Surgery Partners, Inc. (SGRY) Q2 2026 Earnings Report, Transcript and Summary

Greetings, welcome to Surgery Partners Second Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Dave Doherty, Chief Financial Officer. Thank you. You may begin.

Good morning, and thank you for joining Surgery Partners' Second Quarter 2026 Earnings Call. I'm joined today by Eric Evans, our Chief Executive Officer; and Justin Oppenheimer, our Chief Operating Officer. During this call, we will make forward-looking statements. There are risk factors that could cause future results to be materially different from these statements as described in this morning's press release and in the reports we file with the SEC. The company does not undertake any duty to update these forward-looking statements. In addition, we will reference certain non-GAAP financial measures, which we believe can be useful in evaluating our performance. We have reconciled these measures to the applicable GAAP measures in this morning's press release and in the supplemental materials posted to our Investor Relations website. With that, I will turn the call over to Eric Evans. Eric?

Thank you, Dave, and good morning, everyone. Before discussing our quarterly results, I want to address a significant portfolio optimization milestone we announced last month. As we noted, we have signed definitive agreements in escrow for the sale of our interest in the Idaho Falls market, Mountain View Hospital and Idaho Falls Community Hospital to our partner, Intermountain Health. We have had a successful and long-standing partnership with Intermountain, not only in Idaho, but also in 15 ASCs across Utah and Montana that remain in our portfolio. The Idaho Falls facilities have built an exceptional reputation as preferred providers and leaders in delivering high-quality, affordable care for the Idaho Falls region. At the same time, they have evolved in ways that today extend well beyond our core short-stay surgical focus to include more traditional acute care services such as obstetrics, neonatology, pediatrics and other nonsurgical service lines. We are confident these facilities will continue to grow and serve the health care needs of this community with the strength of Intermountain's partnership. This pending transaction is the most impactful part of our strategic review process to date and represents the vast majority of planned portfolio optimization. Our objectives in this process were to further sharpen our focus on our core short-stay surgical facility portfolio to simplify our operations, drive growth and strengthen our balance sheet, and we believe we have been successful in achieving this. To help investors evaluate the company on a comparable basis, in the supplemental financial information we posted on our Investor Relations website this morning, we provide key financial and nonfinancial metrics about this market to help illustrate the change in our business mix, assuming this transaction closes. Dave will speak to the transaction financials in greater detail shortly. We believe this additional information will make it easier for investors to evaluate the growth profile, margin profile and capital structure of the company following the anticipated closing of the transaction. Upon closing, we will update our forward guidance. Turning now to our second quarter results. We delivered results that were ahead of our expectations for both revenue and adjusted EBITDA, giving us the confidence to reaffirm our full year guidance. Net revenue was approximately $849 million, up 2.7% year-over-year and adjusted EBITDA was approximately $125 million. Adjusted EBITDA margin was 14.7%. On a year-to-date basis, net revenue was approximately $1.66 billion, up 3.6% and adjusted EBITDA was approximately $228 million. As we have consistently reiterated, same facility revenue is one of the clearest indicators of the underlying performance of our platform because it captures case volume, acuity and rate. In the second quarter, same-facility net revenue increased 5% over last year with 4.8% related to rate, which reflects the continued benefit of our focus on higher acuity procedures. On a year-to-date basis, same-facility revenue increased 4.9% with same-facility cases increasing 0.8% and net revenue per case increasing 4%. We performed approximately 168,000 surgical cases in the second quarter driven by orthopedic and vascular procedures, reflecting the continued robust growth in both acuity and joint-related surgeries. Payer mix also contributed to quarterly performance. As expected, commercial mix moderated compared to the prior year period on both a quarterly and year-to-date basis, while government mix moved correspondingly higher. This dynamic was primarily isolated to our larger surgical hospitals and was consistent with the assumption embedded in our full year guidance. Importantly, we view this as expected revenue mix item rather than a change in the underlying patient demand environment. And our focus remains on driving acute clinical quality and appropriate reimbursement across the portfolio. Physician recruiting is another important contributor to that same facility growth profile. In the second quarter, 191 new physicians began using our facilities, bringing our year-to-date recruits to 330. The mix of new recruits continues to be broad-based across our specialties, including orthopedics, ophthalmology, GI, pain and other service lines and the initial revenue contribution from the 2026 cohort increased nearly 16% compared to last year's cohort. As we have discussed in prior periods, these recruiting cohorts compound over time as physicians build volumes in our facilities, and we believe our recruiting capabilities, physician relationships and differentiated operating platform remain key contributors to sustainable growth. Beyond same-facility performance, we are pursuing growth through targeted de novo development and M&A activity. At quarter end, we had 6 de novo facilities under construction and an additional 7 facilities in the pipeline. These projects are an important long-term growth opportunity and are anchored by high-quality health systems and physician groups in attractive markets. Our approach to M&A continues to be disciplined as we evaluate opportunities against their strategic fit, return and growth potential and impact on our balance sheet objectives. While we maintain and continue to pursue a strong pipeline of opportunities, we have completed an immaterial amount of acquisitions year-to-date. A significant focus this year has admittedly been on optimizing our existing portfolio, divesting assets that no longer align with our short-stay surgical strategic direction and sharpening our focus on core growth. While we do anticipate closing additional acquisitions before year-end, we will clearly not reach our $200 million average annual M&A investment target in 2026. That said, we remain confident that our M&A strategy is appropriate given how fragmented the ASC industry remains our unique position as the only scaled fully independent ASC management company and our track record of successful integrations and physician partner value creation that has and will continue to make us a partner of choice. That foundation, combined with a stronger portfolio and balance sheet keeps us well positioned as the right opportunities emerge. Before turning the call back to Dave, I want to thank our colleagues, physicians, partners and operators across the company. We are excited about our growth trajectory, the value of our physician partnerships and the significant long-term opportunity we have to expand access to high-quality, high-value surgical care provided in the optimal setting. The pending Idaho Falls transaction represents an important step on that journey, and our first half results reinforce our confidence in our full year outlook and long-term strategy. With that, I'll turn it to Dave. Dave?

