying amount of goodwill follows (in millions):
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Acquisitions, including post acquisition adjustments | ||||||||||||||
| Disposals | ( | ( | ||||||||||||
| Impairments | ( | |||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
A summary of the Company's acquisitions and disposals for the years ended December 31, 2021 and 2020 is included in Note 2. "Acquisitions and Disposals."
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||
| Finite-lived intangible assets: | ||||||||||||||||||||||||||||||||||||||
| Management rights agreements | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
| Other | ( | ( | ||||||||||||||||||||||||||||||||||||
| Total finite-lived intangible assets | ( | ( | ||||||||||||||||||||||||||||||||||||
| Indefinite-lived intangible assets | — | — | ||||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||
During the year ended December 31, 2021, the Company disposed of its management rights associated with one of its existing non-consolidated surgical facilities, resulting in a $2.8 million pretax loss included in loss on disposals, net in the consolidated statement of operations for the year ended December 31, 2021.
During the year ended December 31, 2019, the Company acquired a clinic that was previously managed by the Company. As a result of the transaction, the Company determined the management rights agreement related to the acquired clinic no longer provided a future benefit. As such, the Company recorded non-cash impairment charges of $5.4 million, which was included as a component of impairment charges on the accompanying consolidated statement of operations.
Amortization expense for intangible assets was $4.3 4.6 million for the year ended December 31, 2019.
F-17
Total estimated amortization expense for the next five years and thereafter related to intangible assets follows (in millions):
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
5. Long-Term Debt
A summary of long-term debt follows (in millions):
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
Senior secured term loan (1) | $ | $ | ||||||||||||
| Senior secured revolving credit facility | ||||||||||||||
| Notes payable and other secured loans | ||||||||||||||
| Finance lease obligations | ||||||||||||||
| Less: unamortized debt issuance costs | ( | ( | ||||||||||||
| Total debt | ||||||||||||||
| Less: Current maturities | ||||||||||||||
| Total long-term debt | $ | $ | ||||||||||||
(1)Includes unamortized fair value discount of $3.0 million and $3.7 million as of December 31, 2021 and 2020, respectively
Senior Secured Credit Facilities
The Company has a credit agreement (the "Credit Agreement") providing for a $1.545 billion senior secured term loan (the "Term Loan") and a $210.0 million senior secured revolving credit facility (the "Revolver" and together with the Term Loan, the “Senior Secured Credit Facilities"). During 2021, the Company entered into amendments to the Credit Agreement, which provided for (i) a new tranche of term loans that replaced or refinanced all of the existing term loans outstanding under the Credit Agreement, (ii) provided for an extension of the Term Loan and Revolver, (iii) and increased the outstanding commitments under the Revolver (the "2021 Amendments"). As of both December 31, 2021 and 2020, the Company had no 203.0 million (including outstanding letters of credit of $7.0 million).
The Term Loan will mature on August 31, 2026 (or, if at least $185 million of the Borrower’s 6.750 % senior unsecured notes due 2025 shall have not either been repaid, repurchased or redeemed or refinanced with indebtedness having a maturity date not earlier than 91 days after August 31, 2026 by no later than April 1, 2025, then April 1, 2025). The Revolver matures on February 1, 2026. The Senior Secured Credit Facilities will bear interest at a rate per annum equal to (x) LIBOR plus a margin of 3.75 % per annum (LIBOR with respect to the Term Loan shall be subject to a floor of 0.75 %) or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5 % per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00 % per annum (the alternate base rate with respect to the Term Loan shall be subject to a floor of 1.75 %)) plus a margin of 2.75 % per annum.
The Term Loan is subject to quarterly amortization in an aggregate original principal amount of approximately 1.00 % per annum. Voluntary prepayments of the Term Loan are permitted, in whole or in part, with prior notice, without premium or penalty (except LIBOR breakage costs and a call premium in the case of certain repricing events within a specified period of time after May 3, 2021). In addition, the Company is required to pay a commitment fee of 0.50 % per annum in respect of unused commitments under the Revolver.
With respect to the Revolver, the Company is required to comply with a maximum consolidated total net leverage ratio of 9.50 :1.00, which covenant will be tested quarterly on a trailing four quarter basis only if, as of the last day of the applicable fiscal quarter the Revolver is drawn in an aggregate amount greater than 35 % of the total commitments under the Revolver. Such financial maintenance covenant is subject to an equity cure. The Credit Agreement includes customary negative covenants restricting or limiting the ability of the Company and its restricted subsidiaries, to, among other things, sell assets, alter its business, engage in mergers, acquisitions and other business combinations, declare dividends or redeem or repurchase equity interests, incur additional indebtedness or guarantees, make loans and investments, incur liens, enter into transactions with affiliates, prepay certain junior debt, and modify or waive certain material agreements
F-18
and organizational documents, in each case, subject to customary and other agreed upon exceptions. The Credit Agreement also contains customary affirmative covenants and events of default. The Revolver may be utilized for working capital, capital expenditures and general corporate purposes. Subject to certain conditions and requirements set forth in the Credit Agreement, the Company may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver. As of December 31, 2021, the Company was in compliance with the covenants contained in the Credit Agreement.
The Senior Secured Credit Facilities are guaranteed, on a joint and several basis, by SP Holdco I, Inc. and each of Surgery Center Holdings, Inc.'s current and future wholly-owned domestic restricted subsidiaries (subject to certain exceptions) (the "Subsidiary Guarantors") and are secured by a first priority security interest in substantially all of Surgery Center Holdings, Inc.'s, SP Holdco I, Inc.'s and the Subsidiary Guarantors’ assets (subject to certain exceptions).
In connection with the 2021 Amendments, the Company recorded debt issuance costs and discount of $11.9 million, and a debt extinguishment loss of $9.1 million, included in loss on debt extinguishment in the accompanying consolidated statement of operations for the year ended December 31, 2021. The loss includes the partial write-off of unamortized debt issuance costs and discounts related to the prior existing term loans, and a portion of debt issuance costs incurred with the Term Loan modification.
During 2020, in connection with incremental term loan borrowings, the Company recorded debt issuance costs and discount of $6.5 million for the year ended December 31, 2020.
Effective June 30, 2017, the Company issued $370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"). The 2025 Unsecured Notes bear interest at the rate of 6.750 % per year, payable semi-annually on January 1 and July 1 of each year. The 2025 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly-owned restricted subsidiaries that guarantees the Senior Secured Credit Facilities (subject to certain exceptions).
The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption:
| July 1, 2021 to June 30, 2022 | % | ||||
| July 1, 2022 and thereafter | % | ||||
If Surgery Center Holdings, Inc. experiences a change in control under certain circumstances, it must offer to purchase the 2025 Unsecured Notes at a purchase price equal to 101.000 % of the principal amount, plus accrued and unpaid interest, if any, up to, but excluding, the date of repurchase.
The 2025 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.
Effective April 11, 2019, the Company issued $430.0 million in an aggregate principal amount of senior unsecured notes due April 15, 2027 (the "2027 Unsecured Notes"). The 2027 Unsecured Notes bear interest at the rate of 10.000 % per annum, payable semi-annually on April 15 and October 15 of each year, beginning on October 15, 2019. The 2027 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly-owned restricted subsidiaries that guarantees the Senior Secured Credit Facilities (subject to certain exceptions).
The Company may redeem up to 40 % of the aggregate principal amount of the 2027 Unsecured Notes at any time prior to April 15, 2022, with the net cash proceeds of certain equity issuances at a redemption price equal to 110.000 % of the principal amount of notes to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption.
The Company may redeem the 2027 Unsecured Notes, in whole or in part, at any time prior to April 15, 2022, at a redemption price equal to 100 % of the principal amount of notes to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2027 Unsecured Notes, in whole or in part, at any time on or after April 15, 2022, at the redemption prices set forth below (expressed as a percentage of the principal amount of notes to be redeemed), plus accrued and unpaid interest, if any, up to, but excluding, the date of redemption:
| April 15, 2022 to April 14, 2023 | % | ||||
| April 15, 2023 to April 14, 2024 | % | ||||
| April 15, 2024 and thereafter | % | ||||
F-19
If Surgery Center Holdings, Inc. experiences a change of control under certain circumstances, it must offer to purchase the 2027 Unsecured Notes at a purchase price equal to 101.000 % of the aggregate principal amount of notes, plus accrued and unpaid interest, if any, up to, but excluding, the date of repurchase.
The indenture governing the 2027 Unsecured Notes contains customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.
On July 30, 2020, the Company completed the issuance and sale of $115.0 million in aggregate principal amount of senior unsecured notes due 2027 at 100.75 % of the principal amount. The notes were issued as part of the same series as the existing 2027 Unsecured Notes originally issued in April 2019, and have the same terms. In connection with the notes issuance, the Company recorded debt issuance costs, net of issuance premium of $1.0 million.
Other Debt
Certain of the Company’s subsidiaries have outstanding indebtedness under notes payable and other secured loans, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made, and right-of-use finance lease obligations for which the Company is liable to various vendors for several property and equipment leases classified as finance leases. The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. At December 31, 2021, the Company was in compliance with its covenants contained in the credit agreements.
Maturities
A summary of maturities for the Company's long-term debt, excluding unamortized debt issuance costs and the unamortized fair value discount discussed above, for the next five years and thereafter as of December 31, 2021 follows (in millions):
| 2022 | $ | |||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| Thereafter | ||||||||
| Total | $ | |||||||
6. Leases
The Company determines if an arrangement is a lease at inception. Right-of-use assets represent the right to use the underlying assets for the lease term and the lease liabilities represent the obligation to make lease payments arising from the leases. Right-of-use assets and liabilities are recognized at commencement date based on the present value of future lease payments over the lease term, which includes only payments that are fixed and determinable at the time of commencement. When readily determinable, the Company uses the interest rate implicit in a lease to determine the present value of future lease payments. For leases where the implicit rate is not readily determinable, the Company's incremental borrowing rate is used. The Company calculates its incremental borrowing rate on a periodic basis using a third-party financial model that estimates the rate of interest the Company would have to pay to borrow an amount equal to the total lease payments on a collateralized basis over a term similar to the lease. The Company applies its incremental borrowing rate using a portfolio approach. The right-of-use asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options.
The Company's operating leases are primarily for real estate, including medical office buildings, and corporate and other administrative offices. The Company's finance leases are primarily for medical equipment and information technology and telecommunications assets. The Company's finance leases also include certain land, buildings and improvements as discussed in Note 3. "Property and Equipment." Real estate lease agreements typically have initial terms of ten years and may include one or more options to renew. Certain leases also include options to purchase the leased property. The useful life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The majority of the Company's medical equipment leases have a bargain purchase option that is reasonably certain of exercise, so these assets are depreciated over their useful life. The Company's lease agreements do not contain any material residual value guarantees, restrictions or covenants.
Certain of the Company's lease agreements require the Company to pay common area maintenance, repairs, property taxes and insurance costs, which are variable amounts based on actual costs incurred during each applicable period. Certain lease agreements also include escalating rent payments that are not fixed at commencement but are based on an index that is determined in future periods over the lease term based on changes in the Consumer Price Index or other measure of cost inflation. These variable components of lease payments are expensed as incurred and are not included in the determination of the right-of-use asset or lease liability.
F-20
The following table presents the components of the Company's right-of-use assets and liabilities related to leases and their classification in the consolidated balance sheets at December 31, 2021 and 2020 (in millions):
| Classification in Consolidated Balance Sheets | December 31, 2021 | December 31, 2020 | ||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Operating lease assets | Right-of-use operating lease assets | $ | $ | |||||||||||||||||
| Finance lease assets | ||||||||||||||||||||
| Total leased assets | $ | $ | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Operating lease liabilities: | ||||||||||||||||||||
| Current | $ | $ | ||||||||||||||||||
| Long-term | Right-of-use operating lease liabilities | |||||||||||||||||||
| Total operating lease liabilities | ||||||||||||||||||||
| Finance lease liabilities: | ||||||||||||||||||||
| Current | ||||||||||||||||||||
| Long-term | ||||||||||||||||||||
| Total finance lease liabilities | ||||||||||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||||||||
The following table presents the weighted-average lease terms and discount rates at December 31, 2021 and 2020 (in millions):
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Operating Leases | Finance Leases | Operating Leases | Finance Leases | |||||||||||||||||||||||
| Weighted-average remaining lease term | ||||||||||||||||||||||||||
| Weight average discount rate | % | % | % | % | ||||||||||||||||||||||
The following table presents the components of the Company's lease expense and their classification in the consolidated statement of operations for the years ended December 31, 2021 and 2020 (in millions):
| December 31, 2021 | December 31, 2020 | |||||||||||||
| Operating lease costs | $ | $ | ||||||||||||
| Finance lease costs: | ||||||||||||||
| Amortization of leased assets | ||||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Total finance lease costs | ||||||||||||||
| Variable and short-term lease costs | ||||||||||||||
| Total lease costs | $ | $ | ||||||||||||
During the years ended December 31, 2021 and 2020, the Company incurred lease costs of $25.8 million and $22.8 million, respectively, under operating lease agreements with physician investors who are related parties. During the years ended December 31, 2021 and 2020, the Company paid rent of $17.4 million and $6.9 million, respectively, under finance lease agreements with a lessor who is a related party. One of the Company's surgical facilities has a non-controlling ownership interest in the lessor. Payments are allocated to principal adjustments of the finance lease liability and interest expense.
F-21
The following table presents supplemental cash flow information for the years ended December 31, 2021 and 2020 (dollars in millions):
| December 31, 2021 | December 31, 2020 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||
| Operating cash outflows from operating leases | $ | $ | ||||||||||||
| Operating cash outflows from finance leases | $ | $ | ||||||||||||
| Financing cash outflows from finance leases | $ | $ | ||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||||||||
| Operating leases | $ | $ | ||||||||||||
| Finance leases | $ | $ | ||||||||||||
Future maturities of lease liabilities at December 31, 2021 are presented in the following table (in millions):
| Operating Leases | Finance Leases | |||||||||||||
| 2022 | $ | $ | ||||||||||||
| 2023 | ||||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | ||||||||||||||
| Less: imputed interest | ( | ( | ||||||||||||
| Total lease obligations | $ | $ | ||||||||||||
7. Redeemable Preferred Stock
On August 31, 2017, the Company completed the sale issuance of 310,000 shares of the Company's preferred stock, par value $0.01 per share, designated as 10.00 % Series A Convertible Perpetual Participating Preferred Stock (the "Series A Preferred Stock") to Bain Capital at a purchase price of $1,000 per share for an aggregate purchase price of $310.0 million (the "Preferred Private Placement").
Pursuant to the Certificate of Designations, Preferences, Rights and Limitations of 10.00 % Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc. (the “Certificate of Designation”), the Company was permitted to require the conversion of all, but not less than all, of the Series A Preferred Stock pursuant to the terms and conditions of the Certificate of Designation, after the second anniversary of the date of issuance, if the volume weighted average closing price of the Common Stock for any twenty out of thirty consecutive trading days prior to such date, equals or exceeds $42.00 per share. In accordance with such provision, on May 17, 2021, the Company converted all outstanding shares of Series A Preferred Stock into approximately 22.609 million shares of common stock, $0.01 par value per share. Following the conversion, no shares of Series A Preferred Stock remain outstanding. The conversion of the Series A Preferred Stock into common stock was a non-cash transaction, and therefore had no impact on the consolidated statements of cash flows.
The following table presents a summary of activity related to the redeemable preferred stock for the years ended December 31, 2021 and 2020 (in millions):
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Balance at beginning of period | $ | $ | ||||||||||||
| Dividends accrued | ||||||||||||||
| Dividends declared | ( | |||||||||||||
| Redeemable preferred stock conversion to common stock | ( | |||||||||||||
| Balance at end of period | $ | $ | ||||||||||||
F-22
8. Derivatives and Hedging Activities
In May 2021, the Company entered into additional interest rate swap agreements to match the terms of the new Term Loan and have an effective termination date of March 31, 2025. As of December 31, 2021, the Company had nine interest rate swaps with a total net hedged notional amount of $1.2 billion. Of the nine interest rate swaps, three are pay-fixed, receive 1-Month LIBOR (subject to a minimum of 0.75 %) interest rate swaps designated in cash flow hedging relationships with a total notional amount of $1.2 billion and a termination date of March 31, 2025. The remaining six interest rate swaps are undesignated and consist of three pay-fixed, receive 1-Month LIBOR (subject to a minimum of 1.00 %) interest rate swaps and three pay 1-Month LIBOR (subject to a minimum of 1.00 %), receive-fixed interest rate swaps with a termination date of November 30, 2023. The pay-floating, receive-fixed swaps are designed to economically offset the undesignated pay-fixed, receive-floating swaps.
Concurrently with the May 2021 transactions, the four previously existing interest rate swap positions were amended, de-designated or terminated and replaced with the interest rate swaps discussed above. The Company voluntarily de-designated an aggregate notional amount of $435 million (the effects of which are offset by the pay-floating, receive-fixed interest rate swaps) and terminated an aggregate notional amount of $435 million. No cash was exchanged between the Company and the counterparties due to the transactions described above, therefore the non-cash transactions had no impact on the consolidated statements of cash flows. The amount of unrealized losses recorded in OCI related to the de-designated and terminated notional amounts at the time of the de-designation and termination was $55.0 million. This amount will be amortized to interest expense over the remaining term of the original interest rate swaps. The liability of the de-designated and terminated notional amounts was blended into the fixed rate of the new pay-fixed interest rate swaps.
The pay-fixed, receive floating interest rate swaps entered into in May 2021 do not meet the requirements to be considered derivatives in their entirety as a result of the financing component. Accordingly, the swaps are considered hybrid instruments, consisting of a financing element treated as a debt instrument and an embedded at-market derivative that was designated as a cash flow hedge.
