Surgery Partners Inc (SGRY) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Surgery Partners, Inc. Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Mike Doyle, CEO of Surgery Partners. Please proceed, sir.

Thank you, operator. I'd like to welcome everyone to Surgery Partners Second Quarter 2017 Earnings Call. Joining me on the call today is Teresa Sparks, our Executive Vice President and Chief Financial Officer. I'll now turn it over to Teresa to review the safe harbor statement.

Thanks, Mike. Before we begin, let me remind everyone that during this call, Surgery Partners' management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, anticipation, beliefs, estimates, plans and prospects.

Such statements are subject to a variety of risk, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risk and other factors are set forth in the company's earnings release posted on the website and provided in our annual report on Form 10-K and our quarterly report on Form 10-Q, each is filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. A reconciliation of adjusted EBITDA and adjusted net income to net earnings calculated under GAAP can be found in our earnings release, which is posted on our website at surgerypartners.com and in our most recent quarterly report on Form 10-Q.

With that, I'll turn the call back over to Mike.

Thanks, Teresa. Thank you for joining us today to discuss Surgery Partners second quarter results. This quarter is a bit of a tale of 2 cities. We are encouraged by the underlying dynamics of our business model, our pending acquisition of National Surgical Healthcare and our progress in attracting higher-acuity cases. However, we recognize that the weak near-term health care utilization in combination with payer mix dynamics has had an adverse effect on our earnings.

Let me start with our core business. During the quarter, from a same-facility perspective, we saw a modest increase in patient cases of 0.4% and had a 1.5% increase in revenue per case. This was softer than our recent trends, and we simply did not see the usual pickup that occurs from the first quarter to the second.

There are 3 major factors affecting our second quarter results: slower industry-wide utilization, unfavorable payer dynamics and slower-than-expected progress on our integrated physician practice acquisition from the prior year. The slower utilization experienced during the quarter was broad-based, not isolated to specific markets or geographies, and we are experiencing the same issues that some of our peers have reported as it relates the volume challenges. We continue to have strong physician retention with our physician base remaining stable. However, we do see a slowdown in physician practice volumes translating to softer surgical volumes.

Second, the payer mix shifted away from commercial payers towards more government-pay and self-pay during the quarter. We continue to see an increase in high deductible plans as well as larger deductibles embedded in the overall structure of these plans. We believe that this trend of shifting the cost of health care to the consumer has delayed the normal utilization patterns, which will be weighted to the second half of the year once these higher deductibles are more likely to have been met.

Lastly, we continue to have challenges as it relates to the turnaround of our integrated physician practice acquisition we discussed last quarter. While we have made progress, we have seen limited sequential improvement from this asset.

The soft utilization in the second quarter was disappointing, but we believe there is no change in the secular trends towards more outpatient care and towards more efficient and cost-effective settings. This view is reinforced by recent actions by CMS. As you may have seen a couple of weeks ago, CMS proposed a 1.9% rate adjustment for ASCs for the fiscal year 2018.

Another significant development was that the agency also officially proposed removing knee replacements from the inpatient-only list and requested comments on whether total hip and partial hip replacements should also be added to the covered procedure list for ASCs. These changes, if passed, should significantly increase our target patient market. Medicare covered more than 400,000 hip and knee replacements in 2014 at a cost of over $7 billion. While not every procedure would be appropriate to shift to the outpatient setting, even a fraction of this market could represent a huge opportunity for ASCs. We continue to advance our capabilities as it relates to higher-acuity cases.

Our strategy is built upon partnering with physicians to offer high-quality services and attractive settings to serve patients and payers. We have built an extensive network of multispecialty ambulatory surgery centers, surgical hospitals and supporting services. With the bulk of the ASC industry still owned by local physicians, we [see] the opportunity for continued consolidation.

