What changed in this filing

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Item 1. Business

2021-03-10 compared with 2020-03-13 · 142 added, 89 removed, 398 unchanged (37% of the section changed)

Surgery Partners, Inc., a Delaware corporation, acting through its subsidiaries, owns and operates a national network of surgical facilities and ancillary services.

Surgery Partners, Inc.

was formed April 2, 2015, as a holding company for the purpose of facilitating an initial public offering of shares of common stock.

Prior to September 30, 2015, we conducted business through Surgery Center Holdings, Inc.

and its subsidiaries.

Unless the context otherwise indicates, Surgery Partners, Inc.

and its subsidiaries are referred to herein as "Surgery Partners," "we," "us," "our" or the "Company."

On August 31, 2017, we completed the acquisition of NSH Holdco, Inc.

(the "NSH Merger" or "acquisition of NSH").

Also on August 31, 2017, (i) we completed the sale and issuance of 310,000 shares of our 10.00% Series A Convertible Perpetual Participating Preferred Stock (the "Series A Preferred Stock") to a fund advised by an affiliate of Bain Capital Private Equity LP ("Bain Capital"), at a cash purchase price of $1,000 per share (the "Preferred Private Placement"), and (ii) Bain Capital completed its purchase of 26,455,651 shares (the "Purchased Shares") of our common stock from H.I.G.

Surgery Centers, LLC ("H.I.G.") (the "Private Sale").

As a result, Bain Capital became our controlling stockholder, holding Series A Preferred Stock and Common Stock that collectively represented approximately 65.7% of the voting power of all classes of capital stock of the Company as of August 31, 2017, and H.I.G.

and its affiliated investment funds no longer own any capital stock of the Company.

On August 31, 2017, (i) we completed the sale and issuance of 310,000 shares of our 10.00% Series A Convertible Perpetual Participating Preferred Stock (the "Series A Preferred Stock") to a fund advised by an affiliate of Bain Capital Private Equity LP ("Bain Capital"), at a cash purchase price of $1,000 per share (the "Preferred Private Placement"), and (ii) Bain Capital completed its purchase of 26,455,651 shares (the "Purchased Shares") of our common stock (the "Private Sale").

We refer to the Preferred Private Placement and the Private Sale collectively in this Annual Report as the "Transactions."

The following discussion of our business covers periods both prior to and subsequent to the Transactions.

As discussed in the notes to the consolidated financial statements included in this Annual Report, in connection with the change of control effected by the Private Sale, we elected to apply "pushdown" accounting.

We have presented the information for the year ended December 31, 2017 on a Predecessor period and Successor period combined basis (each as defined in Note 1.

"Organization and Summary of Accounting Policies" of our consolidated financial statements) to facilitate meaningful comparisons of operating results to the prior year periods.

You should read the following discussion together with our consolidated financial statements and related notes included elsewhere herein.

As of December 31, 2019 , we owned or operated primarily in partnership with physicians, a portfolio of 128 surgical facilities in the United States comprised of 112 ambulatory surgical centers ("ASCs") and 16 surgical hospitals ("surgical hospitals," and together with ASCs referred to as "surgical facilities" or "facilities") across 30 states, including a majority interest in 85 of the surgical facilities.

As of December 31, 2020, we owned or operated primarily in partnership with physicians, a portfolio of 127 surgical facilities in the United States ("U.S.") comprised of 110 ambulatory surgical centers ("ASCs") and 17 surgical hospitals ("surgical hospitals," and together with ASCs referred to as "surgical facilities" or "facilities") across 30 states, including a majority interest in 84 of the surgical facilities.

During 2020, patient services provided in our surgical facilities generated approximately $1.8 billion in revenue.

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• Seek partnership opportunities with payors to make health care more affordable for their members;

• Seek partnership opportunities with health systems looking to develop and/or enhance their ambulatory surgery footprint to better meet the needs of the patients and medical staff;

• Continue our disciplined acquisition strategy;

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In addition, we believe favorable industry trends such as an aging population and advancements in medical technology will further drive growth.

We operate in three reporting segments:

Total Addressable Market

Based on management estimates, we believe that the total U.S.

surgical facility market represents approximately $90 billion in annual revenue, including approximately $55 billion of hospital outpatient department procedures and $35 billion of ambulatory surgical center procedures, and we believe that ambulatory surgical centers are capturing an increasing share of the total surgical procedure market.

We estimate that as a result of this trend, total annual procedure volume is expected to grow over the next few years by approximately 2% in hospital outpatient departments and by approximately 6% in ambulatory surgery centers, while inpatient procedures will decline by approximately 2% during the same period.

