Surgical Care Affiliates
Surgical Care Affiliates, Inc. (Form: 10-K, Received: 03/10/2015 11:15:06)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2014

Commission file number: 001-36154

 

SURGICAL CARE AFFILIATES, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-8740447

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

520 Lake Cook Road, Suite 250

Deerfield, IL

 

60015

(Address of principal executive offices)

 

(Zip Code)

(847) 236-0921

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Exchange on Which Registered

Common Stock, par value $0.01 per share

 

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ¨     No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

Accelerated filer

 

x

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes   ¨     No   x

The aggregate market value of the registrant’s voting and non-voting common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold on June 30, 2014 was $411,378,097.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Class of Common Stock

 

Outstanding at March 1, 2015

Common stock, par value $0.01 per share

 

38,671,573 shares

 

 

 

 

 

 


SURGICAL CARE AFFILIATES, INC.

FORM 10-K

INDEX

 

General

  

2

 

 

Forward — Looking Statements

  

2

 

 

 

PART I.

 

 

  

 

 

 

 

Item 1.

 

Business

  

3

 

 

 

Item 1A.

 

Risk Factors

  

31

 

 

 

Item 1B.

 

Unresolved Staff Comments

  

55

 

 

 

Item 2.

 

Properties

  

55

 

 

 

Item 3.

 

Legal Proceedings

  

55

 

 

 

Item 4.

 

Mine Safety Disclosure

  

55

 

 

 

PART II.

 

 

  

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

56

 

 

 

Item 6.

 

Selected Financial Data

  

57

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

58

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

  

84

 

 

 

Item 9.

 

Changes in and Disagreements with Accounting and Financial Disclosures

  

131

 

 

 

Item 9A.

 

Controls and Procedures

  

131

 

 

 

Item 9B.

 

Other Information

  

132

 

 

 

PART III.

 

 

  

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

  

132

 

 

 

Item 11.

 

Executive Compensation

  

140

 

 

 

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

148

 

 

 

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

  

151

 

 

 

Item 14.

 

Principal Accounting Fees and Services

  

153

 

 

 

Part IV.

 

 

  

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

  

155

 

 

 

Signatures

  

178

 

 

 

1


GENERAL

Unless the context otherwise indicates or requires, references in this Annual Report on Form 10-K to “Surgical Care Affiliates,” the “Company,” “we,” “us” and “our” refer to Surgical Care Affiliates, Inc. and its consolidated affiliates after our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013 and to ASC Acquisition LLC and its consolidated subsidiaries prior to our conversion from a Delaware limited liability company to a Delaware corporation on October 30, 2013. In addition, unless the context otherwise indicates or requires, the term “SCA” refers to Surgical Care Affiliates, LLC, our direct operating subsidiary.

Pursuant to the conversion, every 10.25 outstanding membership units of ASC Acquisition LLC were converted into one share of common stock of Surgical Care Affiliates, Inc., and options to purchase membership units of ASC Acquisition LLC were converted into options to purchase shares of common stock of Surgical Care Affiliates, Inc. at a ratio of 10.25 membership units of ASC Acquisition LLC underlying such options to each one share of common stock of Surgical Care Affiliates, Inc. underlying such converted options. In connection with the conversion, the exercise prices of such converted options were adjusted accordingly. In addition, every 10.25 outstanding restricted equity units of ASC Acquisition LLC were converted into one restricted stock unit (“RSU”) of Surgical Care Affiliates, Inc. All information included in this Annual Report on Form 10-K is presented giving effect to the conversion.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance, which involve substantial risks and uncertainties. Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include any statement that, without limitation, may predict, forecast, indicate or imply future results, performance or achievements instead of historical or current facts and may contain words like “anticipates,” “approximately,” “believes,” “budget,” “can,” “could,” “continues,” “contemplates,” “estimates,” “expects,” “forecast,” “intends,” “may,” “might,” “objective,” “outlook,” “predicts,” “probably,” “plans,” “potential,” “project,” “seeks,” “shall,” “should,” “target,” “will,” or the negative of these terms and other words, phrases, or expressions with similar meaning.

Any forward-looking statements contained in this Annual Report on Form 10-K are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of forward-looking information should not be regarded as a representation by us that the future plans, estimates or expectations will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Forward-looking statements involve risks and uncertainties which may cause actual results to differ materially from those projected in the forward-looking statements, and the Company cannot give assurances that such statements will prove to be correct. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information or otherwise. Given these uncertainties, the reader should not place undue reliance on forward-looking statements as a prediction of actual results. Factors that could cause actual results to differ materially from those projected or estimated by us include those that are discussed in “Part I, Item 1A. Risk Factors”.