As we announced last quarter, our operations will significantly expand following the confirmation of the National Surgical Healthcare acquisition. This strategic acquisition will position the company to expand upon our musculoskeletal procedures and capture the cases shifting into the appropriate [site] of service. I am pleased to report that we have received all the regulatory approvals for this transaction and have the financing in place. We expect to close this transaction later in the third quarter.

NSH was the largest remaining freestanding and independent surgical facilities company, and we are excited about the opportunities it will provide Surgery Partners. This transaction will add 21 surgical facilities in 15 markets, with 75% of the revenue derived from musculoskeletal procedures and more than 1,000 affiliated physicians.

The NSH facilities also enjoy top rankings in terms of quality and patient satisfaction. We expect that NSH will add new locations for our ancillary services as well as additional expertise in high-acuity procedures. The combined company will have a portfolio of 125 surgical facilities, 58 physician practices and complementary ancillary services. We will operate in 32 states and have more than 5,000 affiliated physicians.

The National Surgical Healthcare transaction will bring us a new financial partner as Bain Capital Private Equity provided part of the financing for the transaction. With this transaction, Bain also acquired a 54% interest in Surgery Partners at $19 a share from our original private equity sponsor, H.I.G. Capital, who has had an investment in the company for the past 8 years. Bain Capital Private Equity is a well-established, successful investment firm with years of experience across the health care industry. We are enthusiastic about working with the NHS team and the newly appointed Bain Capital board members.

At this time, we are tracking with our pre-acquisition game plan for NSH and are prepared for a close in the third quarter. We have engaged AlixPartners, a well-known consulting firm, to assist us with the integration and synergy capture both on near-term and long-term opportunities. We expect to achieve our target of $20 million of cost synergies with a focus on procurement, duplicative overhead and overall margin enhancement opportunities.

As we have focused on our pre-close activities for NSH, we chose to pause on our other active pipeline opportunities. Our full year guidance had included $5 million to $7 million in EBITDA from these transactions. We are prepared to reengage these acquisition opportunities. However, due to the timing of the NSH close, these acquisitions would have an immaterial contribution to earnings in the current year. We look forward to the next stage of our growth and bringing the NSH and Surgery Partners teams together.

Let me turn it over to Teresa to discuss the results for the quarter.

Thanks, Mike. As discussed, we remain optimistic concerning the fundamentals of the industry and our acquisition of NSH. For the quarter, total cases increased 3.5%, driven by acquisitions in the prior year, while revenue per case declined by 3.9%. On a same-facility basis, our cases increased 0.4%, revenue per case increased 1.5% and same-facility revenue increased 2% to $296.5 million.

Total revenue decreased 0.5% to $288.4 million from $289.7 million in the same period last year. As expected, total revenue reflects the anticipated lapse of a breakeven anesthesia contract to an unaffiliated provider. The contract was neutral to EBITDA but dilutive to revenue by approximately $8.8 million during the quarter. Excluding the contract from both periods, we would have achieved revenue growth of 2.7%.

Our quarterly results were affected by softer volumes experienced industry-wide, along with the adverse payer mix that Mike mentioned earlier. Within the case mix, we experienced an increase in higher-acuity procedures, combined with the shift in payer mix towards less favorable payers, including more government reimbursement and self-pay. Government reimbursement, which is primarily Medicare, represented 41.7% of revenue this quarter compared to 40.2% for the same period a year ago, while commercial payers declined to 49.6% of revenues from 51.3%. While our efforts to increase our higher-acuity cases have been successful, the higher mix of less favorable payers hindered the overall benefit.

As we take a closer look at EBITDA for the quarter, we anticipated achieving approximately 25% of our full year guidance during the second quarter as consistent with historical trends and including a normalized approach to M&A. Since we had the opportunity to acquire NSH, we did not pursue the usual smaller one-off acquisitions. The absence of those smaller transactions made a difference of approximately $1.5 million this quarter.

