What changed in this filing

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Item 1. Business

2022-03-01 compared with 2021-03-10 · 63 added, 67 removed, 473 unchanged (22% of the section changed)

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

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.

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

As of December 31, 2021, we owned or operated primarily in partnership with physicians, a portfolio of 126 surgical facilities in the United States ("U.S.") comprised of 108 ambulatory surgical centers ("ASCs") and 18 surgical hospitals ("surgical hospitals," and together with ASCs referred to as "surgical facilities" or "facilities") across 31 states, including a majority interest in 88 of the surgical facilities.

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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.

This has resulted in an average patient net promoter score of 94, based on patient satisfaction surveys conducted from December 2019 to May 2020.

Impact of COVID-19

The COVID-19 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.

The COVID-19 pandemic materially impacted our financial performance for the year ended December 31, 2020, and has continued to impact our financial performance during the year ended December 31, 2021.The impact of the COVID-19 pandemic on our surgical facilities varies 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, which is difficult to predict and is dependent on factors beyond our control, we saw improvement in

surgical case volumes as states re-opened and allowed for non-emergent procedures.

We cannot predict if or when utilization may return to pre-pandemic levels.

The Company continues to monitor legislative actions at federal and state levels, including the impact of the CARES Act and other governmental assistance that might be available.

During 2021, we operated in two reporting segments:

Surgical Facility Services and Ancillary Services.

Prior to 2021, we also operated in the Optical Services reporting segment.

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

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• 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 and 2019.

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As of December 31, 2021, we owned or operated primarily in partnership with physicians, 126 surgical facilities, including 108 ASCs and 18 licensed surgical hospitals.

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 Surgical Facility Services segment contributed approximately 97%, 96% and 95% of our total revenue in 2021, 2020 and 2019, respectively.

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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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

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

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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The strategic relationships through which we own and operate surgical facilities are governed by partnership and operating agreements that are generally comparable to the partnership and operating agreements of the other surgical facilities in which we own an interest.

The primary difference between the structure of these strategic relationships and the other surgical facilities in which we hold ownership is that, in these strategic relationships, a health care system holds ownership in the surgical facility in addition to physician investors.

The primary difference between the structure of these strategic relationships and the other surgical facilities in which we hold ownership is that,

in these strategic relationships, a health care system holds ownership in the surgical facility in addition to physician investors.

In each of these strategic relationships, we also have entered into a management agreement under which we provide day-to-day management services for a management fee equal to a percentage of the revenues of the surgical facility.

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Medicare Reimbursement - Hospital Inpatient Services

Seventeen of our surgical facilities are licensed as hospitals.

Eighteen 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").

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

On August 2, 2021, CMS published the IPPS final rule for federal fiscal year ("FFY") 2022, which began on October 1, 2021.

Under the FFY 2022 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 2.5%.

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 1.87%.

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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Instead, these facilities are paid under the Medicare Physician Fee Schedule ("MPFS"), which typically results in lower reimbursements.

Services provided in a dedicated emergency department are still paid under the OPPS.

provided in a dedicated emergency department are still paid under the OPPS.

This change has not significantly affected reimbursement to any of our HOPDs, but we cannot assure you that our HOPDs will not be impacted in the future.

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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.

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

Our portfolio of outpatient surgical facilities is complemented by a suite of ancillary services that we provide to support physicians in providing high quality and cost-efficient patient care.

This segment includes 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 3% of our total revenue in 2020, and 4% of our total revenue in both 2019 and 2018.

Our Ancillary Services segment contributed approximately 3% of our total revenue in both 2021 and 2020 and 4% of our total revenue in 2019 and inlcuded the following:

• 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.

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

In one model, we wholly own and operate physician practices.

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.

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

Sources of Revenue - Ancillary Services Segment

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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 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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In developing or acquiring existing surgical facilities, we compete with other public and private surgical facility and hospital companies.

Several large national companies own and/or manage surgical facilities, in some cases in connection with other lines of business with which we do not compete, including HCA Holdings, Inc., Envision Healthcare Corporation, Tenet Healthcare Corporation, Surgical Care Affiliates, Inc.

Several large national companies own and/or manage surgical facilities, in some cases in connection with other lines of business with which we do not compete, including HCA Healthcare, Inc., Envision Healthcare Corporation, Tenet Healthcare Corporation, Surgical Care Affiliates, Inc.

and Optum, Inc.

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

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

We appreciate that our colleagues are key to creating value and believe that we have a good relationship with them.

