Surgery Partners, Inc. (SGRY) Q2 2017 Earnings Report, Transcript and Summary

Greetings. And welcome to the Surgery Partners' Inc. Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today Mr. Mike Doyle, the CEO of Surgery Partners. Please proceed, sir.

Thank you, Operator. I'd like to welcome everyone to Surgery Partners' second quarter 2017 earnings call. Joining me on the call today is Teresa Sparks, our Executive Vice President and Chief Financial Officer. I’ll now turn it over to Teresa to review the Safe Harbor statements.

Thanks Mike. Before we begin, let me remind everyone that, during this call, Surgery Partners' management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipations, beliefs, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company's earnings release posted on the website and provided in our annual report on Form 10-K and our quarterly report on Form 10-Q each is filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, the company will discuss non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of adjusted EBITDA and adjusted net income to net earnings calculated under GAAP can be found in our earnings release, which is posted on our website at surgerypartners.com and in our most recent quarterly report on Form 10-Q. With that, I'll turn the call back over to Mike.

Thanks Teresa. Thank you for joining us today to discuss Surgery Partners second quarter results. This quarter is a bit of a tale of two cities. We are encouraged by the underlying dynamics of our business model, our pending acquisition of National Surgical Healthcare, and our progress in attracting higher acuity cases. However, we recognize the week near-term healthcare utilization in combination with payor mix dynamics has had an adverse effect on our earnings. Let me start with our core business. During the quarter from a same facility perspective, we saw a modest increase in patient cases of 0.4% and had a 1.5% increase in revenue per case. This was softer than our recent trends and we simply did not see the usual pickup that occurs from the first quarter to the second. There are three major factors affecting our second quarter results, slower industry-wide utilization, unfavorable payor dynamics, and slower than expected progress on our integrated physician practice acquisition from the prior year. The slow utilization experienced during the quarter was broad-based not isolated to specific markets or geographies and we are experiencing the same issues that some of our peers have reported as it relates to volume challenges. We continue to have strong position retention with our physician base remaining stable. However we do see a slowdown in physician practice volumes translating to softer surgical volumes. Second, the payor mix shifted away from commercial payors towards more government pay and self-pay during the quarter. We continue to see an increase in high deductible plans, as well as larger deductibles embedded in the overall structure of these plans. We believe that this trend of shifting that cost of healthcare to the consumer has delayed the norm utilization patterns which will be weighted to the second half of the year once these hard deductibles are more likely to have been met. Lastly we continue to have challenges as it relates to the turnaround of our integrated physician practice acquisition we discussed last quarter. While we have made progress, we have seen limited sequential improvement from these assets. The soft utilization in the second quarter was disappointing but we believe there is no change in the secular trend towards more outpatient care and towards more efficient and cost-effective settings. This view is reinforced by recent actions by CMS. As you may have seen a couple of weeks ago, CMS proposed a 1.9% rate adjustment for ASCs for the fiscal year 2018. Another significant development was at that he agency also officially proposed removing knee replacements from the inpatient only list and requested comments on whether total hip and partial hip replacements should also be added to the covered procedure list for ASCs. These changes if passed should significantly increase our target patient market. Medicare covered more than 400,000 hip and knee replacements in 2014 at a cost of over $7 billion. While not every procedure would be appropriate to shift to the outpatient setting, even a fraction of this market could represent a huge opportunity for ASCs. We continue to advance our capabilities as it relates the higher acuity cases. Our strategy is built upon partnering with physicians to offer high-quality services and attractive settings to serve patients and payors. We've built an extensive network of multispecialty ambulatory surgery centers, surgical hospitals, and supporting services. With the bulk of the ASC industry still owned by local physicians, we see as the opportunity for continued consolidation. As we announced last quarter, our operations will significantly expand following the confirmation of the National Surgical Healthcare acquisition. This strategic acquisition will position the company to expand upon our musculoskeletal procedures and capture the case of shifting into the appropriate site of service. I'm pleased to report that we have received all the regulatory approvals for this transaction and have the financing in place. We expect to close of this transaction later in the third quarter. NSH was the largest remaining freestanding and independent surgical facilities company and we are excited about the opportunities that will provide Surgery Partners. This transaction will add 21 surgical facilities and 15 markets with 75% of the revenue derived from musculoskeletal procedures and more than 1000 affiliated physicians. The NSH facilities also enjoy top rankings in terms of quality and patient satisfaction. We expect that NSH will add new locations for our ancillary services, as well as additional expertise and high acuity procedures. The combined company will have a portfolio of 125 surgical facilities, 58 physician practices, and complementary ancillary services. We will operate in 32 states and have more than 5000 affiliated physicians. The National Surgical Healthcare transaction will bring us a new financial partner as Bain Capital Private Equity provided part of the financing for the transaction. With this transaction, Bain also acquired a 54% interest in Surgery Partners at $19 a share from our original private equity sponsor HIG Capital, whose had an investment in the company for the past 8 years. Bain Capital Private Equity is a well-established successful investment firm with years of experience across the healthcare industry. We are enthusiastic about working with the NSH team and the newly appointed Bain capital board members. At this time we are tracking with our pre-acquisition game plan for NSH and our prepared foreclose in the third quarter. We've engaged AlixPartners, a well-known consulting firm to assist us with the integration and synergy capture both our near-term and long-term opportunities. We expect to achieve our target of $20 million of cost synergies with a focus on procurement, duplicate of overhead and overall margin enhancement opportunities. As we have focused on our pre-closed activities for NSH, we chose to pause on our other active pipeline opportunities. Our full-year guidance had included 5 million to 7 million of EBITDA from these transactions. We are prepared to reengage these acquisition opportunities, however due to the timing of the NSH close, these acquisitions would have an immaterial contribution to earnings in the current year. We look forward to the next stage of our growth and bringing the NSH and Surgery Partners teams together. Let me turn over to Teresa to discuss the results for the quarter.