In bridging back to our expectation for the quarter, the 3 major factors Mike highlighted earlier affected our quarterly EBITDA results as follows. First, slower industry-wide utilization relative to our volume expectations resulted in a difference of approximately $3 million. Second, the unfavorable payer dynamics with the shift to a less favorable payer mix impacted adjusted EBITDA by approximately $6 million to $7 million. Lastly, the slower-than-expected improvement at our integrated physician practice acquisition resulted in a shortfall of approximately $3 million. The combination of all these factors resulted in less favorable margins as our adjusted EBITDA margin declined to 12.8% from 15.9% of revenues, with adjusted EBITDA at $37 million in the quarter.

On a year-to-date basis, revenues increased 3.2% to $574.5 million from $556.8 million for the same period last year. Total cases increased 5.7% while revenue per case declined by 2.4%. On a same-facility basis, our cases increased 1.3%, revenue per case increased 3.7% and same-facility revenue increased 5% to $581.4 million.

As highlighted for the quarter, total revenue reflects the anticipated lapse of a breakeven anesthesia contract to an unaffiliated provider. The contract was neutral to EBITDA but dilutive to revenue by approximately $20 million for 2017, of which $17.8 million is reflected in the year-to-date results. Excluding the contract from both periods, we would have achieved revenue growth of 6.6%. Adjusted EBITDA is $77.2 million on a year-to-date basis, a decrease over prior year due to the second quarter results.

Turning to the balance sheet. We ended the quarter with cash and equivalents of $57 million and availability of approximately $56 million under our revolving credit facility. Normalized net operating cash flow less distributions to noncontrolling interest was $4 million during the quarter and includes approximately $35 million of cash interest payment, which were not reflected in the prior quarter, along with $2.9 million in merger and integration-related costs.

The $35 million of cash interest payment includes a $17.8 million interest payment on our existing senior unsecured note, not reflected in the prior period, as well as the timing of our interest payments on the variable-rate term loan adjusted to maintain a LIBOR rate at or below our 1% floor. In addition during the quarter, our cash flow from financing activities reflected an interest payment of approximately $7 million related to our new $370 million senior unsecured notes related to the acquisition of NSH and currently held in escrow.

Our ratio of total debt to EBITDA as calculated under the company's credit agreement was 6.94x, which is temporarily higher than we planned. As previously discussed, we structured the NSH transaction in leverage-neutral manner. We expect, as health care demand returns to a more normal level, we will move toward deleveraging. We continue to target a range of 5x during the first half of 2019.

Given the trends we experienced this quarter, we believe it is prudent to adjust our guidance for the full year on a stand-alone basis. The company now anticipates revenue in the range of $1.18 billion to $1.2 billion and adjusted EBITDA in the range of $174 million to $181 million for the full year 2017. Including the partial year impact of NSH, revenue would be in the range of $1.34 billion to $1.36 billion and adjusted EBITDA in the range of $199 million to $207 million. This guidance does not incorporate any smaller one-off acquisitions this year and assumes that we experience a return to higher demand in the second half of the year but not to the extent that we forecast previously.

With that, I'll turn the call back over to Mike.

Thanks, Teresa. We remain enthusiastic about the prospects for Surgery Partners as the health care industry continues move towards more efficient care and consumers play an increasingly important role in choosing their health care providers. This company is at the center of this trend as it builds out a network of diversified, high-quality services that meet the needs of patients, physicians and payers.

Finally, we would like to thank our hardworking physicians and employees for their contributions.

I would now like to turn the call back over to the operator to begin the question-and-answer session.

(Operator Instructions) Our first question comes from Kevin Fischbeck with Bank of America Merrill Lynch.

So I appreciate the color about the 3 drivers, I guess, to the weakness in the quarter. Do you have a similar breakout for kind of the reduction in core guidance? How much of that core guidance reduction was volumes versus mix versus the physician deal?

