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Amsurg Corp. (NASDAQ:AMSG)

February 27, 2013 9:35 am ET

Executives

Christopher A. Holden - Chief Executive Officer, President and Director

Analysts

Gary P. Taylor - Citigroup Inc, Research Division

Gary P. Taylor - Citigroup Inc, Research Division

Good morning. Thanks for joining us for our fireside chat with AmSurg this morning. AmSurg acquires, develops and operates surgery centers in partnership with physicians. As of year end 2012, the company operated 240 centers and in 2013, forecasting over $1 billion of revenue. So I have the CEO, Chris Holden, up here with me. CFO Claire Gulmi, is in the front row just in case we get off track with our numbers, I guess, so she'll keep us in line. But anyway, thanks for joining us.

Christopher A. Holden

She'll definitely keep us in line. Glad to be here.

Question-and-Answer Session

Gary P. Taylor - Citigroup Inc, Research Division

First question I have for you is kind of a standard question we've been asking every company to get kind of a gauge and a continuum and I think there should be a lay-up question for AmSurg. But it's really around the question of value. And as a healthcare team looking out over the next 5 to 10 years, we think, big challenge for the healthcare industry is moving away from getting paid for every procedure you do to really demonstrating value to the payers, both government and private, for the service that you provide. So the big-picture question is do you think that thesis is right? And if so, what do you have to do to position AmSurg to do well in a changing payer environment?

Christopher A. Holden

I get that question in a lot of different ways, and there's a lot of different, I think, sub questions in there. I think, generically speaking, if you're not thinking about value, it has to just be part of your DNA all the time, whether it's value you provide to your key customers or value you provide to society. I think, we've always held out and particularly in the last 5 years the obvious cost value of the surgery center space. If you look at Medicare, I'll say this over and over again, it's -- we're almost half the price as the other alternatives. And in a country that's trying to solve the cost curve, or trying to bend the cost curve, we're -- the more advantage they take at the surgery center space, the more savings, obviously. I guess I do struggle a little bit with the thesis that everybody's going to go to this fee-for-service-is-dead mentality, not to say that there has to be -- there won't be transformation and like there's -- it's a lot easier said than done. I may be a little jaded because I've been at this for a long time over and I've seen 3 cycles of failures. Services as a general rule are not competent in managing risk and this is a profound amount of change in a short period of time and I think there is going to be some struggles and some misfires along the way. So I may be a little less bullish on the pace of that change and in the long haul and is it -- it's just a lot harder to bundle things than I think people really perceive it to be. But you got some profound geographic differences in the country as well. I mean, the West Coast is not spending any time thinking about doing things a lot differently because they've been used to a different model. It's the northeast that's really going through the big change, I mean, trying a lot of new different things. So that would be the place to watch. The middle of the U.S., is going to wait and see where the failures are and probably play catch up after that. So it will be -- I think there'll be a tale of 3 cities as we go through it.

Gary P. Taylor - Citigroup Inc, Research Division

A couple of things you said are interesting to me and I agree when I look at, I guess -- I'm only going back to kind of last cycle, late-80s early to mid-90s when we kind of rip -- went down this road. And I think there are some things that are different in the environment today. I think there are some things that are the same and in my view, the list of things that are the same is longer than the list of things that are different. So I'm not sure it is a foregone conclusion that fee-for-service is gone or dead in 5 or 10 years. But it certainly feels like we're going to at least make another attempt at getting there. But California, I think, is your second largest state, or it's in your top 5. Can you talk a little bit about, just to your point, California versus rest of country and how are ASCs utilized by these large physician groups in California that might be capitated or might be paid in a different way? Is there any different in kind of their utilization or uptake of the surgery center model?

Christopher A. Holden

Nothing dramatic, not really. We don't really take -- I think we might have 1 small-risk deal in the entire portfolio, it's de minimis. No, it's really -- it's not -- you see a little more -- to the M&A environment, you see more out of network in California. But there's a big distinction in how to network to across the country. There's out of network, which is a price matching and then there's that egregious out of network that you read about from time to time. And there's more price matching in California where there's really no -- it's really no different to the patient or the payer. Whether you're in network or out of network. It's just about having access that is the key.