In addition, we believe that approximately $60 billion of inpatient surgical cases have the potential to move to outpatient surgery centers, which, together with procedures performed at hospital outpatient departments and ambulatory surgical centers, represents what we believe is a total addressable market of approximately $150 billion.

Patient and Physician Satisfaction

We are leveraging our growth strategies to capture market share by providing high quality service.

According to a 2019 survey of health and life safety tags, our ASCs averaged 25% fewer deficiencies compared with the total market, with 6.3 deficiencies at our ASCs compared to 8.4 in other ASCs.

Similarly, our surgical hospitals averaged 48% fewer deficiencies per survey compared to all other hospitals surveyed, with 17.6 deficiencies for our surgical hospitals compared with 33.7 deficiencies at other hospitals according to a 2019 industry survey.

In addition, 71% of our surgical hospitals in 2019 were rated five star in the CMS star rating, with the remaining 29% rated four star.

This has resulted in an average patient net promoter score of 94, based on patient satisfaction surveys conducted from December

2019 to May 2020.

Our physicians similarly report strong satisfaction levels with Surgery Partners, with an average physician net promoter score of 81 based on a 2015 survey.

Impact of COVID-19 update

The COVID-19 global pandemic has significantly affected our facilities, employees, patients, communities, business operations and financial performance, as well as the U.S.

economy and financial markets.

Beginning mid-March 2020, the COVID-19 pandemic began to negatively affect our revenue and business operations, due in part to local, state and federal guidelines, as well as recommendations from major medical societies, requiring social distancing and self-quarantines in response to the COVID-19 pandemic.

Surgical case volumes across most of our surgical facilities were significantly impacted in the second quarter of 2020.

The impact of COVID-19 on our surgical facilities has varied based on the market in which the facility operates, the type of surgical facility and the procedures typically performed.

Although we cannot provide any certainty regarding the length and severity of the impact of the COVID-19 pandemic, surgical case volumes improved in the second half of 2020 as states began to re-open and allow for non-emergent procedures.

Our operating structure naturally enables some flexibility in the cost structure according to the volume of surgical procedures performed, including much of our cost of revenues.

In addition to the natural variability of these costs, we and our partners in the surgical facilities have undertaken additional steps to preserve financial flexibility.

Beginning in mid-March, and during the remainder of 2020, we took actions that included significantly reducing cash operating expenses and deferring non-essential expenditures at the height of the crisis.

These measures were gradually reduced as surgical case volumes improved.

For more information, please refer to Note 1.

"Organization and Summary of Accounting Policies - COVID-19 Pandemic" to our audited consolidated financial statements for the year ended December 31, 2020 included elsewhere herein.

During 2020, we operated in three reporting segments:

Surgical Facility Services, Ancillary Services and Optical Services.

Our surgical facility services segment consists of the operation of ASCs and surgical hospitals and includes our anesthesia services.

• Our Surgical Facility Services segment consisted of the operation of ASCs and surgical hospitals and includes our anesthesia services.

Our surgical facilities primarily provide non-emergency surgical procedures across many specialties, including, among others, orthopedics and pain management, ophthalmology, gastroenterology ("GI") and general surgery.

Our ancillary services segment consists of a diagnostic laboratory and multi-specialty physician practices, including physician practices owned and operated pursuant to long-term management service agreements.

Our optical services segment consists of an optical products group purchasing organization.

• Our Ancillary Services segment consisted of a diagnostic laboratory and multi-specialty physician practices, including physician practices owned and operated pursuant to long-term management service agreements.

During the third quarter of 2020, we closed our diagnostic laboratory.

• Our Optical Services segment consisted of an optical products group purchasing organization, which was divested on December 31, 2020.

Until we divested certain businesses in October 2018, this segment also included an optical laboratory that manufactured eyewear.

Our Optical Services segment was not a material component of our total revenue, contributing less than 1% in each of 2020, 2019 and 2018.

Surgical Facility Services Segment

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As of December 31, 2020, we owned or operated primarily in partnership with physicians, 127 surgical facilities, including 110 ASCs and 17 licensed surgical hospitals.

Our surgical facility services segment contributed approximately 95% of our total revenue in both 2019 and 2018, and 93% of our total revenue in 2017.

Our Surgical Facility Services segment contributed approximately 96% of our total revenue in 2020, and 95% of our total revenue in both 2019 and 2018.

Our typical ASC is a free-standing facility that performs planned surgical procedures on an outpatient basis for patients not requiring hospitalization and for whom an overnight stay is not expected after surgery.

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Our surgical hospitals are generally larger than our ASCs and include inpatient hospital rooms and, in certain cases, emergency departments.

Our surgical hospitals also provide ancillary services such as diagnostic imaging, pharmacy and laboratory.