Thanks Mike. As discussed we remain optimistic concerning the fundamentals of the industry and our acquisition of NHS. For the quarter, totaled cases increased 3.5% driven by acquisitions in the prior year while revenue per case declined by 3.9%. On a same facility basis, our cases increased [0.4%], revenue per case increased 1.5% and same facility revenue increased 2% to $296.5 million. Total revenue decreased 0.5% to $288.4 million from $289.7 million in the same period last year. As expected, total revenue reflects the anticipated lapse of a breakeven anesthesia contract to an unaffiliated provider. The contract which neutrals the EBITDA was diluted to revenue by approximately $8.8 million during the quarter. Excluding the contract from both periods, we would have achieved revenue growth of 2.7%. Our quarterly results were affected by softer volumes experienced industry wide along with the adverse payor mix that Mike mentioned earlier. Within the case mix, we experience an increase in higher acuity procedure combined with the shift in payor mix towards less favorable payors including more government reimbursement and self-pay. Government reimbursement which is primarily Medicare represented 41.7% of revenue this quarter compared to 40.2% for the same period a year ago while commercial payors declined to 49.6% of revenues from 51.3%. While our efforts to increase our hard acuity cases have been successful, the higher mix of less favorable payors hindered the overall benefits. As we take a closer look at EBITDA for the quarter, we anticipate of achieving approximately 25% of our full year guidance during the second quarter as consistent with historical trends and including a normalized approach to M&A. Since we have the opportunity to acquire NSH, we do not pursue the usual smaller one-off acquisition. The absence of those smaller transactions mean a difference of approximately $1.5 million this quarter. In bridging back to our expectation for the quarter, the three major factors Mike highlighted earlier affected our quarterly EBITDA results as follows; first, smaller industry-wide utilization relative to our volume expectations resulted in a difference of approximately $3 million. Second, the unfavorable payor dynamic with the shift to a less favorable payor mix impacted adjusted EBITDA by approximately $6 million to $7 million. Lastly, the slower than expected improvement and our integrated physician practice acquisition resulted in a shortfall of approximately $3 million. The combination of all these factors resulted in less favorable margins as our adjusted EBITDA margin declined to 12.8% from 15.9% of revenue with adjusted EBITDA at $37 million in the quarter. On a year-to-date basis, revenues increased 3.2% to $574.5 million from $556.8 million for the same period last year. Total cases increased 5.7% while revenue per case declined by 2.4%. On a same facility basis, our cases increased 1.3%, revenue per case increased 3.7%, and same facility revenue increased 5% to $581.4 million. As highlight for the quarter, total revenue reflects the anticipated lapse of a breakeven anesthesia contract and unaffiliated provider. The contract was neutral to EBITDA but diluted to revenue by approximately 20 million for 2017, of which $17.8 million is reflected in the year-to-date results. Excluding the contracts from both periods, we would have achieved revenue growth of 6.6%. Adjusted EBITDA is $77.2 million on a year-to-date basis, a decrease over prior year due to the second quarter result. Turning to the balance sheet, we ended the quarter with the cash and equivalence of $57 million and availability of approximately $56 million under our revolving credit facility. Normalized net operating cash flow, less distributions to non-controlling interest was $4 million during the quarter, and includes approximately $35 million of cash interest payment which were not reflected in the prior quarter along with $2.9 million in merger and integration related cost. The $35 million of cash interest payments includes a $17.8 million interest payment on our existing senior unsecured note, not reflected in the prior period, as well as the timing of our interest payments on the variable rate term loan adjusted to maintain a LIBOR rate at or below our 1% floor. In addition during the quarter, our cash flow from financing activities reflected in interest payment of approximately $7 million related to our new $370 million senior unsecured note relates to the acquisition of NSH and currently held in Escrow. Our ratio of total debt to EBITDA as calculated under the company’s credit agreement was 6.94 times which is temporarily higher than we planned. As previously discussed, we structured the NSH transaction and leveraged neutral manner. We expect as healthcare demand returns to a more normal level, we will move towards deleveraging. We continue to target a range of 5 times during the first half of 2019. Given the trends we experienced this quarter, we believe that it’s prudent to adjust our guidance for the full year on a standalone basis. The company now anticipates revenue in the range of $1.18 billion to $1.2 billion, and adjusted EBITDA in the range of $174 million to $181 million for the full year 2017. Including the partial year impact of NSH, revenue would be in the range of $1.34 billion to $1.36 billion and adjusted EBITDA in the range of $199 million to $207 million. This guidance does not incorporate any smaller one-off acquisition this year and assumes that we experience their returns to higher demand in the second half of the year, but not to the extent that we forecasted previously. With that, I’ll turn the call back over to Mike.