Thanks, Eric. As Eric mentioned, our second quarter net revenue was approximately $849 million, up 2.7% year-over-year. Adjusted EBITDA was approximately $125 million compared to approximately $129 million in the prior year period and in line with our expectations. Adjusted EBITDA margin was 14.7%. For the first half of the year, net revenue was approximately $1.66 billion, up 3.6% year-over-year and adjusted EBITDA was approximately $228 million, down 2.3% year-over-year. Year-to-date adjusted EBITDA margin was 13.7% compared to 14.5% in the prior year period. Looking at the quarter in more detail. Revenue growth was driven primarily by higher acuity cases, bringing strong net revenue per case partially offset by the anticipated increase in our government payer mix. Same facility revenue increased 5% in the quarter with case growth of 0.3% and net revenue per case growth of 4.8%. The year-to-date, same facility revenue has increased 4.9%, with cases increasing 0.8% and net revenue per case increasing 4%. Our commercial payer mix was approximately 49% of net revenue in the second quarter, approximately 350 basis points lower than last year, with a correspondingly higher mix of government payments driven by shifts within our larger surgical hospitals and case growth that skewed slightly towards higher government paid. Turning to expenses. Salaries and wages were approximately 29.8% of revenue in the second quarter, improving sequentially from 30.5% in the first quarter, though higher than 28.5% in the prior year quarter, due primarily to the change in payer mix we've noted. Supplies were 26.7% of revenue, also improving sequentially from 27.2% last quarter, though higher than 26.0% reported in the second quarter of 2025. Professional fees and medical-related expenses were 12.1% of revenue, improving from 12.5% sequentially and 12.4% in the prior year quarter. Other operating expenses were 6.1% of revenue compared to 7.3% in the first quarter and 6.7% in the prior year quarter. G&A expenses were 4.3% of revenue compared to 4.8% in the first quarter and 4.4% in the prior year quarter. Taken together, operating expenses improved meaningfully as a percentage of revenue compared to the first quarter, reflecting the expected seasonal step-up in revenue as well as continued operating discipline. Turning back to the balance sheet and cash flow. Interest payments were approximately $90 million in the second quarter compared to approximately $81 million in the prior year quarter. On a year-to-date basis, interest payments were approximately $134 million compared to approximately $126 million in the prior year period. Operating cash flow was approximately $59 million in the second quarter. We distributed $46 million to physician partners and had approximately $7 million of maintenance capital expenditures. On a year-to-date basis, operating cash flow was approximately $71 million. We anticipate improvement in working capital at our facilities during the remainder of the year, consistent with the seasonal nature of our business. At quarter end, cash flow was approximately $217 million. Revolver borrowings were approximately $75 million and available revolver capacity was approximately $618 million. Credit agreement net debt leverage was approximately 4.4x compared to 4.3x at the end of the first quarter and 4.1x in the prior year quarter. Balance sheet-based net debt to EBITDA was approximately 5.1x, consistent with the first quarter. Before discussing our outlook, I want to spend a few minutes reviewing the financial implications of the expected Idaho Falls transaction and how we believe investors should think about Surgery Partners following closing. This transaction represents the largest step in our portfolio optimization strategy, and it reinforces our commitment to streamlining the business, sharpening our focus on our core short-stay surgical platform improving the conversion of adjusted EBITDA to cash and supporting further deleveraging over time. I would like to spend some time elaborating on how this transaction streamlines our remaining business. The anticipated transaction is expected to simplify the go-forward portfolio in several important ways. In the supplemental information released today and included on our website, we help illustrate the changes to our business, excluding the Idaho Falls facilities. Excluding these facilities, we expect the company to have a clear ASC and short-stay surgical profile, a significantly lower Medicaid mix, no obstetrics and neonatology services, meaningfully smaller exposure to ICU beds and emergency department visits and a majority reduction of our nonsurgical admissions. The transaction is also expected to eliminate our inpatient pediatric business and retail and compounding pharmacy services and will decrease our exposure to Medicaid