Our surgical hospitals also provide services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care.

We operate both multi-specialty and single-specialty facilities.

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We own and operate our surgical facilities through partnerships or limited liability companies with physicians, physician groups and health care systems.

One of our wholly-owned subsidiaries typically serves as the general partner or managing member of our surgical facilities.

One of our wholly-owned subsidiaries typically serves as the general partner or managing member of our surgical

We generally seek to own a majority interest in our surgical facilities or otherwise have sufficient control over the facilities in order to consolidate the financial results.

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Year Ended December 31,

2020 2019 2018

Private Insurance 53.9 % 53.8 % 54.6 %

Government 38.6 % 38.9 % 37.6 %

Self-pay 3.2 % 2.6 % 2.9 %

Other 4.3 % 4.7 % 4.9 %

Total patient service revenues 100.0 % 100.0 % 100.0 %

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Medicare Reimbursement - Hospital Inpatient Services

Sixteen of our surgical facilities are licensed as hospitals.

Seventeen of our surgical facilities are licensed as hospitals.

Most inpatient services provided by hospitals are reimbursed by Medicare under the inpatient prospective payment system ("IPPS").

Under the IPPS, a hospital receives a fixed amount for inpatient hospital services based on each patient's final assigned Medicare-severity diagnosis related group ("MS-DRG").

Each MS-DRG is assigned a payment rate that is prospectively set by CMS using national average resources used per case for treating a patient with a particular diagnosis.

Each MS-DRG is assigned a payment rate that is prospectively set by the Centers for Medicare and Medicaid Services ("CMS") using national average resources used per case for treating a patient with a particular diagnosis.

This assignment also affects the prospectively determined capital rate paid with each MS-DRG.

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The index used to adjust the MS-DRG rates, known as the "hospital market basket index," gives consideration to the inflation experienced by hospitals in purchasing goods and services.

On August 2, 2019, the Centers for Medicare and Medicaid Services ("CMS") published the IPPS final rule for federal fiscal year ("FFY") 2020, which began on October 1, 2019.

On September 2, 2020, CMS published the IPPS final rule for federal fiscal year ("FFY") 2020, which began on October 2, 2020.

Under the FFY 2020 final rule, rates for inpatient stays in hospitals paid under the IPPS that successfully report certain quality data under the Hospital Inpatient Quality Reporting ("IQR") Program and demonstrate meaningful use of certified electronic health record ("EHR") technology will be increased by 2.9%.

Those hospitals that do not successfully report quality data under the IQR Program (but are meaningful EHR users) may receive a payment rate increase of only 1.85%.

Those hospitals that do not successfully report quality data under the IQR Program (but are

meaningful EHR users) may receive a payment rate increase of only 1.85%.

In addition to the IQR Program, hospitals will be subject to payment adjustments under the Value Based Purchasing Program, Readmissions Reduction Program and Hospital Acquired Conditions Reduction Programs that have been implemented by the Department of Health and Human Services ("HHS").

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The OPPS, established by the Secretary of HHS, determines payment amounts prospectively (generally the following calendar year) for various categories of medical services performed in HOPDs.

On November 12, 2019, CMS published its OPPS final rule for 2020.

On December 2, 2020, CMS published its OPPS final rule for 2021.

The final rule provides for a payment rate increase of 2.4%.

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Providers may appeal any final determination made in connection with an audit.

ASCs are not currently subject to federal cost reporting requirements, it is possible that such requirements, which could be costly for us, will be implemented by CMS in the future.

Ancillary Services and Optical Services Segments

While ASCs are not currently subject to federal cost reporting requirements, it is possible that such requirements, which could be costly for us, will be implemented by CMS in the future.

Ancillary Services Segment

Ancillary Services

Our portfolio of outpatient surgical facilities is complemented by a suite of ancillary services, which support our physicians in providing high quality and cost-efficient patient care.

Rather than contracting with insurance providers, in some markets we own ancillary businesses, including a diagnostic laboratory, multi-specialty physician practices and urgent care facilities.

Our ancillary services are comprised of multi-specialty physician practices, urgent care facilities and anesthesia services.

The Company, physicians and patients benefit from these services through improved clinical efficiency and scheduling, and from incremental revenue associated with retaining fees for these services.

Our ancillary services segment contributed approximately 4% of our total revenue in both 2019 and 2018, and 6% of our total revenue in 2017 .

We offer physicians toxicology testing services through our wholly-owned diagnostic laboratory, based in Tampa, Florida.

Advanced toxicology screening provides physicians with the ability to identify when a patient is taking too much of a prescribed substance, when a patient is non-compliant with a prescribed substance or when a patient is taking unprescribed or illicit substances.