 

 

 

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Part I

 

 

Item 1. BUSINESS

Overview

We are a leading national provider of solutions to physicians, health systems and payors to optimize surgical care. We operate one of the largest networks of outpatient surgery facilities in the United States, which as of December 31, 2014, was comprised of 179 ambulatory surgery centers (“ASCs”), six surgical hospitals and one sleep center with 11 locations. Our business model is focused on building strategic relationships with health systems, physician groups and payors to acquire, develop and optimize facilities in an aligned economic model that enables better access to high-quality care at lower cost. As of December 31, 2014, we owned and operated facilities in partnership with 42 health systems and approximately 2,000 physician partners. We believe that our partnership strategy and comprehensive suite of solutions will enable continued growth by capitalizing on increasing demand for high quality, cost-effective settings of care, the increasing need for scaled partners in healthcare, the transition to a coordinated care delivery model and the trend of physician and health system consolidation.

The healthcare industry is in the midst of a transition characterized by increasing focus on cost containment and clinical outcomes, driven by recent regulatory efforts and new payment and delivery models, such as Accountable Care Organizations (“ACOs”). In this environment, improving clinical quality and reducing the cost of surgical delivery, which represents one of the largest components of medical spending in the United States, will be of greater focus. We believe we are a critical part of the solution because we provide a lower-cost delivery alternative that (1) we believe enhances the quality of care and patient experience, (2) provides a strategic approach for physicians that improves productivity and economic alignment, (3) enables our health system partners to expand access within their markets while addressing the pressures resulting from changing payment models and (4) offers an efficient and lower-cost alternative for health plans, employers and other health plan sponsors.

Our scale of operations allows us to provide our affiliated physicians and health system partners with a comprehensive suite of services that support clinical quality, operational efficiency and enhanced financial performance. We offer tools and systems in the areas of clinical benchmarking, clinical best practices, operating efficiency, care coordination and supply chain management. Our partnership model aligns the interests of our partners in achieving strong clinical and operational outcomes.

Following the purchase of our company in 2007 by TPG Global, LLC (together with its affiliates, “TPG”), MTS-SCA Acquisition LLC (“MTS”) and certain of our current and former directors, our senior leadership team has transformed our strategic approach from operating a network of facilities to providing a comprehensive suite of solutions to multiple constituents along the surgical care continuum. We have experienced significant growth in our provider partnerships and enhanced our focus on clinical outcomes and patient experience, resulting in strong and consistent performance in our key financial and operating metrics. We believe our comprehensive solution set has established SCA facilities as a site of choice to patients, physicians, health systems and payors, as reflected in (1) our patient and physician Net Promoter Scores, which are measures of loyalty based on asking patients or physicians whether they would recommend our facilities to a friend or family member or colleague, as applicable, (2) growth in the number of physician partners to approximately 2,000 as of December 31, 2014, with approximately 7,500 physicians performing procedures in our affiliated facilities in 2014 and (3) growth in health system partnerships from 18 to 42 from December 31, 2007 to December 31, 2014.

Our commitment to patient care, our outstanding teammates, our health system partnerships and our investments in systems and processes to drive results, coupled with strong industry trends, have enabled us to build a track record of growth. Our consolidated total net operating revenues increased from $726.4 million in 2012 to $864.7 million in 2014, representing a 9.1% compounded annual growth rate (“CAGR”). Given the significant increase in the number of our nonconsolidated facilities, driven by the success of our health system and physician partnership growth strategy, we also review an internal supplemental operating measure that does not comply with generally accepted accounting principles (“GAAP”) called systemwide net operating revenues growth, which includes both consolidated and nonconsolidated facilities (without adjustment based on our percentage of ownership). Our systemwide total net operating revenues increased at a 12.7% CAGR from 2012 to 2014. Our net income increased from a loss of $20.0 million in 2012 to income of $32.0 million in 2014, our Adjusted EBITDA-NCI increased from $130.1 million in 2012 to $156.7 million in 2014, representing a 9.7% CAGR, and our Adjusted Net Income increased from $36.6 million in 2012 to $81.5 million in 2014, representing a 49.2% CAGR. Adjusted EBITDA-NCI and Adjusted Net Income are non-GAAP financial measures and should not be considered substitutes for and are not comparable to our GAAP net income. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Adjusted EBITDA-NCI and Adjusted Net Income Reconcilements” for an explanation of Adjusted EBITDA-NCI and Adjusted net income and a reconciliation to the most directly comparable GAAP financial measures.

The revenues and expenses of affiliated facilities in which we do not have a controlling interest but do have an equity interest are not directly included in our consolidated GAAP results; rather, only the net income earned from such facilities is reported on a net basis in the line item Equity in net income of nonconsolidated affiliates, and we refer to such facilities as our “nonconsolidated facilities.”

