Surgical Care Affiliates' (SCAI) CEO Andrew Hayek on Q2 2016 Results - Earnings Call Transcript

| About: Surgical Care (SCAI)

Surgical Care Affiliates, Inc. (NASDAQ:SCAI)

Q2 2016 Earnings Conference Call

August 2, 2016, 8:00 am ET

Executives

Tom De Weerdt - EVP & CFO

Andrew Hayek - Chairman & CEO

Analysts

Joanna Gajuk - Bank of America

Josh Raskin - Barclays

Rachana Fellinger - Barclays

David MacDonald - SunTrust

Tejus Ujjani - Goldman Sachs

Dana Hambly - Stephens

Brian Tanquilut - Jefferies

Vikram Ashoka - Morgan Stanley

Tom De Weerdt

Good morning. This is Tom De Weerdt, Executive Vice President and Chief Financial Officer of Surgical Care Affiliates. Welcome to our Second Quarter 2016 Earnings Conference Call. After our prepared remarks, we will open up the call for your questions. [Operator Instructions]. This call is being recorded and a replay will be available for the next 30 days. You can find the link to the replay on our website at investor.scasurgery.com.

Before I turn the call over to Andrew Hayek, Chairman and Chief Executive Officer, I will read our customary disclosures.

During today's call, we may make statements relating to our future operating plans, expectations and performance that constitute forward-looking statements within the meaning of the federal securities laws.

Any such forward-looking statements only reflect management's expectations based upon currently available information are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our documents filed with the Securities and Exchange Commission. Our actual results, performance, or achievements may differ materially from those expressed in or implied by such forward-looking statements.

We undertake no obligation to update or revise any forward-looking statements to reflect events or developments after the date of this call.

During today's call, we will discuss financial measures derived from our financial statements that are not determined in accordance with U.S. Generally Accepted Accounting Principles, or GAAP, including adjusted earnings before interest, taxes depreciation and amortization less non-controlling interest or adjusted EBITDA less NCI, adjusted net income, adjusted operating cash flow, adjusted operating cash flow less distributions to NCI, and adjusted net debt leverage.

We will also discuss on today's call certain non-GAAP system-wide operating metrics, such as system-wide net patient revenue growth which treat our non-consolidated facilities as if they were consolidated and which management uses to analyze our results of operations. System-wide measures do not represent actual operating results of the company as calculated in accordance with GAAP.

A reconciliation of each of the non-GAAP measures discussed on this call to the most directly comparable GAAP measure is presented in our earnings release which is available in the Investor section of the company's website at scasurgery.com.

Andrew, I will now turn the call over to you.

Andrew Hayek

Thanks, Tom. We continue to make great progress in building our community and we are pleased with our second quarter 2016 results clinically, strategically, and financially. Patient care is our first priority and our physicians and teammates continue to achieve outstanding results in terms of clinical quality metrics, patient satisfaction, and accreditation survey results. Great teams deliver great care and we continue to achieve strong results from a teammate and physician satisfaction standpoint.

Our teammate engagement is well above healthcare industry benchmarks and our physician satisfaction based on net promoter score rivals some of the leading brands in customer service like Amazon, Zappos, and Southwest Airlines.

From a strategic standpoint, we continue to partner with health plans, medical groups, and health systems that are committed to improving the quality and cost efficiency of healthcare. Surgery represents approximately 30% of total healthcare spending. And our strategic partnerships materially improve the patient experience, quality outcomes, and cost effectiveness of surgical care, which benefits patients, employers, and the government.

These strategic partnerships help us to enter new markets, acquire interests in existing facilities, build new facilities, and achieve stronger organic growth. Our health plan relationships are designed to optimize surgical services, improving both the quality of care and the patient experience, while reducing the total cost of care.

In the second quarter of 2016, we entered into three additional strategic partnerships with health plans. These new partnerships together represent another significant step forward in the execution of our health plan strategy and we now have several health plan partnerships that include value-based incentive payments, similar in many respects to the health plan partnerships we announced last year and earlier this year.