Our diagnostic laboratory supports the needs of our physicians across our existing specialties and new service lines.

Our Ancillary Services segment contributed approximately 3% of our total revenue in 2020, and 4% of our total revenue in both 2019 and 2018.

• Until it was closed in the third quarter of 2020, we offered physicians toxicology testing services through our wholly-owned diagnostic laboratory based in Tampa, Florida.

• We employ two models in connection with our network of multi-specialty physician practices.

For example, in the state of Florida, where the law does not preclude a business corporation from employing physicians, we own and operate Tampa Pain Relief Center, Inc., a wholly-owned business with several locations throughout Florida.

For example, in the state of Florida, where the law does not preclude a business corporation from employing physicians, we wholly-own and operate physician practices in several locations throughout Florida.

In certain other states, we operate physician practices pursuant to long-term management service agreements with separate professional corporations that are wholly-owned by physicians.

Optical Services

Our optical services segment contributed less than 1% of our total revenue in each of 2019 , 2018 and 2017 .

Sources of Revenue - Ancillary Services and Optical Services Segments

The fees charged for services in our ancillary services and optical services segments depend on a variety of factors, including the type of service provided, the location in which the service is provided and the provider of the service.

Sources of Revenue - Ancillary Services Segment

The fees charged for services in our Ancillary Services segment depend on a variety of factors, including the type of service provided, the location in which the service is provided and the provider of the service.

Service fees are received from both government and private insurance payors.

The amounts that we receive in payment for the provision of ancillary and optical services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid and state regulations, cost containment and utilization decisions and reduced reimbursement schedules of private insurance payors.

Our ancillary services revenue primarily consists of fee for service revenue that is derived principally from the provision of physician and laboratory services to patients of our surgical facilities.

Medicare pays for physician services based upon the MPFS.

Payment rates under the MPFS are determined based on (i) relative value units for the services provided, (ii) a geographic adjustment factor and (iii) a conversion factor.

Payment rates under the MPFS are updated annually by HHS.

The primary element in each year’s update calculation is the Medicare Economic Index ("MEI"), which is a measure of the inflation of the cost of operating a physician practice.

The update is then adjusted in conformity with the Medicare Access and CHIP Reauthorization Act of 2015 ("MACRA"), which was enacted in 2015.

Beginning in 2019, Medicare compensation to physicians and physician practices are subject to adjustment under the Merit-Based Incentive Payment System ("MIPS").

Under MIPS, physicians are assigned a composite performance score based on measures of quality, resource use, meaningful use of EHR, and clinical practice improvement activities.

A threshold performance score is set annually by CMS at the mean or median of all composite scores for a prior annual performance period.

Performance exceeding the threshold results in a positive adjustment, performance below the threshold results in a negative adjustment, and performance at the threshold results in no adjustment.

We cannot predict the effect of future payment methodology changes under MACRA on our physician practices.

Certain of our laboratory ancillary services are reimbursed by Medicare under the Medicare Clinical Laboratory Fee Schedule ("CLFS").

Under a 2016 final rule that implemented the Protecting Access to Medicare Act of 2014 ("PAMA"), as of January 1, 2018 the CLFS payment methodology was adjusted so that payment amounts for laboratory tests on the CLFS is determined by calculating a weighted median of private payor rates using reported private payor rates and associated volume (number of tests).

For tests that were paid on the CLFS prior to the implementation of PAMA, any reduction in payment amount will be phased in over the first six years of payment under the new system.

The amounts that we receive in payment for the provision of ancillary services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare, Medicaid and state regulations, cost containment and utilization decisions and reduced reimbursement schedules of private insurance payors.

Acquisition and Development Programs

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In addition to our corporate strategy, we continuously evaluate opportunities to expand our presence in the surgical facility market by making strategic acquisitions of existing surgical facilities and by developing new surgical facilities in cooperation with local physician partners and, when appropriate, health care systems and other strategic partners.

We generally structure our partnerships as two-way arrangements where either we are a majority owner partnered with physicians or we are a minority owner with buy-up rights.

We generally structure

our partnerships as two-way arrangements where either we are a majority owner partnered with physicians or we are a minority owner with buy-up rights.

These buy-up rights give us the option to own a controlling interest at some point in the future.

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Our team seeks to acquire surgical facilities that meet our criteria, including prominence and quality of physician partners, specialty mix, opportunities for growth, level of competition in the local market, level of private insurance penetration and our ability to access private insurance contracts.

We carefully evaluate each of our acquisition opportunities through an extensive due diligence process to determine which facilities have the greatest potential for growth and profitability

improvements under our operating structure.