and other state-based reimbursement program changes. We are immensely proud of the growth of the Idaho Falls facilities and the comprehensive service we offered to its community. But as my comments illustrate the market has become more complex than the rest of our portfolio. Another distinguishing fact about this market compared to the rest of our portfolio is the capital intensity of these facilities. Over the past 3 years, average annual capital expenditures for these facilities have been approximately $17 million. and the Idaho Falls facilities represented approximately 32% of the company's total finance lease obligations. When combined, these factors demonstrate that the capital required to manage these facilities is meaningfully different from the rest of our portfolio and more closely aligned with what you would expect to see in traditional acute care settings. After factoring these capital-related items, the distributions we have received from Idaho Falls have represented less than 50% of the facility's adjusted EBITDA. This capital intensity was a significant factor in our portfolio optimization review and supports our view that these facilities are better positioned under ownership with resources and scale to support their continued long-term growth. Following the completion of this transaction, we believe the company will be easier to understand, more operationally focused and better aligned with the areas where we believe Surgery Partners has the strongest long-term growth opportunity. At closing, the total consideration we expect to receive is approximately $795 million of gross proceeds. From a transaction economics perspective, we recognize the transaction can be evaluated through multiple lenses. Based on the Idaho Falls facility's historical earnings contribution, the proceeds represent approximately 7x LTM adjusted EBITDA. However, we also believe it is important to evaluate the transaction based on the cash flow ultimately accrued to Surgery Partners, given the meaningful facility level debt service and capital investment associated with these assets. On that basis, transaction proceeds represent approximately 17x the distributions we have received from the facilities on average over the past 3 years, which we believe better reflects the value realized for Surgery Partners shareholders. Net cash proceeds will be determined at closing as the final amount will be impacted by closing levels of indebtedness, cash and working capital. These proceeds will be used primarily to pay down debt. We expect this transaction to reduce the consolidated debt on our balance sheet, reducing our balance sheet leverage by approximately 0.3 turns. On a historical basis, excluding the Idaho Falls facility, the company would have generated revenue in the second quarter of approximately $660 million and adjusted EBITDA of approximately $98 million. For the first half of 2026, excluding Idaho Falls, revenue would have been roughly $1.29 billion and adjusted EBITDA would have been approximately $173 million. We believe these ex Idaho Falls metrics are important because they provide a better view of the future growth profile of the company, particularly as we continue to focus on higher acuity outpatient procedures, physician recruitment, de novo development, health system partnerships and disciplined capital allocation. Turning to our outlook. We are reaffirming our previously issued full year 2026 guidance for revenue of $3.35 billion to $3.45 billion and adjusted EBITDA of at least $530 million. This excludes any financial impact from the Idaho Falls transaction. As we've noted, the transaction has not yet closed and remains subject to customary closing conditions, including the requisite physician member and physician governing board approvals. Given this fact, we believe the cleanest approach is to reaffirm our existing guidance at this time and provide updated guidance as soon as the transaction closes, which we expect to occur in the near term. Following the anticipated closing of the Idaho Falls transaction, we expect to provide updated guidance, additional detail regarding the company's go-forward financial profile. We will continue to prioritize disciplined capital allocation with a focus on deleveraging high-return organic growth, de novo development and strategic acquisitions that fit our return threshold. In summary, we delivered second quarter results ahead of our expectations, continue to generate same facility revenue growth, reaffirmed our full year 2026 guidance in advance, a significant portfolio optimization transaction that we believe strengthens the go-forward profile of the business. We expect to provide updated guidance promptly following the closing of the Idaho Falls transaction. With that, I will turn the call back to the operator for questions. Operator?