And we continue to see growth at our health system relationships. In the second quarter, we added our first facility in the Greater Chicago area in partnership with Advocate Health Care. Advocate is the largest health system in Illinois and a national leader in Population Health Management with one of the largest accountable care organizations in the country.

The DuPage Medical Group is also a partner in this center. The DuPage Medical Group is the largest multispecialty physician group in the Chicago area.

Lastly, we are increasing our investments in de novo projects. De novo projects are attractive for us as they generally yield higher returns on capital than traditional acquisitions and because they can fit well with our health plan, medical group, and health system strategies. As of today, we have two de novo projects that are expected to open in 2017 and we have several more de novo projects in the pipeline.

So far this year we have added 14 new facilities to our portfolio and our acquisition pipeline continues to be strong. As of today, we have 203 facilities in our portfolio, up from 198 facilities as of our last call.

Overall we believe that we are continuing to position SCA as the partner of choice for leading health plans, medical groups, and health systems. This progress is the result of significant investments we have made in building our team and capabilities over the past several years. Our strong organic growth continues to be driven by strategic partnerships with health plans, medical groups, and health systems which strengthen our ability to recruit new physicians and launch new service lines.

Ongoing investments in our physician recruitment team resulting in an accelerated pace at which we are adding new doctors to our facilities, and the expansion of our new service lines, such as total joint replacements and complex spine surgeries, which continue to grow at strong double-digit rates improving the patient experience and lowering the total cost of care for these procedures.

As part of our efforts to develop new service lines, during the second quarter, we invested in SwiftPath, LLC. SwiftPath develops evidence based protocols that support surgeons specializing in hip and knee replacements to begin performing these procedures on an outpatient basis including an ambulatory surgery centers. Our investment in SwiftPath is intended to expand our network of surgeons who are offering these procedures to patients in our facilities.

We are also pleased with our second quarter financial results. Our consolidated net operating revenue was $300 million and our system-wide net operating revenue grew 17%.

We grew our adjusted EBITDA less NCI in the second quarter by 11% year-over-year driven by strong organic growth including 8% same-site system-wide net patient revenue growth and a strong pace of acquisitions.

Our adjusted EBITDA less NCI growth in the second quarter was consistent with the expectation we shared on our last call, at which time we indicated that we expected our adjusted EBITDA less NCI growth rate in the second quarter 2016 to be slightly below our full year 13% to 16% growth guidance range due to the timing of planned investments that were unique to the second quarter.

Overall, from a financial standpoint, we remain highly confident in our full-year adjusted EBITDA less NCI growth guidance of 13% to 16% based on our expectation of continued strong organic growth and our strong pace of acquisitions, which should position us well for 2016 to become our eighth consecutive year of approximately 10% or greater adjusted EBITDA less NCI growth.

Lastly, and most importantly, we want to take a moment to thank our teammates and our physicians. Their dedication to outstanding patient care and their commitment to helping to build our SCA community is extraordinary and humbling. They bring our mission of improving health care in America to life and it continues to be truly a privilege to serve our community with such an outstanding team.

Tom will now share more details. Tom?

Tom De Weerdt

Thank you, Andrew. Our second quarter consolidated net operating revenue grew 18.2% year-over-year to $299.9 million and system-wide net operating revenue grew 17.3% year-over-year. Same-site system-wide net patient revenue for the second quarter grew 8.1% year-over-year, driven by strong same-site system-wide volume growth of 4.1% and net patient revenue per case growth of 3.8%.

Our adjusted EBITDA less NCI was $47.7 million for the second quarter of 2016, up 10.9% year-over-year, and as Andrew mentioned, we did expect our adjusted EBITDA less NCI growth rate in the second quarter of 2016 to be slightly below our full year 13% to 16% growth guidance range due to the timing of planned investments that were unique to the second quarter.