Thanks Teresa. We remain enthusiastic about the prospects for Surgery Partners' as the healthcare industry continues to move towards more efficient care and consumers play an increasingly important role in choosing their healthcare providers. This company is at the center of this trend as it builds out a network of diversified high-quality services that meet the needs of patients physicians and payors. Finally, we would like to thank our hard-working physicians and employees for their contributions. I would now like to turn the call back over to the operator to begin the question-and-answer session.

[Operator Instructions] Our first question comes from Kevin Fischbeck with Bank of America/Merrill Lynch. Please proceed with your question.

So I appreciate the color about the three drivers I guess to the weakness in the quarter, you have a similar breakout for kind of the reduction in core guidance, how much of that core guidance reduction was volumes versus mix versus the physician deal?

So Kevin thanks for the question diving in. As we look at the core guidance and we bridge back to kind of the softness as I mentioned that we experienced in the second quarter based on that our expectations are outlined that was about $11 million. And so we give the case impact and the rate impact as you think about cases returning to 3% as expected and rate of 1.4 and we had expected 3. So that breakout of the $11 million was provided in my prepared remarks. And then we're anticipating that that softness continues in the second half, but overall we think about same facility for the revised guidance, same facility revenue growth. Our original target was 5% to 7% and we brought that down to a range of 3.5% to 5.5%.

And then I guess these issues I guess around volumes and payor mix, did does impact NSH as well has your view about what NSH might be able to contribute next year change that are given the weak broader backdrop?

Yes, I think on a positive note, as we’ve taken look at NSH results for the second quarter and year-to-date they’ve performed as expected and though we’re seeing some of the same things in their assets from a payor mix perspective that’s been able to have a broader array of types of procedures with the capabilities of overnight stay. And some of the capabilities around higher acuity procedures that they can perform in some their facilities which we can't in the ASD sector. So from that perspective although they are performing as expected they probably got there a little bit differently than expected but have been able have success in performing as expected. So we’re excited about that piece of it.

Our next question comes from Ralph Giacobbe with Citigroup. Please proceed with your question.

You noted again expectation go back to the guidance of sequential improvement I guess what are some of the tangible things that you can do to sort of improve operations aside from kind of the hope that macro factors bounce back. And I guess, coming off a print where you know you had the 19% decline in EBITDA, just talk about your comfort - so that mid single-digit back half growth estimate at this point?