[Operator Instructions] Our first question is from Brian Tanquilut with Jefferies.

Maybe, Eric, I'll start just on the core business. I mean it looks like volumes are holding up okay here. Really good rev per procedure performance Curious what you're seeing in the market. I know there's a lot of concern about broader surgical volumes. So if you can share with us kind of insights on that and how you're expecting the strategy with acute or higher acuity procedures continuing to progress?

Appreciate the question. Yes, so we're really quite pleased with the, obviously, acuity growth in our volume. You can see it showing up. As we mentioned, in our prepared remarks, we're seeing strong acuity growth across total joints. I'd also say we're seeing it in spine in a big way within the MSK bucket and also in vascular procedures. So as far as we continue to point everyone towards that same-store net revenue growth number because it is really the right way to think about the business. Clearly, that total case number is a number that the industry typically has seen higher. We expect that it will be higher over time. But we are actively pursuing and obviously prioritizing high acuity procedures and feel quite good about the year so far, and it's basically very, very aligned with our expectations.

Got it. And then maybe just to click on the Idaho Falls discussion here a little bit. As we think about the go-forward strategy, should we expect more divestitures or any other surgical hospitals that you would consider either partnering or maybe even divesting? And then, Dave, just any other color on tax liability leases and things like that, that we need to consider? Or is the $795 million the right kind of like net number? I know you already gave the impact on leverage. Just anything you can add to those discussions in Idaho Falls and go-forward strategy?

Yes, I really appreciate the question, Brian. I think on the portfolio optimization, I would say this is by far and away, the biggest part of what we were planning to do. Obviously, the most impactful big size of the business. And as we show in our supplemental information, we posted had such a dramatic impact on kind of the simplification of our business, giving us a pure-play short-stay surgical company. I would say this, we -- I want to reiterate, we really, really like the surgical hospital business. We have a lot of great surgical hospitals that perform very well. They're very focused on driving high-value elective surgery cases. And in general, that's a business we are quite happy with. Now I would say, from an optimization standpoint, I would use the example last year, we did the partnership in Bryan, Texas with Baylor. I think you'll continue to see us do thoughtful partnerships that we think continue the goals we talked about with optimization, deleveraging expediting free cash flow growth and simplifying the business. But this is by far and away, the biggest part and step there. And so you shouldn't expect there's going to be specific reports beyond that. And Dave, I'll let you maybe dive in a little bit on this question.

Yes, yes, sure. So first off, on the tax piece, Brian, were protected still even with this transaction with the state and federal NOLs that we carry into this transaction. So there will be no tax leakage on this transaction, and we're still protected on future earnings by some portion of the NOL. So there won't be a tax cash payer for the foreseeable future at this point. And on the transaction itself and the calculations on how you look at that, the $795 million total consideration that we'll receive as an organization, will be used partially to pay down debt on the balance sheet. So the net cash proceeds of those will be determined at the closing date after you look at the net indebtedness of the facility as well as working capital on a couple of other matters that sit inside there. In our financial supplement that we released this morning, you'll see that the Idaho Falls facilities themselves carry about 1/3 of the company's total noncorporate debt. So about $350 million of consolidated debt that sits on the books, about 3/4 of that is our proportionate share based on the ownership that we have out there. I hope that helps.

Our next question is from Joanna Gajuk with Bank of America.

So I guess in terms of the core business, if I may, first, on the payer mix, right, and you said it was anticipated that the government mix will increase. So just to clarify, so you're talking about the surgical hospital exposure not ASCs because my related question is, in the ASC side of things, have you seen kind of the inflow of some of the procedures because of the removal or the start of the process of removing the Medicare inpatient on the list? Is that something that you can also maybe flesh out in terms of the types of procedures you're seeing from that?

Joanna, thanks for that question. I'm going to go ahead and turn this over to Justin to give some detail on what they're seeing in operations from a payer mix perspective.

Great. Thanks, Eric, and thanks, Joanna, for the question. Maybe first just on the payer mix. As mentioned during the opening remarks, the payer mix came in for the first 6 months of the year on plan. And that's something that we studied and prioritized going into the year. To your question though about ASCs versus hospitals, it was also mentioned, we saw a moderation in payer mix slightly more on the hospital side than on the ASC side. And then shifting to your second question, we have started seeing cases and continue to see cases that come off the inpatient-only list come into the ASCs. That's part of what's driving the acuity that we're seeing, especially more complex things in orthopedics, cardiovascular and spine, as Eric mentioned before.

If I may follow up on that comment about hospitals, so the mix deterioration on the hospital side or surgical hospital side, is that related to some of the people losing insurance on exchanges or just something else because you made it sound like you had expected it. So that's why I just want to clarify like what exactly was happening with the pay mix in surgical hospitals.

Yes. It's largely just what we're all seeing in the industry is a shift in the basis in where they're being performed, which is also having an effect on revenue and payer mix. Just to clarify your comment about exchange and the HIX business, that's a relatively small and material part of our business. Our exposure to it is much, much smaller than what you see in broader acute care hospital operators, right? So we're a short-stay surgical facility provider. And because we don't have a lot of emergency departments or uninsured exposure, that really makes our risk much smaller. And I think we're even smaller now with the divestiture of Idaho Falls.