We were also pleased with our adjusted operating cash flow performance for the second quarter as we generated $77.9 million, down 0.7% year-over-year and adjusted operating cash flow less distributions to non-controlling interest of $41.4 million, up 5.2% year-over-year.

Year-to-date June 2016, our adjusted operating cash flow less distributions to non-controlling interest was $62.7 million, up 27.6% from the same period prior year.

Adjusted net income was $19.1 million for the quarter, down from $19.9 million last year primarily as a result of an increase in interest expense and the recent acquisition having an unusually high depreciation expense.

Turning to the balance sheet now, our financial condition remains strong. And as of June 30, 2016, we had $37.8 million in cash on hand and we had $10 million drawn on our revolver facility due to the timing of acquisition activity and distributions to our physician partners. As of the end of the second quarter, we had more than $220 million of additional capacity available under our revolving credit facility.

And during the first six months of this year, our capital outlay for new acquisitions was $75.2 million and we continue to expect the full year capital outlay for acquisition to be in the range of $150 million to $200 million.

Our adjusted net debt leverage taking into account the first 12 months of expected earnings of our newly acquired facilities was 4.3 times adjusted EBITDA less NCI, unchanged from the prior quarter this year, and up slightly from 4.1 times at the end of the second quarter of last year, and this continues to be at a lower end of our comfort range of 4 to 5 times adjusted EBITDA less NCI.

Looking forward to the remainder of 2016 based on the continued strong same-site performance and the continued health of our acquisition pipeline, we remain highly confident in our full year adjusted EBITDA less NCI growth guidance of 13% to 16%.

Andrew, I will now turn the call back over to you.

Andrew Hayek

Thanks, Tom. As always, on behalf of our teammates, our physicians, and our strategic partners, we appreciate your interest and your support. Abigail, please open the line for our first question.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

Our first question comes from Kevin Fischbeck with Bank of America. Your line is open.

Joanna Gajuk

Good morning, this is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the questions. So just couple of things around the fundamental growth, the same-store facilities system-wide revenue sales growth was pretty strong, and specifically, the question I had is around pricing, which was very strong accelerated nicely to almost 4%. So the question is really now, what's been driving that strong growth in this quarter and is that sustainable going forward?

Tom De Weerdt

Well first of all, we feel very good about the same-site growth that we realized. Same-site growth is going to continue to fluctuate a little bit quarter-over-quarter. But as you mentioned, the second quarter was strong both driven by sustained volume growth but also net patient revenue per case growth. And I think the different drivers of our diversified growth strategy are supportive of that.

We've delivered same-site growth over the past seven years of approximately 5%, and we feel confident that is also a good trend for us for the next couple of years.

Joanna Gajuk

So is there anything in particular that has driven the acceleration in pricing this quarter?

Andrew Hayek

Well, a few things. This is Andrew. The continued growth of our new service lines, total joint replacements, complex spine, growth in cardiovascular, those growth areas contribute to higher pricing.

The second thing would be our partnerships with health plans as well as health systems can contribute to that as we grow more procedures in those partnership models. So it's not a particular geography, it's not a particularly type of the center. But it certainly is connected back to growing the strategic service lines and growing facilities in those strategic partnership structures.

Joanna Gajuk

And then in terms of the same-site volume growth, which was still very solid but obviously accelerated from extremely strong Q1 performance. So how should we think about same-site volume growth for the near-to-medium-term for the company?

Tom De Weerdt

Well, I think along with the elements that Andrew just mentioned; continue to drive volume growth over time. Keep in mind as well we have dedicated sales team that is out there recruiting physicians but also some of the health plan partnerships will help us over time to migrate volume into our facility. So I think we have a number of levers in place, again, which make us comfortable that we can sustain a solid volume growth rate over time.