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We present Adjusted EBITDA-NCI because we believe it is useful for investors to analyze our operating performance on the same basis as that used by our management. Our management believes Adjusted EBITDA-NCI can be useful to facilitate comparisons of operating performance between periods because it excludes the effect of depreciation and amortization, which represents a non-cash charge to earnings, income tax, interest expense and other expenses or income not related to the normal, recurring operations of our business. In addition, Adjusted EBITDA-NCI is considered a non-GAAP financial measure and should not be considered a substitute for and is not comparable with net income or net operating income as determined in accordance with GAAP.

Strategic Partnerships with Leading Health Systems

In 2008, recognizing the trend towards branded integrated delivery systems in healthcare, we began to selectively partner with leading health systems in specific markets. From December 31, 2007 to December 31, 2014, we have grown the number of our health system partners from 18 to 42. Our health system partners include many of the leaders in healthcare delivery, such as Indiana University Health, Inc. (“IUH”), MemorialCare Health System (“MemorialCare”), Sutter Health and Texas Health Resources (“THR”), among others. We believe we are a partner of choice to leading health systems because of our comprehensive suite of surgical solutions, expertise in clinical operations and efficiency programs and developmental expertise. Partnering with leading health systems allows us to enter new markets in a capital-efficient way that provides us with immediate relevance to our partners, physicians and payors, translating into greater stability and growth opportunity. Our material health system partners are IUH, MemorialCare, Sutter Health and THR.

When we partner with a health system in a three-way joint venture, we typically hold a noncontrolling ownership interest in a holding company that owns a majority or controlling ownership interest in the facility, while the health system partner holds the controlling interest in the holding company.

We typically have co-development arrangements with our health system partners to jointly develop a network of outpatient surgical facilities. These co-development arrangements are an important source of differentiation and growth for our business. For example, through our relationship with THR, as of December 31, 2014, we have acquired controlling interests in or developed 10 surgery centers since 2012.  

In addition to expanding the number of co-developed facilities within our existing partnerships, we continue to establish new partnerships with market-leading providers. During the twelve-months ended December 31, 2014, we added three affiliated facilities with three new health system partners. Our co-development arrangements are often informal, but in some cases, we enter into formal co-development agreements with our health system partners. In these agreements, we agree to collaborate on the identification of opportunities for the acquisition or development of new facilities within a defined geographic area. The co-development agreements generally have a duration of one or two years, with the option to renew upon mutual agreement. Some of the co-development agreements contain termination provisions that allow either party to terminate the agreement upon 60 to 120 days’ notice or for cause, and others are silent as to termination. For example, our co-development agreement with IUH provides that the Company and IUH will collaborate in good faith to identify, solicit and cultivate potential opportunities for the acquisition of facilities in Indiana. The co-development agreement with IUH provides that it will continue for so long as the partnership between the Company and IUH continues.

Our systemwide net operating revenues attributable to facilities with a health system partner have grown at a much higher rate than our systemwide net operating revenues attributable to facilities without a health system partner. Our systemwide net operating revenues attributable to facilities with a health system partner have grown 350.4% from 2009 to 2014, while our systemwide net operating revenues attributable to facilities without a health system partner have grown 9.7% over the same period.

Our Affiliated Facilities

Our network of facilities includes:

·

ASCs. Like hospitals, ASCs serve as locations where physicians on each individual facility’s medical staff perform surgeries on their patients. Our ASCs provide the facilities, equipment, supplies and clinical support staff necessary to provide non-emergency surgical services to patients not requiring hospitalization. Surgeries in ASCs are typically reimbursed at significantly lower rates than in a hospital setting, and ASCs generally operate with greater efficiency and lower costs. For the year-ended December 31, 2014, our ASCs generated 90.3% of our net operating revenues.

·

Surgical hospitals. Our surgical hospitals allow physicians to perform a broader range of surgical procedures, including more complex surgeries, and allow patients to stay in the hospital overnight. For the year-ended December 31, 2014, our surgical hospitals generated 9.3% of our net operating revenues.

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·

Hospital surgery departments. We also contract with hospitals to manage in-hospital surgery departments, which can focus exclusively on supporting physicians in the performance of surgeries on patients who do not require hospitalization (on an outpatient basis) or provide a full array of surgeries, including emergency surgeries, as well as surgeries on hospital inpatients and patients who will be admitted post-procedure. We believe managing hospital surgery departments strengthens our relationships with our hospital partners, as we are engaged across the continuum of surgical care. For the year-ended December 31, 2014, such hospital surgery departments generated 0.4% of our net operating revenues.

Physicians at our facilities provide surgical services in a wide variety of specialties, including orthopedics, ophthalmology, gastroenterology, pain management, otolaryngology (ear, nose and throat, or “ENT”), urology, spine and gynecology, as well as other general surgery procedures. As of December 31, 2014, we consolidated the operations of 95 of our 186 affiliated facilities, had 65 nonconsolidated affiliated facilities and held no ownership in 26 affiliated facilities that contract with us to provide management services.