Yes. So Kevin, thanks for the question and dialing in. As we look at the core guidance and we bridge back to kind of the softness, as I mentioned, that we experienced in the second quarter, based on our expectation, as I outlined, that was about $11 million. And so we give the case impact and the rate impact, as you think about cases returning to 3% as expected and rate of 1.4% and we had expected 3%. So that breakout of the $11 million is -- was provided in my prepared remarks. And then we're anticipating that, that softness continues in the second half. But overall, when you think about same facility for the revised guidance -- same-facility revenue growth, our original target was 5% to 7%, and we brought that down to a range of 3.5% to 5.5%.

Okay. And then, I guess, these issues, I guess, around volumes and payer mix, did those impact NSH as well? Has your view about what NSH might be able to contribute next year changed at all given the weak broader backdrop?

Yes. I think the -- on a positive note, as we've taken a look at NSH results for the second quarter and year-to-date, they have performed as expected. And although we're seeing some of the same things in their assets from a payer mix perspective, they've been able to have a broader array of types of procedures with the capabilities of overnight stay and some of the capabilities around higher-acuity procedures that they can perform in some of their facilities, which we can't in the ASC sector. So from that perspective, although they are performing as expected, they probably got there a little bit differently than expected, but have been able to have success in performing as expected. So we're excited about that piece of it.

Our next question comes from Ralph Giacobbe with Citigroup.

You noted, again, expectation, going back to the guidance, of sequential improvement. I guess, what are some of the tangible things you can do to sort of improve operations aside from kind of the hope that macro factors bounce back? And I guess, coming off a [print] where you had the 19% decline in EBITDA, just talk about your comfort with sort of that mid-single-digit back half growth estimate at this point.

Yes. I think the dynamics that -- again, as you say, one of the things you can point to that can begin to have a shift in some of those things, the effect of the payer mix shift, I think that's a little bit difficult. As we focus on some of the things we can do there, it's looking at some of these higher-acuity cases and the cases that are coming through with unfavorable payers and really focusing on the margin of those. As we've always had a pretty fair mix of -- a favorable payer mix on these higher-acuity specialties, it's been something that has been overall positive to earnings. As you see that payer mix shift, it becomes a little bit more challenging. So some of the things that we have in place on a combined company with NSH and bringing the 2 companies together are really focusing on that procurement, the capabilities around implants, which are newer types of cases to some of our existing facilities, and really improving the margins on those regardless of payers. So that will continue to be a big focus. And we've engaged the team, both internal and externally, to help us through that process and really making sure we're set up long term to continue to excel on the fact that these higher-acuity cases are the right place to be. From the other perspective, as we take a look and have the conversations, and it's more anecdotal with the physicians, is that we are seeing that the physicians continue to obviously see patients through their doors and in their individual practices. It may be a little bit softer, but what they're really seeing is that transition -- due to the higher deductible plans and the size of those deductibles, they're seeing a delay in the patients that need surgery, that it's not as simple as it was before. We're not seeing it in ophthalmology where you have 70% of your volumes coming from Medicare and the economics of the patient hasn't changed. We're seeing a delay in these commercial payers -- the commercial patients with the higher deductible plans. So the idea and the thought process that we have on that and the anecdotal information we're getting back on a specialty-by-specialty and doctor-by-doctor basis is that those high deductibles are putting a delay in the access to health care for many of the patients, and we continue to see that in our own physician practices.

Okay. And then I wanted to go back to the ancillary piece that fell off sequentially. I guess I'm still sort of unclear in terms of what changed there from kind of last quarter. As I think you had highlighted -- you've certainly highlighted the integration challenges in the past, but I think, last quarter's call, you suggested volumes were intact, physicians were in place, things were going well. So just help us understand kind of what the real drop-off was there, I guess, either from a top line and/or, more importantly, I guess, from a cost perspective.