Joanna Gajuk

Great. And just lastly, I guess on health plans commentary here, so you're saying, you're already seeing some meaningful or rather quantifiable benefits from your partnerships with health plans. So is there any update on the -- I guess the latest announcement you made on Q1 call in terms of the larger health plan partnership which you enter in? Thank you.

Andrew Hayek

Sure. As we shared in the prepared remarks, we added three new health plan partnerships in the second quarter. And we now have several of these partnership structures. In terms of the partnerships we shared on the last call, both continued to progress well. In one case that partnership has been in place for about two-and-a-half years, and our partner health plan is very pleased with our performance. In other words, our ability to improve quality and the patient experience and reduce total cost, by shifting care to our environment from the higher cost acute-care hospital environment so that partnership progresses, and our partner is pleased.

The partnership we highlighted on the last call continues to go well. We are performing at or above their expectation, and they continue to be a good partner. So I think overall, it's been positive, and it remains early days. And so well, we'll continue to keep you updated.

Operator

Thank you. Our next question comes from Josh Raskin with Barclays. Your line is open.

Josh Raskin

Hi, thanks good morning. I'm here with Rach; I've got a question I think she's going to follow-up. But Andrew, I just want to stick on the health plan relationships, the three new ones, and I know it's tough to sort of quantify in terms of size. But even rough magnitude in terms of size or total members covered or geography or addressable market or anything that could help us sort of understand these three relative to may be the -- I can't remember what we're calling it the Midwest Blues or that you guys talked about last year?

Andrew Hayek

You bet, Josh. So in general, when we're referring to a health plan partnership that would be a large health plan covering a state that's usually the way we refer to it, or a major MSA. And in the case of the three additional partnerships that we secured in the last quarter, both would fit that description, and frankly, they would be of a potential magnitude, it's probably larger than the Mountain State Blues plan, given Mountain States tend to be on the smaller end, and these partnerships are in larger states.

So Josh, I'd say they're similar in many of the structural elements and potential size and potential impact over the coming years as we grow it and the partnership is probably larger than the Mountain State Blues plan example.

Josh Raskin

Okay. And then do you have any statistics on sort of organic growth or case growth or even the same-store revenue number in that Mountain State? You guys have been over two years, anything in terms of where is that, where do those centers run relative to your overall book?

Andrew Hayek

Josh, we haven't broken that out. The growth has been strong, and that's part of the value proposition to our health plan partner that we'll be able to execute on the partnership by migrating high acuity targeted service lines into our settings. So safe to say, it's strong. And when we highlight strong double-digit growth in these service lines, total joints and complex spine, there is some directional connectivity back to some of these health plan partnerships, not one for one, but it's directionally at the same genre.

The other piece is we have shared that in a particular MSA where that Mountain State Blues plan partnership is operational, we've delivered about $8 million of savings, and a lot of that is obviously migrating cases into our setting. So those are some of the directional elements, Josh, to help you triangulate, but we haven't given specific numbers for a variety of reasons.

Josh Raskin

Okay, and Rach, I think you had a follow-up, right?

Rachana Fellinger

Yes. Hi Andrew, you've spoken about 2017 growth reverting back to 8% to 11% range. Are some of the recent acquisitions and health system or health plan relationships consistent with that view? Or do you think there's potential for 2017 to be slightly out of that historical norm?

Andrew Hayek

I'm not sure we really commented on 2017 at all. And in general, we continue to work real hard to partner strategically with health plans, medical groups, health systems. We continue to work real hard on our acquisition pipeline, and we're working hard across the board on things that drive profitable growth and value to our strategic partners. I think as usual, we'll plan likely we had at the January conference with JPMorgan to give commentary around 2017. So that's where we need to leave it today, and I'm sure you can relate to why.

Operator

Thank you. Our next question comes from David MacDonald with SunTrust. Your line is open.