Our Industry

Medical costs account for a substantial percentage of spending in America. The United States spent $2.9 trillion on healthcare in 2013, according to Centers for Medicare and Medicaid Services (“CMS”), and the percentage of gross domestic product devoted to healthcare has increased from 7.0% in 1970 to 17.4% in 2013. Surgical delivery is one of the largest components of medical costs in the United States, currently representing approximately 30% of medical spending for individuals with commercial insurance and Medicare, according to our estimates.

Against this backdrop, we believe that we are well positioned to benefit from trends currently affecting the markets in which we compete, including:

Continued Migration of Procedures out of Hospitals

According to the American Hospital Association, from 1992 to 2012, outpatient surgeries increased from 53.8% of total surgery volumes to 64.5%. In addition, a significant share of outpatient surgeries shifted from hospitals to free-standing facilities over a similar period. Advancements in medical technology, such as lasers, arthroscopy, fiber optics and enhanced endoscopic techniques, have reduced the trauma of surgery and the amount of recovery time required by patients following certain surgical procedures. Improvements in anesthesia have also shortened the recovery time for many patients by minimizing post-operative side effects such as nausea and drowsiness, thereby avoiding, in some cases, overnight hospitalization. These medical advancements have significantly increased the number of procedures that can be performed in a surgery center and have fueled the migration of surgical procedures out of hospitals and into outpatient settings. We expect that continued advancements in healthcare delivery and regulatory reform will further this trend.

Growing Focus on Containment of Healthcare Costs

Because of an increased focus on controlling the growth of healthcare expenditures in our economy, constituents across the healthcare continuum, including government payors, private insurance companies and self-insured employers, are implementing meaningful cost containment measures. These initiatives have contributed to the shift in the delivery of healthcare services away from traditional inpatient hospitals to more cost-effective settings, such as ASCs. For example, based on Medicare fee schedules, a procedure in an ASC costs, on average, 55% of what the same procedure costs when performed in a hospital surgery department, according to the Ambulatory Surgery Center Association. The cost differential creates savings for the government, Medicare plans, commercial payors and patients when a procedure is performed at an ASC instead of a hospital-based surgery department.

In addition, as self-insured employers look to reduce their overall healthcare costs, they are shifting increased financial responsibility to patients through higher co-pays and deductibles. These changes to health plan design, coupled with increased pricing transparency, have encouraged patients to seek out more cost-effective options for their healthcare delivery and may reduce demand for discretionary healthcare services. Because of their cost advantage and high patient satisfaction, we believe ASCs stand to benefit from this increase in consumerism.

Opportunities Created by Healthcare Legislation

We anticipate that recent healthcare legislation will create greater opportunities for cost-effective providers of healthcare. The Patient Protection and Affordable Care Act (“PPACA”) and other related healthcare reform activities are expected to promote the transition from traditional fee-for-service payment models to more “at risk” or “capitated” models in which providers receive a flat fee per member per month from payors, regardless of the cost of care. These changes will be reflected through the creation of ACOs or other payment model reforms. This shift will create financial incentives for “at-risk” providers to direct patient procedures into the most cost-effective settings, such as ASCs. We believe health systems, which are expected to remain the center of the delivery network in many markets, are resolving to shift many types of surgical cases out of their hospital surgery departments into the lower-

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cost ASC setting. Given that, according to management estimates, surgical spending currently represents approximately 30% of all medical spending for individuals with commercial insurance and Medicare, the shift to “at risk” payment models is likely to create greater interest from physicians and health systems in shifting care to ASCs and surgical hospitals.

Dynamics Impacting Health Systems

Many hospitals and health systems anticipate strategic and financial challenges stemming from healthcare reform and growing efforts to contain healthcare costs. In response, many health systems are focused on strategies to reduce operating costs, build market share, align with physicians, create additional service lines, expand their geographic footprint and prepare for new payment models, including ACOs, which are networks of doctors, hospitals and other healthcare providers who share responsibility for providing coordinated care to patients with the goal of improving quality and reducing overall spending. As a result, a growing number of health systems are entering into strategic partnerships with select provider organizations that can provide focused expertise, scaled operating systems, best practices, speed of execution and financial capital.

Increased Pressure on Physicians and Physician Groups

Physicians in many markets are increasingly interested in affiliating with leading health systems, especially in the context of an operating partner that can help ensure the continued efficiency of their practices. Uncertainty regarding reimbursement along with increased financial and administrative burdens resulting from healthcare legislation have contributed to the trend toward health system partnerships. As a result, physicians in many markets are pursuing partnerships with surgical providers and health systems in order to gain greater stability, access to scaled clinical and operating systems and a pathway to participating in new payment models. This is creating opportunities for providers with expertise and a track record of structuring partnerships with health systems and physicians in a way that creates value for all constituents.