Within the Company’s consolidated balance sheets, the financing elements treated as debt instruments described above are carried at amortized cost and the embedded at-market derivatives and the undesignated swaps are recorded at fair value. The cash flows related to the portion treated as debt are classified as financing activities in the consolidated statements of cash flows while the portion treated as an at-market derivative are classified as operating activities. Cash settlements related to the undesignated swaps will offset and are classified as operating activities in the consolidated cash flows.
In September 2021, the Company entered into interest rate cap agreements to more effectively hedge the interest rate risk. As of December 31, 2021, the Company had two interest rate caps with a total hedged notional amount of $333.6 million, and each has a termination date of March 31, 2025. Within the Company’s consolidated balance sheets, the interest rate caps are recorded at fair value. The cash flows related to the interest rate caps are classified as operating activities in the consolidated statements of cash flows.
F-23
The key terms of interest rate swaps and interest rate caps outstanding are presented below:
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||||||||
| Description | Effective Date | Notional Amount (in millions) | Status | Notional Amount (in millions) | Status | Maturity Date | ||||||||||||||||||||||||||||||||
| Pay-fixed swap | May 7, 2021 | $ | Active | $ | NA | March 31, 2025 | ||||||||||||||||||||||||||||||||
| Pay-fixed swap | May 7, 2021 | Active | NA | March 31, 2025 | ||||||||||||||||||||||||||||||||||
| Pay-fixed swap | May 7, 2021 | Active | NA | March 31, 2025 | ||||||||||||||||||||||||||||||||||
| Interest rate cap | September 30, 2021 | Active | NA | March 31, 2025 | ||||||||||||||||||||||||||||||||||
| Interest rate cap | September 30, 2021 | Active | NA | March 31, 2025 | ||||||||||||||||||||||||||||||||||
| Pay-fixed swap | November 30, 2018 | Active | NA | November 30, 2023 | ||||||||||||||||||||||||||||||||||
| Pay-fixed swap | November 30, 2018 | Active | NA | November 30, 2023 | ||||||||||||||||||||||||||||||||||
| Pay-fixed swap | June 28, 2019 | Active | NA | November 30, 2023 | ||||||||||||||||||||||||||||||||||
| Receive-fixed swap | April 30, 2021 | ( | Active | NA | November 30, 2023 | |||||||||||||||||||||||||||||||||
| Receive-fixed swap | April 30, 2021 | ( | Active | NA | November 30, 2023 | |||||||||||||||||||||||||||||||||
| Receive-fixed swap | April 30, 2021 | ( | Active | NA | November 30, 2023 | |||||||||||||||||||||||||||||||||
| Pay-fixed swap | November 30, 2018 | Terminated | Active | November 30, 2023 | ||||||||||||||||||||||||||||||||||
| Pay-fixed swap | November 30, 2018 | Terminated | Active | November 30, 2023 | ||||||||||||||||||||||||||||||||||
| Pay-fixed swap | November 30, 2018 | Terminated | Active | November 30, 2023 | ||||||||||||||||||||||||||||||||||
| Pay-fixed swap | June 28, 2019 | Terminated | Active | November 30, 2023 | ||||||||||||||||||||||||||||||||||
| $ | $ | |||||||||||||||||||||||||||||||||||||
Our interest rate swap agreements, excluding the portion treated as debt, are recognized at fair value in the consolidated balance sheets and are valued using pricing models that rely on market observable inputs such as yield curve data, which are classified as Level 2 inputs within the fair value hierarchy.
The fair value of the interest rate caps are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the caps. The variable interest rates used in the calculation of projected receipts on the caps are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The interest rate caps are classified using Level 2 inputs within the fair value hierarchy.
The following table presents the fair values of our derivatives and their location on the consolidated balance sheets (in millions):
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||||||
| Location | Assets | Liabilities | Assets | Liabilities | ||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||||||||
| Interest rate swaps | Other long-term assets | $ | $ | — | $ | $ | — | |||||||||||||||||||||||||
| Interest rate swaps | Other long-term liabilities | — | — | |||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships | ||||||||||||||||||||||||||||||||
| Interest rate caps | Other long-term assets | — | — | |||||||||||||||||||||||||||||
| Interest rate swaps | Other long-term assets | — | — | |||||||||||||||||||||||||||||
| Interest rate swaps | Other long-term liabilities (1) | — | — | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
(1)The balance as of December 31, 2021 is related to the financing component of the pay-fixed, receive floating interest rate swaps.
F-24
The following table presents the pre-tax effect of the interest rate swaps and caps on the Company's accumulated OCI and consolidated statement of operations (in millions):
| Year Ended December 31, | |||||||||||||||||||||||
| Location | 2021 | 2020 | 2019 | ||||||||||||||||||||
| Derivatives not designated as hedging instruments | |||||||||||||||||||||||
| Gain recognized in income | Other income | $ | $ | $ | |||||||||||||||||||
| Derivatives in cash flow hedging relationships | |||||||||||||||||||||||
| (Gain) loss recognized in OCI (effective portion) | $ | ( | $ | $ | |||||||||||||||||||
Loss reclassified from accumulated OCI into income (effective portion) (1) | Interest expense, net | $ | $ | $ | |||||||||||||||||||
(1)Includes amortization of accumulated OCI related to de-designated and terminated interest rate swaps of $14.0 million for the year ended December 31, 2021. There was no
9. Earnings Per Share
A reconciliation of the numerator and denominator of basic and diluted earnings per share follows (dollars in millions, except per share amounts; shares in thousands):
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net loss attributable to Surgery Partners, Inc. | $ | ( | $ | ( | $ | ( | ||||||||||||||
Less: Amounts allocated to participating securities (1) | ( | ( | ( | |||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Denominator: | ||||||||||||||||||||
Weighted average shares outstanding- basic and diluted (2) | ||||||||||||||||||||
Basic and diluted loss per share (2) | $ | ( | $ | ( | $ | ( | ||||||||||||||
| Dilutive securities outstanding not included in the computation of diluted loss per share as their effect is antidilutive: | ||||||||||||||||||||
| Stock options | ||||||||||||||||||||
| Restricted shares | ||||||||||||||||||||
(1)Includes dividends accrued for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses.
(2)The impact of potentially dilutive securities for all periods were not considered because the effect would be anti-dilutive in each of those periods.
F-25
Public Offerings
On January 27, 2021, the Company entered into an underwriting agreement relating to a public offering of 7,500,000 shares (the “January Firm Shares”) of the Company’s common stock, $0.01 par value per share, at a price to the public of $30.25 per share. In addition, the Company granted the underwriters an option to purchase up to an additional 1,125,000 shares of common stock at the same price per share as the January Firm Shares. On February 1, 2021, the Company completed the public offering pursuant to which the Company sold 8,625,000 shares of common stock (including the January Firm Shares and the option shares), resulting in gross proceeds of $260.9 million. In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $12.7 million, which were recognized as a direct reduction of proceeds received.
On November 8, 2021, the Company entered into an underwriting agreement relating to a public offering of 6,000,000 shares (the “November Firm Shares”) of the Company’s common stock, $0.01 par value per share, at a price to the public of $46.50 per share. In addition, the Company granted the underwriters an option to purchase up to an additional 900,000 shares of common stock at the same price per share as the November Firm Shares. On November 12, 2021, the Company completed the public offering pursuant to which the Company sold 6,900,000 shares of common stock (including the November Firm Shares and the option shares), resulting in gross proceeds of $320.9 million. In connection with the offering, the Company incurred underwriting discounts, commissions and other related costs of $14.9 million, which were recognized as a direct reduction of proceeds received.
Preferred Conversion
On May 17, 2021, the Company converted all outstanding shares of Series A Preferred Stock into approximately 22.609 million shares of common stock. See Note 7. "Redeemable Preferred Stock" for further discussion.
Share Repurchase Authorization
On December 15, 2017, the Company's Board of Directors authorized a share repurchase program of up to $50.0 million of the Company's issued and outstanding common stock from time to time. The timing and size of repurchases will be determined based on market conditions and other factors. The authorization does not obligate the repurchase of any shares and the Company may repurchase shares of common stock at any time without prior notice. The share repurchases will be made in accordance with applicable securities laws in open market or privately negotiated transactions. The authorization does not have a specified expiration date, and the share repurchase program may be suspended, recommenced or discontinued at any time or from time to time without prior notice. At December 31, 2021, the Company had $46.0 million of repurchase authorization available under the December 2017 authorization.
10. Income Taxes
Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Any change in tax rates that could impact deferred tax assets or liabilities are recognized in the same period the change occurs. If a net operating loss ("NOL") and/or interest limitation ("163(j)") carryforward exists, the Company makes a determination as to whether that NOL and/or 163(j) carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss and interest limitation carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.
The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2018 or state income tax examinations for years prior to 2017.
The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners.
The Company made income tax payments of $1.5 million, $1.7 million and $1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
F-26
Income tax expense (benefit) is comprised of the following (in millions):
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | $ | ( | $ | ( | |||||||||||||||
| State | ||||||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | ( | |||||||||||||||||||
| State | ||||||||||||||||||||
| Total income tax expense (benefit) | $ | $ | ( | $ | ||||||||||||||||
A reconciliation of the provision for income taxes as reported in the consolidated statements of operations and the amount of income tax expense (benefit) computed by multiplying consolidated income (loss) in each year by the U.S. federal statutory rate of 21% (2021, 2020 and 2019) follows (in millions):
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Tax expense (benefit) at U.S.federal statutory rate | $ | $ | ( | $ | ||||||||||||||||
| State income tax, net of U.S. federal tax benefit | ||||||||||||||||||||
| Change in valuation allowance | ||||||||||||||||||||
| Net income attributable to non-controlling interests | ( | ( | ( | |||||||||||||||||
| Changes in measurement of uncertain tax positions | ( | |||||||||||||||||||
| Stock option compensation | ( | |||||||||||||||||||
| Differences related to divested facilities | ( | ( | ||||||||||||||||||
| Tax return reconciling differences | ||||||||||||||||||||
| Change in effective tax rate | ( | |||||||||||||||||||
| Tax Receivable Agreement liability | ||||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||
| Litigation settlement | ( | |||||||||||||||||||
| Adjustments to unrealized attributes | ||||||||||||||||||||
| Other | ( | |||||||||||||||||||
| Total income tax expense (benefit) | $ | $ | ( | $ | ||||||||||||||||
F-27
The components of temporary differences and the approximate tax effects that give rise to the Company’s net deferred tax asset are as follows (in millions):
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Deferred tax assets: | ||||||||||||||
| Medical malpractice liability | $ | $ | ||||||||||||
| Accrued vacation and incentive compensation | ||||||||||||||
| Net operating loss carryforwards | ||||||||||||||
| Allowance for bad debts | ||||||||||||||
| Capital loss carryforwards | ||||||||||||||
| Amortization of intangible assets | ||||||||||||||
| Deferred financing costs | ||||||||||||||
| Section 163(j) interest | ||||||||||||||
| Interest rate swap liability | ||||||||||||||
| TRA liability | ||||||||||||||
| Right of use | ||||||||||||||
| Other deferred assets | ||||||||||||||
| Total gross deferred tax assets | ||||||||||||||
| Less: Valuation allowance | ( | ( | ||||||||||||
| Total deferred tax assets | ||||||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Depreciation on property and equipment | ( | ( | ||||||||||||
| Basis differences of partnerships and joint ventures | ( | ( | ||||||||||||
| Right of use | ( | ( | ||||||||||||
| Other deferred liabilities | ( | ( | ||||||||||||
| Total deferred tax liabilities | ( | ( | ||||||||||||
| Net deferred tax assets | $ | $ | ||||||||||||
The Company had federal NOL carryforwards of $573.0 million as of December 31, 2021, of which $478.3 million expire between 2029 and 2037. The remaining federal NOL carryforwards, which were generated after 2017, do not expire. The Company had state NOL carryforwards of $594.9 million as of December 31, 2021, which expire between 2022 and 2041. The Company had Section 163(j) interest limitation carryforwards of $397.5 million as of December 31, 2021, which do not expire.
The Company has recorded a valuation allowance against deferred tax assets at December 31, 2021 and 2020 totaling $113.0 million and $91.1 million, respectively, which represents an increase of $21.9 million. The valuation allowance continues to be provided for certain deferred tax assets for which the Company believes it is more likely than not that the tax benefits will not be realized, which are primarily Section 163(j) interest carryforwards, certain state NOLs and state credit carryforwards. Approximately $14.4 million of the valuation allowance as of December 31, 2021 is recorded against deferred tax assets attributable to interest rate swap liabilities that, if subsequently recognized, will be credits directly to contributed capital.
The Company has evaluated the realizability of its deferred tax assets based on sources of positive and negative evidence, and determined that it is more likely than not that the NOL carryforwards will be realized. The determination was made based upon projections of future book and taxable income. If the Company's expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in health care regulations, general economic conditions, or other factors, the Company may need to adjust the valuation allowance, for all or a portion of its deferred tax assets. The Company's income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in its valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on the Company's future earnings.
F-28
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Unrecognized tax benefits at beginning of year | $ | $ | ||||||||||||
| Reductions for tax positions of prior year | ||||||||||||||
| Unrecognized tax benefits at end of year | $ | $ | ||||||||||||
The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes in the consolidated statements of operations. For the years ended December 31, 2021 and 2020, the Company had approximately $0.1 0.1
11. Equity-Based Compensation
Equity-based awards are granted pursuant to the Surgery Partners, Inc. 2015 Omnibus Incentive Plan, as amended and restated effective January 1, 2020 ("2015 Omnibus Incentive Plan"). Under this plan, the Company can grant stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, performance awards, cash awards and other awards convertible into or otherwise based on shares of its common stock. As of December 31, 2021, 11,815,700 shares were authorized to be granted under the 2015 Omnibus Incentive Plan and 8,048,499 were available for future equity grants.
Restricted and Performance Share-Based Awards
During the years ended December 31, 2021 and 2020, the Company granted 232,097 and 1,077,367 restricted stock awards ("RSAs") to certain officers, employees and non-employee directors in accordance with the 2015 Omnibus Incentive Plan, respectively. Vesting and payment of these RSAs are generally subject to continuing service of the employee or non-employee director over the ratable vesting periods beginning one year from the date of grant to or five years after the date of grant. The fair values of these RSAs were determined based on the closing price of the Company’s common stock on the trading date immediately prior to the grant date.
During the years ended December 31, 2021 and 2020, the Company granted 182,964 and 854,367 performance-based restricted stock units ("PSUs") subject to the achievement of a combination of performance conditions, respectively. In addition to the achievement of the performance conditions, these PSUs are generally subject to the continuing service of the employee over the ratable vesting period from the earned date continuing for two years . For these PSUs, the number of shares payable at the end of the performance periods ranges from 0 % to 150 % of the targeted units based on the Company’s actual performance and/or market conditions results as compared to the targets. These PSUs are not considered outstanding until earned. During the years ended December 31, 2021 and 2020, 776,988 and 309,692 of the PSUs previously granted were deemed to have been earned, respectively.
F-29
Restricted and Performance Share-Based Activity
A summary of non-vested restricted share-based activity for the years ended December 31, 2021, 2020, and 2019 follows:
| Unvested Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Outstanding at December 31, 2018 | $ | |||||||||||||
| Granted/Earned | ||||||||||||||
| Forfeited/Cancelled | ( | |||||||||||||
| Vested | ( | |||||||||||||
| Outstanding at December 31, 2019 | $ | |||||||||||||
| Granted/Earned | ||||||||||||||
| Forfeited/Cancelled | ( | |||||||||||||
| Vested | ( | |||||||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||||
| Granted/Earned | ||||||||||||||
| Forfeited/Cancelled | ( | |||||||||||||
| Vested | ( | |||||||||||||
| Outstanding at December 31, 2021 | $ | |||||||||||||
Stock Options
The Company granted 2,256,500 stock options during the year ended December 31, 2019. No
The stock options granted during the year ended December 31, 2019 are subject to the following performance and vesting criteria: (i) one-third (33.3 %) of the award will vest in three equal annual installments on each of the first three anniversaries of December 31, 2019, (ii) one-third (33.3 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of thirty (30 ) consecutive trading days, and (iii) one-third (33.3 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of thirty (30 ) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred.
Option Valuation
In applying the Monte Carlo simulation model to value the stock options, the Company used the following assumptions:
▪ Risk-free interest rate. The risk-free interest rate is used as a component of the fair value of stock options to take into account the time value of money. For the risk-free interest rate, the Company uses the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life, in years, of the options granted.
▪ Expected volatility. Volatility, for the purpose of share-based compensation, is a measurement of the amount that a share price has fluctuated. Expected volatility involves reviewing historical volatility and determining what, if any, change the share price will have in the future. The Company used historical stock price information of certain peer group companies for a period of time equal to the expected option life period to determine estimated volatility.
▪ Expected life, in years. A clear distinction is made between the expected life of an option and the contractual term of the option. The expected life of an option is considered the amount of time, in years, that an option is expected to be outstanding before it is exercised. Whereas, the contractual term of the stock option is the term an option is valid before it expires.
▪ Expected dividend yield. Since issuing dividends will affect the fair value of a stock option, GAAP requires companies to estimate future dividend yields or payments. The Company has not historically issued dividends and does not intend to issue dividends in the future. As a result, the Company does not apply a dividend yield component to its valuation.
F-30
The following table sets forth the assumptions used by the Company to estimate the fair value of stock options granted during the year ended December 31, 2019. No stock options were granted during the years ended December 31, 2021 and 2020.
| 2019 | ||||||||
| Expected volatility | % | |||||||
| Risk-free interest rate | ||||||||
| Expected dividends | ||||||||
| Average expected term (years) | ||||||||
| Fair value of stock options granted | $ | |||||||
The estimated fair value of options is amortized to expense on a straight-line basis over the options’ vesting period.