Yes, I think the dynamics - again as you say what are the things you can point to that that can begin to have a shift in some of those things. The effect of the payor mix shift I think that's a little bit difficult as we focus on some of things we can do there it’s looking at some of these higher acuity cases and the cases that are coming through with unfavorable payors and really focusing on the margin of those. As we’ve always had a pretty favorable payor mix on these higher acuity specialties it's been something that that has been in overall positive to earnings as you see that payor mix shift its become a little more challenging. So some of the things that we have in place on a combined company with NSH and bringing the two companies together are really focusing on that procurement, the capabilities around implants which are newer types of cases to some of our existing facilities and really improving the margins on those regardless of payors. So that will continue to be a big focus and we’ve engaged the team both internally and externally to help us through that process and we're making sure we’re setup long-term to continue to excel on the fact that these higher acuity cases are the right place to be. From the other perspective as we take a look and have a conversation and it’s more anecdotal with the physicians is that we are seeing that the physicians continue to obviously see patients through their doors and in their individual practices, it maybe a little bit softer, but what they're really seeing is that transition due to the higher deductible plans and the size of those deductibles they’re seeing a delay in the patient that needs surgery that it’s not as simple as it was before. We’re not seeing it in ophthalmology where you have 70% of your volume coming from Medicare and the economics of the patient hasn't changed. We’re seeing a delay in these commercial payors, the commercial patients with a high deductible plan. So the idea and the thought process that we have on that and the anecdotal information we’re getting back on our specialty-by-specialty and doctor-by-doctor basis is that those high deductibles are putting a delay in the access to healthcare for many of the patients and we continue to see that in our own physician practices.

And then wanted you to go back to the ancillary piece that fell off sequentially. I guess I'm still sort of unclear in terms of what change there from kind of last quarter as I think you have highlighted - you’ve certainly highlighted integration challenges in the past. But you know I think last quarter's call you suggested volumes are intact, physicians were in place, things are going well. So just help us understand kind of what the real drop-off was there, I guess either from a topline and/or more importantly I guess from a cost perspective? Thanks.

I’ll touch on some of the numbers and then Mike will add the commentary just on the efforts there in terms of turnaround and improvement in operations. So year-over-year Riverside or the acquisition that were speaking to was about $3 million and sequentially that was about $1 million. So that’s the overall impact and some of the effort that we saw some deterioration while we had some momentum related to this acquisition first quarter, second quarter we saw some deterioration in terms of that - momentum that we felt like was in place as we started at the beginning of the year.

And I think just to give an overview on the turnaround efforts is that this is a large platform integrated physician practice that has multiple service lines and really what we’re seeing is revenues and volumes across the integrated platform has taken a different mix and a different pattern over the past call it six to 12 months and that piece of it has caused the revenue down, cost have come up, and during this period where we’re in the process of turning around and we're really finding that stable operating position we’ll continue to see some of those increase cost. So really a combination of mix within that integrated practice, revenue and volumes being softer and then dealing with that increase cost on top of it. So as in most situations that you see where you have to jump in and have that that post integration lift we’re seeing that perfect storm of the three factors that we’ve focused on and have a plan in place over the next 90 days to continue to get improvement.

Is there anything that’s kind of one-time in nature that you can get back just as quickly as you sort of lost it, is there a way to frame how much this is kind of quick come back if you will as opposed to something that continues to linger?

Yes, so I think there are some initiatives that we have kicked off that can be quicker come back I think that probably accounts for about a third of it I think the rest is just going to be something that has to be worked through over the next call it the next nine months.

Our next question comes from John Ransom with Raymond James. Please proceed with your question.

On the practice - integrated practice let's say 90 days or so from now things that have gotten better what are some potential Plan B, Plan C things you can do?