We carefully evaluate each of our acquisition opportunities through an extensive due diligence process to determine which facilities have the greatest potential for growth and profitability improvements under our operating structure.

Our team may also identify opportunities to attract additional physicians to increase the acquired facility’s revenues and profitability.

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Before and during the development phase of a new surgical facility, we analyze the competitive environment in the local market, review market data to identify appropriate services to provide, prepare and analyze financial forecasts, evaluate regulatory and licensing issues and assist in designing the surgical facility and identifying appropriate equipment to purchase or lease.

After the surgical facility is developed, we typically provide general startup operational support, including information systems, equipment procurement and financing.

After a surgical facility is developed, we typically provide general startup operational support, including information systems, equipment procurement and financing.

We primarily direct our sales and marketing efforts at physicians who would utilize our surgical facilities.

Marketing activities directed at physicians and other health care providers are coordinated locally by the individual surgical facility and are supplemented by our dedicated corporate personnel.

Marketing activities directed at physicians and other health care providers are coordinated locally by the individual surgical facility and are supplemented by dedicated corporate personnel.

These activities generally emphasize the benefits offered by our surgical facilities compared to other facilities in the market, such as the proximity of our surgical facilities to physicians’ offices, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the efficient turnaround time between cases, our advanced surgical equipment and our simplified administrative procedures.

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In addition, revenue in the fourth quarter could also be impacted by an increased utilization of services due to annual deductibles which are not usually met until later in the year and also as patients utilize their health care benefits before they expire at year-end.

At December 31, 2019 , we had approximately 9,600 employees, including approximately 6,900 full-time employees.

Human Capital Resources

At December 31, 2020, we had approximately 10,800 employees, including approximately 1,700 part-time employees.

None of our employees are represented by a collective bargaining agreement.

We believe that we have a good relationship with our employees.

We are subject to various state and federal laws that regulate wages, hours, benefits and other terms and conditions relating to employment.

In some markets, nurse and medical support personnel availability has become a significant operating issue to healthcare providers.

address this challenge, we have implemented several initiatives to improve engagement, retention, recruiting, compensation programs and productivity.

Our surgical facilities are staffed by licensed physicians.

Our mission is to enhance patient quality of life through partnership.

We generally do not enter into contracts with physicians who use our surgical facilities, other than partnership and operating agreements with physicians who own interests in our surgical facilities, agreements for anesthesiology services and medical director agreements.

Most physicians are not employees of our surgical facilities and are not contractually required to use our facilities.

Physicians who use our surgical facilities also use other facilities or hospitals and may choose to perform procedures in an office-based setting that might otherwise be performed at our surgical facilities.

Our operations are dependent on the efforts, abilities and experience of our physicians and clinical personnel.

We compete with other health care providers, primarily hospitals and other surgical facilities, in attracting physicians to utilize our surgical facilities, nurses and medical staff to support our surgical facilities, recruiting and retaining qualified management and support personnel responsible for the daily operations of each of our facilities.

Our surgical facilities, like most healthcare providers, have experienced rising labor costs.

We may be required to continue to enhance wages and benefits to recruit and retain nurses and other medical support personnel or to hire more expensive temporary or contract personnel.

As a result, our labor costs could continue to increase.

We also depend on the available labor pool of semi-skilled and unskilled employees in each of the markets in which we operate.

We believe that our employees are vital contributors to our success, and we devote significant resources to recruit and retain our workforce.

We strive to recruit and retain a diverse population of employees at all stages of their careers that are reflective of the communities we serve.

We are committed to promoting an inclusive culture through diversity of thoughts and backgrounds, recognizing the value these experiences bring to our colleagues, physicians, patients and the communities in which we reside.

Our workforce is comprised of approximately 81% female and 26% people of color.

Our policies prohibit discrimination on the basis of race, sex, religion, color, national or ethnic origin, age, disability, sexual orientation, gender identity, gender expression, military service, pregnancy, physical or mental disabilities, genetic information, or any other class protected by applicable law in its administration of policies, programs or employment.

We have established, and continue to enhance and refine, a comprehensive set of practices for engagement, recruiting, managing and optimizing the human resources of our organization.

In general, we seek to attract, develop and retain an engaged workforce and improve talent management processes accordingly.

We offer a competitive range of compensation and benefit programs.

In response to the COVID-19 pandemic, we implemented changes to address the safety and interests of our patients, employees, and medical staff, including the implementation of additional safety measures.

Our code of conduct that promotes integrity, accountability and transparency, among other high ethical standards and a focus on employee welfare.

Environmental

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The imposition of these regulatory requirements may have the effect of increasing operating costs and reducing the profitability of our operations.