Stock Option Activity
A summary of stock option activity for the years ended December 31, 2021, 2020, and 2019 follows:
| Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | ||||||||||||||||||
| Outstanding at December 31, 2018 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ||||||||||||||||||||
| Forfeited/Cancelled | ||||||||||||||||||||
| Outstanding at December 31, 2019 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ( | |||||||||||||||||||
| Forfeited/Cancelled | ( | |||||||||||||||||||
| Outstanding at December 31, 2020 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
| Exercised | ( | |||||||||||||||||||
| Forfeited/Cancelled | ( | |||||||||||||||||||
Outstanding at December 31, 2021 (1) | $ | |||||||||||||||||||
Stock Appreciation Rights
As of December 31, 2021, there were 200,000 stock-settled stock appreciation right awards (the "SAR Awards") outstanding. These SAR Awards were granted on December 16, 2018. These were the only SAR Awards granted as of December 31, 2021. The SAR Awards have an exercise price of $12.90 , and a remaining contractual term of 6.0 years. Fifty percent (50 %) of the SAR Awards will vest in five equal annual installments on each of the first anniversaries of the date of grant, generally subject to continued employment on each vesting date. Twenty-five percent (25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $25.00 over a period of sixty (60 ) consecutive trading days, and twenty-five percent (25 %) of the award will vest based on satisfaction of the time condition and the achievement by the Company of an average closing price of a share of Common Stock on the Nasdaq Stock Market of $35.00 over a period of sixty (60 ) consecutive trading days, in each case, generally subject to continued employment on each vesting date. Forfeitures are recognized as incurred. Of the outstanding SAR Awards, 120,000 were exercisable as of December 31, 2021.
Other information pertaining to equity-based compensation
At December 31, 2021, unrecognized compensation cost related to unvested shares, stock options and SAR Awards was approximately $19.3 million. Unrecognized compensation cost will be expensed annually based on the number of shares, stock options and SAR Awards that vest during the year.
The Company records equity-based compensation expense to recognize the fair value of the restricted shares, stock options and SAR Awards granted over the relevant vesting period. The Company recorded equity-based compensation expense of $17.4 million, $13.2 million and $10.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.
F-31
12. Employee Benefit Plans
Surgery Partners 401(k) Plan
The Surgery Partners 401(k) Plan is a defined contribution plan whereby certain employees who have completed at least one month of service, including at least one hour of service during that period of time, are eligible to participate. Employees may enroll in the plan immediately upon completion of the minimum service requirement. The Surgery Partners 401(k) Plan allows eligible employees to make contributions of varying percentages or flat dollar amounts of their annual compensation, up to the maximum allowable amounts by the Internal Revenue Service ("IRS"). Eligible employees may or may not receive a match by the Company of their contributions. Employer contributions vest incrementally over a period of five years . The Company's contributions were $9.7 million, $7.2 million and $7.6 million for the years ended December 31, 2021, 2020, and 2019, respectively.
13. Other Current Liabilities
A summary of other current liabilities is as follows (in millions):
| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Right-of-use operating lease liabilities | $ | $ | ||||||||||||
Accrued legal settlement (1) | ||||||||||||||
| Interest payable | ||||||||||||||
| Cost report liabilities | ||||||||||||||
| Amounts due to patients and payors | ||||||||||||||
| Tax receivable agreement liability | ||||||||||||||
| Accrued expenses and other | ||||||||||||||
| Total | $ | $ | ||||||||||||
14. Commitments and Contingencies
Professional, General and Workers' Compensation Liability Risks
The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. The Company maintains professional, general and workers' compensation liability insurance in excess of self-insured retentions, through third party commercial insurance carriers. Although management believes the coverage is sufficient for the Company's operations, some claims may potentially exceed the scope of coverage in effect. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that are reasonably possible to have a material adverse effect on the Company's business, financial position, results of operations or liquidity. Total professional, general and workers' compensation claim liabilities as of December 31, 2021 and 2020 were $19.8 million and $21.4 million, respectively. Expected insurance recoveries of $8.7 million and $10.5 million as of December 31, 2021 and 2020, respectively, are included as a component of other current assets and other long-term assets in the consolidated balance sheets.
Laws and Regulations
Laws and regulations governing the Company's business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how the Company's surgical facilities conduct their operations, from licensing requirements to how and whether the Company's facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory sanctions including fines, penalties, and exclusion from the Medicare, Medicaid and other federal health care programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians.
F-32
Government Settlement
On April 14, 2020, Logan Laboratories, LLC ("Logan Labs"), a toxicology laboratory based in Tampa, Florida, that provides urine testing services and Tampa Pain Relief Centers, Inc. ("Tampa Pain" and, together with Logan Labs, the "Companies"), a pain management medical practice based in Tampa, Florida, both indirect wholly-owned subsidiaries of the Company, entered into a settlement agreement (the "Settlement Agreement") with the United States of America, acting through the United States Department of Justice (“DOJ”) and on behalf of the Office of Inspector General of the Department of Health and Human Services ("OIG"), the Defense Health Agency, acting on behalf of the TRICARE Program, the Office of Personnel Management, as the administrator of the Federal Employees Health Benefits Program, the Office of Workers Compensation Programs of the United States Department of Labor, which administers federal workers compensation claims for federal employees, including the United States Postal Service, and the United States Department of Veterans Affairs and certain other parties to resolve the pending DOJ investigation.
Under the terms of the Settlement Agreement, the Companies paid $30.7 million plus accrued interest on April 1, 2021, representing the final payment related to the resolution of the DOJ Investigation.
Stockholder Litigation
On December 4, 2017, a purported Company stockholder filed an action in the Delaware Court of Chancery (the "Delaware Action"). That action is captioned Witmer v. H.I.G. Capital, L.L.C., et al., C.A. No. 2017-0862. The plaintiff in the Delaware Action asserted claims against (i) certain current and former members of the Company’s Board of Directors (together, the "Directors"); (ii) H.I.G. Capital, LLC and certain of its affiliates (collectively, "H.I.G."); and (iii) Bain Capital Private Equity, L.P. and certain of its affiliates (collectively, "Bain Capital" and, together with the Directors and H.I.G., the "Defendants"). The plaintiff asserted derivative claims on behalf of the Company, which is a nominal defendant in the Delaware Action, as well as putatively direct claims on behalf of a purported class of Company stockholders. The plaintiff in the Delaware Action asserted that the Defendants breached their fiduciary duties in connection with the transactions in which (i) the Company acquired National Surgical Healthcare; (ii) Bain Capital acquired preferred equity in the Company; and (iii) Bain Capital acquired H.I.G.'s equity stake in the Company, and that, in the alternative, Bain Capital aided and abetted those purported breaches. The plaintiff also asserted an unjust enrichment claim against Bain Capital.
On January 2, 2018, the Defendants moved to dismiss the plaintiff’s complaint. On December 19, 2018, the Court of Chancery issued a decision on that motion. Following that decision, all of the Directors have been dismissed from the Delaware Action. The Court did not dismiss the plaintiff’s breach of fiduciary duty claim against H.I.G. or the aiding and abetting claim asserted against Bain Capital. However, the Court dismissed the plaintiff’s breach of fiduciary duty and unjust enrichment claims against Bain Capital. In addition, the Court dismissed all of the plaintiff’s claims that were asserted on behalf of a putative class of Company stockholders. Accordingly, all of the plaintiff’s remaining claims in the Delaware Action are asserted derivatively on the Company’s behalf. Discovery in the Delaware Action principally concluded on July 30, 2021, and the Defendants moved for summary judgment with respect to the remaining claims asserted against them. While those motions were pending, the parties to the Delaware Action reached an agreement-in-principle to settle the Delaware Action. The parties to the Delaware Action negotiated a final stipulation of settlement (the “Settlement Stipulation”), which governs the terms of the settlement of the Delaware Action, and which they filed with the Court of Chancery on November 22, 2021. On February 11, 2022, the Court of Chancery approved the settlement of the Delaware Action as memorialized in the Settlement Stipulation. That decision will become final and non-appealable on March 14, 2022. The case will then be closed. Because the plaintiff in the Delaware Action asserted only derivative claims on the Company’s behalf, the Company was the beneficiary of the settlement approved by the Court of Chancery.
Acquired Facilities
The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with health care laws and regulations, such as billing and reimbursement laws and regulations, the Stark Law, the Anti-Kickback Statute, the FCA, and similar fraud and abuse laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.
The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other health care providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.
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Potential Physician Investor Liability
A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.
Tax Receivable Agreement
On May 9, 2017, the Company entered into an agreement to amend that certain Income Tax Receivable Agreement, dated September 30, 2015 (as amended, the "TRA"), by and between the Company, and the other parties referred to therein, which amendment became effective on August 31, 2017. Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G., the Company's former controlling shareholder, in its capacity as the stockholders representative pursuant to a fixed payment schedule. The amounts payable under the TRA are calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent. The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next five years and are not dependent on the Company’s actual tax savings over such period. The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that the Company is unable to make payments under the TRA, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.
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15. Segment Reporting
The Company currently operates in two major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities and the operation of ancillary services. The Surgical Facility Services segment includes the operation of ASCs, surgical hospitals and anesthesia services. The Ancillary Services segment consists of multi-specialty physician practices. Prior to 2021, the Ancillary Services segment also included a diagnostic laboratory, which was closed during the third quarter of 2020. The Optical Services segment for the years ended December 31, 2020 and 2019 reflected in the table below consisted of an optical products group purchasing organization, which was sold on December 31, 2020. The "All other" line item primarily consists of amounts attributable to the Company's corporate general and administrative functions.
The following tables present financial information for each reportable segment (in millions):
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Surgical Facility Services | $ | $ | $ | |||||||||||||||||
| Ancillary Services | ||||||||||||||||||||
| Optical Services | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Adjusted EBITDA: | ||||||||||||||||||||
| Surgical Facility Services | $ | $ | $ | |||||||||||||||||
| Ancillary Services | ( | |||||||||||||||||||
| Optical Services | ||||||||||||||||||||
| All other | ( | ( | ( | |||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Reconciliation of Adjusted EBITDA: | ||||||||||||||||||||
| Income (loss) before income taxes | $ | $ | ( | $ | ||||||||||||||||
| Net income attributable to non-controlling interests | ( | ( | ( | |||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||
| Equity-based compensation expense | ||||||||||||||||||||
Transaction and integration related costs (1) | ||||||||||||||||||||
| Loss (gain) on disposals, net | ( | |||||||||||||||||||
Litigation settlement and other litigation costs (2) | ||||||||||||||||||||
| Impairment charges | ||||||||||||||||||||
Gain on escrow release (3) | ( | |||||||||||||||||||
| Loss on debt extinguishment | ||||||||||||||||||||
Hurricane-related impacts (4) | ( | |||||||||||||||||||
| Tax receivable agreement expense | ||||||||||||||||||||
| Adjusted EBITDA | $ | $ | $ | |||||||||||||||||
(1)For the year ended December 31, 2021, this amount includes transaction and integration costs of $39.8 million and start-up costs related to a de novo surgical hospital of $6.3 million. For the year ended December 31, 2020, this amount includes transaction and integration costs of $23.2 million and start-up costs related to a de novo surgical hospital of $15.0 million. For the year ended December 31, 2019, this amount includes transaction and integration costs of $19.0 million and other acquisition costs and start-up costs related to a de novo surgical hospital of $17.1 million.
(2)This amount includes litigation settlement costs of $1.2 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively, with no comparable costs in 2021. This amount also includes other litigation costs of $5.6 million, $5.2 million and $4.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.
(3)Included in other income in the consolidated statement of operations for the year ended December 31, 2020, with no comparable gain in 2021 and 2019.
(4)Reflects the impact of insurance proceeds received net of operating losses incurred in the six months ended December 31, 2021, at a surgical facility that was closed following Hurricane Ida.
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| December 31, | ||||||||||||||
| 2021 | 2020 | |||||||||||||
| Assets: | ||||||||||||||
| Surgical Facility Services | $ | $ | ||||||||||||
| Ancillary Services | ||||||||||||||
| All other | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Year Ended December 31, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Cash purchases of property and equipment: | ||||||||||||||||||||
| Surgical Facility Services | $ | $ | $ | |||||||||||||||||
| Ancillary Services | ||||||||||||||||||||
| All other | ||||||||||||||||||||
| Total cash purchases of property and equipment | $ | $ | $ | |||||||||||||||||
16. Subsequent Events
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SURGERY PARTNERS, INC. | |||||
| By: | /s/ J. Eric Evans J. Eric Evans Chief Executive Officer (Principal Executive Officer) | ||||
Date: March 1, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| SIGNATURES | TITLE | DATE | ||||||
| Chief Executive Officer, Director (Principal Executive Officer) | March 1, 2022 | |||||||
| /s/ J. Eric Evans | ||||||||
| J. Eric Evans | ||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | March 1, 2022 | |||||||
| /s/ David T. Doherty | ||||||||
| David T. Doherty | ||||||||
| Executive Chairman of the Board | March 1, 2022 | |||||||
| /s/ Wayne S. DeVeydt | ||||||||
| Wayne S. DeVeydt | ||||||||
| Director | March 1, 2022 | |||||||
| /s/ T. Devin O'Reilly | ||||||||
| T. Devin O'Reilly | ||||||||
| Director | March 1, 2022 | |||||||
| /s/ Teresa DeLuca | ||||||||
| Teresa DeLuca | ||||||||
| Director | March 1, 2022 | |||||||
| /s/ John A. Deane | ||||||||
| John A. Deane | ||||||||
| Director | March 1, 2022 | |||||||
| /s/ Brent Turner | ||||||||
| Brent Turner | ||||||||
| Director | March 1, 2022 | |||||||
| /s/ Andrew Kaplan | ||||||||
| Andrew Kaplan | ||||||||
| Director | March 1, 2022 | |||||||
| /s/ Clifford G. Adlerz | ||||||||
| Clifford G. Adlerz | ||||||||
| Director | March 1, 2022 | |||||||
| /s/ Blair E. Hendrix | ||||||||
| Blair E. Hendrix | ||||||||
| Director | March 1, 2022 | |||||||
/s/ Patricia A. Maryland, Dr.PH | ||||||||
Patricia A. Maryland, Dr.PH | ||||||||
Exhibit 10.40
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this “Agreement”) is hereby entered into effective as of November 23, 2021 (the “Effective Date”), between Surgery Partners, Inc. (the “Company”) and Marissa Brittenham (“Executive”).
1.Employment. The Company shall employ Executive, and Executive hereby accepts continued employment with the Company, upon the terms and conditions set forth in this Agreement for the period beginning on January 10 2022 (the “Commencement Date”) and ending on the Termination Date, as provided for in Section 4 (the “Employment Period”).
2.Position and Duties.
(a)During the Employment Period, Executive shall serve as Executive Vice President, Chief Strategy Officer. Executive shall have such responsibilities, duties and authorities, and will render such services for the Company and its Subsidiaries or Affiliates as the Board of Directors of the Company (the “Board”) may from time to time direct. Executive will devote her best efforts, energies and abilities and her full business time, skill and attention to the business and affairs of the Company and its Subsidiaries, and shall perform her duties and responsibilities to the best of her ability, in a diligent, trustworthy, businesslike and efficient manner for the purpose of advancing the businesses of Company and its Subsidiaries. Executive acknowledges that her duties and responsibilities will require her full time business efforts and agrees that during the Employment Period she will not engage in any other business activity or have any business pursuits that interfere with Executive’s duties and responsibilities under this Agreement or are competitive with the businesses of the Company. Notwithstanding the foregoing, Executive shall be permitted to devote a reasonable amount of time and effort to (i) providing service to, or serving on governing boards of, civic and charitable organizations, and (ii) personally investing and managing personal and family investments in real estate and in any corporation, partnership or other entity; but in each case, only to the extent that any of the activities described in clauses (i) or (ii), individually or as a whole, do not
(A) require or involve the active participation of Executive in the management of any corporation, partnership or other entity or interfere with the execution of Executive’s duties hereunder, or (B) otherwise violate any provision of this Agreement.
(b)For purposes of this Agreement, (i) “Subsidiaries” means any corporation or other entity
(A) of which the securities or other ownership interests having the voting power to elect a majority of the board of directors or other governing body are, at the time of determination, owned by the Company, directly or through one or more subsidiaries or (B) to which the Company or any of its Affiliates provide management services, and (ii) “Affiliate” of an entity means any other person or entity, directly or indirectly controlling, controlled by or under common control with an entity.
3.Compensation and Benefits.
(a)During the Employment Period, Executive’s base salary shall be $450,000 per annum, payable by the Company in regular installments in accordance with the Company’s general payroll practices, less taxes and other applicable withholdings, and subject to review and adjustment from time to time by the Board or the Compensation Committee thereof (the “Committee”), in either case, in its discretion (as modified from time to time, the “Base Salary”).
(b)Within 30 days after the Commencement Date, the Company will provide the Executive with a one-time cash payment of $125,000 gross (the “Signing Bonus”); provided, however, the if the Executive resigns her employment without Good Reason or the Company terminates Executive’s employment for Cause (as such terms are defined in Section 4), in either event prior to the second
anniversary of the Commencement Date, the Executive will repay the Signing Bonus immediately upon the end of the Employment Period.
(c)In addition, during the Employment Period, Executive shall be entitled to participate in all of the Company’s benefit programs for which employees of the Company are generally eligible, subject to the eligibility and participation requirements thereof, including, but not limited to, the following:
(i)medical, dental, vision, life and disability insurance, as is generally provided to other executives and employees of the Company; and
(ii)eligibility for vacation time in accordance with the policies of the Company as from time to time in effect.