Continued Provider Consolidation Driven by Changing Environment

We believe that consolidation among healthcare providers will continue due to cost pressures, a changing regulatory environment and the requirements imposed by new payment and delivery models. Our industry remains highly fragmented relative to other healthcare sectors, with the three largest companies in our industry operating an aggregate of only 12% of approximately 5,400 Medicare-certified ASCs in the United States as of December 31, 2014. We expect consolidation to continue, as larger operators like us bring to bear the benefits of systems, processes and larger-scale relationships.

Our Competitive Strengths

We believe that our commitment to outstanding patient care, our strategy and our market position align us to benefit from trends in the U.S. healthcare market. An environment that demands better access to high-quality care, improved patient experience, health system and physician partnership and continuous clinical and administrative improvement and efficiency aligns very well with our competitive strengths:

Multi-Pronged Growth Strategy Based on Aligned Economic Model and Diverse Business Mix

Our business model is focused on building strategic relationships with leading health systems, physician groups and payors to acquire, develop and operate facilities in an aligned economic model. The alignment of strategic and financial interests through shared ownership is an integral component of our ability to achieve strong results — clinically, operationally and financially. We believe our business model, which is aligned with secular industry trends demanding high quality, cost-effective settings of care, the need for more scaled partners in healthcare and the transition to a coordinated care delivery model, enables the following multiple growth avenues and positions us for long-term sustainable growth:

·

Strong same-site growth. We believe that several factors will contribute to continued same-site growth: (1) a significant majority of our facilities are multi-specialty (160 of our 186 affiliated facilities), (2) a payor mix weighted toward non-governmental payors (62% of our consolidated net patient revenues and 74% of net patient revenues at our nonconsolidated facilities for the year-ended December 31, 2014 came from commercial payors), (3) our partnerships with leading health systems, (4) our strong physician satisfaction and (5) the continued focus of our regional facility leadership on physician recruitment, leveraging our tools and systems.

·

In-market expansion and co-development with existing leading health system partnerships. We have partnered with many leading health systems in the country, and we are generally in the early stages of developing those health system partnerships. These partnerships create an opportunity for continued growth through expanding our footprint of facilities in the markets of our health system partners.

·

New health system partnerships . Many factors are driving health systems to increasingly seek out partners, including the need for focused expertise and scaled operating systems and the need for human and financial capital. These dynamics will contribute to our ability to add new health system partnerships to our existing portfolio.

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·

Additional services across our broad suite of solutions . We provide a broad suite of solutions to meet the specific needs of our health system, physician partners and payors in the communities they serve. These solutions include, among others, development of market growth strategies, multiple physician alignment models (including joint ventures and clinical co-management agreements), perioperative consulting and management services to assist health systems in increasing the efficiency of their own hospital surgery departments, supply chain management, data analytics and benchmarking and analytics to support the transition to new payment models. These additional services enhance patient care and strengthen our partnerships with health systems, physicians and payors while providing additional economic benefits to us.

·

Opportunistic acquisitions . Our partnership model with leading health systems enables us to be a strategic acquirer in multiple geographic markets within the fragmented ASC industry. From June 30, 2010 to December 31, 2014, we acquired or entered into management agreements with 47 facilities in our existing markets and 40 facilities in new markets. Also during this same time period, we placed two de novo facilities into operation in existing markets and one de novo facility in a new market.

Strategic Partnerships with Leading Health Systems

We have positioned ourselves for the continued shift toward large scale, integrated delivery systems by selectively partnering with health systems that hold market-leading positions in their primary service areas. From December 31, 2007 to December 31, 2014, we have grown the number of our health system partners from 18 to 42, including many of the leaders in healthcare delivery, such as IUH, Sutter Health, THR and MemorialCare, among others. We believe we are a partner of choice to leading health systems because of our comprehensive suite of surgical solutions, expertise in clinical operations and efficiency programs and development expertise. Partnering with leading health systems allows us to enter new markets in a capital-efficient way that provides us with immediate relevance to our patients, physicians and payors, translating into greater stability and growth opportunity. Historically, our partnerships have delivered above-market same-site revenue growth, as well as growth from the co-development of additional facilities alongside our health system partners.