Regulatory Development in Response to COVID-19

Numerous recent legislative and regulatory actions have been taken in an attempt to provide businesses, including health care providers, with relief from the negative impacts of the COVID-19 pandemic.

The legislative and regulatory responses to the COVID-19 pandemic generally impact many of the statutes, regulations and policies summarized or discussed throughout this Annual Report.

CARES Act and Other Stimulus Legislation

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law to provide stimulus funding for the U.S.

The CARES Act is intended to provide over $2 trillion in stimulus benefits for the U.S.

economy in order to offset the negative economic impact of the COVID-19 public health emergency.

Among other things, the CARES Act includes support for small businesses, expands unemployment benefits, and provides $500 billion for loans, loan guarantees, and other investments for or in U.S.

The CARES Act contains a number of provisions that are intended to assist health care providers as they combat the effects of the COVID-19 public health emergency.

The healthcare-specific provisions include:

• the temporary suspension of Medicare sequestration from May 1, 2020, to March 31, 2021;

• an appropriation of $100 billion to the Public Health and Social Services Emergency Fund for a new program to reimburse, through grants or other mechanisms, eligible health care providers and other approved entities for COVID-19-related expenses or lost revenues;

• the expansion of CMS’ Accelerated and Advance Payment Program;

• waivers or temporary suspension of certain regulatory requirements.

On December 27, 2020, the COVID-19 Economic Relief Bill (the “Bill”) was enacted, which among other significant matters, revised previous guidance on how grant funds distributed under the CARES Act may be utilized.

These changes included greater clarity on the measurement of lost revenues eligible to be claimed against grant funds received through the CARES Act as well as how funds can be allocated among consolidated facilities.

HHS’ interpretation of the underlying terms and conditions of grant funds received through the CARES Act, the Bill and other governmental assistance programs, including auditing and reporting requirements, continues to evolve.

Additional guidance or new and amended interpretations of existing guidance on the terms and conditions of such payments may result in our inability to recognize certain payments, changes in the estimate of amounts recognized, or the derecognition of amounts previously recognized, including the amount estimated and included in our consolidated statement of operations for the year ended December 31, 2020 provided herein.

Such changes may be material.

We continue to closely monitor legislative actions and regulatory guidance at the federal, state and local levels with respect to the CARES Act as other governmental assistance might become available to us.

For more information, please refer to Note 1.

"Organization and Summary of Accounting Policies - COVID-19 Pandemic" to our audited consolidated financial statements for the year ended December 31, 2020 included elsewhere herein.

Waivers or Temporary Suspension of Certain Regulatory Requirements

In addition to the financial and other relief that has been provided by the federal government through the CARES Act and other legislation that has been passed by Congress, CMS and many state governments have also issued a number of waivers and temporary suspensions of health care facility licensure, certification, and reimbursement requirements in order to provide hospitals, ambulatory surgery centers, physicians, and other health care providers with increased flexibility to meet the challenges presented by the COVID-19 public health emergency.

For example, CMS has temporarily waived the enforcement of certain requirements of the Medicare conditions of participation and implemented a "hospitals without walls" program that would enable hospitals to treat patients in temporary locations and enable ASCs to temporarily enroll in Medicare as hospitals.

CMS has also temporarily waived many provisions of the Stark law, including those provisions of the Stark law that prohibit our hospitals with physician ownership from expanding capacity.

Many states have also suspended the enforcement of certain regulatory requirements to ensure that health care providers have sufficient capacity to treat COVID-19 patients.

These regulatory changes are temporary, and we anticipate substantially all requirements will be reinstated in all material respects at the conclusion of the public health emergency.

Certificates of Need, Licensure and Accreditation

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Our surgical facilities also are subject to state licensing requirements for medical providers.

Our ASCs have licenses to operate in the states in which they operate and must meet all applicable requirements for ASCs.

Our ASCs have licenses to operate as required in the states in which they operate and must meet all applicable requirements for ASCs.

In addition, even though our surgical facilities that are licensed as hospitals primarily provide surgical services, they must meet all applicable requirements for general hospital licensure.

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As of December 31, 2020, legislative efforts to repeal and replace the Affordable Care Act in full have not been successful.

However, as a result of the enactment of the Tax and Jobs Act of 2017, the tax penalty associated with the so-called "individual mandate," which requires most individuals to obtain qualifying health insurance coverage or pay a tax penalty, was reduced to zero as of calendar year 2019.

The effective repeal of the individual mandate tax penalty and any other future repeal or replacement of the Affordable Care Act may have significant impact on the reimbursement for health care services generally, and may cause more individuals to become uninsured, rendering them unable to afford health care services offered by the Company.

The Affordable Care Act also remains subject to various lawsuits challenging its enforcement and constitutionality.