(d)During the Employment Period, the Company shall reimburse Executive for all reasonable out-of-pocket expenses incurred by her in the course of performing her duties and responsibilities under this Agreement which are consistent with the Company’s policies in effect from time to time with respect to travel, entertainment and other business expenses, subject to the Company’s requirements with respect to reporting and documentation of such expenses. Executive’s right to payment or reimbursement for business expenses hereunder will be subject to the following additional rules: (i) no reimbursement of any expense shall affect Executive’s right to reimbursement of any other expense in any other taxable year; (ii) the amount of expenses eligible for payment or reimbursement during any calendar year will not affect the expenses eligible for payment or reimbursement in any other taxable year; (iii) payment or reimbursement will be made not later than December 31 of the calendar year following the calendar year in which the expense was incurred or paid, and (iv) the right to payment or reimbursement is not subject to liquidation or exchange for any other benefit.
(e)In addition to the Base Salary, Executive will be eligible to receive an annual bonus of sixty percent (60%) of the Base Salary, with the actual amount of any such bonus being determined by the Board or the Committee, in either case, in its discretion, based on the achievement of performance goals established annually by the Board or the Committee, as applicable. Any annual bonus payable under this Section 3(d) will be paid no later than March 31st following the close of the year for which the bonus is earned.
(f)Executive shall be eligible to participate in the Surgery Partners, Inc. 2015 Omnibus Incentive Plan (as amended from time to time, (the “Equity Plan”) on terms and conditions set forth in the Equity Plan and in the relevant award agreement, which must be executed as a condition of receiving the award, unless specifically stated otherwise in this Agreement. Any action to be taken by the Committee with respect to the Equity Plan may be taken by an officer who has been properly delegated authority by the Committee. The number of shares subject to each award will be determined by reference to the fair market value of the Company’s common stock on the date of the grant of the award.
(i)Commencing in calendar year 2023, Executive will be eligible for annual equity grants under the Equity Plan. Initially, the targeted equity grant will be $450,000, subject to approval of the Committee, in such forms as determined by the Committee in its discretion.
(ii)Subject to approval by the Committee, as soon as reasonably practicable following the Commencement Date, the Company shall provide two equity grants under the Equity Plan to the Executive with an aggregate value of $850,000 as follows: (1) $475,000 in a restricted stock award that becomes vested in three equal annual installments following the grant date; and (2)
$375,000 in a performance stock unit award that becomes earned and vested based on performance criteria specified in the award.
(g)All amounts payable to Executive hereunder shall be subject to all required withholdings by the Company. If additional guidance is issued under, or modifications are made to, Section 409A of
the Internal Revenue Code of the Internal Revenue Code and the regulations and other interpretive guidance issued thereunder (collectively, “Section 409A”), or any other law affecting payments to be made under this Agreement, Executive agrees that the Company may take such reasonable actions and adopt such reasonable amendments as the Company believes are necessary to ensure continued compliance with the Internal Revenue Code, including Section 409A. However, the Company does not hereby or otherwise represent or warrant that any payments hereunder are or will be in compliance with Section 409A, and Executive shall be responsible for obtaining her own tax advice with regard to such matters.
4.Termination.
(a)Termination by Executive or the Company. The Employment Period (i) shall terminate upon Executive’s resignation with Good Reason (as defined below) or without Good Reason, death or Incapacity (as defined below) or (ii) may be terminated by the Company at any time for Cause (as defined below) or without Cause.
(b)“Good Reason” shall mean without the express written consent of Executive:
(i)a material diminution of her position, duties, responsibilities, and status with the Company as in effect as of the Commencement Date or a material reduction of Executive’s resources as in effect on the Commencement Date;
(ii)a material reduction in Executive’s Base Salary or annual bonus target percentage;
(iii)a material reduction in the level of benefits available or awarded to Executive, other than any reduction in connection with a Company-wide reduction applicable generally to similarly situated executive officers of the Company;
(iv)within twelve months of a Change in Control (as defined herein), a material increase in Executive’s core functional responsibilities with a corresponding material change in Executive’s core functional role without a corresponding increase in compensation, provided, however, the addition of additional facilities or territories to Executive’s oversight responsibilities or other ordinary course growth of the Company or any of its Subsidiaries or Affiliates shall not be a material increase in Executive’s core functional responsibilities;
(v)a relocation by the Company of Executive’s primary employment location to a location which is more than 50 miles from Executive’s primary employment location on the date hereof; or
(vi)a material breach by the Company of the terms of this Agreement;
but only if (x) Executive notifies the Company in writing within 90 days after the initial existence or occurrence of any of these conditions which notice describes in reasonable detail the basis for Executive’s belief that Good Reason exists and that Executive intends to resign for Good Reason and the Company, within 30 days after receipt of such notice, either fails to cure the condition or delivers a written notice to Executive that the Company intends not to cure such condition and (y) Executive actually resigns prior to 15 days after the earlier to occur of either the end of such 30-day cure period or delivery of such written notice by the Company.
(c)“Incapacity” as used herein shall mean that Executive is unable to perform, with or without reasonable accommodation, by reason of physical or mental incapacity, the essential duties, responsibilities and functions of her position for a period of 84 days (which need not be consecutive) in any 12-month period. A medical examination by a physician selected by the Company to whom Executive or her duly appointed guardian, if any, has no reasonable objection shall determine, according to the facts then available, whether and when Incapacity has occurred. Such determination shall not be arbitrary or unreasonable and shall be final and binding on the parties hereto.
(d)“Cause” as used herein means the occurrence of any of the following events:
(i)a material breach by Executive of any of the terms and conditions of this Agreement; provided that, if curable, Executive shall have a reasonable period of time (which in no event shall exceed 45 days) during which to cure such material breach following the date on which Executive receives the Company’s written notice of such material breach;
(ii)Executive’s reporting to work (A) intoxicated (other than Executive’s reasonable use of alcohol in connection with business entertainment, provided, that such use of alcohol does not cause the Company or any of its Subsidiaries or Affiliates substantial public disgrace or disrepute or economic harm) or (B) under the influence of illegal drugs;
(iii)Executive’s use of illegal drugs (whether or not at the workplace) or other conduct causing the Company or any of its Subsidiaries or Affiliates substantial public disgrace or disrepute or economic harm;
(iv)breach of fiduciary duty, gross negligence or willful misconduct with respect to the Company or any of its Subsidiaries or Affiliates,
(v)chronic absenteeism, which shall be deemed to have occurred if Executive has at least ten absences unrelated to paid time off, disability or illness in any ten week period;
(vi)Executive’s material failure or willful refusal to substantially perform her duties, responsibilities and functions; provided that, if curable, Executive shall have a reasonable period of time (which in no event shall exceed 45 days) during which to cure such failure following the date on which Executive receives the Company’s written notice of such failure;
(vii)Executive’s failure to comply with any of the Company’s or any of its Subsidiaries’ written guidelines or procedures promulgated by the Company or any such Subsidiary and furnished to Executive, including, without limitation, any guidelines or procedures relating to marketing or community relations; provided that, if curable, Executive shall have a reasonable period of time (which in no event shall exceed 45 days) during which to cure such failure following the date on which Executive receives the Company’s written notice of such failure; or
(viii)Executive has committed an act or acts constituting a felony or any other act or omission involving theft, dishonesty or fraud against the Company or any of its Subsidiaries or any of their respective customers or suppliers or other business relationships.
(e)A “Change in Control” shall be deemed to have occurred upon any of the following events, provided that, to the extent required by Section 409A, such events would also qualify as a “change in control event” under Treas. Reg. §1.409A-3(i)(5):
(i)Upon the closing of a reorganization, merger, share exchange or consolidation, other than a reorganization, merger, share exchange or consolidation with respect to which those persons who were the beneficial owners, immediately prior to such reorganization, merger, share exchange or consolidation, of outstanding securities of the Company ordinarily having the right to vote in the election of directors own, immediately after the closing of such transaction, more than 51% of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors; or
(ii)Upon approval by the stockholders of a complete liquidation and dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company other than to a Subsidiary or Affiliate.
(f)Termination by Executive. Executive has the right to terminate her employment under this Agreement at any time, for any or no reason, but only after giving the Company (i) 30 days prior written notice with respect to any termination without Good Reason or (ii) the number of days prior written notice set forth in the last sentence of Section 4(b) with respect to any termination with Good Reason.
(g)Compensation after Termination.
(i)If the Employment Period is terminated pursuant to Executive’s resignation without Good Reason, death or Incapacity, Executive shall only be entitled to receive her Base Salary through the date of termination and shall not be entitled to any other salary, bonus, compensation or benefits from the Company or its Subsidiaries, except as may be required by applicable law.
(ii)If the Employment Period is terminated by the Company for Cause, Executive shall only be entitled to her Base Salary through the date of termination and shall not be entitled to any other salary, bonus, compensation or benefits from the Company or its Subsidiaries, except as may be required by applicable law. In addition, in such event, Executive shall automatically forfeit any rights to any unvested equity owned by Executive in the Company or any Subsidiary.
(iii)If the Employment Period is terminated by the Company without Cause or by Executive for Good Reason, then subject to the conditions described in Section 4(g)(v) below, Executive shall be entitled to receive as severance compensation the following (collectively, “Severance Pay”): (A) an amount equal to twelve (12) months of Executive’s then-current annual Base Salary, payable in regular installments beginning within 30 days following the Termination Date in accordance with the Company’s general payroll practices for salaried employees; (B) continuation of the welfare benefits described in Section 3(b) for twelve (12) months to the extent permissible under the terms of the relevant benefit plans at the same cost to Executive as if Executive were an active employee of the Company; (C) the Bonus payable to Executive within 3 months after the end of the year of termination (to the extent not previously paid), paid in a lump sum at the time that bonuses are regularly paid to employees; (D) any awarded but unpaid Annual Bonus for the prior year; (E) with respect to the portion of each restricted stock award held by Executive as of date on which the Employment Period is terminated that is subject to time-based vesting (the “Time-Based RSA”), accelerated vesting of the Time- Based RSA to the vesting event next following the date on which the Employment Period is terminated; (E) with respect to the portion of each performance stock unit award held by the Executive as of the date on which the Employment Period is terminated that has been converted into “earned shares” (the “Earned PSUs”), accelerated vesting of the Earned PSUs will occur when the Employment Period ends; and (F) with respect to each performance stock unit award held by the Executive that have not been converted to Earned PSUs, the Executive’s rights under the award will be fully vested based on the number of shares that would be earned under the award based on performance measured through the end of the Employment Period. For purposes of this Section 4(g), “Bonus” shall mean an amount equal to Executive’s then-current annual Base Salary, multiplied by the percentage contained in Section 3(d) hereof. With respect to any PSU award, it is further agreed that if Executive’s employment is terminated without Cause or Executive terminates her employment
for Good Reason before the Performance Period End Date (as defined in such PSU award agreement), and a Change in Control occurs within 90 days following such termination, then notwithstanding such termination the terms of Section 3(b) of the award agreement shall apply to determine Earned Shares as if the Executive were still employed by the Company, and Section 6(a) of the award agreement shall apply to such Earned Shares. For the avoidance of doubt, the unvested portion of any restricted stock awards and performance share unit awards held by Executive as of the date on which the Employment Period ends (after giving effect to the acceleration provisions set forth in subsections (D), (E) and (F) herein and the terms and conditions of the applicable award agreements and the Surgery Partners, Inc. 2015 Omnibus Incentive Plan (as amended from time to time)) shall be forfeited and of no further force and effect.
(iv)If, within 90 days prior to or 12 months following a Change in Control, either (A) the Company terminates the employment of Executive hereunder without Cause under Section 4(a) above, or (B) Executive terminates her employment for Good Reason under Section 4(b) above, then, in lieu of any other compensation that may be specified in this Agreement, the Company will pay Executive the Severance Pay in a single lump-sum payment not later than 30 days after termination. If any payment obligation under this Section 4(g) arises, no compensation received from other employment (or otherwise) will reduce the Company’s obligation to make the payment(s) described in this paragraph.
(v)Notwithstanding Sections 4(g)(iii) or (iv), Executive’s right to receive Severance Pay hereunder is conditioned upon: (A) Executive executing, and not revoking, a written separation agreement and general release of all claims against the Company, its Subsidiaries and Affiliates and their respective managers, directors, officers, shareholders, members, representatives, agents, attorneys, predecessors, successors and assigns (other than a claim for the severance payments described in Section 4(g)(iii) or (iv) and Executive’s rights to future distributions and payments related to the continued ownership of any equity securities in the Company that Executive will continue to own after such termination), in form and substance acceptable to the Company, which shall among other things, contain a general release by Executive of all claims arising out of her employment and termination of employment by the Company (a “Release Agreement”) within 30 days of Executive’s Termination Date; and (B) Executive’s material compliance with all of her obligations which survive termination of this Agreement. The Severance Pay is intended to be in lieu of all other payments to which Executive might otherwise be entitled in respect of her termination without Cause or resignation with Good Reason. The Company and its Subsidiaries and Affiliates shall have no further obligations hereunder or otherwise with respect to Executive’s employment from and after the date of termination of employment with the Company (the “Termination Date”), and the Company and its Subsidiaries and Affiliates shall continue to have all other rights available hereunder (including without limitation, all rights hereunder at law or in equity).
(vi)Notwithstanding the foregoing, the Release Agreement (x) shall not require the release of Executive’s rights arising from the express terms of this Agreement or any applicable award agreement that are associated with a termination of employment; (y) shall not impose any postemployment restrictions other than those set forth in this Agreement, and (z) shall take into account and preserve Executive’s rights in the event that a Change in Control occurs within 90 days after termination of employment (or such longer tail period as may be provided by any agreement between Executive and the Company).
(vii)Except as otherwise expressly provided herein, all of Executive’s rights to salary, bonuses, benefits and other compensation hereunder which might otherwise accrue or become payable after the termination of the Employment Period shall cease upon such termination, other than those expressly required under applicable law (such as COBRA). All amounts payable to Executive as severance hereunder shall be subject to all required withholdings by the Company.
(h)The Company may offset any amount Executive owes the Company or its Subsidiaries or Affiliates against any amount they or their Subsidiaries or Affiliates owe Executive hereunder.
5.Confidential Information. Other than in the performance of her duties hereunder, during the Restrictive Period (as defined below) and thereafter, Executive shall keep secret and retain in strictest confidence, and shall not, without the prior written consent of the Company, furnish, make available or disclose to any third party or use for the benefit of himself or any third party, any Confidential Information. As used in this Agreement, “Confidential Information” shall mean any information relating to the business or affairs of the Company or any of its Subsidiaries or Affiliates or the Business, including but not limited to any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, designs, processes, procedures, improvements, models, manuals, financial data, acquisition strategies and information, information relating to operating procedures and marketing strategies, and any other proprietary information used by the Company or any of its Subsidiaries or Affiliates in connection with the Business, irrespective of its form; provided, however, that Confidential Information shall not include any information which is in the public domain or becomes known in the industry, in each case through no wrongful act on the part of Executive. Executive acknowledges that the Confidential Information is vital, sensitive, confidential and proprietary to the Company and its Subsidiaries and Affiliates. Executive will immediately notify the Company of any unauthorized possession, use, disclosure, copying, removal or destruction, or attempt thereof, of any Confidential Information by anyone of which Executive becomes aware and of all details thereof. Executive shall take all reasonably appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. Executive shall deliver to the Company at the termination or expiration of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, computers, printouts and software and other documents and data (and copies thereof) embodying or relating to the Confidential Information, Inventions and Discoveries (as defined below) or the business of the Company or any of its Subsidiaries or Affiliates which Executive may then possess or have under her control. Nothing in this Agreement limits, restricts or in any other way affects Executive’s communicating with any governmental agency or entity, or communicating with any official or staff person of a governmental agency or entity, concerning matters relevant to the governmental agency or entity, or requires Executive to provide notice to the Company of the same. Executive cannot be held criminally or civilly liable under any federal or state trade secret law for disclosing a trade secret (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspended violation of law, or (2) in a compliant or other document filed under seal in a lawsuit or other proceeding. Notwithstanding this immunity from liability, Executive may be held liable if Executive unlawfully accesses trade secrets by unauthorized means.
“Business” as used herein means the business of owning, operating, developing and/or managing, or providing management or administrative services to, (a) ambulatory surgery centers anywhere in the United States or (b) physician-owned surgical hospitals within a 50 mile radius of any hospital that is owned, operated, developed or managed by the Company or any Affiliate.
6.Inventions and Discoveries.
(a)Executive understands and agrees that all inventions, discoveries, ideas, improvements, whether patentable, copyrightable or not, pertaining to the Business or relating to Company’s or any of its Subsidiaries’ or Affiliates’ actual or demonstrably anticipated research, development or inventions (collectively, “Inventions and Discoveries”) that result from any work performed by Executive solely or jointly with others for the Company or any of its Subsidiaries or Affiliates which Executive, solely or jointly with others, conceives, develops, or reduces to practice during the course of Executive’s
employment with the Company or any of its Subsidiaries, are the sole and exclusive property of the Company. Executive will promptly disclose all such matters to the Company and will assist the Company in obtaining legal protection for Inventions and Discoveries. Executive hereby agrees on behalf of himself, her executors, legal representatives and assignees that she will assign, transfer and convey to the Company, its successors and assigns the Inventions and Discoveries.
(b)THE COMPANY AND EXECUTIVE ACKNOWLEDGE AND AGREE THAT SECTION 6(a) SHALL NOT APPLY TO AN INVENTION OF EXECUTIVE FOR WHICH NO EQUIPMENT, SUPPLIES, FACILITY OR TRADE SECRET INFORMATION OF THE COMPANY OR ANY OF ITS SUBSIDIARIES WAS USED AND WHICH WAS DEVELOPED ENTIRELY ON EXECUTIVE’S OWN TIME, UNLESS (A) THE INVENTION RELATED (I) TO THE BUSINESS OF THE COMPANY OR ANY OF ITS SUBSIDIARIES OR AFFILIATES OR (II) TO THE COMPANY’S OR ANY OF ITS SUBSIDIARIES’ OR AFFILIATES’ ACTUAL OR DEMONSTRABLY ANTICIPATED RESEARCH OR DEVELOPMENT, OR (B) THE INVENTION RESULTS FROM ANY WORK PERFORMED BY EXECUTIVE FOR THE COMPANY OR ANY OF ITS SUBSIDIARIES OR AFFILIATES.