Leading National Brand and Scaled Franchise

We believe a healthcare environment characterized by cost pressure, regulatory change, increased consumerism and consolidation favors large scale competitors with strong reputations. We are one of the largest multi-specialty operators of ASCs in the United States with 179 ASCs operating in 33 states. We operate a large surgical services purchasing platform that provides us substantial purchasing advantages as our dedicated supply chain team works with our facilities, health system partners and affiliated physicians across the country. Through our partnerships with locally branded health systems, we have established strong brand recognition among physicians in many communities, and we believe our national presence and leading reputation provide us with a greater opportunity to establish strategic relationships with local health systems, physicians and payors. Our facilities have also developed a strong reputation among patients in our communities as a result of our focus on patient care and clinical quality. We provide each patient with a survey regarding their experience at our facility which is generally provided in person after their procedure has been performed or through the mail. According to our patient surveys conducted during 2014, we have a Net Promoter Score of approximately positive 97. This Net Promoter Score is a measure of loyalty ranging from negative 100 to positive 100 based on asking patients whether they would recommend our facilities to a friend or family member. The overall response rate for these surveys has been, on average, approximately 62% in 2014, which represented an average of approximately 32,600 responses received per month in 2014.

Proprietary and Expanding Suite of Technology-Enabled Solutions

New payment models and increasing pressure on health systems and physicians to contain costs are forcing providers to make new investments in areas such as information systems and data analytics in an effort to become more efficient and meet the demands for improved clinical outcomes. We have developed a comprehensive set of proprietary technology tools that enable health systems, physicians and payors to optimize patient experience, clinical outcomes, physician productivity and operating performance. Our proprietary technology tool set includes:

·

SCA Quality Index . We measure patient satisfaction, clinical outcomes and licensure and accreditation inspection readiness for each affiliated facility and combine those measures into our SCA Quality Index to track quality metrics and increasingly to support the transition to new payment models.

·

Operating system . Our operating system provides detailed benchmarking of key operational measures (including on-time starts, turn-times, staffing ratios and supply expense metrics) that allows management to identify, monitor and adjust areas such as case mix, staffing and operating costs to improve overall performance.

·

Proprietary case-costing system (which we call the “Every Case Optimized System” or “ECOSystem™”) . Our ECOSystem™ provides detailed labor cost, supply cost and contribution margin data by procedure code, physician, facility and payor to monitor key expenses and margins, allowing us to benchmark best practices by case type.

·

Supply chain management system . Our supply chain management system provides detailed analysis on supply cost management to improve purchasing efficiency and costs.

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Our data-driven insight and ability to measure performance metrics such as clinical outcomes and patient satisfaction as well as optimize performance through our ECOSystem™ have been integral in achieving clinical and operational excellence to date and position us for success in the payment models of the future, such as ACOs, bundled payments and capitated models.

Strategic Partner to Physicians

The evolving healthcare landscape, including regulatory changes, increasing administrative burden, payor consolidation, shifting competitive landscape and transition to new payment models, is increasing pressure on physicians. We offer physicians an attractive solution to help them operate successfully in this environment as we design our facilities, structure our strategic relationships and adopt staffing, scheduling and clinical systems and protocols with the aim of increasing physicians’ productivity and promoting their professional and financial success. Our approximately 2,000 physician partners (as of December 31, 2014), many of whom are leading practitioners in their respective fields and geographies, value the efficiency and convenience that our facilities provide. Our technology solutions allow our physicians to optimize clinical, operational and financial results. Our success in forming productive relationships with physicians is reflected in both the growth in the number of our physician partners and our Net Promoter Score of positive 88, which was derived from surveys completed by our physician partners and non-partner physician utilizers across 130 of our 186 facilities during January 2015.  The surveys had a response rate of approximately 77%, which is calculated on a weighted basis based on the number of cases performed by a physician at the facilities surveyed.  This Net Promoter Score is a measure of loyalty ranging from negative 100 to positive 100 based on asking each of the physicians who utilize our facilities whether they would recommend performing cases at our facilities to a physician colleague. We monitor physician satisfaction on a facility-by-facility basis, survey all of our physicians who utilize our facilities at least on an annual basis and use physician feedback to drive continuous improvement on a local and national basis.

Proven Management Team

Our senior leadership team of Andrew Hayek, President and Chief Executive Officer, Peter Clemens, Executive Vice President and Chief Financial Officer, Michael A. Rucker, Executive Vice President and Chief Operating Officer, Joseph T. Clark, Executive Vice President and Chief Development Officer, and Richard L. Sharff, Jr., Executive Vice President, General Counsel and Corporate Secretary, averages over 20 years of experience in the healthcare industry and has transformed our strategic approach to provide solutions to physicians, health systems and payors to optimize surgical care. Under this management team, we have experienced significant growth in our provider partnerships and enhanced our focus on clinical outcomes and patient experience, resulting in strong and consistent performance in our key financial and operating metrics and positioning us well for long-term growth.