The United States Supreme Court recently agreed to hear a case that seeks to invalidate the Affordable Care Act, but it likely will not issue an opinion until 2021.

Accordingly, there can be no assurance that the adoption of any future federal or

state health care reform legislation, or any ruling by a court with respect to the Affordable Care Act, will not have a negative financial impact on the Company.

Supreme Court recently agreed to hear a case that seeks to invalidate the Affordable Care Act, but it will not issue an opinion until 2021.

Accordingly, there can be no assurance that the adoption of any future federal or state health care reform legislation, or any ruling by a court with respect to the Affordable Care Act, will not have a negative financial impact on the Company.

Medicare and Medicaid Private Contractor Audits

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Moreover, in recent years, the increase in Medicare payment appeals has created a backlog such that resolving appeals often takes multiple years.

For instance, we recently settled claims resulting from an audit for the period July 1, 2009 through May 31, 2012 in the second quarter of fiscal 2017.

Commitments and Contingencies to our consolidated financial statements included in this Annual Report.

Although all other repayments requested to date as a result of RAC, MIC and ZPIC audits have not been material to our Company, we are unable to quantify the aggregate financial impact of these audits on our facilities given the pending appeals and uncertainty about the extent of future audits.

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Among other things, these regulations, known as "conditions for coverage" or "conditions of participation," impose numerous requirements on our facilities, their equipment, their personnel and their standards of medical care, as well as compliance with all applicable state and local laws and regulations.

In 2007, CMS issued a policy memorandum (the "2007 CMS Policy Memorandum") that reaffirmed its prior interpretation of its conditions of participation that all hospitals (other than critical access hospitals) participating in the Medicare program are required to provide basic emergency care interventions regardless of whether or not the hospital maintains an emergency department.

In 2007, CMS issued a policy memorandum (the "2007 CMS Policy Memorandum") that reaffirmed its prior interpretation of its conditions of participation that all

hospitals (other than critical access hospitals) participating in the Medicare program are required to provide basic emergency care interventions regardless of whether or not the hospital maintains an emergency department.

Our facilities licensed as hospitals are required to meet this requirement to maintain their participating provider status in the Medicare program.

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We believe the ownership and operations of our surgical facilities do not fit wholly within any of the safe harbors, but we attempt to structure our ASCs to fit as closely as possible within the safe harbor designed to protect distributions to physician-investors in ASCs who directly refer patients to the ASC and personally perform the procedures at the center as an extension of their practice (the "ASC Safe Harbor").

The ASC Safe Harbor protects four categories of investors, including ASCs owned by (1) general surgeons, (2) single-specialty physicians, (3) multi-specialty physicians and (4) hospital/physician joint ventures, provided that certain requirements are satisfied.

The ASC Safe Harbor protects four categories of investors, including ASCs owned by (1) general surgeons, (2) single-specialty

physicians, (3) multi-specialty physicians and (4) hospital/physician joint ventures, provided that certain requirements are satisfied.

These requirements include the following:

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We believe that the ownership and operations of our surgical facilities will not fully satisfy the ASC Safe Harbor requirements for investment interests in ASCs because, among other things, we or one of our subsidiaries will generally be an investor in and provide management services to each ASC.

While we believe our ASCs would nonetheless be found to be compliant with the Anti-Kickback Statute, we cannot

assure you that the OIG would view our activities favorably even though we strive to achieve compliance with the remaining elements of this safe harbor.

While we believe our ASCs would nonetheless be found to be compliant with the Anti-Kickback Statute, we cannot assure you that the OIG would view our activities favorably even though we strive to achieve compliance with the remaining elements of this safe harbor.

In addition, although we expect each physician-investor to utilize the ASCs as an extension of his or her practice and ask each physician-investor to certify this practice, we cannot assure you that all physician-investors will derive at least one-third of their medical practice income from performing Medicare-covered ASC procedures, perform one-third of their procedures at the centers or inform their referred patients of their investment interests.

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The OIG stated that a cash flow-based valuation of the business contributed by the physician investors potentially would include the value of the physician investors’ referrals over the time that their ASC was in existence prior to the merger with the hospital’s ASC.

The OIG went on to note that a valuation involving intangible assets would not necessarily result in a violation of the Anti-Kickback Statute, but would require a review of all the facts and circumstances.

on to note that a valuation involving intangible assets would not necessarily result in a violation of the Anti-Kickback Statute, but would require a review of all the facts and circumstances.

It is not clear whether the OIG is concerned about using a cash flow-based valuation in most health care transactions involving referral sources, or just transactions where the parties’ contributions would be valued differently for contributing the same assets if only one party’s contribution is valued as a going concern based on cash flow.