Yes. Justin, just to tag on to that. I mean, just to reiterate the point, when you look at the transaction we just made, we have a very small emergency business today, which is part of the reason we have very little HIX exposure, over half of that goes away with the sale. And so we're clearly simplifying the business. On the payer mix side, you mentioned uninsured and HIX, I would just remind everyone that really isn't a risk for us. purely elective business. Our Medicaid business actually post the pending transaction would be less than 2%. And so we look at that going forward as risk that we would have in any kind of economic situation would simply be volume, we would not have exposure to uninsured or underpaying -- or underinsured patients.

Our next question is from Matthew Gillmor with KeyBanc.

Just two. First, quick confirmations on Idaho Falls. Just in terms of the mathematics in terms of the net proceeds, the way to think about it is the $795 million and then we deduct the finance lease and the other debt, and that gives us some sense for the net proceeds to you all. And then also, could you just confirm that the transaction includes some of the related operations in that market, not just the hospital facilities themselves?

Yes. Yes, Matt. I can confirm both the way you're thinking about the cash proceeds is approximately correct. But just be careful when you're looking at the debt that we included in our financial supplement, which is the consolidated debt, all of that consolidated debt, of course, is going to come off of our balance sheet. But what will affect the net capital is it's just our proportionate share, which is roughly 3/4 of that amount. Of course, cash proceeds will also be impacted by the cash that sits on the books at the time of closing and as well as the working capital. So that's what makes it difficult for us to give you an accurate number on that net cash proceeds at this point. Those won't be known until the closing, of course. And this transaction, when it does close, does represent the entirety of the Idaho Falls market, including the ASCs, physician practices and other ancillary businesses that were owned by Mountain View Hospital.

And then I thought I might ask about the ASC rate proposal for 2027. It seems sort of in line with what you normally expect, but MSK maybe got a little bit of a bigger bump. So I just thought I'd see if you had any perspective to share on how that proposal lined up with your general expectations.

Matt, I guess we -- I would say we were very pleased with how the Medicare program continues to, I think, value the ASC space. We've said in the past, no matter whether it's a Democrat or Republican government, we've had broad support. And obviously, the reason for that is we create a ton of value. We're seeing that investment continue to happen. And I think that, yes, you're right. We like the fact that they're focusing on some of those really higher-acuity places where we create the most value. We expect that we'll continue to see strong support for the ASCs from the governing forward. And very pleased with the initial read and it was in line with what we expected.

Our next question is from Benjamin Rossi with JPMorgan.

Bringing some of the Idaho Hospital operating changes, you mentioned that Idaho Falls includes business lines like ED, ICU and some other noncore services. How should we think about the degree to which this divestiture reduces your exposure to acute care volatility and headwinds versus your core ambulatory short-stay model? And then on the expense side, how do you think the shift in service mix and payer mix will adjust to your consolidated expense profile on the remaining assets going forward? Do you think this will allow some cost release on maybe hospital-based areas like pro fees for emergency medicine or radiology?

Yes, great question. So I would just start with saying that -- and this is somewhat highlighted in our supplemental documents, but it greatly simplifies our business and dramatically reduces our exposure to traditional acute care. As we point out in the documents, over about 3/4 of our total nonsurgical admissions are in this market. The majority of our ICU beds, really the -- this is probably by far and away, the market that's furthest from the pen as far as pure short-stay surgery. And what you're seeing even in the year, if you look at the way the market is laid out in the document, you can see it's really not growing, partially because of the pressures that you're seeing from things like Medicaid, some of the changes that are happening related to infusion on site of care, there's a lot of unique things there that only happen there. And so we definitely -- you can read into this that this takes away a lot of those things, we're not really in that business in traditional acute care, and it certainly reduces our exposure to those pressures moving forward, which is a significant positive, obviously, for the company. The second question, I'll let Dave give a little more color on.

Yes. On the -- I think again, spot on the question, the expense profile of the company does change, predominantly on the pro fees and medical fees line item, as you would imagine, with some of these nonsurgical procedures and the high expense profile that sits there. So I think you'll see a noticeable change there. I think it will be more muted in the other aspects of our simplified P&L. But we'll provide that color when we've updated guidance ex Idaho Falls.

Yes. I got a highlight, too. You see in the document that our cash conversion improves. This is a very capital-intensive market. And so it simplifies the business, improve cash conversion, reduces our exposure to some of those pressures. And so again, we feel like it accomplished those key objectives we set out for when we started a portfolio optimization.

Super helpful. Just as a follow-up on maybe OR capacity and general throughput. Can you just comment on potential capacity constraints from things like OR staffing, anesthesia coverage or block availability that could potentially impact volumes in 3Q and 4Q? And then when you compare between the ASC surgical hospitals? Are there any noticeable differences in those OR dynamics?

