How Surgery Partners plans to grow in the next year: 8 key points on strategy

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On Sept. 4, Surgery Partners Executive Vice President and CFO Tom Cowhey participated in the Wells Fargo Securities 2018 Healthcare Conference in Boston, addressing several questions about the company's growth strategy and where he sees the best opportunities for the future.

Here are eight key takeaways from the discussion:

1. There are still plenty of opportunities to acquire new centers, with around 5,500 Medicare-certified ASCs in the U.S. as of 2016. Surgery Partners is affiliated with around 175 ASCs and surgical hospitals. "There is a tremendous amount of white space and there are really small individual facilities that are operating out there that present a great opportunity for the roll-up strategy," said Mr. Cowhey.

2. Despite consolidation in the industry, Surgery Partners is poised to remain independent. Over the past few years, Surgical Care Affiliates, United Surgical Partners International and AmSurg have merged or been acquired by larger entities. Surgery Partners remains independent.

"As it relates to what we are seeing from other providers and payers, our independence is a real asset right now," Mr. Cowhey said. "We can work with a provider in a larger system in a particular geography to help them manage a facility differently or bring different doctors to bear or do things a little bit differently than they might have thought of."

3. Payer partnerships are slow to develop. Surgery Partners is in discussion with payers about potential ASC partnerships. "They like to think about doing a pilot program and then think about expanding that pilot, and then bringing that pilot to the region," said Mr. Cowhey. "I'm used to what that model is, but we also have a very clear view on what the goal posts are there to try to make [the partnership] attractive…We can help a payer direct care to our facilities to achieve higher savings at the same quality and we're having some of those conversations now, whether it's about simple bundles or potentially even co-investing with us alongside physician partners to think about freestanding ASCs."

4. Surgery Partners more than doubled the size of the physician recruiting team, and it paid off. The company reported more physicians recruited in the first half of the year than over the same time period in 2017, and the new physicians are bringing high acuity cases to Surgery Partners' ASCs.

"We are thinking about whether or not it makes sense to expand the team further to get more productivity," said Mr. Cowhey. "But even if you look at the team that has ramped up to get more sales over the course of this month, as you look at the pure number of doctors recruited, they recruited slightly more doctors in the first half of the year than the first half of last year. The productivity in terms of the doctors is okay but not great, but where you really see the benefit is in the cases those doctors produce"

5. After evaluating its GPO contract, Surgery Partners changed vendors. "We selected a vendor and we have a new contract that went into place this quarter and we expect those savings to ramp up as we train the field this quarter on what SKUs they need to get the maximized savings and we have an action plan for training that is happening at each facility," said Mr. Cowhey. "We will get the full benefit of that in 2019."

6. Surgery Partners is in the middle of transitioning all facilities to a single clearinghouse to streamline operations. "That will provide us with some benefits and understanding of what some of the causes are for some payments getting denied so we can attack those processes across the entire organization," said Mr. Cowhey. "While in theory, we had the opportunity to do that by having the same vendors and consolidating those reports, having it in one place allows for easier and quicker analytics."

7. The company aims to complete $80 million to $100 million in mergers and acquisitions by the end of the year; during the first half of the year, Surgery Partners completed $50 million in M&A. "At some point, we need to think about what our capacity is to do these deals and what we need to think about [is] the cash flows generated by our business for the remainder of the year," said Mr. Cowhey. "If I had more capacity, would I do more deals? As I think about the leverage ratio and how I want to manage it, I think I need to grow into my leverage more than I think people are going to see me deploy capital to actively deleveraging…If we keep the deals small enough, the integration risk should be low, especially as we standardize a lot more of these systems and processes."

8. The company is looking to expand in certain geographies and specialties to maximize investment. While Mr. Cowhey wouldn't divulge which geographies Surgery Partners may jump into next, he did discuss the company's focus on growing its musculoskeletal services.

Prior to his joining the team, Surgery Partners was examining operating room time as its scarcest asset; the team calculated how each procedure contributed to the margin of what the center makes per minute. Procedures that are done in a short amount of time typically had finite margins, whereas the potential for reimbursement was larger with larger orthopedic procedures that take longer in the OR.

"What we found is that from a dollars on the contribution margin perspective on per minute of OR time, the [orthopedic surgeries with implants] are actually the most profitable things we can do," he said. "We talk about the implantables; we talk about the hips and knees and the shoulders and joints. Those are the most profitable things we do per minute of our most scarce resource. And so as we think about what we're investing in from an M&A standpoint and where we're targeting from a physician recruiting standpoint, this is where we are going."

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