Gary P. Taylor - Citigroup Inc, Research Division

Yes, I guess, something about -- we wouldn't expect AmSurg to be front dollar taking risks. But if you have large multispecialty groups, large primary care groups that are taking some risk, to your point, if you can provide service at half the cost of the hospital outpatient department, why wouldn't those big physician groups for smaller outpatient procedures? It seems like their utilization of ASC would be higher than...

Christopher A. Holden

The rate that those centers are -- that's why the utilization is there, because they're -- even at our competitive rates, we're less than the alternative. So it's a pretty easy decision.

Gary P. Taylor - Citigroup Inc, Research Division

And I haven't looked at -- it's been a while, we've had a slowdown in AFC development, but 4 or 5 years ago, we were adding 300 -- 400 new ASCs every year. We used to have those charts where we'd look at every state and how many ASCs by state and that sort of thing. And California, I think, always ranked pretty high in terms of ASCs per -- maybe total ASCs, but ASC per capita was high or low, I'm forgetting. Is there...

Christopher A. Holden

No, not per capita. It's a -- well, if you look at the country, yet, California, Texas and Florida sort of lead the way in total. But right now, we're, I guess, 5,400 now or 5,500. But there's only been net 0.5% to 1% new capacity created each of the last 3 years versus the 4% to 7% -- 4% to 10% that you saw prior to the economic cliff in 2008 for a lot of different reasons. You can triangulate that back a couple of other ways too. There's 4,800 acute care hospitals, so you've got just barely more surgery centers than you have hospitals, which makes sense, because you're sharing medical staffs, you're matching communities. So I think, it's fair to call it a maturation coupled with a change in the economics. Really the question will be, well -- and then in the last several years with the hospital outpatient department rate differential, you saw an attempt to take some of the existing surgery center capacity and reverse engineer it into hospital outpatient department. So you got 70% growth in your revenue overnight on the same book of business. So all of that to say that capacity has been flat while demand is dramatically increasing. So if you're in our shoes, that's a good fact. We like that. It's dynamics over long haul.

Gary P. Taylor - Citigroup Inc, Research Division

I know the answer to this question because I ask this question at least once a year, but I feel like the more I ask it, sooner or later, it's actually going to have some uptake. But when you look at the basic value proposition, where you're providing the exact same service, same quality at half the price, why is every commercial and MA plan in the country, not doing everything they can -- oh, and lower out of pocket for any of you that had a procedure as well? Why are the plans not trying to drive that volume out of hospitals in your direction? And is there any...

Christopher A. Holden

I think it's improved. I mean, I think 3 years ago, the answer would have been education deficit. Two years ago, it would've been that it's still a small number in the scheme of -- in the total spend. But now today, I think, that there is a -- more awareness just about the personal benefit of choosing it. What does it mean to me on an out-of-pocket basis and the biggest education that had to take place was at the physician level. Even doctors didn't know who owns surgery centers, didn't really realize that we spend a lot of time and that's been probably half of our marketing, the last 3 years is just explaining to physicians that they have that obvious positive story to share. So it's made a big difference.

Gary P. Taylor - Citigroup Inc, Research Division

And you haven't said it yet, but I will. But presumably in the future, if we see employers moving more towards defined contribution plan versus defined benefit and we see more HSA more high deductibles and all of that plays right at your alley in terms of lower out-of-pocket per procedure for a patient.

Christopher A. Holden

Well, I would dovetail that with the entire healthcare reform. You know, ACO formation, all of that, should be net positive for the ASC space, because as you -- if you think about shifting from when you talk about healthcare systems today, who are really market-share motivated and have to shift to medical loss ratio management focus, every incentive will be to find the most cost-efficient modalities and we're a perfect fit for that. And it's too expensive to rebuild it or duplicate it. You want to partner, you want to use what's there.

Gary P. Taylor - Citigroup Inc, Research Division

Just talking about -- continuing on that vein of healthcare reform and thinking about Obama Care a little bit, you have very little bad debt, very low uninsured exposure, or you get to schedule everything in advance and make sure that you're going to be able to be paid before you actually do the procedure, which is a positive. What are kind of the direct and indirect impacts you see out of Obama Care? I guess, certainly I'm sure you'd argue if 20 to 30 million people get coverage, then there ought to be some volume tailwind for your business. There's obviously that provision, where commercial and Medicare can't charge that co-pay on colonoscopies. Any other direct or indirect impacts that you think are material besides those...