Yes. Maybe I'll hop in and answer the second one first, which there are no notable dynamics differences between the surgical go in our ASCs on capacity they're really very similar acting facilities now in our first state business. In terms of constraints as we look at the back half of the year, you're not seeing any staffing issues or shortages. We are not seeing any anesthesia issues that are different than we've been talking about in the past, nothing to constrain capacity for sure. And then all of our facilities do still have some facility -- some capacity of room to grow. So no foreseen barriers from that standpoint.

Yes. I might just remind you on capacity. We tend to -- as you guys know, we run a day -- weekday business. We have a kind of unlimited ability in the short run to open up evenings and weekends. You see us do that in Q4. And we are constantly assessing our facilities and trying to stay ahead of, and we do a pretty good job of this, adding capacity where we see the run rate increasing. And so Justin and his team look at that constantly. Luckily, the smaller facilities as you get away from facilities like Idaho Falls, the ability to pivot, add procedures, even move the facilities if required is obviously much easier and then the complexity of some of the large markets like Idaho Falls.

Our next question is from Sarah James with Cantor Fitzgerald.

I just wanted to circle back to the commercial mix pressure. Was any of this related to the physician churn that you brought up in 4Q with a little bit more Medicare mix away from commercial. Has that improved in those markets? I think you called it Market 3. And then being that this is mostly a large surgical hospital, can you confirm if it is or is not Idaho Falls that was causing this mix pressure.

Yes. So thanks for the question. I would say we are -- certainly, there's some of last years' experience is in our guide, right, that's in moderating. And so we're lapping that as we go through the course of the year. So there is certainly part of that. And then again, in a given year, we watch very closely the mix of our new recruits. Sometimes for higher acuity reasons, it might start out being a little bit higher Medicare. We do watch that, and we have guided for that where it's applicable. But the underlying business mix, we feel really good about. We're still competing very well in the commercial space. Expect to continue to do that. And so I would say, yes, there's some of that that's in there from last year's exposure, but it's been moderating as expected throughout the course of the year. And your second question was?

Just whether it was Idaho Falls.

Yes. So Idaho Falls as we pointed out, obviously has a payer mix that's a little bit different than the rest of the company. So again, if you look at our document, you'll see that Medicaid falls by over half for the company. Certainly, because of its ER exposure, its mix can vary differently from the company. But there were other surgical hospitals that had unique challenges last year that are all taken into account here, and we feel good about how they have recovered. In fact, those facilities are on track this year with what we expect and continue to be a big part of our portfolio going forward.

Great. And last one, could you just refresh us on site neutrality exposure after the closing of Idaho Falls?

Yes. So look, we think from a site anchor perspective, obviously, we want to be true to our ethos, which is we believe patients should be taken care of in the right site of care. Certainly, we become a less acute traditional acute kind of looking place when we only have -- when Idaho Falls goes away, we're basically pure play. From a site neutrality perspective, we continue to believe that where the government is heading and what needs to happen in the health care system aligns perfectly with what we're trying to do, getting patients at the right price, the right place at the right time. And so while there certainly will be transitions timing issues for that. We think in the long run, we're going to pick up additional business as it moves out of the traditional acute setting, given our large footprint, and that includes at our short-stay surgical hospitals, which are well positioned from a value perspective. So I continue to believe that the direction and the value position that payers and Medicare is taking aligns very, very well with where we want to take the business.

Our next question is from Andrew Mok with Barclays.

You called out SW&B as a percentage of revenue increasing due to payer mix. However, the expense itself was also up, I think, 7% year-over-year. Can you provide a little bit more color on the underlying drivers of that growth and how we should be thinking about wage inflation going forward? And related to that, as you continue to shift towards higher acuity procedures, does that typically require a more specialized and higher cost surgeon mix as well?

Yes. Thanks for the question. On SW&B, we have not seen from a per unit cost or from a labor cost, any abnormal pressures. That's been well controlled. When we say payer mix, obviously, as we have a higher acuity, it definitely shows up in net revenue. But in some of those, obviously, longer procedures do require some additional labor, and that's showing up in the numbers. But underlying that, labor -- the labor market has recovered very nicely. We don't have any pressures there. We're not seeing the need for any kind of premium labor. We continue to be a preferred site of care. And our expectation is that's going to continue to be a driver of our operating leverage moving forward. When it comes to the higher acuity stuff, you're correct. They can be -- they can certainly have higher implant costs, but the reality of it is on a per minute basis, how we think about the business per minute earnings, adjusted EBITDA, a little lower margin, but higher overall earnings growth, a place we're very, very excited to grow and certainly have been focusing on.