David MacDonald

Andrew just wanted to jump back on the health plan for a bit. When you look at the pipeline, is it fair to say that a larger percentage of the opportunities now as opposed to a year or two ago, these health plan type tie-ups. And then secondly, within those potential relationships, are most looking for some type of risk-sharing or value-based type of arrangement in terms of how you guys would get paid?

Andrew Hayek

You bet, David, good morning.

David MacDonald

Good morning.

Andrew Hayek

So yes, in general, I think if you look over the next five years, more of our growth is tied to health plan partnerships and some combination of health plan and medical group partnerships.

Now in that context, we expect our health system relationships to continue to grow. We continue -- we peered on the call, we're adding our first facility with the Advocate Health system here in Chicago. Now as a point of reference, Advocate is a very, very large medical group in IPA, and they are very progressive in terms of shifting their business model to risk. We believe they're one of the largest, if not the largest, Accountable Care Organizations in the country that a medical group with more than 2,000 physicians in it. And so Advocate Health System relationship, and in many ways, they really look and behave like a large medical group, and in some ways, like a health plan. We expect our other health systems continue to grow, and we expect to continue to add more health systems that are progressive and oriented towards improving cost of care.

That said, to your point, yes, we do see and we've talked about this in prior calls and prior meetings where we do see an increasing amount of our growth tied to health plan partnerships and medical group partnerships. And the alignment there is very strong. For -- with health plans, for obvious reasons, they're focused around patient experience, quality and, of course, cost. And then medical groups increasingly are oriented towards taking risk, those Medicare Advantage risk as well as commercial risk. And so we line up very, very well, given the importance of surgery in the context of both those entities succeeding in a risk environment.

To your second question about health plan looking for us to take a modicum of risk or being a value-based payment, the answer is yes. And that doesn't necessarily mean a bundled payment or an Accountable Care Organization structure. In general, our risk arrangements are -- we try to keep them very simple, and we try to tie them to our performance in migrating cases to our environment where we know the quality is fantastic, patient experience is better and the cost is lower. And so in a number of these partnerships, we are signing up to be accountable for some amount of shift in volume increase in the facilities, and to-date, we have performed well against those measures that we're signing up for.

David MacDonald

Andrew, is this dynamic may be pushing some of the health systems to think more quickly or more strategically? I mean, if you guys are in a position where you kind of like, hey, we'll just go and partner with the health plan, I got to imagine, in some markets that makes the health system nervous, but that volume may shift out of their setting a little more quickly and may be it pushes them to the table more; is that happening also?

Andrew Hayek

It's hard to tell. And everything in healthcare, as you know, is local and market-by-market. I would say there is a broader realization that irrespectively of our role that health plans, independent medical groups; other risk-bearing entities are quite focused around surgery. And given surgery is 30% of the total medical spend, and as we've shared at prior meetings, two-thirds of that is either outpatient today or could be outpatient, and within that outpatient component, two-thirds is still occurring in a higher cost environment than it could be, so it's a very materials savings opportunity.

And I think that dynamic is being more broadly realized as to whether we're contributing in some unique way to that, very hard to tell, but I think there's a more general realization around these cases will migrate out over time.

David MacDonald

And then just last question, I realized it's early days, but any update or anything you want to talk about in terms of potential investments on the cardio side? I know that that's one area that could be an opportunity over time in terms of some of these higher acuity procedures shifting out?

Andrew Hayek

Its early days, as we've shared before, and in many ways, it feels like joints or complex spine might have a few years ago. I mean, at this point, we've assembled a team, and we feel really, really good about our team. We're working on a number of projects. A lot of the projects, frankly, relate to existing facilities and standing up cardiovascular, peripheral vascular, CRM or cardiac rhythm management programs in existing facilities.

And there is a growing but early-stage pipeline that would be really focused around new facilities or dedicated facilities as well and that will take time. But we've got a team, and we're working at it.

David MacDonald

And Andrew is it logical to think that a lot of the existing facilities that you'd be adding it to are the ones that are already doing some of the high-end complex spine, some of the higher end orthopedic procedures?