(c)EXECUTIVE ACKNOWLEDGES THAT SHE HAS READ THIS SECTION 6 AND FULLY UNDERSTANDS THE LIMITATIONS WHICH IT IMPOSES UPON HER AND HAS RECEIVED A DUPLICATE COPY OF THIS AGREEMENT FOR HER RECORDS.
7.Restrictive Covenants. Executive acknowledges that in the course of her employment with the Company or any of its Subsidiaries or Affiliates, or their predecessors or successors, she has been and will be given access to and has and will become familiar with their trade secrets and with other Confidential Information and that her services have been and shall be of special, unique and extraordinary value to the Company and its Subsidiaries or Affiliates. Therefore, and in further consideration of the compensation to be paid to Executive hereunder and in connection with her employment, and to protect the Company’s and its Subsidiaries’ and Affiliates’ Confidential Information, business interests and goodwill:
(a)Non-compete. Executive hereby agrees that for a period commencing on the date hereof and ending on the Termination Date, and thereafter, through the period ending twelve (12) months after the Termination Date (collectively, the “Restrictive Period”), she shall not, directly or indirectly, as employee, agent, consultant, stockholder, director, co-partner or in any other individual or representative capacity, own, operate, manage, control, engage in, invest in or participate in any manner in, act as a consultant or advisor to, render services for (alone or in association with any person, firm, corporation or entity), or otherwise assist any person or entity (other than the Company and its Subsidiaries) that engages in or owns, invests in, operates, manages or controls any venture or enterprise that directly or indirectly engages or is actively developing or attempting to develop in any element of the Business anywhere within a 50-mile radius of the Nashville, Tennessee metropolitan area or within a 50-mile radius of any area (or in the event such area is a major city, the metropolitan area relating to such city) in which the Company or any of its Subsidiaries on the Termination Date actively engages or is actively developing or attempting to develop in any element of the Business (the “Territory”); provided, however, that nothing contained herein shall be construed to prevent Executive from investing in the stock of any competing corporation listed on a national securities exchange or traded in the over-the-counter market, but only if Executive is not involved in the business of said corporation and if Executive and her associates (as such term is defined in Regulation 14(A) promulgated under the Securities Exchange Act of 1934, as in effect on the date hereof), collectively, do not own more than an aggregate of 3% of the stock of such corporation. With respect to the Territory, Executive specifically acknowledges that the Company and its Subsidiaries intend to expand the Business into and throughout the United States. Notwithstanding the foregoing, the activity proscribed by this Section 7(a) shall not constitute a violation of this Section 7(a) where performed for (x) an entity where no more than a de minimis amount of revenue is derived from a business that is competitive with the business of the Company or any of its Affiliates; or (y) an entity that derives no more than $100 million in revenue from one or more divisions, departments or segments, in the aggregate, that are engaged in any business competitive with the business of the Company or any of
its Affiliates; provided, that in either case, you are not responsible for (and do not engage or participate in) the day-to-day management, oversight or supervision of such business and provided you do not have direct supervision over the individual or individuals who are so responsible for such day-to-day management, oversight or supervision.
(b)Interference with Relationships. Without limiting the generality of the provisions of Section 7(a) hereof, Executive hereby agrees that, for a period commencing on the Commencement Date and ending on the Termination Date, and thereafter, through the period ending twelve (12) months after the Termination Date (the “Non-Solicit Restrictive Period”), she will not, directly or indirectly, as employee, agent, consultant, stockholder, director, partner or in any other individual or representative capacity, (i) solicit or encourage, or participate in any business which solicits or encourages (A) any person, firm, corporation or other entity which has executed, or proposes to execute, a management services agreement or other services agreement with the Company or any of its Subsidiaries at any time during the term of this Agreement, or any successor in interest to any such person, firm, corporation or other entity, for the purpose of securing business or contracts related to any element of the Business, or (B) any present customer or patient of the Company or any of its Subsidiaries or any of their Affiliated Practices to terminate or otherwise alter his, her or its relationship with the Company or any of its Subsidiaries or such Affiliated Practice; provided, however, that nothing contained herein shall be construed to prohibit or restrict Executive from soliciting business from any such parties on behalf of the Company or any of its Subsidiaries in performance of her duties as an employee of the Company required under and as specifically contemplated by Section 2 above or (ii) divert, entice away, solicit or encourage, or attempt to divert, entice away, solicit or encourage, any physician who utilizes or has invested in an Affiliated Practice to become an owner, investor or user of another practice or facility that is not an Affiliated Practice or approach any such physician for any of the foregoing purposes or authorize or assist in the taking of any such action by any third party. In addition, at all times from and after the Termination Date, Executive shall not contact or communicate in any manner with any of Company’s, or any of its Subsidiaries’ or Affiliates’ suppliers or vendors, or any other third party providing services to the Company or any of its Subsidiaries, regarding the Company or any of its Subsidiaries or any Company- or any such Subsidiary-related matter (which suppliers, vendors or third party service providers will include, without limitation, any third party with whom the Company or any of its Subsidiaries was, during the term of Executive’s employment with the Company or any of its Subsidiaries, contemplating engaging, or negotiating with, for the future provision of products or services). Provided, however, that these restrictions shall apply (x) only with respect to those persons who are or have been a business partner of the Company or any of its Affiliates at any time within the immediately preceding two (2)-year period or whose business has been solicited on behalf of the Company or any of the Affiliates by any of their officers, employees or agents within such two (2)-year period, other than by form letter, blanket mailing or published advertisement, and (y) only if Executive has performed work for such person during his employment with the Company or one of its Affiliates or been introduced to, or otherwise had contact with, such person as a result of his employment or other associations with the Company or one of its Affiliates or have had access to Confidential Information which would assist in his solicitation of such person.
(c)Non-solicitation. Other than in the performance of her duties hereunder, during the Non- Solicit Restrictive Period, Executive shall not, directly or indirectly, as employee, agent, consultant, stockholder, director, co partner or in any other individual or representative capacity, employ, recruit or solicit for employment or engagement, any person who is employed or engaged by the Company or any of its Subsidiaries or any of its Affiliated Practices during the Non- Solicit Restrictive Period, or otherwise seek to influence or alter any such person’s relationship with any of the Affiliated Practices, the Company or any of its Subsidiaries; provided, however that responses to a general solicitation (such as an internet or newspaper solicitation) that are not targeted towards any particular person shall not be deemed to be a violation of the restrictions set forth in this Section 7(c).
(d)Affiliated Practice. For purposes of this Agreement, an “Affiliated Practice” shall include any practice or facility (i) in which the Company or any of its Subsidiaries has an ownership interest or (ii) that is managed by or receives other services from the Company or any of its Subsidiaries in connection with any element of the Business.
(e)Blue Pencil. If any court of competent jurisdiction shall at any time deem the term of this Agreement or any particular Restrictive Covenant (as defined below) too lengthy or the Territory too extensive, the other provisions of this Section 7 shall nevertheless stand, the Restrictive Period herein shall be deemed to be the longest period permissible by law under the circumstances and the Territory herein shall be deemed to comprise the largest territory permissible by law under the circumstances. The court in each case shall reduce the time period and/or Territory to permissible duration or size.
(f)Covenant Not to Disparage. During the Restrictive Period and thereafter, Executive shall not disparage, denigrate or derogate in any way, directly or indirectly, the Company, any of its Subsidiaries or Affiliates, or any of its or their respective agents, officers, directors, employees, parent, subsidiaries, affiliates, Affiliated Practices, affiliated doctors (including any physicians who utilize or have invested in any Affiliated Practice), representatives, attorneys, executors, administrators, successors and assigns (collectively, the “Protected Parties”), nor shall Executive disparage, denigrate or derogate in any way, directly or indirectly, her experience with any Protected Party, or any actions or decisions made by any Protected Party.
(g)Remedies. Executive acknowledges and agrees that the covenants set forth in this Section 7 and the preceding Sections 5 and 6 (collectively, the “Restrictive Covenants”) are reasonable and necessary for the protection of the business interests of the Company and its Subsidiaries and Affiliates, that irreparable injury may result to the Company and its Subsidiaries and Affiliates if Executive breaches any of the terms of said Restrictive Covenants, and that in the event of Executive’s actual or threatened breach of any such Restrictive Covenants, the Company and its Subsidiaries and Affiliates will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by him of any of the Restrictive Covenants, the Company and its Subsidiaries and Affiliates shall be entitled to immediate temporary injunctive and other equitable relief subject to hearing as soon thereafter as possible. Nothing contained herein shall be construed as prohibiting the Company or any of its Subsidiaries or Affiliates from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove. In addition and supplementary to other rights and remedies existing in its (or their) favor, in the event of the material breach by Executive of any of the provisions of this Section 7, the Company (and/or its Subsidiaries or Affiliates) shall be entitled to require Executive to account for and pay over to the Company (and/or its Subsidiaries or Affiliates) all compensation, profits, moneys, accruals, increments or other benefits actually derived from or received as a result of any transactions constituting a breach of the covenants contained in this Agreement which may require Executive to repay any severance. In addition, in the event of an alleged breach or violation by Executive of this Section 7, the restricted periods set forth in this Section 7 shall be tolled until such breach or violation has been duly cured.
(h)Executive understands that the foregoing restrictions may limit her ability to earn a livelihood in a business similar to the business of the Company and its Subsidiaries or Affiliates, but she nevertheless believes that she has received and will receive sufficient consideration and other benefits as an executive of the Company and as otherwise provided hereunder to clearly justify such restrictions which, in any event (given her education, skills and ability), Executive does not believe would prevent him from otherwise earning a living. Executive acknowledges that the Restrictive Covenants are reasonable and that she has reviewed the provisions of this Agreement with her legal counsel. During the Restricted Period, Executive shall inform any prospective or future employer of any and all restrictions contained in this Agreement and provide such employer with a copy of such restrictions, prior to the commencement of that employment.
8.Executive’s Representations and Covenants.
(a)Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which she is bound, (ii) to the best of Executive’s knowledge and other than as previously disclosed to the Company, Executive is not a party to or bound by any employment agreement, non- compete agreement or confidentiality agreement with any other person or entity and (iii) upon the
execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that she has consulted with independent legal counsel regarding her rights and obligations under this Agreement and that she fully understands the terms and conditions contained herein.
(b)During the Employment Period and thereafter, Executive shall cooperate with the Company and its Subsidiaries and Affiliates in any internal investigation or administrative, regulatory or judicial proceeding as reasonably requested by the Company (including, without limitation, Executive being available to the Company upon reasonable notice for interviews and factual investigations, appearing at the Company’s request to give testimony without requiring service of a subpoena or other legal process, volunteering to the Company all pertinent information and turning over to the Company all relevant documents which are in or may come into Executive’s possession, all at times and on schedules that are reasonably consistent with Executive’s other permitted activities and commitments). In the event the Company requires Executive’s cooperation in accordance with this Section 8(b), the Company shall reimburse Executive for reasonable travel expenses (including, without limitation, travel expenses, lodging and meals, and reasonable attorneys’ fees upon submission of receipts).
9.Survival. Sections 4 through 22 shall survive and continue in full force in accordance with their terms notwithstanding the expiration or termination of the Employment Period.
10.Notices. Any notices provided for in this Agreement shall be in writing and shall be effective when delivered in person or deposited in the United States mail, postage prepaid, and addressed to Executive at her last known address on the books of the Company or, in the case of the Company, to it at its principal place of business, attention of the Chief Executive Officer, or to such other address as either party may specify by notice to the other actually received.
11.Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.
12.Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith, embody the complete agreement and understanding among Executive and the Company and its Subsidiaries and, as of the Effective Date, shall supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way, including, for the avoidance of doubt, the Former Employment Agreement.
13.No Strict Construction. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto.
14.Counterparts. This Agreement may be executed in separate counterparts (including by facsimile or PDF signature pages), each of which is deemed to be an original and all of which taken together constitute one and the same agreement.
15.Legal Fees. The Company will reimburse you for legal fees of up to $5,000 incurred in connection with the negotiation and documentation of this Agreement and related documents, which shall be paid within twenty (20) days of presentation.
16.Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive and the Company and its successors and permitted assigns. Executive may not assign any of her rights or obligations hereunder without the prior written consent of the Company. The Company may (a) assign any or all of its respective rights and interests hereunder to one or more Subsidiaries or Affiliates of the Company, (b) designate one or more Subsidiaries or Affiliates of the Company to perform its obligations hereunder (in any or all of which cases the Company nonetheless shall remain responsible for the performance of all of its obligations hereunder), (c) assign its rights hereunder in connection with the sale of all or a substantial part of the business or assets of the Company or one of its Subsidiaries (whether by merger, sale of stock or assets, recapitalization or otherwise) and (d) merge any of the Subsidiaries or Affiliates with or into the Company (or vice versa). The rights of the Company hereunder are enforceable by the Company or its Subsidiaries or Affiliates, which are the intended third party beneficiaries hereof and no other third party beneficiary is so otherwise intended.
17.Delivery by Facsimile or PDF. This Agreement and any amendments hereto, to the extent signed and delivered by means of a facsimile machine or PDF, shall be treated in all manner and respects as an original agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person. At the request of any party hereto, each other party hereto shall re-execute original forms thereof and deliver them to the other party. No party hereto shall raise the use of a facsimile machine or PDF to deliver a signature or the fact that any signature or agreement or instrument was transmitted or communicated through the use of a facsimile machine or PDF as a defense to the formation or enforceability of a contract and each such party forever waives any such defense.
18.Income Tax Treatment. Executive and the Company acknowledge that it is the intention of the Company to deduct all cash amounts paid under this Agreement as ordinary and necessary business expenses for income tax purposes. Executive agrees and represents that she will treat all such non- reimbursable amounts as ordinary income for income tax purposes, and should she report such amounts as other than ordinary income for income tax purposes, she will indemnify and hold the Company harmless from and against any and all taxes, penalties, interest, costs and expenses, including reasonable attorneys’ and accounting fees and costs, which are incurred by Company directly or indirectly as a result thereof.
19.Governing Law. This Agreement shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Agreement shall be governed by, the laws of the state in which Executive resides, without giving effect to provisions thereof regarding conflict of laws.
20.Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE PARTIES HERETO ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT, BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTY. THE PARTIES HERETO ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE COMPANY AND EXECUTIVE FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS WAIVER WITH THEIR RESPECTIVE LEGAL
COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES THEIR RESPECTIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE TRANSACTION CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
21.Consent to Jurisdiction.
(a)THE COMPANY AND EXECUTIVE HEREBY CONSENT TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE STATE IN WHICH EXECUTIVE RESIDES AND IRREVOCABLY AGREE THAT SUBJECT TO THE COMPANY’S ELECTION, ALL ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT SHALL BE LITIGATED IN SUCH COURTS. EXECUTIVE ACCEPTS FOR HERSELF AND IN CONNECTION WITH HER PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT.
(b)Notwithstanding Section 20(a), the parties intend to and hereby confer jurisdiction to enforce the covenants contained in Sections 5 through 7 upon the courts of any jurisdiction within the geographical scope of such covenants. If the courts of any one or more of such jurisdictions hold such covenants wholly or partially invalid or unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the parties that such determination not bar or in any way affect the Company’s right to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.
22.Amendment and Waiver. Any provision of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or course of dealing or failure or delay by any party hereto in enforcing or exercising any of the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement or be deemed to be an implied waiver of any provision of this Agreement.
23.Section 409A. To the maximum extent permitted by law, this Agreement shall be interpreted in such a manner that the payments to Executive under this Agreement are either exempt from, or comply with, Section 409A, including without limitation any such regulations or other guidance that may be issued after the date hereof. For purposes of Section 409A, each payment made under this Agreement shall be treated as a separate payment and the right to a series of installment payments under this Agreement is to be treated as a right to a series of separate payments. Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” as defined below, as of Executive’s termination of employment, then, to the extent any payment under this Agreement resulting from Executive’s termination of employment constitutes deferred compensation (after taking into account any applicable exemptions from Section 409A) and to the extent required by Section 409A, no payments due under this Agreement as a result of Executive’s termination of employment may be made until the earlier of (a) the first day following the six-month anniversary of Executive’s date of termination and (b) Executive’s date of death; provided, however, that any payments delayed during this six-month period shall be paid in the aggregate in a lump sum as soon as reasonably practicable following the sixth month anniversary of Executive’s date of termination. For purposes of this Agreement, all references to “termination of employment” and correlative phrases shall be construed to require a “separation from service” (as defined in Treas. Reg. §1.409A-1(h) after giving effect to the presumptions contained therein), and the term “specified employee” means an individual determined by the Company to be a specified employee under Treas. Reg. §409A-1(i).
* * * * * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first written above.
SURGERY PARTNERS, INC.
By: /s/ Jennifer Baldock
Jennifer Baldock
Executive Vice President and Chief Legal Officer
Accepted and Agreed:
/s/ Marissa Brittenham
Marissa Brittenham
Date: November 23, 2021
Exhibit 10.41
RETIREMENT AND CONSULTING AGREEMENT
This RETIREMENT AND CONSULTING AGREEMENT (the “Agreement”) is entered into on February 25, 2022, by and between Surgery Partners, Inc., a Delaware corporation (the “Company”), and George M. Goodwin, a resident of Tennessee (“Executive”).