Our Business Strategy

We seek to provide outstanding patient care and clinical quality, and we seek to create measurable clinical, operational and financial advantages for our partners by leveraging our tools and processes, knowledge and experience and talented leaders in each market. The key components of our strategy include:

·

Delivering outstanding patient care and clinical outcomes;

·

Driving strong and consistent same-site performance;

·

Capitalizing on existing health system partnerships poised for growth;

·

Developing new health system partnerships;

·

Leveraging our core competencies to expand into new service lines;

·

Establishing partnerships that take advantage of new payment models; and

·

Consolidating a fragmented industry in attractive markets.

Delivering Outstanding Patient Care and Clinical Outcomes

We are committed to outstanding patient care and clinical quality. Our culture and operating systems reinforce this focus and commitment. We measure patient satisfaction, clinical outcomes and licensure and accreditation inspection readiness for each affiliated facility and combine those measures into our SCA Quality Index, which we monitor closely to identify areas for improvement and track progress. We also develop and implement clinical toolkits, clinical training and best practice sharing across our network to drive ongoing improvement in clinical outcomes. Our Regional Quality Councils (“RQCs”) enable identification and sharing of best practices across our affiliated facilities. Each RQC is composed of at least one representative, such as a Regional Quality Coordinator or a Center Quality Coordinator, from each facility in the applicable region. Each RQC meets on at least a quarterly basis to share and compare clinical and operational experiences and to develop best practices, which are shared with governing boards at each facility. We have also developed focused training resources that are available to our physicians, nurses and surgical technicians at our affiliated facilities, including through a proprietary, learning computer portal called the Clinical Excellence

8


Universe (or “CEU”). Our training programs include new teammate trainings, telephone and web conferences focusing on key clinical issues, continuing education programs, leadership development programs and initiatives aimed at enhancing our culture of patient safety.

Driving Strong and Consistent Same-Site Performance

Achieving strong performance on a same-site basis is important for us to drive organic revenue growth as well as support consistent operating performance for SCA and our partners. We believe that our partnership model aligns incentives such that we and our partners can achieve improved long-term performance. We also believe that our ability to affiliate with physicians as an extension of their practices is an important driver to sustained same-site performance. Our clinical protocols and proprietary technology tools are designed to improve physician productivity and increase the number of procedures performed in our facilities while improving both physician and patient satisfaction. In addition, our ability to attract physicians through recruitment initiatives provides an additional opportunity for us to drive same-site growth. This alignment with partner hospitals and physicians has contributed to annual same site systemwide net operating revenues growth of 3.1% in 2014, 9.4% in 2013 and 9.8% in 2012. We have shown an ability to improve facility-level profitability by gaining physician alignment around more efficient supply utilization, reducing clinical variation, more effectively contracting with payors and lowering administrative costs.

Capitalizing on Existing Health System Partnerships Poised for Growth

We believe that development of our existing health system relationships is an important part of our continued growth. While our facility count has grown significantly, from 131 to 186 affiliated facilities from December 31, 2007 to December 31, 2014, our growth in health system partners has been even stronger, more than doubling from 18 to 42 over the same time period. We believe this growth in health system partnerships creates significant opportunities. Our aligned model incentivizes our partners to work closely with us to identify strategically important and financially accretive growth opportunities in the markets we serve. Our experience has shown that demonstrated results in achieving exceptional patient care and strong physician partnerships have encouraged our partners to expand their relationships with us. For example, through our relationship with THR, as of December 31, 2014, we have acquired controlling interests in or developed 10 surgery centers since 2012.  

Developing New Health System Partnerships

We are focused on developing new health system partnerships, and we expect this to continue as we position ourselves as a partner of choice to physician groups, health systems and payors. While we have demonstrated a track record of success among a group of leading health systems, we believe that our current footprint represents only a small percentage of potential health system partnerships and that we have substantial long-term opportunities to add new relationships. In addition, industry dynamics, such as a challenging reimbursement environment and an increased emphasis on achieving cost savings with improved clinical outcomes, are encouraging health systems with which we do not already have relationships to seek partners. We believe that our expertise developing tools that ensure improved outcomes, drive cost savings and support efficiencies in the clinical setting will further strengthen our value proposition as a partner of choice for new health system relationships.

Leveraging Our Core Competencies to Expand into New Service Lines

We intend to leverage significant expertise related to the provision of surgical solutions in the form of expansion into new lines of service. Our relationships and operating systems provide a strong platform from which we can deliver a broader range of solutions designed to achieve excellent clinical outcomes while improving efficiency and generating significant savings in the healthcare system. As an example, we operate our perioperative consulting services with health system partners to optimize physician engagement, operating and cost efficiency, margin enhancement, market share growth and the development of new service lines. As of December 31, 2014, we provided such services to 13 facilities, and we have a dedicated team of professionals focused on expanding this business, as we believe it represents an area of potential growth. In addition to providing potentially high growth and diversified revenue stream, our perioperative consulting business also serves as a sales channel for potential health system partnerships. By demonstrating our value proposition and operational expertise with the effective management of their surgical operations, we believe we are better positioned for partnering with the health system’s current and prospective ASCs.