Christopher A. Holden

Those are the 2 biggest and just focusing -- I think, we probably haven't given enough discussion around just raising the collective consciousness about how this can help save money for the system and making that part of the dialogue has helped us. It's raised awareness to an issue that, before, most people didn't spend any time on. But the -- on a practical level, raising consciousness around colon cancer screening has been a big help. And that -- the expanded coverage should help, particularly with colon cancer screening, because that's the barrier. And even today, we only know about 60% of the people who are screened in a timely fashion. So there's still a lot of room there, but we'll see. There's still a lot of room to move share over the long haul. Half the procedures in this country are done in the more expensive setting every day, so a lot of reasons we think it should be moving in that direction.

Gary P. Taylor - Citigroup Inc, Research Division

You had touched on hospitals in some cases, trying to sort of reverse engineer the ASC and the HOPD for the reimbursement uptick and that just kind of touches on a topic that people ask me a lot about and just kind of vertical-integration risk that hospitals, employing more physicians, buying more ancillaries, how that -- what risk does that pose to AmSurg's growth prospects? And I touched on that just a little bit on your call on Monday night, but maybe just kind of repeat that here. What are you seeing in the market? Are you seeing that this accelerating physician-employment trend having any impact on what you think your market opportunities are?

Christopher A. Holden

There's 2 questions. I mean, on the physician-employment trend, we really haven't experienced a lot of -- it hasn't really generated a lot of activity for us other than dialogue with our doctors, what should we do, what should we think about, and really it hasn't been -- the world really hasn't changed that much through that process. The positive has been that hospital systems are contacting us. They're saying that we know we're underweighted in the outpatient. We know it's not necessarily one of our core competencies. You have assets in our markets, or you have the M&A experience to help us with that. So it's been more of a net positive to maybe generate a new line of growth and some more market development. Over the long haul, the wildcard for us is how big will that be, what form will it take. We feel like we still want to be -- we want to look for opportunities that are accretive and we want to look for opportunities that are with partners that we enjoy being partners with. And most importantly, we want to be physician-centric. That's been what served the company over its 20 -- now almost 21-year history. And we don't want to lose that by shifting our focus to a different customer who's not in sync with that.

Gary P. Taylor - Citigroup Inc, Research Division

Do you have an updated number? When you look at your facilities, obviously, you've got physician owners that drive a large amount of volume and you have non-physician owners who are affiliated and using the facilities. How much of that volume is now coming from those non-owner affiliates?

Christopher A. Holden

Do you know what number is off the top of your head? Most of them are partners. We have -- there are quite a few non-owner utilizers. Generally, you find there are a lot of different reasons for that. But sometimes it's the junior partner in the group just hasn't bought up into the group [indiscernible].

Gary P. Taylor - Citigroup Inc, Research Division

It just seemed like that, that non-owner affiliated volume, if there was some risk from physician employment, et cetera, maybe that would be the piece that would be more at risk, but you're -- that's entirely [indiscernible].

Christopher A. Holden

Yes, we're really talking about, for the most part, 3 major specialties. Ophthalmology, which the hospitals have no interest in, GI, which is way down their list and -- if at all and orthopedics, which is like trying to herd cowboys. So good luck with that one. But after that, the list is really short. It's much different. If you think about who's been in the bull's-eye of the hospital system, it's primary care, cardiology, and the hospital-based physician services, none of which really overlap that much in our universe.

Gary P. Taylor - Citigroup Inc, Research Division

On the orthopedic side, I mean, you have increasingly moved towards multi-specialty and doing more orthopedics and you've got competitors out there that structure a lot of those deals, 1/3, 1/3, 1/3, with hospital, ownership and they -- has the multi-specialty deals that you've been doing, have you been able to stick to kind of your 51%-49%?

Christopher A. Holden

We have. I mean, it's a -- and we -- there's good competitors with good stories, but here's how that shakes out. One, the 1/3 and 1/3 and 1/3 deal is more dilutive to the doctor. Usually those deals come along with a management fee, which really makes it a lot less than 1/3, 1/3, 1/3 and it usually comes with a preexisting hospital partner, which may or not -- may or may not be your partner of choice. So we come in with a less dilutive option, more freedom to work with them, to think strategically about where we want to go. And we talk about preserving independence. We're not convinced that you have to give up your independence to be successful over the long haul. And that's a story that's working. And it's true.