WHEREAS, Executive is employed by and provides services to the Company as the President of the American Group;
WHEREAS, Executive has expressed a desire to retire from employment and the parties further desire that Executive continue to provide certain consulting services after retirement to the Company in order to assure an orderly transition of his duties and responsibilities to successors;
WHEREAS, the parties are entering into this Agreement to specify the following: (i) the date of Executive’s retirement; (ii) certain additional consideration provided to Executive; (iii) the terms of Executive’s consulting services to the Company; (iv) Executive’s agreement to be bound by certain restrictive covenants; and (v) a release and waiver of all claims by Executive based on his employment with the Company;
NOW, THEREFORE, based on the foregoing premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree:
1. Retirement from Employment.
(a) Retirement Date. In order to ensure a smooth transition for the Company, Executive will continue to provide services as the President of the American Group and assist the Company in identifying a successor to assume Executive’s duties. The intended date of retirement is September 30, 2022 (the “Retirement Date”); provided, however the Retirement Date may be extended by the Company in its discretion until the commencement of employment of the successor who will assume Executive’s duties. As of the Retirement Date, Executive hereby agrees that he shall relinquish all positions which he then holds with the Company and any of its “Affiliates” (as defined below), including positions he holds as an officer or director. For purposes of this Agreement, an “Affiliate” is any business entity that directly, or indirectly through one or more intermediaries, either controls, or is controlled by, the Company.
(b) Post-Retirement Consulting. Following the Retirement Date, Executive will be available to the Company to provide consulting services under the terms provided in Section 4.
2. Payments and Benefits.
(a) Expense Reimbursement. Executive has presented or will present evidence of all expenditures that may be reimbursed under the Company’s business expense reimbursement policy. The Company will provide full reimbursement of any such expenses that are outstanding within ten days of receipt of such evidence.
(b) Company Benefits. The parties acknowledge that Executive is participating in certain employee health, welfare, retirement and fringe benefit plans maintained by the Company or an Affiliate (collectively, the “Employee Plans”). Executive’s rights under the Employee Plans on and after the Retirement Date shall be determined under the terms of the Employee Plans. Executive’s retirement on the Retirement Date is intended to be a separation from service under the Employee Plans. The waiver or settlement of rights herein are not intended to include a waiver of amounts due, payable or owing under the Employee Plans.
(c) Payments on Separation. Executive shall receive the following payments and benefits:
(i) $440,000 paid over a period of 12 months, commencing on April 1, 2023 or, if later, as described in Section 2(e);
(ii) $264,000 representing a full annual bonus at target, paid in a single sum on April 1, 2023 or, if later, as described in Section 2(e);
(iii) All base salary that has been earned but not paid as of the Retirement Date, paid in a single sum in accordance with normal payroll procedures;
(iv) An amount equal to a prorated portion (based on time employed in 2022) of any bonus earned by Executive for the calendar year 2022 determined and paid following the end of calendar year 2022 in accordance with past Company practices for the determination of Executive’s annual bonus;
(v) $8,800 in contributions by the company to the Supplemental Executive Retirement Plan (“SERP”), representing the match for 2021 contributions by Executive; and
(vi) Continued participation in the Company’s group health plan under the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for a period of 12 months at no cost to Executive. Thereafter, Executive may continue COBRA continuation coverage for any remaining period of COBRA eligibility at the normal cost of continuation coverage. Executive’s continued participation is contingent on Executive timely enrolling in COBRA continuation coverage. Notwithstanding the foregoing, COBRA participation will terminate when Executive and covered dependents are no longer eligible for continuation coverage under COBRA.
(d) Tax Withholdings. The payments payable to Executive under this Agreement are subject to reduction to satisfy any and all applicable standard federal, state and local withholding obligations and any other required withholdings.
(e) Section 409A Restrictions. This Agreement shall be interpreted in such a manner that the payments to Executive are either exempt from, or comply with, Section 409A of the Internal Revenue Code, including any regulations or other guidance that may be issued after the date hereof. For purposes of Section 409A, each payment made under this Agreement shall be treated as a separate payment and the right to a series of installment payments under this Agreement is to be treated as a right to a series of separate payments. Notwithstanding anything to the contrary in this Agreement, if Executive is a “specified employee” as defined below, as of the Retirement Date, then, to the extent any payment under this Agreement resulting from Executive’s retirement from the Company constitutes deferred compensation (after taking into account any applicable exemptions from Section 409A) and to the extent required by Section 409A, no payments due under this Agreement as a result of Executive’s retirement may be made until the earlier of (a) the first day following the six-month period that follows the Retirement Date or, if later, six months following the date that Executive incurs a separation from service defined in Treas. Reg. §1.409A-1(h), and (b) Executive’s date of death; provided, however, that any payments delayed during this six-month period shall be paid in the aggregate in a lump sum as soon as reasonably practicable after the expiration thereof. For purposes of this Agreement, the term “specified employee” means an individual determined by the Company to be a specified employee under Treas. Reg. §1.409A-1(i).
3. Stock Incentive Awards. The parties acknowledge that Executive holds the awards described in this Section 3 under the terms of the Surgery Partners, Inc. Stock Incentive Plan (the “Stock Incentive Plan”) that are not fully vested. The awards will be amended and modified so that they do not terminate upon the Retirement Date and that additional vesting will be applied to such awards, as described herein, provided Executive continues in employment through the Retirement Date, provides continuing consulting services as described in Section 4 and does not violate the restrictive covenants in Sections 5 and 6.
(a) Restricted Stock Awards. Executive holds the following “Restricted Stock” awards, as described in the Stock Incentive Plan, that are not fully vested. A portion of each Restricted Stock award will become vested as specified below:
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(i) 13,040 Restricted Stock shares, awarded March 15, 2019; 4,347 shares to become vested on March 15, 2022;
(ii) 34,428 Restricted Stock shares, awarded March 13, 2020; 11,476 shares to become vested on March 13, 2022, and an additional 11,476 shares to become vested March 13, 2023; and
(iii) 5,233 Restricted Stock shares, awarded March 10, 2021; 1,744 shares to become vested on March 11, 2022, and an additional 1,744 shares to become vested on March 11, 2023 and the balance will be forfeited.
In addition, Restricted Stock valued at $73,333 will be awarded to Executive in March 2022; which award will vest in its entirety on the one-year anniversary of the award date.
(b) Performance Share Units. Executive holds the following “Performance Share Units,” as described in the Stock Incentive Plan, that are not fully vested. For Performance Share Units that are earned upon the achievement of performance goals, as described in the Stock Incentive Plan, will become vested as specified below, and will be paid to Executive as described in the Stock Incentive Plan or an award agreement between the Company and Executive:
(i)13,040 Performance Share Units awarded March 15, 2019, with performance previously certified; 6,520 to become vested on March 13, 2022;
(ii) 34,428 Performance Share Units awarded March 13, 2020, with performance previously certified; 17,214 shares to become vested on February 24, 2022, and an additional 17,214 shares to become vested on February 24, 2023; and
(iii) 5,233 Performance Share Units awarded March 10, 2021, with performance previously certified; 2,617 shares to become vested on February 10, 2023 and the balance will be forfeited.
(c) Stock Option. Executive was awarded an option to purchase 148,500 shares of the common stock of the Company for an exercise price of $13.42 per share (the “Stock Option”), which the parties acknowledge is vested and exercisable as to two-thirds of the Stock Option. The remaining one-third of the Stock Option will vest and become exercisable on December 31, 2022. Executive’s right to exercise the option expires as follows: (i) the right to exercise one-third of the Stock Option will expire on December 31, 2024, (ii) the right to exercise an additional one-third of the Stock Option will expire on December 31, 2025 and (iii) the right to exercise the balance of the Stock Option will expire on March 31, 2026.
4. Consulting Services. Executive may be retained by the Company to provide personal consulting services for the period commencing immediately after the Retirement Date until terminated by either party (the “Consulting Period”). The Consulting Period may be terminated by either party by providing written notice of termination.
(a) Nature of Services. Executive will consult with the Company in matters related to his former employment as President of the American Group and the transition of his duties to the successor identified by the Company. Such duties will include training and advising to assist a successor in becoming competent to manage the duties and responsibilities currently held by Executive. Executive shall not be required to perform services that are inconsistent with the services Executive provided during the term of his employment prior to the Retirement Date.
(b) Location and Availability. Executive shall be available at reasonable times as reasonably needed for conferences, meetings and appearances during normal business hours, primarily at the Company’s headquarter offices in Nashville, Tennessee, after first being provided reasonable notice by the Company. Executive shall be free to pursue business opportunities and other activities that are consistent with his obligations in Sections 5 and 6.
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(c) Level of Services. During the Consulting Period, the Company will request services from Executive from time to time as needed by the Company. The parties anticipate and intend that Executive will provide services only on occasion and generally will be engaged for less than 32 hours per month.
(d) Compensation. Executive will be paid $300.00 per hour for services performed during the Consulting Period. The Company shall provide Executive with office space, equipment and administrative assistance that is reasonably needed for the performance of his duties hereunder. The Company shall pay for or reimburse Executive for reasonable expenses incurred in the performance of services during the Consulting Period in accordance with its business expense reimbursement policy as then in effect.
5. Confidential Information. Other than in the performance of his duties hereunder, during the Restrictive Period (as defined below) and thereafter, Executive shall keep secret and retain in strictest confidence, and shall not, without the prior written consent of the Company, furnish, make available or disclose to any third party or use for the benefit of himself or any third party, any Confidential Information.
(a) As used in this Agreement, “Confidential Information” shall mean any information relating to the business or affairs of the Company or any of its Affiliates or the Business, including but not limited to any technical or non-technical data, formulae, compilations, programs, devices, methods, techniques, designs, processes, procedures, improvements, models, manuals, financial data, acquisition strategies and information, information relating to operating procedures and marketing strategies, and any other proprietary information used by the Company or any of its Affiliates in connection with the Business, irrespective of its form; provided, however, that Confidential Information shall not include any information which is in the public domain or becomes known in the industry, in each case through no wrongful act on the part of Executive. Executive acknowledges that the Confidential Information is vital, sensitive, confidential and proprietary to the Company and its Affiliates. Executive will immediately notify the Company of any unauthorized possession, use, disclosure, copying, removal or destruction, or attempt thereof, of any Confidential Information by anyone of which Executive becomes aware and of all details thereof. Executive shall take all reasonably appropriate steps to safeguard Confidential Information and to protect it against disclosure, misuse, espionage, loss and theft. Executive shall deliver to the Company at the termination or expiration of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, computers, printouts and software and other documents and data (and copies thereof) embodying or relating to the Confidential Information, Inventions and Discoveries (as defined below) or the business of the Company or any of its Affiliates which Executive may then possess or have under his control. Nothing in this Agreement limits, restricts or in any other way affects Executive’s communicating with any governmental agency or entity, or communicating with any official or staff person of a governmental agency or entity, concerning matters relevant to the governmental agency or entity, or requires Executive to provide notice to the Company of the same. Executive cannot be held criminally or civilly liable under any federal or state trade secret law for disclosing a trade secret (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspended violation of law, or (2) in a compliant or other document filed under seal in a lawsuit or other proceeding. Notwithstanding this immunity from liability, Executive may be held liable if Executive unlawfully accesses trade secrets by unauthorized means.
(b) “Business” as used herein means the business of owning, operating, developing and/or managing, or providing management or administrative services to, (a) ambulatory surgery centers anywhere in the United States or (b) physician-owned surgical hospitals within a 50 mile radius of any hospital that is owned, operated, developed or managed by the Company or any Affiliate.
6. Restrictive Covenants. Executive acknowledges that in the course of his employment with the Company or any of its Affiliates, or their predecessors or successors, he has been given access to and has become familiar with their trade secrets and with other Confidential Information and that his services have been and shall be of special, unique and extraordinary value to the Company and Affiliates. Therefore, and in further consideration of the compensation to be paid to Executive hereunder and in connection with his employment, and to protect the Company’s and its Affiliates’ Confidential Information, business interests and goodwill:
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(a) Non-compete. Except as specifically agreed between Executive and the Chief Executive Officer of the Company, Executive hereby agrees that for a period ending twelve (12) months after the Retirement Date (the “Restrictive Period”), he shall not, directly or indirectly, as employee, agent, consultant, stockholder, director, co-partner or in any other individual or representative capacity, own, operate, manage, control, engage in, invest in or participate in any manner in, act as a consultant or advisor to, render services for (alone or in association with any person, firm, corporation or entity), or otherwise assist any person or entity (other than the Company and its Affiliates) that engages in or owns, invests in, operates, manages or controls any venture or enterprise that directly or indirectly engages or is actively developing or attempting to develop in any element of the Business anywhere within a 50-mile radius of the Nashville, Tennessee metropolitan area or within a 50-mile radius of any area (or in the event such area is a major city, the metropolitan area relating to such city) in which the Company or any of its Affiliates on the Termination Date actively engages or is actively developing or attempting to develop in any element of the Business (the “Territory”); provided, however, that nothing contained herein shall be construed to prevent Executive from investing in the stock of any competing corporation listed on a national securities exchange or traded in the over-the-counter market, but only if Executive is not involved in the business of said corporation and if Executive and his associates (as such term is defined in Regulation 14(A) promulgated under the Securities Exchange Act of 1934, as in effect on the date hereof), collectively, do not own more than an aggregate of 3% of the stock of such corporation. With respect to the Territory, Executive specifically acknowledges that the Company and its Affiliates intend to expand the Business into and throughout the United States. Notwithstanding the foregoing, the activity proscribed by this Section 6(a) shall not constitute a violation of this Section where performed for (x) an entity where no more than a de minimis amount of revenue is derived from a business that is competitive with the business of the Company or any of its Affiliates; or (y) an entity that derives no more than $100 million in revenue from one or more divisions, departments or segments, in the aggregate, that are engaged in any business competitive with the business of the Company or any of its Affiliates; provided, that in either case, you are not responsible for (and do not engage or participate in) the day-to-day management, oversight or supervision of such business and provided you do not have direct supervision over the individual or individuals who are so responsible for such day-to-day management, oversight or supervision.
(b) Interference with Relationships. Without limiting the generality of the provisions of Section 6(a) hereof, Executive hereby agrees that, during the Restrictive Period, he will not, directly or indirectly, as employee, agent, consultant, stockholder, director, partner or in any other individual or representative capacity, (i) solicit or encourage, or participate in any business which solicits or encourages (A) any person, firm, corporation or other entity which has executed, or proposes to execute, a management services agreement or other services agreement with the Company or any of its Affiliates at any time during the term of this Agreement, or any successor in interest to any such person, firm, corporation or other entity, for the purpose of securing business or contracts related to any element of the Business, or (B) any present customer or patient of the Company or any of its Affiliates or any of their Affiliated Practices to terminate or otherwise alter his, her or its relationship with the Company or any of its Affiliates or such Affiliated Practice; or (ii) divert, entice away, solicit or encourage, or attempt to divert, entice away, solicit or encourage, any physician who utilizes or has invested in an Affiliated Practice to become an owner, investor or user of another practice or facility that is not an Affiliated Practice or approach any such physician for any of the foregoing purposes or authorize or assist in the taking of any such action by any third party. In addition, at all times from and after the Retirement Termination Date, Executive shall not contact or communicate in any manner with any of Company’s or any of its Affiliates’ suppliers or vendors, or any other third party providing services to the Company or any of its Affiliates, regarding the Company or any of its Affiliates or any Company- or any such Affiliate-related matter (which suppliers, vendors or third party service providers will include, without limitation, any third party with whom the Company or any of its Affiliates was, during the term of Executive’s employment with the Company or any of its Affiliates, contemplating engaging, or negotiating with, for the future provision of products or services). Provided, however, that these restrictions shall apply (x) only with respect to those persons who are or have been a business partner of the Company or any of its Affiliates at any time within the immediately preceding two (2)-year period or whose business has been solicited on behalf of the Company or any of the Affiliates by any of their officers, employees or agents within such two (2)-year period, other than by form letter, blanket mailing or published advertisement, and (y) only if Executive has performed work for such person during his employment with the Company or one of its Affiliates or been introduced to, or
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otherwise had contact with, such person as a result of his employment or other associations with the Company or one of its Affiliates or have had access to Confidential Information which would assist in his solicitation of such person.
(c) Non-solicitation. Other than in the performance of his duties hereunder, during the Restrictive Period, Executive shall not, directly or indirectly, as employee, agent, consultant, stockholder, director, co-partner or in any other individual or representative capacity, employ, recruit or solicit for employment or engagement, any person who is employed or engaged by the Company or any of its Affiliates or any of its Affiliated Practices during the Restrictive Period, or otherwise seek to influence or alter any such person’s relationship with any of the Affiliated Practices, the Company or any of its Affiliates; provided, however that responses to a general solicitation (such as an internet or newspaper solicitation) that are not targeted towards any particular person shall not be deemed to be a violation of the restrictions set forth in this Section 6(c).
(d) Affiliated Practice. For purposes of this Agreement, an “Affiliated Practice” shall include any practice or facility (i) in which the Company or any of its Affiliates has an ownership interest or (ii) that is managed by or receives other services from the Company or any of its Affiliates in connection with any element of the Business.
(e) Blue Pencil. If any court of competent jurisdiction shall at any time deem the term of this Agreement or any particular Restrictive Covenant (as defined below) too lengthy or the Territory too extensive, the other provisions of this Section 6 shall nevertheless stand, the Restrictive Period herein shall be deemed to be the longest period permissible by law under the circumstances and the Territory herein shall be deemed to comprise the largest territory permissible by law under the circumstances. The court in each case shall reduce the time period and/or Territory to permissible duration or size.
(f) Covenant Not to Disparage. During the Restrictive Period and thereafter, Executive shall not disparage, denigrate or derogate in any way, directly or indirectly, the Company, any of its Affiliates, or any of its or their respective agents, officers, directors, employees, parent, subsidiaries, affiliates, Affiliated Practices, affiliated doctors (including any physicians who utilize or have invested in any Affiliated Practice), representatives, attorneys, executors, administrators, successors and assigns (collectively, the “Protected Parties”), nor shall Executive disparage, denigrate or derogate in any way, directly or indirectly, his experience with any Protected Party, or any actions or decisions made by any Protected Party.