Andrew Hayek

Not necessarily. A total joint or complex spine procedure, just in terms of the size, the OR, has significant requirements that for some of the very low acuity cardio-related procedures, you don't need that size of OR. So it's not necessarily where we're doing the most complex spine or ortho procedures.

Operator

Thank you. Our next question comes from Matthew Borsch with Goldman Sachs. Your line is open.

Tejus Ujjani

Hi this is Tejus joining on for Matt. Thanks for taking the question. Supply cost came in a little higher than consensus. Is that really from the growth in orthopedic cases like higher implant device cost?

Tom De Weerdt

Yes, hey this is Tom. Yes, that is absolutely the biggest drivers as we continue to see the shift towards higher acuity cases, you seen the supply cost per case increase. And if you actually look at the net patient revenue per case, you will see that that increase is even more. So the dollar margin if you want per case increases. Even though it's a detriment to our margin percentage as we've indicated in the past as well. But the supply cost increases indeed primarily coming from the implant cost per case that it increases.

Tejus Ujjani

Great, thanks very much. And then in terms of your de novo facilities under development are there any differences from your typical ASC in your portfolio? I guess, like the size of facilities, or kind of makeup, touch especially, anything different to call out there?

Andrew Hayek

Tejus, this is Andrew. In general, the de novo facilities would be not dissimilar from our average size or average partnership structure from existing facilities. Obviously, we learned a lot about flow and design, so they certainly capture our best thinking about efficient flow and design to be able to take on complex procedures down the line. So with that caveat though, I'd say they're quite similar to what we have.

Operator

Thank you. Our next question comes from Dana Hambly with Stephens. Your line is open.

Dana Hambly

Hi thanks, good morning. Just following up on the de novo. Can you remind me, have you done these in the past? Is this more of a new strategy for you? And may be talk a little bit about the payback period, time to develop ROIC, any kind of unit economics you can put on that?

Andrew Hayek

You bet. We have done de novos in the past. It hasn't been large a focus area for us, just given the amount of opportunity to invest in current facilities and the speed to market that that allows, it's been a historical focus for us.

So the reason to begin focusing more on de novo is, frankly, the partnership structures we're putting into place, be that partnership structure with the health plans, with the medical group or the progressive health system. Those partnership structures are creating opportunities to frankly realign surgeons from one venue to another venue that other venue were relying them to, in some cases, it works really well to build a purpose-built de novo facility right where they want it to be with the design aspects that fits the type of cases they want to do. And especially, if we're talking about higher acuity orthopedics or spine, it helps a lot to have a purpose-built facility in some cases. And so really it's strategic partnerships coming into place than fueling more de novo opportunities for us.

We haven't commented on the payback period in a specific way. In general, though, the returns on capital, the payback period, virtually any financial metric, in general, looks more attractive with the de novo than the average general acquisition simply because you're getting in at cost with a group of partners from day one versus buying into an earnings stream that, of course, commands some evaluation multiple.

So in general, they are more attractive from a financial standpoint. They take longer to develop. There is a more risk embedded in them. That said, we think that risk is more than overwhelmed by attractive financials, and so we generally lean into them.

Dana Hambly

Okay. So these de novos are with existing physician partnerships that you have already?

Andrew Hayek

No, I'm sorry. Let me clarify. They are often in a market where we have a strategic partnership with a health plan, with a large medical group, i.e., multispecialty group or really large PCP group or with a large health system.

In terms of the specific surgeons that would be partners in the de novo, usually they are not current partners. In fact, where we have current partners, they're usually in a facility that's got a non-compete in an existing partnership. So it's fairly unusual to do a de novo with existing partners. We would tend to refer to that as a relocation in the new facility with a current partnership. We would not tend to call that a de novo.

Dana Hambly

Okay. So you're not -- these are not shutting -- you're not opening one of these and shutting down and building then?