Gary P. Taylor - Citigroup Inc, Research Division

Got it. You're in a sector, where basically, a majority of your big competition all went private a number of years ago. Is there anything different in how they're owned and capitalized that's impacted what you've seen and doing strategically? In other words, if you had 3 or 4 public competitors again, do you think there'd be much difference in how the industry operates and competes against each other than having these guys be private?

Christopher A. Holden

That's a good question. The answer is not -- I'm going to get wrecked for this answer.

Gary P. Taylor - Citigroup Inc, Research Division

Do it.

Christopher A. Holden

I would say, over the last 5 years, given the macroeconomic pressures and the high leverage that was part and parcel of those LBOs, their only hand they could really play with the financial engineering strategy during that period of time where we were really, I think, stayed true to having an operating strategy and a strategy and a customer-driven strategy, which really differentiated us through that period of time and showed what we were capable of operationally, what we were capable of on the development front. It did kind of launch us. I think that one distinction is that we were head and shoulders, the consolidator during that period of time and we're able to accomplish that with maintaining a healthy balance sheet, which was really not an option for any of them. All that said, I have some really good competitors and they're good companies and not -- I think they deserve credit for playing that hand that was in front of them, but I think, it was dramatically different from what we had to do during that period of time.

Gary P. Taylor - Citigroup Inc, Research Division

So if we see some of those companies coming back public again, would you anticipate that they're going to have to get more aggressive on acquisition, consolidated goals...

Christopher A. Holden

I don't see how any of them could come public. I think that would be a really difficult story, given their current leverage levels. And really, they're on a -- they have a positive model the way they are now. There wouldn't be a lot to gain other than monetizing your private equity interest, but there's other ways to do that. I don't know that would be the best strategy for any of them at this point of time.

Gary P. Taylor - Citigroup Inc, Research Division

Are you seeing dividend being part of that strategy?

Christopher A. Holden

Yes, it is strong cash flow business. If you are in their position, the dividend strategy is probably more effective than a private -- than a public exit.

Gary P. Taylor - Citigroup Inc, Research Division

Talk about your own M&A pipeline, you've had -- last few years have been really active for you. Part of that seems to be driven by some tax laws change. Part of that certainly seems to be driven by Obama Care and the uncertainties that physicians have or just kind of some general fear that they have of Obama Care's driving a changing payer environment with a different bundled payment, ACOs, all the different demonstrations kind of part of that. Do you see that continuing? I mean, if you -- as you look into 2013, you gave pretty solid guidance for -- I guess, you're not giving center guidance anymore given the operating income guidance that you expect to acquire. But if you look '13, '14, '15, do you think those years remain as active as you've seen in the last few?

Christopher A. Holden

Well the last two of them, last year, in particular, with the threat of the tax law change, which turned out to be true, that was really catalytic in the physicians' minds. And we saw that, there's no denying that. And we've executed on a -- and I thought we had a, really, banner year on that front. And will that repeat? There's not the same catalyst in '13 necessarily, but there's still a lot of fear, there's particularly around healthcare reform and what it means. And out of the gate, we're seeing a pretty quick rebuilding of the pipeline and a lot of activity out there. So probably a little better than I thought it might be after we finished with such a strong run there at the end of 2012.

Gary P. Taylor - Citigroup Inc, Research Division

But you're saying you're not worried that taxes are going up any longer?

Christopher A. Holden

No, I'm worried about that.

Gary P. Taylor - Citigroup Inc, Research Division

You might get another catalyst to some of the...

Christopher A. Holden

No, I think the real takeaway is that consolidation is still a major force in services and surgery centers will be no different.

Gary P. Taylor - Citigroup Inc, Research Division

One thing, I don't think -- unless I'm mistaken, I've heard you talk about much, just kind of a long-term outlook. When you -- we had a few years, where you did a refinancing, for example, another refinancing. You kind of gave us some early looks last year what '13 would look like and then we've had those 3 years -- at least 3 years of rolling in the ASP payment cost, et cetera, so a kind of, through to the other side of that. So if you kind of think of about a 5-year revenue growth rate, 5-year earnings growth rate, where would you ballpark those?