Sure. I'll touch on some of the numbers and then Mike -- let Mike add the commentary just on the efforts there in terms of turnaround and improvements in operations. So year-over-year, Riverside or the acquisition that we're speaking to was about $3 million, and sequentially, that was about $1 million. So that's the overall impact. And some of the efforts that -- we saw some deterioration. While we had some momentum related to this acquisition, first quarter to second quarter, we saw some deterioration in terms of that momentum that we felt like was in place as we started the beginning of the year.

And then just to give an overview on the turnaround efforts, is that this is a large platform, integrated physician practice that has multiple service lines. And really, what we've seen is revenues and volumes across the integrated platform has taken a different mix and a different pattern over the past, call it, 6 months -- 6 to 12 months. And that piece of it has caused -- the revenue down, costs have come up. And during this period where we're in the process of turning around and really finding that stable operating position, we'll continue to see some of those increased costs. So really, a combination of mix within that integrated practice, revenue and volumes being softer and then dealing with that increased cost on top of it. So as in most situations that you see where you have to jump in and have that post-integration lift, we're seeing that perfect storm of the 3 factors that we've focused on and have a plan in place over the next 90 days to continue to get improvement.

Is there anything that's kind of onetime in nature that you can get back just as quickly as you sort of lost it? Is there a way to frame how much of this is kind of a quick comeback, if you will, as opposed to something that continues to linger?

Yes. So I think there are some initiatives that we have kicked off that can be quicker comebacks. I think that probably accounts for about 1/3 of it. I think the rest is just going to be something that has to be worked through over the next -- call it, the next 9 months.

Our next question comes from John Ransom with Raymond James.

On the practice -- integrated practice, let's say, 90 days or so from now, things haven't gotten better, what are some potential Plan B, Plan C things you can do?

Yes. I think we've been -- I think the key piece of it for us, we're -- I know that we've heard others talk about having these large anesthesia practices. This is a little different. This is not an anesthesia practice. This is a practice that's integrated practice that's focused on musculoskeletal, spine and pain management, and there are obviously a lot of options to pivot here. We have a surgery center that's associated with it, and we have a multi-location physician practice. So there's always a way to focus on operational changes and have a different approach in the market. I think from our perspective, it's really worth that focus to continue operational improvement, working with the physicians in the market and ensuring that we could get -- A, get costs under control and bring the overall mix of the practice back to where it was. And that's really placing this practice side by side on previous performance and understanding the levers we need to pull to bring it back to that performance. And also -- we also have successful large practices throughout our network of facilities that will influence how we approach that as well. So I would say from a -- on a high level, not that we're thinking anything around alternatives right now, we've got an asset, we've got a good market, and we're going to work through the process of fixing it and bringing it back around.

So has the unhappy experience here cured you of your desire to do another one of these? I mean, when you came public, the big story was, "We do small tuck-in deals where we already have a big surgery center practice." This was a bit of a departure. Is this a teaching moment, I would think?

Yes. You kind of led me down the path I don't have a choice, but it's a teaching moment. But I think it's been a teaching moment before this. I think where we've seen success is just in our surgical markets, bringing in one-off physician practices that allow us to capture new surgical volume, capture new ancillary services. And the thought process when you do a platform acquisition is that things remain pretty close to the way they were, and that's the first thing that is very difficult to control. When you're on a one-off physician practice, those aspects of it become very -- much easier to control, I shouldn't say easy to control, but much easier. So on an overall basis, our focus will be on larger practices. We're going to follow what's been successful in our surgery center industry for many years and joint venture those when we do have that type of situation. So there continues to be a very vested interest of the physicians when we do them, but I -- what you will see more from us is on a one-off physician practice in a market where we have a surgical facility, would be what you should be expecting.

Okay. And just a couple of other things. What do we think now is the new normal? I know you're guessing a little bit here. But if we're thinking about ASCs, just simplistically, they do 100 procedures a year. How many of those are being now done in the fourth quarter, do you think, versus a couple of years ago?

I think we're continuing...