Andrew Hayek

When we talk about de novos, we're not talking about opening one and shutting another. We do, do that from time to time with older facilities, and we want to expand. But we call that a relocation, we don't call that a de novo.

Dana Hambly

Got you. All right. Just lastly for me, you mentioned the SwiftPath LLC, I'm not sure I exactly understand what it is they're doing?

Andrew Hayek

You bet. So SwiftPath is a group of surgeons who have worked collaboratively with surgeons around the country that focus on hip and knee replacements. And it's almost like a Wikipedia type of model. We have a lot of peers collaborating on clinical pathways, on clinical protocols. And so there's a great degree of science and that they have created in this collaborative peer reviewed manner that is really focused on how to take hip and knee replacements from the inpatient setting to an outpatient setting, and frankly, all the way to a surgery center setting.

And a number of our doctors really appreciate the technology and the process that they really starts all the way from patient selection through how you educate the patient preoperatively in a boot camp, to how the day of surgery flows, and in the postoperative care. So it's kind of end-to-end set of protocols that are helpful to some surgeons in migrating their cases to the ASC environment.

Not all surgeons find it useful, but many do. And we believe it's a helpful tool to us as we continue to ramp up these new case types.

Operator

Thank you. Our next question comes from Brian Tanquilut with Jefferies. Your line is open.

Brian Tanquilut

Good morning guys. Andrew, so first on the joint ventures. Considering that there are joint ventures are probably just the health plans. Considering that they're being assigned kind of mid-year, so how should we think about the financial impact or when we will see the benefit for those JVs as we think about plan designs, changes we have to make, number one. And then number two, you alluded earlier to some of these are related to the neurosurgeons that you're rolling out. So are some of these very specific to joint replacements or specific DRGs or procedures?

Andrew Hayek

You bet. So let me tackle a number of these, the questions here. Usually, the structure is not tied to them adjusting existing planned documents or plan designs with ASO customers or their fully insured book.

The structures have much more to do with time reimbursement of facility or reimbursement of the surgeon to achievement of clinical outcomes, efficiency protocols, and cost savings, and totality, and those that tend not to require waiting for end of year plan document revision. So they can happen in middle year, they can happen at the end of the year. It's timing-agnostic.

In terms of -- there is degree of specificity, often conversations will involve a focus around orthopedics or spine or some targeted groups. That said the structure cannot be targeted at one or two specialties. So some of the genesis of the discussion may be we really think there is a major opportunity in orthopedics, let's talk about that, and then the structure usually would cover the full range of procedure types. So I'm speaking in generalities, but generally, they would apply to all ASC types of procedures.

Brian Tanquilut

Got it. And then on the total joint replacement programs, we've talked about that probably for three quarters now. Where are you in terms of the penetration of service in your lines? And then what percentage of joint replacement do you think that your physicians do are now in the outpatient setting? And where do you see that going in the next few years?

Andrew Hayek

So that would call for a degree of speculation. We really haven't shared in terms of what percent of joints will be outpatient five or 10 years from now, et cetera. But I can give some general feedback. I'd say, in general, the degree of penetration of total joint replacement shifting to an outpatient in an ASC environment remains very low. In other words, we're in the very early stages of a long cycle process. And you know this that things in health care take time. They're not sudden, and so we're not anticipating some sudden change. But we do believe we're in the early, early stages of a long cycle shift.

In terms of -- for some of our physicians, the percent that would be in the ASC environment, there's a large range today based on comfort level, based on the patient base that a surgeon has. We have surgeons that are well into the double-digits in terms of percent of patients having their joint replacement procedures done in an ASC environment.

The SwiftPath Group shared a report at the American Association of Orthopedic Surgeons earlier this year, and they were seeing, again, total joint patient populations reaching the strong double-digit ASC penetration rate. In other words, you could have in the low-to-mid-double-digit, well let me be more specific, upwards 30%, 40% of total joint replacements could be done in the ASC environment. That's -- those are fairly advanced surgeons in terms of comfort level with the ASC environment. So hopefully, that's got a directional sense for you, and we believe, again, we're in the very early stages. It varies a lot by geography; it varies a lot by surgeon.