Christopher A. Holden

Well, first of all, if anyone says they have a 5-year outlook in today's world, you need to sell whatever they're selling -- whatever they're...

Gary P. Taylor - Citigroup Inc, Research Division

How about goals? How about goals?

Christopher A. Holden

Well, I think, the underlying organic growth rate is somewhere between 3% and 7%. If you look at demographics, if you look at utilization trends and opportunities, look at innovation, look at consolidation, I think, it all supports that type of number. The wildcards are what flies in the window that you didn't see coming. We should be in a pretty good spot on the regulatory front. We should be in a good spot on the reimbursement front, given that we've already taken our beating from '08 to '11 and it's a low-priced procedure. And we're heavily weighted on the cost-value proposition and we're heavily weighted on the preventive-care proposition. We should be in a good spot on that. So I mean we -- our short answer is we're very bullish on the long-term outlook on the organic growth rate and the ability to grow this company. I think it's reasonable to think there will be a 500 and maybe even a 1,000 center company some day.

Gary P. Taylor - Citigroup Inc, Research Division

So when you say organic, 3% to 7% on the top line, are you -- you have de novos in there? Or you really think that the way you get back to a real organic volume, pricing [indiscernible]?

Christopher A. Holden

Well, pricing, the thing is you can't cut forever.

There has to be -- Medicare can't do 0s indefinitely. And we had around 1% last year and you saw what we can do with that. So it doesn't take a lot to really drive the engine. And if we get where the hospitals are with the 2% or 3% a year from Medicare, that will be -- which is fair, I think, it'll happen that -- when will that -- when will we reach that trough is the question. I'm thinking that we're pretty close right now.

Gary P. Taylor - Citigroup Inc, Research Division

Okay, that's a fair acceleration from -- even your -- a really solid 4Q is at the lower end for you [indiscernible].

Christopher A. Holden

Well, it should mirror the correct inflator. That's what it should do. And we'll have to see when that will happen. And I think we have a lot of -- that's been the focus of our advocacy for the last several years. And I'm -- we have the support but just given the politics in Washington right now, it's hard to get the things over the goal line.

Gary P. Taylor - Citigroup Inc, Research Division

And then last question for me just as we're thinking about supplementing that organic revenue growth rate with the acquisitions you want to do. Walk us through GI, ophthalmology and multi ortho and just give us your thoughts on kind of what's still out there, what's motivating that particular specialty right now and where you expect to see most of your activity.

Christopher A. Holden

They all 3 have energy. I mean, if you go back in time, ophthalmology was really the first service to break out into surgery centers and independents. It's been in its own world and actually did really well in '12. And we feel we're the market leader in that position. And we have about 5% and there's just a lot of room to grow that. And Surgery Partner is really the only one with a close -- after that, there's no third. So we have a lot of room to really create with that line of business. GI, we're dominant by an uncatchable position. Where the probably top number, there'll be 900 GI centers out there. We're at 150. We're partnered with 1 of 9 private practicing GIs in the country. We're the dominant provider of colon cancer screening. We're the first to roll out a lot in some real innovation around quality. And I think, 1 area there that we're exploring is really what -- back to your original theme, is translating true quality data in a way that generates value and maybe dictates how you get paid. We've already had some early successes with that. We just had a big contract there with the Blues in North Carolina that we got a pretty substantial increases on. We've been able to demonstrate that. And then orthopedics is really wide open. A lot of orthopedics is done in hospital today, continues to move more and more on the outpatient, more and more away from overnight stay. So I think, there is some upside to continue to grow that on even just -- I don't know if there is as much innovation around the types of procedures done in ophthalmology and GI as there is around orthopedics and to some extent, pain management. Pain management has really been the growth catalyst in several of my competitors over the last few years. Some 23% of Americans suffer from some type of chronic pain. There's been a lot of innovation in the treatment of that. I think, that could still continue as well. But that will be, I mean, coupled with the orthopedic service volume.

Gary P. Taylor - Citigroup Inc, Research Division

Okay, good. Any questions from the audience? Very good. Well, if not, thank you very much for your time.

Christopher A. Holden

Yes, thank you. Good to see you again. Thank you, all.

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Source: AmSurg's CEO Presents at Citi 2013 Global Healthcare Conference (Transcript)

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