I mean, does it -- I'm sorry, because it looks like you're assuming about 1/3 of the EBITDA from your acquisition is coming in 4Q. And I just can't remember. Is that higher, lower than it was a couple of years ago?

Well, what I was going to say, just as you think about on a stand-alone basis, so put the acquisition of NSH aside, we're continuing to hear and others report that we're moving to this 40-60 mix, 40% of the contribution in the first half and 60% in the second. Our -- we're not quite moving to that level in terms of our guidance, but we see that inching up over where we were in the prior year. And so you continue to see that push and that pronounced effect of the high deductible plans and just the overall environment pushing into the last half of the year.

So it's -- you would say it's markedly higher today than 2 years ago? I mean, so -- if you were looking at fourth quarter, you have ...

Yes. Sequentially, I think you -- yes, fourth quarter, you continue to see on a year-over-year basis that it continues to be a bigger part of the year's performance.

Okay. And then lastly, your balance sheet's a little bit tight. What's the level of EBITDA needed in '18 on a pro forma basis to be in compliance or comfortably ahead of your covenants?

Yes. So we are -- we finance -- we're within -- when you think about the transaction being structured in a leverage-neutral manner, the synergies that we've identified, which, just to point out, are all cost synergies, we -- the transaction works on a stand-alone basis for -- just looking at a leverage-neutral transaction from that standpoint and $20 million of cost synergies. So that's -- the point being that we have not layered in revenue synergies, which we think are definitely out there to be captured. The deal stands on its own with the cost synergies that we've identified. So we'll have anticipated covenant EBITDA [at] close -- approximately $300 million to $310 million. And so there's no covenants that govern that, but -- so we're well within kind of what we had originally thought through from a transaction perspective.

So where does the trip -- what's the tripwire in '18? What's the minimum EBITDA you would need pro forma for '18?

Well, there's no minimum requirement. I think our original expectations as we think through kind of a normalized growth to the covenant EBITDA, we would be in that, call it, $330 million range for -- at the end of 2018, kind of back to our original thought process with the combined transaction.

But as you look at the covenants in our credit agreements, we have a ton of room. I mean, we would have to be over 9x to trip a covenant.

Yes. I was just looking for -- is it $250 million? Is it $230 million? Is it $275 million?

Yes. It's the low 2 -- it's like 220-ish. And again, I don't have the math right out here, but it's that low.

Our next question comes from Chad Vanacore with Stifel.

It's Seth Canetto on for Chad. My first question's, just looking at the NSH and your comments that you guys made that it's performed as expected but got there differently. I mean, is there any more color that you can give on how that trended in the quarter as far as are they being impacted the same way as you guys and then they made it up on the cost side? Or any more color you can give there?

I think there's a -- I think it's a combination of just an expansion of the types of services provided. So it's not necessarily making it up on the cost side. It's being able to make it up from a volume perspective and make it up from a specialty mix perspective. Keeping in mind that the specialty mix is a little bit different in those assets.

Okay, great. And then are there any parallels that you can draw from the physician integration issues and NSH that you'll have to work for -- or work through going forward? I think they both have musculoskeletal. Is there any concerns from integration with NSH?

No. I mean, I think what you have to understand is having a one-off acquisition in this Florida market is -- and again, it's a platform acquisition, but it's not a company. It's not a true platform of surgical facilities. This is a much different asset with a great infrastructure, great team that's coming with it that's been operating and growing for -- I probably won't quote the founding date of NSH, but we've been familiar with the company over the last 7 or 8 years. They've got a great team, and we are -- we really look at the business the same way. So there's really no way to draw a parallel between integration issues as you bring in a one-off physician practice platform acquisition versus bringing in a company. We've been through -- and again, as you take a look historically through the company, we've continued to do multiple acquisitions. And this is really the one that we've had difficulty with from an integration perspective. We've done -- since combining with Symbion, we've done 20 transactions, and we have one that's causing us some grief. I think if you take a look at our experience on bringing Surgery Partners and -- NovaMed and Surgery Partners and Symbion together, again, we've had very, very successful integrations from that perspective. And we're interacting with the team and are excited about working with them. They've done a good job with their facilities. The physician-owned hospitals are exciting, and we look at some of the benefits and experience that they're going to bring on these higher-acuity cases and musculoskeletal with the fact that 75% of their revenues are coming from that and the expanded capabilities that they already have due to some of their overnight stay capabilities in their facilities. So I think, from that perspective, it'll be positive and very little risk.