In terms of impact, you asked about that. We think about this just continuing to contribute to our overall growth rate. Years ago, other procedure types were migrating to the ASC environment. Today, the focus area is total joints and spine. We think in the future, it may be a little more cardiovascular. And we just think about this contributing to our long-term trend of growth and opportunity.

Brian Tanquilut

And thanks for all that color, Andrew. So one follow-up to that. So what do you think are the gating factors in terms of physician adoptions, health plan adoption, and patient adoption of outpatient knees and hips? Thank you.

Andrew Hayek

All list some of the gating factors. One gating factor would be clinical comfort. And physicians getting comfortable with the technique and protocol and process involved in shifting a total joint replacement case to the outpatient and ultimately the ASC environment.

A second gating factor would be having an ASC clinically ready with all the different steps involved prepared for a total joint replacement program. And that's not just equipment and day of surgery expertise, that's preoperatively all the Boot Camp work, and post-operatively, making sure that everything is set up from all the way from patient selection through how you educate the patient, all the way through the home care protocols and postoperative follow-ups. So there's a clinical setup process that's involved.

A third gating item would be engaging in the right health plan relationship. In a lot of geographies, total replacements are still not an approved or a contracted item, I should say. In some places, they're contracted, but the implantable device is not reimbursed, which makes them pragmatically prohibitive to do. And so there's a whole process of getting lined up the right way with the major health plans to enable that shift.

So those are three of the hurdles. And as you can imagine, these things take time, and we've now been at it for a few years, and we're cognizant that it's a long cycle process.

Operator

Thank you. [Operator Instructions].

Our next question comes from Andrew Schenker with Morgan Stanley. Your line is open.

Vikram Ashoka

Hi this is Vikram on for Andrew. Can you talk about the outlook for salaries, wages and benefits? We've been hearing that there's some pretty strong combination out there for orthopedics. Just some color on physician recruitment and wages going forward?

Andrew Hayek

So a couple of comments, this is Andrew. We very, very rarely would employ a physician, and where we might that would tend to be an anesthesiologist. So in terms of the impact of physician compensation or physician salaries on our model, there really isn't a one-for-one for one relationship. Our surgeons almost entirely are billing their professional fees to the health plan and running their practice. We do from time to time help our physicians in their practices in providing sort of support to help them stay independent, but it's extraordinarily rare where we'd be their employer. Is that responsive?

Vikram Ashoka

It's perfect. And then also I guess, one of your peers, I guess, have been purchasing a majority equity stake in their previously non-consolidated facilities. Other markets where you're evaluating similar investments in order to pursue some of the differentiated growth strategies that you can kind of employ at your sites when you're the majority owner?

Andrew Hayek

Well, over -- since 2008, we've had facilities go from consolidated to equity ownership, and from equity ownership back to consolidated. So there's a national flow. It goes back and forth, there are a number of circumstances that can drive that, be it local market dynamics, be it new physician group wants to come in, and it frankly makes sense economically to sell a stake and move our ownership percentage around.

So there will continue to be a flow backwards and forwards. I wouldn't sit here though and say, there is a significant push to take lots of our equity facilities into a consolidated state. We tend to really think about what's right for the partnership, what's right for that facility and what's right for long-term growth versus a nearer term financial dynamic.

Operator

Thank you. [Operator Instructions].

And I'm showing no further questions at this time. I'd like to turn the call back to Andrew Hayek for closing remarks.

Andrew Hayek

Thank you. And thank you all for joining us this morning on behalf of our patients, our physicians, and our teammates; we appreciate your interest and your support as we continue to build our SCA community. We look forward to talking with you next quarter, and please don't hesitate to call us with any questions in the interim. Take care.

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