Yes, I think the key piece for it for us were - I know that we've heard others talk about to having these large anesthesia practices, this is a little different. This is not an anesthesia practice. This is an integrated practice that's focused on musculoskeletal, spine and pain management. And there are obviously a lot to pivot here. We have a surgery center that’s associated with it and we have a multi-location physician practice. So there's always a way to focus on operational changes and have a different approach in the market. I think from our perspective it’s really worth that focus to continue operational improvement working with the physicians in the market and ensuring that we get – a get cost up under control, and bring the overall – the overall mix the practice back to where it was and that’s really placing this practice side-by-side on previous performance and understanding the levers we need to pull to bring it back to that performance. And also, we also have successful larger practices throughout our network of facilities that that will influence how we approach that as well. So, I would say from a high-level not that we’re thinking anything around alternatives, right now, it's – we’ve got an asset, we got a good market and we’re going to work to the process of fixing it and bring it back around.

So, the unhappy experience here cured you of your desire to do another one of this. I mean. I mean when you came public the big story was we do small tuck-in deals where we already have a big surgery center practices. This was a bit of a departure as this a teaching moment, I would think?

You kind of led me down the path, I don’t have a choice, but it’s a teaching moment, but I think it's a teaching moment before this. I think what we’re seeing success is just in our surgical markets, bringing in one-off physician practices that allow us to capture new surgical volume, capture new ancillary services and the thought process when you do a platform acquisition is that things remain pretty close to the way they were, and that’s the first thing that is difficult to control. When you're on a one-off physician practices those aspects of it becomes very much easier to control, I shouldn’t say easy to control, but much easier. So on an overall basis, our focus will be on larger practices. We’re going to follow what’s been successful in our surgery center industry for many years, and joint venture those, when we do have that type of situation. So, that continues to be a very vested interest of the physicians, when we do them. What you will see more from us is on a one-off physician practices in a market where we have a surgical facility would be what you should be expecting.

And just a couple of other things. What do we think now the new normal, I know you’re guessing a little bit here. But if we’re thinking about ASP's, just simplistically they do a 100 procedures a year. How many of those are being now done in the fourth quarter do you think versus a couple years ago?

Yes. I think…

I mean is it - I am sorry, because you are assuming about a third of the EBITDA from your acquisition that’s coming in the 4Q, and I just can't remember. Is that higher, lower, than it was a couple years ago?

What I am going to say, just as you think about on a standalone basis, to put the acquisition of NAH aside. We’re continuing to hear and others report that we’re moving to this 40-60 mix. 40% of the contribution in the first half and 60% in the second. We’re not quite moving to that level in terms of guidance. But we see that inching up other where we were in the prior year. So you continue to see that push in that pronounced affect of the high deductible plans and just the overall environment pitching into the last half of the year.

So, you would say it’s markedly higher today than two years ago. I mean so, if you are looking at…

Yes. Sequentially - yes, fourth quarter you continue to see on a year-over-year basis that it continues to be a bigger part of the years performance.

And then lastly, your balance sheet is a little bit tight. What’s the level of EBITDA needed in – excuse me, in ’18 on a pro forma basis, that be in compliance or comfortably ahead of your covenants?

We are - refinance, we’re within when you think about the transaction being structured in a leverage neutral manner. The synergies that we’ve identified which is to point out our all cost synergy. The transaction works on a standalone basis for just looking at a leverage neutral transaction from that standpoint and $20 million of cost synergies. So that, the point being that we have not layered in revenue synergies which we think are definitely out there to be captured. The deal stands on its own with the cost synergies that we’ve identified. So, we’ll have anticipated covenants, EBITDA as flows of approximately 300 to 310. So, there is no covenants that govern that. So, we’re well within kind of what we had originally thought through from a transaction perspective.

So, where does the trip - what was the tripwire in '18. What’s the minimum EBITDA you would need pro forma for ’18?

Well, there is no minimum requirement. I think our original expectations as we think through kind of a normalized grows to covenant EBITDA, we would be in that call it 330 range for at the end of 2018, kind of back to our original thought process with the combined transaction.

But as you look at our covenants in our credit agreements, we have a ton of room. I mean we would have to be over nine times to trip a covenant.

Yes. So, I was just looking for – is it 250, is it 230 that…

It’s a low two, it’s like 220-sh and again I don’t have the math run out here. But it’s that low.

Our next question comes from Chad Vanacore with Stifel. Please proceed with your question.

It’s Seth Canetto on for Chad. First question, just looking at the NSH and your comments that you guys made that's performed as expected, but got there differently. I mean is there any more color that you can give on how that trended in the quarter as far as are they being impacted the same way you guys, and then they made it up on the cost side or any more color you can give there?