(g) Remedies. Executive acknowledges and agrees that the covenants set forth in this Section 6 and the preceding Sections 5 (collectively, the “Restrictive Covenants”) are reasonable and necessary for the protection of the business interests of the Company and its Affiliates, that irreparable injury may result to the Company and its Affiliates if Executive breaches any of the terms of said Restrictive Covenants, and that in the event of Executive’s actual or threatened breach of any such Restrictive Covenants, the Company and its Affiliates will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by him of any of the Restrictive Covenants, the Company and its Affiliates shall be entitled to immediate temporary injunctive and other equitable relief subject to hearing as soon thereafter as possible. Nothing contained herein shall be construed as prohibiting the Company or any of its Affiliates from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove. In addition and supplementary to other rights and remedies existing in its (or their) favor, in the event of the material breach by Executive of any of the provisions of this Section 6, the Company (and/or its Affiliates) shall be entitled to require Executive to account for and pay over to the Company (and/or its Affiliates) all compensation, profits, moneys, accruals, increments or other benefits actually derived from or received as a result of any transactions constituting a breach of the covenants contained in this Agreement which may require Executive to repay any severance. In addition, in the event of an alleged breach or violation by Executive of this Section 6, the restricted periods set forth in this Section 6 shall be tolled until such breach or violation has been duly cured.
(h) Acknowledgements. Executive understands that the foregoing restrictions may limit his ability to earn a livelihood in a business similar to the business of the Company and its Affiliates, but he nevertheless believes that he has received and will receive sufficient consideration and
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other benefits as an executive of the Company and as otherwise provided hereunder to clearly justify such restrictions which, in any event (given his education, skills and ability), Executive does not believe would prevent him from otherwise earning a living. Executive acknowledges that the Restrictive Covenants are reasonable and that he has reviewed the provisions of this Agreement with his legal counsel. During the Restricted Period, Executive shall inform any prospective or future employer of any and all restrictions contained in this Agreement and provide such employer with a copy of such restrictions, prior to the commencement of that employment.
(i) Non-Enforcement for Permitted Activities. Nothing contained in this Agreement limits Executive’s ability to file a charge or complaint with any federal, state or local governmental agency or commission (“Governmental Agencies”), as permitted under Securities and Exchange Commission Rule 21F-17, 17 C.F.R. §240.21F-17(a) (“Rule 21F-17”). Executive acknowledges and understands that this Agreement does not limit his ability to communicate with any Governmental Agency or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information. The Company will take no enforcement action against Executive described in this Agreement in the event that Executive validly engages in the conduct described in Rule 21F-17.
7. Release and Waiver of Claims.
(a) Claims Released by Executive. As of the date of the execution of this Agreement, in consideration of the payments, benefits, and other consideration provided to Executive under this Agreement, Executive hereby releases and forever discharges the Company and all of its Affiliates, each of their owners, officers, directors, employees, agents, stockholders, representatives, and their successors and assigns (each a “Company Entity” or, collectively, “Company Entities”), from any and all charges, complaints, obligations, liabilities, promises, agreements, rights, claims, debts, expenses or demands Executive now has or may have, arising at any time on or before the date hereof, based on his employment with the Company or the termination of that employment or any positions, including directorships, with the Company or any of its Affiliates. This includes a release of any and all rights, claims or demands Executive has or may have, whether known or unknown, under the Age Discrimination in Employment Act, which prohibits age discrimination in employment; Title VII of the Civil Rights Act of 1964, which prohibits discrimination in employment based on race, color, national origin, religion or sex; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; the Americans with Disabilities Act; the Family and Medical Leave Act; or under any other federal, state or local laws or regulations regarding employment or termination of employment. This also includes a release by Executive of any claims for wrongful discharge under any statute, rule, or regulation or under the common law.
(b) Review of Release. By signing below, Executive hereby acknowledges and represents that he has been given 21 days to review and consider whether to sign this Agreement and has been advised by the Company to consult with an attorney and his personal advisors before doing so. Executive understands and agrees that by signing this Agreement, Executive gives up any and all rights Executive may have to recover damages against the Company or any other Company Entity, other than payments and benefits described in this Agreement. Executive hereby acknowledges that he is voluntarily entering into this Agreement of his own free will, free of any coercion, pressure or duress, that he understands the terms and conditions of this Agreement, and that he is knowingly releasing each of the Company Entities in accordance with the terms contained herein. Executive further acknowledges that he is receiving consideration under this Agreement beyond anything of value to which he is already entitled.
(c) Right of Revocation. Executive acknowledges that he has been advised by the Company that he has seven days after signing this Agreement within which to revoke his signature, that neither the Company nor any other person is obligated to provide any benefits to him pursuant to the Agreement until eight days have passed, and then only if he has not revoked his signature. Any such revocation must be received by the Company within the seven day revocation period to be effective, and that such a revocation may only be sent by electronic delivery or facsimile to the Company, attention General Counsel. The parties agree that in the event Executive revokes his signature within such seven-day period, Executive’s retirement shall remain effective on the Retirement Date but that this Agreement shall otherwise be void ab initio.
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(d) Rights Not Released or Waived. Notwithstanding the foregoing, by executing this Agreement, neither Executive nor the Company will have relinquished his or its rights to enforce the provisions of this Agreement, the Employee Plans or the Company, Inc. Long-Term Incentive Plan.
(e) Non-Admission. The parties acknowledge that this Agreement does not constitute an admission by Executive or the Company of any violation of any employment law, regulation, ordinance, or administrative procedure, or any other federal, state, or local law, common law, regulation or ordinance, liability for which is expressly denied.
8. Cooperation. The parties recognize that Executive may be named as a defendant in legal actions with respect to his role as an officer of the Company. The Company shall continue to cover Executive under any director’s and officer’s liability insurance policy that it maintains with respect to such claims against Executive in such capacities for six years following the date hereof, which coverage shall be at the same level as the Company provides to its senior executives. Executive agrees that he will participate in, and cooperate with, such defense without additional compensation from the Company, provided, that the Company will reimburse Executive with respect to any expense incurred by Executive as the result of participating in, and cooperating with, such defense. Executive further agrees to provide his full cooperation with the Company or any of the Company Entities in the defense or prosecution of one or more existing or future court actions, governmental investigations, arbitrations, mediations or other legal, equitable or business matters or proceedings which involve the Company Entities. Executive acknowledges and understands that his obligations of cooperation under this Section are not limited in time and may include, but shall not be limited to, the need for or availability for testimony in deposition, affidavit, trial, mediation or arbitration, as well as preparation for that testimony, and consultation for other business matters unrelated to litigation. Executive will be available at the Company’s reasonable request for any meetings or conferences deemed necessary in preparation for the defense or prosecution of any such matters or proceedings.
9. Executive’s Representations. As a material inducement to the Company to enter into this Agreement, Executive hereby makes the following representations:
(a) Document Review. Executive has read all of the terms of this Agreement, including the fact that his employment relationship with the Company shall be permanently and irrevocably terminated as of the Retirement Date, other than with respect to the consulting services contemplated during the Consulting Period, and that this Agreement releases the Company and all Company Entities forever from any legal action arising from that employment relationship and the termination of that relationship. Executive acknowledges that he has been advised to seek legal advice and that he has signed this Agreement of his own free will and in exchange for the consideration to be given which is acknowledged to be adequate and satisfactory and in excess of anything he might be entitled otherwise to receive. Executive represents and warrants that he is competent to execute this Agreement.
(b) Covenant Not to Sue. Except with respect to any activities that are protected under Rule 21F-17, Executive has not filed any complaints or charges against any Company Entity or insurers with any local, state or federal agency or court related to his employment with or retirement from the Company, and will not do so at any time hereafter.
10. Miscellaneous.
(a) Notices. Any notice under this Agreement must be in writing and given by certified or registered mail, postage prepaid, addressed to the party or parties to be notified with return receipt requested, or by delivering the notice in person, to the relevant address set forth below, or to such other address as the recipient of such notice or communication has specified in writing to the other party hereto in accordance with this Section:
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If to the Company to:
Surgery Partners, Inc.
310 Seven Springs Way, Suite 500
Brentwood, TN 37027
Attention: Chief Human Resource Officer
If to Executive, to:
1109 Radnor Glen Drive
Brentwood, TN 37027
Notice to Executive may be to the then-current address of Executive on the records of the Company.
(b) No Offset. No payment under this Agreement will be subject to offset or reduction attributable to any amount Executive may owe to the Company or any other person, except as required by law.
(c) Entire Agreement. The parties have executed this Agreement based upon the express terms and provisions set forth herein and have not relied on any communications or representations, oral or written, which are not set forth in this Agreement. Except with respect to the Employee Plans, the Company’s compensation and agreements referenced in Section 2, and any other agreement specifically referenced herein, this Agreement sets forth the entire agreement between the parties hereto, and fully supersedes any and all prior agreements or understandings between the parties hereto pertaining to the subject matter hereof.
(d) Amendment. This Agreement may be amended in writing at any time by the Company, provided that Executive’s written consent is required for any amendment that would diminish the benefits provided hereunder to Executive.
(e) Choice of Law. This Agreement and the performance hereof will be construed and governed in accordance with the internal laws of the State of Tennessee, without regard to its choice of law principles, except to the extent that federal law controls or preempts state law. Any litigation based hereon, or arising out of, under, or in connection with, this agreement, or any course of conduct, course of dealing, statements (whether oral or written) or actions of any party herein, shall be brought and maintained exclusively in the federal or state courts of the state of Tennessee that are located in Davidson County, Tennessee. Each party hereby irrevocably consents to the service of process of any of the aforementioned courts in any such suit, action or proceeding by the mailing of copies thereof in accordance with Section 10(a).
(f) Successors and Assigns. The obligations, duties and responsibilities of Executive under this Agreement are personal and shall not be assignable. In the event of Executive’s death or disability, the release contained in this Agreement shall be binding on, and the terms of this Agreement shall be enforceable by, Executive’s estate, executors or legal representatives, provided that the Company shall require any corporation, entity, individual or other person who is the successor (whether direct or indirect, by purchase, merger, consolidation, reorganization, or otherwise) to all or substantially all of the business or assets of the Company to expressly assume and agree to perform all of the obligations of the Company under this Agreement. As used in this Agreement, the term “Company” shall mean the Company, as defined herein, and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, written agreement, or otherwise.
(g) Waiver of Provisions. Any waiver of any terms and conditions hereof must be in writing and signed by the parties hereto. The waiver of any of the terms and conditions of this Agreement shall not be construed as a waiver of any subsequent breach of the same or any other terms and conditions hereof.
(h) Severability. The provisions of this Agreement and the benefits and amounts payable hereunder shall be deemed severable, and if any portion shall be held invalid, illegal or
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enforceable for any reason, the remainder of this Agreement and/or benefit or payment shall be effective and binding upon the parties.
(i) Attorneys’ Fees. In the event the Company or Executive breaches any term or provision of this Agreement and the other party employs an attorney or attorneys to enforce the terms of this Agreement, then upon a finding by a court of competent jurisdiction, the breaching or defaulting party agrees to pay the other party the reasonable attorneys’ fees and costs incurred to enforce this Agreement.
(j) Counterparts. This Agreement may be executed in multiple counterparts, each of which will be deemed an original, and all of which together will constitute one and the same instrument.
[signature page follows]
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PLEASE READ CAREFULLY. THIS AGREEMENT INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written.
EXECUTIVE
/s/ George M. Goodwin
George M. Goodwin
SURGERY PARTNERS, INC.
/s/ J. Eric Evans
J. Eric Evans, Chief Executive Officer
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Exhibit 21.1
Subsidiaries of
Surgery Partners, Inc.
| Entity Name | Jurisdiction of Organization | Doing Business As | ||||||
| Advanced Pain Institute Treatment Center, LLC | Louisiana | |||||||
| Advanced Surgery Center, LLC | Nebraska | |||||||
| A&S Management, LLC | Delaware | |||||||
| Afshin Gerayli, MD | California | Pain Specialists of Orange County | ||||||
| AllCare Holdco PC | North Carolina | |||||||
| Ambulatory Resource Centres Investment Company, LLC | Delaware | |||||||
| Ambulatory Resource Centres of Washington, LLC | Tennessee | |||||||
| Ambulatory Resource Centres of Wilmington, LLC | Tennessee | |||||||
| Anderson & Shapiro Eye Surgeons, S.C. | Wisconsin | |||||||
| Anesthesiology Professional Services, Inc. | Florida | |||||||
| Animas Surgical Hospital, LLC | Delaware | |||||||
| APS of Hammond, LLC | Delaware | |||||||
| APS of Jonesboro, LLC | Delaware | |||||||
| ARC Development, LLC | Tennessee | |||||||
| ARC Financial Services, LLC | Tennessee | |||||||
| ARC Kentucky, LLC | Tennessee | ARC Kentucky/Louisville, LLC | ||||||
| ARC of Bellingham, L.P. | Tennessee | |||||||
| ARC of Georgia, LLC | Tennessee | Premier Surgery Center | ||||||
| Armenia Ambulatory Surgery Center, LLC | Florida | |||||||
| ASC Gamma Partners, Ltd. | Florida | West Kendall Surgical Center | ||||||
| Baton Rouge Anesthesia Services, LLC | Delaware | |||||||
| Bayside Endoscopy Center, LLC | Rhode Island | |||||||
| BBH Holdings of Idaho Falls, LLC | Delaware | |||||||
| Birmingham Surgery Center, LLC | Delaware | |||||||
| Blue Ridge Surgical Center, LLC | Delaware | |||||||
| Boulder Spine Center, LLC | Delaware | Minimally Invasive Spine Institute | ||||||
| Brazos Valley Physicians Alliance | Texas | |||||||
| Brazos Valley Physicians Organization MSO, LLC | Texas | |||||||
| Bristol Spine Center, LLC | Delaware | Renaissance Surgery Center | ||||||