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.

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

To 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.

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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.

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.

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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.

One of our core values is to promote a culture of diversity and inclusion.

We have a Diversity, Equity, Inclusion & Community Impact Council comprised of employees with diverse backgrounds, experiences or characteristics who share a common interest in improving corporate culture and delivering sustained business results.

Our workforce is comprised of approximately 81% female and 30% 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.

We have established, and continue to enhance and refine, a comprehensive set of practices for engagement, recruiting, developing, 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.

In light of the ongoing COVID-19 pandemic and CMS COVID Vaccination Regulations, we have 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 promotes integrity, accountability and transparency, among other high ethical standards and a focus on employee welfare.

Environmental

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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 Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law on March 27, 2020.

Among other things, 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;

• the temporary suspension of Medicare sequestration from May 1, 2020, to December 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;

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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.

CMS has also temporarily waived many provisions of the federal physician self-referral law, or 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.

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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.

To assure continued compliance with these regulations, governmental and other authorities periodically inspect our surgical facilities.

To assure continued compliance with these regulations, governmental and other authorities periodically inspect our surgical

The failure to comply with these regulations could result in the suspension or revocation of a facility’s license.

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Failure to maintain accreditation would cause a facility to become subject to state survey agency oversight and potentially subject to increased scrutiny by CMS, and could result in a loss of payment from private insurance health plans.

Executive Order

On July 9, 2021, President Biden issued an executive order that is intended to promote competition in the U.S.

Among other things, the executive order encourages the Federal Trade Commission ("FTC") to ban or limit non-compete agreements, encourages the U.S.

Department of Justice ("DOJ") and the FTC to review and revise their merger guidelines to ensure that patients are not harmed by healthcare mergers, and instructs HHS to support existing price transparency rules and implement the legislation that was recently adopted to address surprise billing.

We cannot predict how, if at all, the various initiatives set forth in the executive order will be implemented by the regulatory agencies involved or the impact that the executive order will have on operations.

Affordable Care Act Repeal Efforts

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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 our health care services.

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

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.

In 2021, the U.S.

Supreme Court dismissed a case that sought to invalidate the Affordable Care Act.

However, the Affordable Care Act remains subject to various lawsuits challenging its enforcement and constitutionality.

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.

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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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Our surgical facilities must also satisfy the conditions of participation to be eligible to participate in the various state Medicaid programs.

The requirements for certification under Medicare and Medicaid are subject to change and, in order to remain qualified for these programs, we may have to make changes from time to time in our facilities, equipment, personnel or services.

The requirements for certification under Medicare and Medicaid are subject

to change and, in order to remain qualified for these programs, we may have to make changes from time to time in our facilities, equipment, personnel or services.

Although we intend to continue to participate in these reimbursement programs, we cannot ensure that our surgical facilities will continue to qualify for participation.

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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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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.

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.

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.

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 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.

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.

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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").

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").

The EKRA creates a new federal crime for knowingly and willfully:

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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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HHS has allocated increased funding towards HIPAA enforcement activity and such enforcement activity has seen a marked increase over recent years.

We cannot predict whether our surgical facilities will be able to comply with the final rules and the financial impact to our surgical facilities in implementing the requirements under the final rules when they take effect, or whether our surgical hospitals will be selected for an audit, or the results of such an audit.

We cannot predict whether our surgical facilities will be able to comply with the final rules and the financial impact to our surgical facilities in implementing

the requirements under the final rules when they take effect, or whether our surgical hospitals will be selected for an audit, or the results of such an audit.

Our facilities also remain subject to any state laws that relate to privacy or the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act.

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In light of these restrictions, in certain states we facilitate the provision of physician services by maintaining long-term management services agreements through our subsidiaries with affiliated professional contractors, which employ or contract with physicians and other health care professionals to provide physician professional services.

Under these arrangements, our subsidiaries perform only non-medical administrative services, do not represent that they offer medical services and do not exercise influence or control over the practice of medicine by the physicians employed by the affiliated professional contractors.

Under these arrangements, our subsidiaries perform only non-medical administrative services, do not represent that they offer medical services and do not exercise

influence or control over the practice of medicine by the physicians employed by the affiliated professional contractors.

Although we believe that the fees we receive from affiliated professional contractors have been structured in a manner that is compliant with applicable fee-splitting laws, it is possible that a government regulator could interpret such fee arrangements to be in violation of certain fee-splitting laws.

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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