I mean there is - I think it’s a combination of just an expansion of the types of services provided. So, it’s not necessarily making it up on the cost side. It’s being able to make it up from a volume perspective and make it up from a specialty mix perspective, keeping in mind that the specialty mix is a little bit different in those assets.

And then are there any parallels that you can draw from the physician integration issues and NSH that you off the work for or work through going forward. I think they both have muscular skills or was there any concerns from integration with NSH?

I mean I think what you have to understand is, having a one-off acquisition in this Florida market is and again it’s a platform acquisition, but it's not a – it’s not a company, it’s not a true platform of surgical facilities this is a much different asset with a great infrastructure, great team that's coming with it, that’s been operating in and growing for, I probably won’t quote the sounding date of NSH. But we’ve been familiar with the company over the last 7, or 8 years. They’ve got a great team and we are – we really look at that business the same way. So, there is really no way to draw a parallel between integration issues as you bring in a one off physician practice, platform acquisition versus bringing in a company. We’ve been through and again – as you take a look at historically through the company, we’ve continued to do multiple acquisitions and this is really the one that we have had difficulty with from an integration perspective. We’ve done since combined with Symbion, we’ve done 20 transactions and we have one that's causing us some grief. I think as you take a look at our experience on bringing Surgery Partners and NovaMed and Surgery Partners and Symbion together. Again we've had very, very successful integrations from that perspective and we are interacting with the team and are excited about working with them. They’ve done a good job with their facilities, the physician owned hospitals are exciting and we look at some of the some of the benefits and experience that they’re going to bring on these higher acuity cases, and muscle skeletal with the fact that the new 75% of the revenues are coming from that and the expanded capabilities that they already have due to some of their overnight stay capabilities in their facilities. So, I think from that perspective it will be positive and very little risk.

And then just last question you know when we look at margins I think you guys mentioned in previous calls that the new service lines you can expect some hit the margins there. When should we really expect those programs to reach maturity?

Well, I think the main point that we've been discussing is when you compare lower acuity case such as GI or just a pain simple procedure and injection those margins are higher because they have very little supply expense associated with those types of cases. And then general theme is that you move into these higher acuity cases they’re by nature lower margin cases they’re higher profitability in terms of total dollar but they have a lower profit margin. For example a pain simulator or and as we move into the total joint continue that push, those higher acuity procedures do have a lower profit margin and so you have to have the right payor mix. As you move up the acuity level and when you don’t it extenuate the fact that those procedures while profitable and good cases to have and everything is trending in that direction, it does play pressure on your margins just from the overall profitability of those cases.

Thanks. Our next question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

It's Jason Plagman for Brian. First question on the ancillary services the EBITDA was down about $3 million sequentially including $1 million decline you mentioned at Riverside. So the remaining $2 million GAAP was that due to the triple-down effect from volumes softness or any insight surprises there that impacted those numbers would be helpful?

Yes, so the acquisition did have an impact on overall margin and profitability. We’re seeing continued improvement with our core one-off physician practices that is improving but sequentially it was about $1 million from the practice. And then the ancillary services associated with that practice also had a sequential decline. Overall the volumes, there had as Mike mentioned have gone – are under pressure and so the practice alone has about $1 million is what we referenced but they are also ancillary component of the services associated with that practice.

And then last quarter you mentioned decelerating growth at a couple of your surgical hospitals which is formed very well and over the last few years any comments you can make on performance of the surgical hospital in your portfolio compared to the overall business, was there any difference that you saw this quarter?

That expectation was there in terms of having a little bit slower growth while we made additional investments to continue to capture market share in those particular market that we have pointed to from a surgical hospital perspective. We also saw in those markets that have higher acuity cases just by nature of it being a hospital. And we saw shifts in those markets as well to lower – less favorable payors in this market.

Our next question comes from Bill Sutherland, The Benchmark Company. Please proceed.

Most of mine have been asked, I am curious about the quarter-over-quarter trend in Q2 same-store growth I know - I mean the drop-down that you guys experienced relative to kind of what you’re seeing in a couple of the peers was dramatic, I know Q1 was off a bit from Q4. But what kind of happened do you think over the course of those two quarters?