And then just last question. When you look at margins, I think you guys mentioned in previous calls that the new service lines, you can expect some hit to margins there. And when should we really expect those programs to reach maturity?

Well, I think the main point that we've been discussing is when you compare lower-acuity case such as GI or just a pain -- a simple procedure, an injection, those margins are higher because they have very little supply expense associated with those types of cases. And the general theme is, as you move into these higher-acuity cases, they're by nature lower-margin cases. They're higher profitability in terms of total dollar, but they have a lower profit margin. For example, a pain stimulator or as we move into the total joint, continue that push, those higher-acuity procedures do have a lower profit margin. And so you have to have the right payer mix as you move up the acuity level. And when you don't, it accentuates the fact that those procedures, while profitable and good cases to have and everything is trending in that direction, it does place pressure on your margins just from the overall profitability of the cases.

Our next question comes from Brian Tanquilut with Jefferies.

It's Jason Plagman on for Brian. First question, on the ancillary services, the EBITDA was down about $3 million sequentially, including the $1 million decline you mentioned at Riverside. So the remaining $2 million gap, was that due to the trickle-down effect from volume softness? Or any insight to provide there that impacted those numbers would be helpful.

Yes. So the River -- the acquisition did have an impact on overall margins and profitability. We're seeing continued improvement with our core one-off physician practices. That is improving, but sequentially, it was about $1 million from the practice. And then the ancillary services associated with that practice also had a sequential decline. And overall, the volumes there have -- as Mike mentioned, have gone -- are under pressure. And so the practice alone had about $1 million is what we referenced, but there are also an ancillary component of the services associated with that practice.

Okay, that makes sense. And then last quarter, you mentioned decelerating growth at a couple of your surgical hospitals which had performed very well in -- over the last few years. Any comments you can make on performance of the surgical hospitals in your portfolio compared to the overall business? Was there any difference that you saw this quarter?

That expectation was there in terms of having a little bit slower growth while we made additional investments to continue to capture market share in those particular markets that we have pointed to from a surgical hospital perspective. We also saw in those markets that have higher-acuity cases, just by nature of it being their hospital, and -- we saw a shift in those markets as well to lower payer -- less favorable payers in those markets.

Our next question comes from Bill Sutherland with The Benchmark Company.

Most of mine have been asked. I'm curious about the quarter-over-quarter trend in Q2 on same-store growth. I know it's a -- I mean the drop down that you guys experienced relative to kind of what you're seeing [with] a couple of the peers was dramatic. I know Q1 was off a bit from Q4. But what kind of happened, do you think, over the course of those 2 quarters?

You know what, I think the key piece is, as we look at our physician base, it remains very stable. We've had very few, and probably less than any other quarter or any other half year, attrition of physicians for retirement, moving out of the area or physicians leaving the network. We haven't had any high-producing physicians moving on or leaving, and those that do, we've been very successful in implementing succession plans. So from being able to recruit new physicians, we continue to be successful there, continue to implement the programs into the existing surgical facilities, continues to be a success. What we're seeing is that as you look throughout the entire base of the physicians, it's not somebody dropping off 50% or 70% or 80%. It's just a small trickle that the existing base has decreased, and we're filling that up as best we can with new recruits. But it's hard to influence that physician practice and the volumes that they're seeing. And even with -- even though their physician practice volumes have -- are a little softer, what's really taking effect is that conversion of their patients that are coming through the door and converting them to surgery. And that's really highlighted around the higher-acuity specialties, such as orthopedic, neuro and some of our pain management.