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The OIG might take the position that the failure of the physician investors to enter into similar guarantees represents a special benefit to the physician investors given to induce patient referrals and that such failure constitutes a violation of the Anti-Kickback Statute.

We believe that the management fees (and in some cases guarantee fees) are adequate compensation to us for the credit risk associated with the guarantees and that the failure of the physician

investors to enter into similar guarantees does not create a material risk of violating the Anti-Kickback Statute.

We believe that the management fees (and in some cases guarantee fees) are adequate compensation to us for the credit risk associated with the guarantees and that the failure of the physician investors to enter into similar guarantees does not create a material risk of violating the Anti-Kickback Statute.

However, the OIG has not issued any guidance in this regard.

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Investigators have also demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purposes of payments between health care providers and potential referral sources.

On October 8, 2019, CMS and the OIG issued proposed rules that would modify the federal physician self-referral law, or Stark Law, regulations and the federal anti-kickback and civil monetary penalty for beneficiary inducement statutes and regulations.

The intent of the proposed rules is to reduce over-burdensome and unnecessary regulatory barriers to value-based compensation models and accelerate the transformation of the health care system into one that better promotes the coordination of care among providers.

Among other things, the proposed rules would create new anti-kickback and beneficiary inducement statute safe harbors and Stark Law exceptions for certain value based arrangements and arrangements that involve the donation of cybersecurity technology.

In addition, the proposed rules would also provide additional guidance on several key requirements, including fair market value and commercial reasonableness, that must be met in order for physicians and health care providers to comply with the Stark Law.

We cannot predict the final form of the rules that may be adopted, or if the proposed rules will be adopted at all, nor can we predict the impact that the final rules would have on our surgery centers and hospitals.

On November 20, 2020, CMS and the OIG issued final rules that modify the federal physician self-referral law, or Stark Law, regulations and the federal anti-kickback and civil monetary penalty for beneficiary inducement statutes and regulations.

The intent of the final rules is to reduce over-burdensome and unnecessary regulatory barriers to value-based compensation models and accelerate the transformation of the health care system into one that better promotes the coordination of care among providers.

Among other things, the

final rules create new anti-kickback and beneficiary inducement statute safe harbors and Stark Law exceptions for certain value based arrangements and arrangements that involve the donation of cybersecurity technology.

In addition, the final rules provide additional guidance on several key compliance requirements, including fair market value and commercial reasonableness, that must be met in order for physicians and health care providers to comply with the Stark Law.

We cannot yet predict the impact that the final rules will have on our surgery centers and hospitals.

Eliminating Kickbacks in Recovery Act

In addition to the Anti-Kickback Statute, the United States recently enacted a new law known as the Eliminating Kickbacks in Recovery Act (the "EKRA").

In addition to the Anti-Kickback Statute, the U.S.

recently enacted a new law known as the Eliminating Kickbacks in Recovery Act (the "EKRA").

The EKRA is contained within the broader Substance Use Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (the "SUPPORT Act").

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The Stark Law currently includes the Whole Hospital Exception, which applies to physician ownership of a hospital, provided such ownership is in the whole hospital and the physician is authorized to perform services at the hospital.

We believe that physician investments

in our facilities licensed as hospitals meet this requirement.

We believe that physician investments in our facilities licensed as hospitals meet this requirement.

However, certain changes to the Whole Hospital Exception were made by the Affordable Care Act including:

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However, a single breach incident can result in violations of multiple requirements, resulting in possible penalties well in excess of $1.5 million.

Under the HITECH Act, HHS is required to conduct periodic compliance audits of covered entities and their business associates.

Under the HITECH Act, HHS is required to conduct periodic compliance audits of

covered entities and their business associates.

The HITECH Act and the HIPAA Omnibus Rule also extend the application of certain provisions of the security and privacy regulations to business associates and subjects business associates to civil and criminal penalties for violation of the regulations.

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However, these laws, rules and regulations have typically been the subject of limited judicial and regulatory interpretation.

As a result, we cannot assure you that our surgical facilities will not be investigated or scrutinized by the governmental authorities empowered to do so or, if challenged, that their activities would be found

to be lawful.

A determination of non-compliance with the applicable state health care laws, rules, and regulations could subject our surgical facilities to civil and criminal penalties and could have a material adverse effect on our operations.

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Where You Can Find More Information

We make available on or through the "Investors-SEC Filings" page of our website at www.surgerypartners.com, free of charge, copies of reports, such as Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports (along with certain other Company filings with the SEC), as soon as reasonably practicable after electronically filing such material

with, or furnishing it to, the SEC.

The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this Annual Report or any other document that we file with the SEC.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business