Great. And maybe just a follow-up on the commercial mix. I think in the back half of '25, you shared some of the deliberate actions you were taking to address commercial mix. I understand that, that number is still moving negatively through the second quarter, but can you update us on the initiatives that you took and progress there?

Yes. Specifically with the markets that we called out last year, we've been very, very focused on partnering with our physicians to ensure we're positioning that marketplace to compete and hopefully take commercial market share. given our value position, again, we feel like we are very well positioned against traditional acute care players in the service lines we're in. And in all 3 of the markets we called out, we have action plans moving. We have -- we are on pace or ahead of pace with where we expected to be for the year. And so those steps include a tighter partnership all the way through the referral chain, making sure we are actively managing what's happening in the marketplace. We had a couple of those pressures last year, but feel really good about our commercial position. Again, this business is highly commercial. When you look at our base, all elective while there will naturally be some government growth just based on the aging of the population, we continue to expect that we are going to maintain and grow commercial share moving forward.

Our next question is from A.J. Rice with UBS.

I know you mentioned in the prepared remarks that you've obviously been focused on this transaction, and therefore, your pursuit of incremental acquisitions has sort of moderated at this point. How quick can you get that pipeline back up and running? What does any pipeline look like at this point? And thoughts on being able to get back to a normal year of acquisitions in 2027.

A.J., I appreciate the question. Yes, so a great question. Obviously, we've had an immaterial amount of transactions this year, which is a little bit abnormal for us, although even last year, we tended -- we very weighted to the fourth quarter. We still have an active pipeline we're managing. We feel good about our position in the industry. As you know, still highly fragmented across this 6,500-plus Medicare license ASCs, and there's a bunch that aren't medical license. And we feel like given our position as the last independent scaled player in the industry, we're really well positioned to continue to be a consolidator in that. We do expect before the end of the year, we'll get some deals done. But we've acknowledged it's not going to be at the $200 million level. Bigger picture to your point, we have no change in our belief or our opportunity in M&A investment going forward. So we -- that hasn't changed. Obviously, again, M&A can be fickle on timing. We're going to be extremely, extremely disciplined which is what we've done throughout, which often means that platform multiples aren't going to be something we have to pay because we do find great opportunities on smaller opportunities that we can quickly integrate into our company. And we think those -- we know those continue to exist in the marketplace and are excited about that. I'd also mention just reiterate our de novo focus that -- those tend to be highly MSK. We have 6 underway, 7 in the pipeline that we're very excited about. Those all take time. But again, that's a part of our broader M&A strategy to ensure we're delivering shareholders the most cost-effective use of capital as we grow our business.

I know you've talked about cost efficiency programs, some as technology investments, some as other initiatives. And I think you've highlighted opportunities around anesthesia costs, purchase standardization, operating room utilization and staffing efficiency. I know you've touched on some of that on some of the previous questions, but anything more to highlight on initiatives there and progress you're making?

Yes. I appreciate the question. And we are very, very focused on cost management, our opportunities to continue to maintain and grow our margin. And that's one reason I'm super excited to have Justin Oppenheimer onboard as our COO. I'll let Justin give you a little bit more flavor there, and you're going to hear a lot more about that over the coming quarters because it remains a big, big focus for us.

Sure. Thanks, Eric. Yes. So cost management discipline is definitely one of our key strategic pillars as an operating unit this year. Maybe just to add a little bit of detail I'd say, 3 key levers we're going after labor supplies and then eliminating other systematic inefficiencies that are across our business. And we're starting to see the results of those. I think -- if you look at our SW&B or supplies or G&A, all of those are going down as a percent of revenue from Q1 to Q2, and there's certainly more to unlock there and continues to be a priority of the team.

Our next question is from Whit Mayo with Leerink Partners.

I haven't heard you guys talk about physician recruiting and the contribution year-to-date from the new physicians. Anything to share any numbers around that might be helpful.

Sure. Whit. I'll go back -- I'll start with kind of what we shared in the opening remarks. We've added 191 physicians in Q2. really strong number. We feel quite good about our physician recruitment. In that cohort, their net revenue is up 16% versus the cohort last year. So as you know, last year was a year where the net was more of a pressure point than it's been in the past. We're quite excited about where the recruiting sits year-to-date and the focus and renewed kind of push we've had around making sure we're well positioned there when it comes to physician transition. So it's been a big focus for us. Year-to-date, we are at or above where we expect to be in that number, and we'll continue to keep you guys updated throughout the year.

Okay. Great. And did you share how much MSK or joints were up year-over-year in the quarter on a same-store basis?