Just to add on to that, when you think about that same base of physicians, since that has remained stable quarter-over-quarter, year-over-year, that same group drove 7.9% case growth in the prior quarter. So this is a tough comp to overcome, and just that base of physicians has remained consistent.

So it's partly a comp issue, Teresa, as well as just the -- I mean just...

General (inaudible).

Yes. On a brighter note, looking at the Medicare proposals, the fraction of uncomplicated procedures that go to ASCs, I've heard 20% to 40%. Is that of the total?

Yes. I think from our perspective -- and again, it's a facility-by-facility basis on how they get to that evaluation, [we've] standardized a lot of that clinical assessment as it relates to commercial. But we have about 1/3, it's kind of how we think about it. So I would say right in that range.

Our next question comes from Frank Morgan with RBC Capital Markets.

I was hoping you could go back to a comment you made earlier when you were describing the performance at NHS -- NSH that you had seen so far. And I think you made a comment: you got there but you got there differently -- or they got there differently. Could you give us a little more color on what you were meaning there?

Yes. I don't think it's anything dramatic. They've just done a great job of pivoting. And as they've seen the softer payer mix, they have been successful in bringing these higher-acuity cases into their existing facilities. And if you think about the physician-owned hospitals and this effort and the programs that they've put in place to ensure they're capturing these higher-acuity cases and have a focus on that, they have been able to do a great job on negotiating on the devices for the higher -- the device-intensive cases. They've continued to be able to take Medicare patients that have very little change in the dynamic of what their economics are on a case-by-case basis when they come to have a surgical procedure done that they've been able to capture those, which are approved in the physician-owned hospitals but not in the ASCs. So there's just a different dynamic, and they've been able -- they've been very successful in leveraging that to overcome this payer mix shift and some softness.

Okay. Maybe one final one here for Teresa. Appreciate the color, the weighting of this -- 40-60 weighting of EBITDA contribution. But as we think about the cadence in the third and fourth quarter, would you care to share any thoughts on how that weighting would be between those -- just between the third and fourth?

Yes. So just kind of recapping our original guidance. We had anticipated 20-roughly percent in the first quarter, 25% in the second and third and the balance in the fourth. And so as we've looked at actual results, that pushes into the fourth quarter but not unreasonable in terms of how we're seeing the business trend. So it pushes up the third -- the fourth quarter 2% in terms of contribution in the fourth quarter.

And again, a lot of this will depend on, from a -- closing the NSH transaction in the third quarter, and timing of that will play into this as well. So we're a little hesitant to get very specific on a quarter-by-quarter basis, but we see a little bit more of a push into the fourth quarter.

From our perspective, would we be better off just basically assuming that acquisition is effective at start of the fourth quarter maybe, just October 1 start for modeling purposes?

Yes, that makes sense. I mean, we have a month of, I guess, [blocks] in terms of the timing. We do expect to close in the third quarter. So I think that's probably a safe bet.

This concludes our question-and-answer session. I would like to turn the call back to Mr. Mike Doyle.

Thank you, operator. Appreciate everybody joining the call today and for the questions. Obviously, we look forward to updating you on the third quarter as we get through the next quarter, and looking forward to better results.

Overall, I think we're pleased with some of the progress that we've made. Although the results are disappointing, we do have a lot of things that we continue to look forward to, bringing the NSH team onboard and continuing to work through the opportunities that we have on the higher-acuity cases and the focus on musculoskeletal and again, working on the -- really the focus on how we continue to improve margin through procurement on these device-intensive cases.

So that will be the focus as we look through the next quarter, and we'll update you on it then. Hope everybody has a great rest of the week. Thank you.

This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.