I think the key piece of it is - as we look at our physician base it remains very stable we've had very few and probably less than any other quarter or any other half year that the attrition of physicians for retirement moving out of the area or physicians leaving the network we haven't had any high producing physicians moving on or leaving and those that do have been very successful in implementing succession plans. So from being able to recruit new physicians we continue to be successful there, continue to implement the programs into the existing surgical facilities continues to be a success. What we're seeing is that as you look throughout the entire base of the physicians, it’s not somebody dropping off 50% or 70% or 80%. It’s just the small circle that the existing base has decreased and we’re filing that up as best as we can with new recruits. But it's hard to influence that physician practice and the volumes that they're seeing. And even though their physician practice volumes are a little softer, what's really taking effect is that conversion of their patients that are coming to the door and converting them to surgery. And that's really highlighted around the higher acuity specialties such as orthopedic, neuro, and some of our pain management.

Just to add onto that, when you think about that same base of physicians, since that has remained stable quarter-over-quarter, year-over-year, that same group drove 7.9% case growth in the prior quarter. So this is a tough comp to overcome. And just that base of physicians has remained consistent.

So it’s partly a comp issue Teresa, as well as just the - just a general. On a brighter note, looking at the Medicare proposals, the fraction of uncomplicated procedures that go to ASCs, I’ve heard 20% to 40%. Is that of the total?

Yes, I think from our perspective, and, again, it's a facility by facility basis on how they get to get that evaluation, we’ve standardized a lot of the clinical assessment as it relates to commercial but we have about a third as kind of how we think about it. So I would say right in that range.

Our next question comes from Frank Morgan with RBC Capital Markets. Please proceed with your question.

I was hoping you could go back to the comment you made earlier when you were describing the performance at NSH that you had seen so far. And I think you made a comment, you’ve got there but you got there differently or they got there differently. Could you give us a little more color on what you mean there?

I don’t think it’s anything dramatic. They’ve just done a great job of pivoting. And as I have seen the softer payor mix, they’ve been successful in bringing these higher acuity cases into their existing facilities. And if you think about the physician owned hospitals and this effort and the programs that they’ve put in place to ensure they’re capturing these higher acuity cases and have a focus on that, they’ve been able to do a great job in negotiating on the devices for the higher device intensive cases. They’ve continued to be able to take Medicare patients that have very little change in the dynamic of what their economics are on a case by case basis. So when they come into have a surgical procedure done, that they’ve been able to capture those which are approved in the physician known hospital but not in the ASCs. So there’s just a different dynamic. And they’ve been very successful in leveraging that to overcome this pair mix shift and some softness.

Maybe one final one here for Teresa. I appreciate the color, the weighting of this 40-60 weighting of EBITDA contribution. But as we think about the cadence in the third and fourth quarter, would you care to share any thoughts on how that weighting would be just between the third and fourth? Thanks.

Yes. So just kind of recapping our original guidance we had anticipate 20 roughly percent in the first quarter, 25% in the second and third and the balance in the fourth. And so as we looked at actual results, that pushes into the fourth quarter, but not unreasonable in terms of how we’re seeing the business trend. So it pushes up to fourth quarter, 2% in terms of contribution in the fourth quarter.

And, again, a lot of this will depend on from closing the NSH transaction in the third quarter and timing of that will play into this as well. So we’re a little hesitant to give very specific on a quarter by quarter basis but we see a little more of a push into the fourth quarter.

From our perspective, would we be better off just basically assuming that acquisition is effective at the start of the fourth quarter maybe. Just October 1, start for modeling purposes.

Yes, that makes sense. We have a month of - I guess blocks in terms of the timing. We do expect to close it in the third quarter. So I think that’s probably says best.

This concludes our question and answer session. I would like to turn the call back to Mr. Mike Doyle.

Thank you, Operator. I appreciate everybody joining the call today and for the questions. Obviously, we look forward to updating you on the third quarter as we get through the next quarter. I’m looking forward to better results overall. I think we’re pleased with some of the progress that we’ve made, although the results are disappointing. We do have a lot of things that we continue to look forward to bringing the NSH team onboard and continue to work through the opportunities that we have on the higher acuity cases and the focus on musculoskeletal. And again, working on the, really the focus on how we continue to improve margin through procurement on these device intensive cases. So that will be the focus as we look through the next quarter and we’ll update you on it then. Hope everybody has a great rest of the week. Thank you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.