| Cache Valley Specialty Hospital, LLC | Utah | |||||||
| Canyon Ambulatory Surgery Center, LLC | North Carolina | |||||||
| Cape Coral Ambulatory Surgery Center, LLC | Florida | |||||||
| Cape Coral Anesthesia Services, LLC | Florida | |||||||
| Cardiac Cath Lab of Idaho Falls, LLC | Delaware | Eagle Rock Outpatient Center | ||||||
| CBSH, LLC | Texas | |||||||
| CBSH Physicians Organization | Texas | |||||||
| CC Pocatello, LLC | Idaho | |||||||
| CCIF, LLC | Delaware | |||||||
| Chesterfield Spine Center, LLC | Delaware | St. Louis Spine and Orthopedic Surgery Center | ||||||
| CIPM Holdco, Inc. | Georgia | |||||||
| CMSC, LLC | Montana | |||||||
| Coastal Bend Medical Park, LLC | Texas | |||||||
| Coastal Bend Surgery Center, Ltd | Texas | |||||||
| Cold Springs Medical Surgical Group, LLC | California | |||||||
| Collier Anesthesia Pain, LLC | Florida | |||||||
| Community Care Channing Way, LLC | Delaware | |||||||
| Community Care Rexburg, LLC | Delaware | |||||||
| Community Care West Side, LLC | Delaware | |||||||
| Community Hospital Holding Company, LLC | Georgia | |||||||
| Community Hospital Management Company, LLC | Georgia | |||||||
| Corpus Christi CBSC GP, Inc. | Texas | |||||||
| Crescent View Surgery Center, LLC | Louisiana | |||||||
| Cypress Surgery Center, LLC | Delaware | |||||||
| Delaware Outpatient Center for Surgery, LLC | Delaware | |||||||
| Dupont Holdco PC | Kentucky | |||||||
| Durango Surgery Center, LLC | Colorado | Animas Surgical Center at Escalante | ||||||
| El Paso Specialty Hospital, Ltd | Texas | |||||||
| El Paso Specialty Physicians Group | Texas | |||||||
| Eyes on Stark Surgery Center, LLC | Ohio | Vista Surgical Center | ||||||
| Eye Surgical Center of San Francisco, LLC | California | |||||||
| Fairfield Surgery Center, LLC | Connecticut | |||||||
| Forest Ambulatory Surgical Associates, LLC | California | |||||||
| Gainesville Eye Physicians, P.A. | Delaware | |||||||
| Gastro Operating Company, LLC | New York | |||||||
| Gold Coast Surgery Center, LLC | California | |||||||
| Gulf Coast Surgical Center, LLC | Louisiana | |||||||
| Grand Teton Surgical Center, LLC | Idaho | |||||||
| Great Falls Clinic, LLP | Montana | |||||||
| Great Falls Clinic Surgery Center, L.L.C. | Montana | |||||||
| Hammond Anesthesia Services, LLC | Louisiana | |||||||
| Haverford Management Company, LLC | Pennsylvania | |||||||
| Heart Hospital of BK, LLC | Delaware | Bakersfield Heart Hospital | ||||||
| Idaho Falls ASC, LLC | Delaware | |||||||
| Idaho Falls Community Hospital, LLC | Delaware | Honolulu Sports and Spine Center | ||||||
| Idaho Falls Internal Medicine, LLC | Idaho | |||||||
| IFSC Acquisition, LLC | Delaware | |||||||
| Interventional Spine Center, LLC | California | |||||||
| IPM Surgery Centers, LLC | California | SpinalCARE Surgicenter | ||||||
| Jacksonville Beach Surgery Center, LLC | Tennessee | Jacksonville Beach Surgery Center | ||||||
| Jenkins County Hospital, LLC | Georgia | |||||||
| Jonesboro Anesthesia Services, LLC | Arkansas | |||||||
| Kent, LLC | Rhode Island | |||||||
| Knowles Surgery Center, LLC | California | |||||||
| Lafayette Surgical Hospital, LLC | Louisiana | |||||||
| Lake Mary Surgery Center, L.L.C. | Florida | |||||||
| La Peer Surgery Center, LLC | California | |||||||
| Largo Endoscopy Center, L.P. | Tennessee | Tampa Bay Regional Surgery Center | ||||||
| Largo Surgery, LLC | Florida | West Bay Surgery Center | ||||||
| Laser and Outpatient Surgery Center, LLC | Delaware | |||||||
| Logan Laboratories, LLC | Delaware | |||||||
| Lubbock Heart Hospital, LLC | Delaware | Lubbock Heart & Surgical Hospital | ||||||
| Meadowbrook Medical Associates, LLP | New York | |||||||
| Medical Center Endoscopy, LLC | Texas | |||||||
| Midwest Surgical Hospital, LLC | Nebraska | |||||||
| Midwest Uncuts, Inc. | Iowa | Midwest Labs | ||||||
| Millenia Surgery Center, L.L.C. | Florida | |||||||
| Minimally Invasive Surgical and Neuroscience Center, LLC | Delaware | |||||||
| Mission Hills Surgicenter, LLC | California | Mission Hills Pain Treatment Center | ||||||
| Montana Health Partners, LLC | Montana | |||||||
| Mountain View Hospital, LLC | Delaware | |||||||
| MV Oncology, LLC | Delaware | |||||||
| MV Pocatello ENT, LLC | Idaho | |||||||
| MVH Anesthesia, LLC | Idaho | Eagle Rock Anesthesia | ||||||
| MVH BMC, LLC | Idaho | |||||||
| MVH Eagle Rock ASC, LLC | Idaho | |||||||
| MVH Idaho Falls Oncology, LLC | Delaware | |||||||
| MVH Parkway, LLC | Delaware | |||||||
| MVH PC Specialists, LLC | Idaho | |||||||
| MVH PIC, LLC | Idaho | |||||||
| MVH PMHS, LLC | Idaho | |||||||
| MVH NWSH, LLC | Idaho | |||||||
| MVH SNF Holding, LLC | Idaho | |||||||
| MVH Surgical Specialists, LLC | Idaho | |||||||
| MVH Valencia, LLC | Idaho | |||||||
| National Surgical Hospitals, LLC | Delaware | |||||||
| NeoSpine Puyallup Spine Center, LLC | Delaware | Microsurgical Spine Center | ||||||
| NeoSpine Surgery of Puyallup, LLC | Delaware | |||||||
| NeoSpine Surgery, LLC | Delaware | |||||||
| North Carolina Specialty Hospital, LLC | North Carolina | |||||||
| North Dakota Surgery Center, LLC | Delaware | |||||||
| North Idaho Day Surgery, LLC | Idaho | |||||||
| North Shore Surgi-Center, Inc. | New York | |||||||
| Northwest Ambulatory Surgery Services, LLC | Washington | Bellingham Ambulatory Surgery Center | ||||||
| NovaMed Acquisition Company, LLC | Delaware | |||||||
| NovaMed Eye Surgery Center of North County, LLC | Delaware | Woodcrest Surgery Center | ||||||
| NovaMed Eye Surgery Center of Overland Park, LLC | Delaware | |||||||
| NovaMed Management of Kansas City, LLC | Missouri | |||||||
| NovaMed Management Services, LLC | Delaware | |||||||
| NovaMed of Bethlehem, LLC | Delaware | |||||||
| NovaMed of Laredo, Inc. | Delaware | |||||||
| NovaMed of Lebanon, LLC | Delaware | |||||||
| NovaMed of San Antonio, LLC | Delaware | |||||||
| NovaMed of Texas, LLC | Delaware | |||||||
| NovaMed of Wisconsin, LLC | Delaware | |||||||
| NovaMed Surgery Center of Baton Rouge, LLC | Delaware | Interventional Pain Management Center | ||||||
| NovaMed Surgery Center of Chattanooga, LLC | Delaware | |||||||
| NovaMed Surgery Center of Chicago-Northshore, LLC | Delaware | NovaMed Eye Surgery Center – Northshore | ||||||
| NovaMed Surgery Center of Cleveland, LLC | Delaware | The Surgery Center of Cleveland | ||||||
| NovaMed Surgery Center of Colorado Springs, LLC | Delaware | United Ambulatory Surgery Center | ||||||
| NovaMed Surgery Center of Denver, LLC | Delaware | Colorado Outpatient Eye Surgery Center | ||||||
| NovaMed Surgery Center of Jonesboro, LLC | Delaware | Eye Surgery Center of Arkansas | ||||||
| NovaMed Surgery Center of Madison, Limited Partnership | Wisconsin | |||||||
| NovaMed Surgery Center of Nashua, LLC | Delaware | Nashua Eye Surgery Center | ||||||
| NovaMed Surgery Center of Oak Lawn, LLC | Delaware | Center for Reconstructive Surgery | ||||||
| NovaMed Surgery Center of Orlando, LLC | Delaware | Downtown Surgery Center | ||||||
| NovaMed Surgery Center of San Antonio, L.P. | Delaware | American Surgery Centers of South Texas | ||||||
| NovaMed Surgery Center of St. Peters, LLC | Delaware | St. Peters Ambulatory Surgery Center | ||||||
| NovaMed Surgery Center of Tyler, L.P. | Delaware | The Cataract Center of East Texas | ||||||
| NovaMed Surgery Center of Warrensburg, LLC | Delaware | Surgery Center of Warrensburg | ||||||
| Eye Surgery Center of Warrensburg | ||||||||
| NovaMed Surgery Center of Whittier, LLC | Delaware | Center for Outpatient Surgery | ||||||
| NovaMed, LLC | Delaware | Surgery Partners | ||||||
| NSH Bryan Hospital, Inc. | Texas | |||||||
| NSH California, LLC | California | |||||||
| NSH Connecticut, LLC | Connecticut | |||||||
| NSH Durham, Inc. | North Carolina | |||||||
| NSH El Paso Specialty Hospital, Inc. | Texas | |||||||
| NSH El Paso, Inc. | Texas | |||||||
| NSH Georgia, LLC | Delaware | |||||||
| NSH Logan, Inc. | Utah | |||||||
| NSH Louisiana, LLC | Louisiana | |||||||
| NSH Management of Arizona, LLC | Arizona | |||||||
| NSH Management of California, LLC | California | |||||||
| NSH Mesa, LLC | Arizona | |||||||
| NSH Michigan, Inc. | Michigan | |||||||
| NSH North Idaho, LLC | Idaho | |||||||
| NSH San Antonio Surgical Hospital, LLC | Texas | |||||||
| NSH Texas, LLC | Illinois | |||||||
| NSH Wisconsin, LLC | Wisconsin | |||||||
| Oak Leaf Surgical Hospital, LLC | Wisconsin | |||||||
| Ocean State Endoscopy Holdings, LLC | Rhode Island | |||||||
| Orange City Surgery Center, LLC | Florida | |||||||
| Orthopedic Surgery Center of Asheville, L.P. | Tennessee | Outpatient Surgery Center of Asheville | ||||||
| Orthopedic & Spine Surgical Hospital of South Texas, LP | Texas | |||||||
| Pain Management Associates, Inc. | California | |||||||
| Park Place Surgery Center, L.L.C. | Florida | |||||||
| Permian Basin Surgical Care Center, LLC | Texas | |||||||
| Physicians Medical Center, L.L.C. | Louisiana | |||||||
| PMCROS, L.L.C. | Louisiana | |||||||
| Portsmouth, LLC | Delaware | |||||||
| Prescription Center, LLC | Idaho | |||||||
| Prescription Center Homecare, LLC | Idaho | |||||||
| PSC Development Company, LLC | Delaware | |||||||
| PSC Operating Company, LLC | Delaware | |||||||
| PSHS Alpha Partners, Ltd. | Florida | Lake Worth Surgery Center | ||||||
| PSHS Beta Partners, Ltd. | Florida | The Gables Surgical Center | ||||||
| Quahog Holding Company, LLC | Delaware | |||||||
| Quantum Enterprises, PLLC | Colorado | |||||||
| Riverside Billing & Management Company, LLC | Florida | |||||||
| Riverside Spine & Pain Physicians, LLC | Florida | |||||||
| Riverside Surgical Center, LLC | Florida | |||||||
| SAM Holdco PC | Georgia | |||||||
| Santa Barbara ASC Holdings, LLC | California | |||||||
| Sarasota Ambulatory Surgery Center, Ltd. | Florida | |||||||
| SARC/Asheville, LLC | Tennessee | |||||||
| SARC/Ft. Myers, Inc. | Tennessee | |||||||
| SARC/Georgia, Inc. | Tennessee | |||||||
| SARC/Kent, LLC | Tennessee | |||||||
| SARC/Largo Endoscopy, LLC | Tennessee | |||||||
| SARC/Largo, Inc. | Tennessee | |||||||
| SARC/Providence, LLC | Tennessee | |||||||
| SARC/St. Charles, Inc. | Tennessee | |||||||
| SCA Holdco PC | Georgia | |||||||
| SCNA Holdco PC | Georgia | |||||||
| Screven County Family Health Center, LLC | Georgia | |||||||
| Screven County Hospital, LLC | Georgia | |||||||
| SGRY, LLC | Delaware | |||||||
| SGRY Holdings, LP | Tennessee | |||||||
| Skyway Surgery Center, LLC | California | |||||||
| SMBI DOCS, LLC | Tennessee | |||||||
| SMBI Great Falls, LLC | Tennessee | |||||||
| SMBI Havertown, LLC | Tennessee | |||||||
| SMBI Idaho, LLC | Tennessee | |||||||
| SMBI LHH, LLC | Delaware | |||||||
| SMBI Portsmouth, LLC | Tennessee | |||||||
| SMBI STLWSC, LLC | Tennessee | |||||||
| SMBIMS Birmingham, LLC | Tennessee | |||||||
| SMBIMS Durango, LLC | Tennessee | |||||||
| SMBIMS Florida I, LLC | Florida | |||||||
| SMBIMS Greenville, LLC | Tennessee | |||||||
| SMBIMS Kirkwood, LLC | Tennessee | |||||||
| SMBIMS Steubenville, Inc. | Tennessee | |||||||
| SMBIMS Wichita, LLC | Tennessee | |||||||
| SMBISS Beverly Hills, LLC | Tennessee | |||||||
| SMBISS Chesterfield, LLC | Tennessee | |||||||
| SMBISS Encino, LLC | Tennessee | |||||||
| SMBISS Irvine, LLC | Tennessee | |||||||
| SMBISS Thousand Oaks, LLC | Tennessee | |||||||
| Snake River Hospitalists, LLC | Idaho | |||||||
| Southpoint Surgery Center, LLC | North Carolina | |||||||
| South Sound Neurosurgery, PLLC | Washington | |||||||
| SP California Management, LLC | Delaware | |||||||
| SP Forest Knowles Holdco, LLC | Delaware | |||||||
| SP FVC, LLC | Illinois | |||||||
| SP Gainesville Management, LLC | Delaware | |||||||
| SP Holdco I, Inc. | Delaware | |||||||
| SP Irvine Holdings, LLC | Delaware | |||||||
| SP Louisiana, LLC | Louisiana | |||||||
| SP Management Services, Inc. | Tennessee | SymbionARC Management Services | ||||||
| Surgery Partners Management Services, Inc. | ||||||||
| SGRY SP Management Services, Inc. | ||||||||
| SGRY Surgery Partners Management Services, Inc. | ||||||||
| SP Maury County, LLC | Delaware | |||||||
| SP New York Management, LLC | Delaware | |||||||
| SP New York Support, LLC | Delaware | |||||||
| SP North Dakota, LLC | Delaware | |||||||
| SP North Shore Administrative Services Organization, LLC | Delaware | |||||||
| SP Physician Management, LLC | Delaware | |||||||
| SP Practice Management, LLC | Delaware | |||||||
| SP Sequoia Holdco, LLC | Delaware | |||||||
| Space Coast Surgery Center LLC | Florida | |||||||
| Specialty Surgical Center of Beverly Hills, L.P. | California | |||||||
| Specialty Surgical Center of Encino, L.P. | California | |||||||
| Specialty Surgical Center of Encino, LLC | California | |||||||
| Specialty Surgical Center of Irvine, L.P. | California | |||||||
| Specialty Surgical Center of Irvine, LLC | California | |||||||
| Specialty Surgical Center, LLC | California | |||||||
| St. Louis Women’s Surgery Center, LLC | Delaware | St. Louis Women's Multispecialty Surgery Center | ||||||
| St. Raphael's Surgery Center, LLC | Texas | |||||||
| STSSH Physicians Organization | Texas | |||||||
| Surgery Center Holdings, Inc. | Delaware | |||||||
| Surgery Center Holdings, LLC | Delaware | |||||||
| Surgery Center of Fremont, LLC | Delaware | |||||||
| Surgery Center of Kalamazoo, LLC | Michigan | |||||||
| Surgery Center of Lebanon, LP | Pennsylvania | Physicians Surgical Center | ||||||
| Surgery Center of Pennsylvania, LLC | Pennsylvania | |||||||
| Surgery Center Partners, LLC | Delaware | Timberlake Surgery Center | ||||||
| Surgery Partners Acquisition Company, LLC | Florida | |||||||
| Surgery Partners of Coral Gables, LLC | Florida | |||||||
| Surgery Partners of Lake Mary, LLC | Florida | |||||||
| Surgery Partners of Lake Worth, LLC | Florida | |||||||
| Surgery Partners of Merritt Island, LLC | Florida | |||||||
| Surgery Partners of Millenia, LLC | Florida | |||||||
| Surgery Partners of Park Place, LLC | Florida | |||||||
| Surgery Partners of Sarasota, LLC | Florida | |||||||
| Surgery Partners of West Kendall, L.L.C. | Florida | |||||||
| Surgery Partners of Westchase, LLC | Florida | |||||||
| Surgery Partners, LLC | Florida | SGRY SP, LLC | ||||||
| Symbion Ambulatory Resource Centres, LLC | Tennessee | |||||||
| Symbion Holdings, LLC | Delaware | |||||||
| SymbionARC Support Services, LLC | Tennessee | |||||||
| Tampa Pain Relief Center, Inc. | Florida | Central Florida Pain Relief Centers | ||||||
| Florida Orthopedic Partners | ||||||||
| Florida Pain Institute - Merritt Island | ||||||||
| Florida Pain Institute - Palm Bay | ||||||||
| Florinda Pain Institute - Pineda | ||||||||
| Florida Spine Sports and Rehabilitation Center | ||||||||
| Orlando Pain Relief Center | ||||||||
| Pain Medicine Institute | ||||||||
| Rehabilitation Medical Group | ||||||||
| Sarasota Pain Relief Center - Bradenton | ||||||||
| Sarasota Pain Relief Center - CPCS | ||||||||
| Sarasota Pain Relief Center - Downtown | ||||||||
| Sarasota Pain Relief Center - Venice | ||||||||
| Sarasota Pain Relief Center | ||||||||
| South Florida Pain Relief Center | ||||||||
| Tattnall Hospital Company, LLC | Georgia | |||||||
| Texarkana Surgery Center GP, LLC | Texas | |||||||
| Texarkana Surgery Center, L.P. | Delaware | |||||||
| Texas Physician Group | Texas | Austin Wound Care and Hyperbaric Center | ||||||
| The Center for Special Surgery, LLC | Delaware | |||||||
| The Center for Specialized Surgery, LP | Pennsylvania | |||||||
| The Surgery Center of Ocala, LLC | Tennessee | |||||||
| Tracy Surgery Center, LLC | California | |||||||
| UniPhy Healthcare of Johnson City VI, LLC | Tennessee | |||||||
| United ASC Holding Company, LLC | Delaware | |||||||
| Universal Management, LLC | Delaware | |||||||
| Universal Spine & Joint Specialists, LLC | Florida | |||||||
| Valley Ambulatory Surgery Center, L.P. | Illinois | |||||||
| Valley Surgical Center, Ltd. | Ohio | |||||||
| VASC, LLC | Illinois | |||||||
| Village Surgicenter, LLC | Delaware | |||||||
| Village Surgicenter, Limited Partnership | Delaware | |||||||
| West Bloomfield Surgery Center LLC | Michigan | |||||||
| Westchase Surgery Center, Ltd. | Florida | |||||||
| Wilmington Surgery Center, L.P. | Tennessee | |||||||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-235664 and 333-252399 on Form S-3 and Registration Statement Nos. 333-207298, 333-233223 and 333-260831 on Form S-8 of our reports dated March 1, 2022, relating to the financial statements of Surgery Partners, Inc. and subsidiaries (the “Company”) and the effectiveness of the Company's internal control over financial reporting appearing in this Annual Report on Form 10-K for the year ended December 31, 2021.
/s/ Deloitte & Touche LLP
Nashville, Tennessee
March 1, 2022
Exhibit 31.1
CERTIFICATIONS
I, J. Eric Evans, certify that:
1. I have reviewed this annual report on Form 10-K of Surgery Partners, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| By: | /s/ J. Eric Evans J. Eric Evans Chief Executive Officer | ||||
Date: March 1, 2022
Exhibit 31.2
CERTIFICATIONS
I, David T. Doherty, certify that:
1. I have reviewed this annual report on Form 10-K of Surgery Partners, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| By: | /s/ David T. Doherty David T. Doherty Executive Vice President and Chief Financial Officer | ||||
Date: March 1, 2022
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Surgery Partners, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.
| By: | /s/ J. Eric Evans J. Eric Evans Chief Executive Officer | ||||
Date: March 1, 2022
| By: | /s/ David T. Doherty David T. Doherty Executive Vice President and Chief Financial Officer | ||||
Date: March 1, 2022