No, here's what I would say on the actual overall volume. We -- when you look at our net revenue growth, there's a few things I would point to. First of all, it's not just total joints. And total joints continues to be an outsized grower for us. It's a big opportunity for us. You know it's been a double-digit opportunity for a long time, continues to do that. On top of that, though, we would emphasize that we're seeing really nice double-digit growth in other places. -- our cardiology, particularly in the vascular space is growing quite nicely, and spine really is starting to move out of hospitals. There was a question earlier about the inpatient outpatient or inpatient only list. I do think as some of those complex cases become eligible in our space, you're seeing technology allow them to come in. So look, joints has a long way to go. As you guys know, the majority of those are still done in a traditional acute care setting. We expect to continue to see that drive outsized growth. But I would also broaden that out to say our acuity is growing in several places, notably in spine and also notably in cardiovascular cases.

Our next question is from Brian Hendrix with RBC Capital Markets.

This is Ben Hendrix. Just a quick question Idaho Falls, the roughly 1/4 of those acute type facilities maybe nonsurgical EV, et cetera, that are continuing in the portfolio. I want to get an idea of how much of those are either congruent with or complementary to your remaining surgical hospitals. Is there a place for those within those capabilities? Or should we think about that remaining one quarter as fair game for continued portfolio optimization in the future.

Yes, it's a great question, Ben. I would say that, that 1 quarter is not all that concentrated. We're certainly going to still be, as I mentioned, we're going to be opportunistic if there are opportunities to simplify the business. When you think about what's left there, our surgical hospitals in general, even the ones that do have ER, see so very few in kind of any one location, you're down to a de minimis number as far as the impact on our business. Actually, well over 90% -- over 95% of our business is now outpatient -- or is now a short-stay surgical cases. So you think about the kind of the mix of the business has changed post pending sale. So while that number there still is some left, it's really not necessarily all that concentrated. We're going to continue, again, to look for opportunistic opportunities I would point to the Bryan, Texas example as a way we could do that. But the biggest step in our portfolio optimization was this transaction. Dave, you want to add anything?

Yes. Maybe just a quick reminder. The emergency room as a referral pattern really only applies to the Idaho Falls market. In many of the surgical hospitals that we do have an ED. They're largely because state requirements are there. And we're more of the diversionary ED than we are the referral pattern. Most of the referral pattern in the rest of the business surgical hospitals are going to look very much like an ASC, where it comes from the independent physician office who also has an ownership interest in the surgical hospital.

Just a follow-up to a prior question. You mentioned seeing double-digit growth in the cardiac space and other outside of MSK. Is this signaling maybe there's a pickup in more greater adoption of cardiac activity? I knew that was a slower burn than the ortho stuff. So just wanted to see if maybe there's something that's happening where we were seeing more pickup in ASC cardio.

Yes, I appreciate the question. I would say it's more vascular-based is where most of the growth is. While we have some cardio growth, it's a small end. And I think our story there remains the same that -- we've got a long runway in orthopedics. I think when in and if that ever starts to slow down, certainly, cardiology presents a tremendous opportunity for cost savings, but it will be a very slow burn, as you mentioned, just because of the structural things within states, the high level of employment, where we're really seeing progress is on the vascular side think about vascular EP, CRM, those kind of places where less cath lab intensive, at least initially. But again, over time, we certainly see the opportunity in cardiology being bigger than that.

Our final question comes from Ryan Langston with TD Cowen.

Can you give us a sense on the case growth and revenue per case growth split between ambulatory and surgical hospitals? Anything interesting to call out in terms of trends between the two?

No. I think what I'd say is those businesses are all in one segment because they do look so similar. I don't think there's anything that I would call out that's made significantly different in those businesses or where a trend has been different. That's especially true now that we've -- we're in the process of letting go of Idaho Falls, which clearly did have a little bit of a different approach with the community hospital attached to it. But big picture, what we love about our go-forward portfolio is that it's focused on the fast-growth short-stay surgery space. And in many -- in almost all cases, it looks very similar across the entire platform.

Just I was -- on the physician recruiting details, I appreciate all the context there. Can you remind us how long it typically takes a physician to get up and running like at a normal run rate at your centers?

Of course. Yes. So typically, we've talked about this in the past that physician recruit will double their business in year 2, which kind of makes sense if you think of a midyear conversion. But there certainly is a period of time where that physician is coming in, getting to know the facility, getting more comfortable with our clinical capabilities before they bring their whole book. But again, that typically doubles in the second year of a cohort, and we see tremendous double-digit growth in that third year. So there is a multiyear growth opportunity there. I think it depends on the type of physician and maybe the level of acuity just how long it takes them to get comfortable in this setting, especially if they have not been in our ambulatory setting before, but we see rapid progress over that first couple of years. With that, I think that was our last question today. I want to thank you again for joining us for today's call, and have a great rest of the day.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.