In addition to perioperative consulting, we also offer additional services relating to the delivery of surgical care, including management services (where we manage a surgical facility in which we do not have an ownership interest), clinical co-management consulting services (for hospital surgery departments interested in having certain of their non-employee physicians participate in management) and supply chain management and data analytics, to better serve patients’ needs and strengthen our partnerships with our health system and physician partners as well as with payors.

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Establishing Partnerships that Take Advantage of New Payment Models

We expect the evolving reimbursement landscape in healthcare to create opportunities to partner with physicians and payors in new payment models. We believe payment models such as “at risk” and “capitated” models, in which the providers receive a flat fee per member per month from payors regardless of the cost of care, drive surgical care to more cost-efficient settings, such as ASCs. We plan to continue working creatively with our various partners and potential partners to structure arrangements that provide solutions to the challenges created by the variety of new payment models.

For example, one of our partners is a large, integrated multi-specialty physician group and one of the original five ACOs piloted under a Dartmouth College/Brookings Institute-supported initiative in ACO healthcare delivery focused on improving care quality and bending the cost curve. As of December 31, 2014, we had five joint venture surgical facilities with this physician group, which takes capitated risk, and we have been able to improve the cost of surgical delivery for its patient base by shifting surgical case volume to our facilities.

As the various risk-based payment models evolve and grow in frequency, physicians and health systems that launch “at risk” payment models will need robust analytics and capabilities to improve the efficiency of surgical delivery. We plan to leverage our experience, data systems and physician engagement models to help health systems, physicians, employers and payors implement and successfully manage new payment models.

Consolidating a Fragmented Industry in Attractive Markets

Greater operating scale allows us to invest in better clinical, operational and financial systems and deliver outstanding results for our patients and partners. Therefore, we are focused on continuing to add new affiliated facilities where we see opportunities to grow volumes by recruiting new physicians and improve profitability by leveraging our scale, technology and operating efficiencies while delivering outstanding patient care. We expect our acquisition activity to continue as we continue to position ourselves as a partner of choice to health systems and physician groups. Given that we operate in a relatively fragmented segment of the healthcare industry, with the three largest ASC management companies operating an aggregate of only 12% of the approximately 5,400 Medicare-certified ASCs in the United States as of December 31, 2014, we believe there are and will continue to be robust opportunities to invest and partner in new facilities. We believe our scale, operational expertise and value-added services and solutions differentiate us and provide us with the ability to selectively acquire attractive assets in attractive markets where we can create value, both in the near term as well as over the longer term. We plan to continue to leverage our proven strategy for target identification, thorough diligence, transaction execution and integration, which we have systematically implemented in acquisitions of 28 consolidated and 39 nonconsolidated facilities from January 1, 2010 to December 31, 2014.

Operations

General

Our operations consist primarily of our ownership and management of surgery centers. Our affiliated facilities provide the space, equipment and medical support staff necessary for physicians to perform non-emergency surgical procedures. Our typical ASC is a freestanding facility with fully-equipped operating and procedure rooms and ancillary areas for reception, preparation, recovery and administration. Our surgical hospitals provide medical services similar to those provided by our ASCs and can also accommodate more complicated procedures requiring patients to stay overnight. The typical staff of an affiliated facility includes an administrator, registered nurses and operating room technicians, as well as personnel in a business office performing tasks such as billing and collecting. In addition, at each facility, a physician who serves as the medical director is responsible for medical direction and certain administrative services at the facility, including ensuring that clinical activities are performed in accordance with the facility’s policies and procedures and serving as a liaison between the facility’s administration and its medical staff. Our facilities generally have service agreements with anesthesiologists and certified registered nurse anesthetists (“CRNAs”) to provide anesthesiology services. Generally, those anesthesiologists and CRNAs are independent contractors of the facilities and are responsible for their own clinical and billing activities; in a few cases, those individuals are employed by the facility. Otherwise, the physicians who utilize our facilities are not employees of our facilities. We typically assist each of our facilities with marketing, payor contracting, purchasing and other strategic and operational services, including the preparation of financial statements.

Each affiliated facility is licensed in accordance with local and state requirements. All of our facilities are also certified as Medicare providers. Our facilities are available for use only by licensed physicians and other qualified healthcare providers. To ensure consistent quality of care, each facility has a medical executive committee comprised of local physicians that reviews the qualifications of each physician who applies to practice at the facility. In addition, as of December 31, 2014, 176 of our 179 ASCs and all six of our surgical hospitals were accredited by either The Joint Commission or the Accreditation Association for Ambulatory Health Care (“AAAHC”), the two major national organizations that establish standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of various types of healthcare facilities. Two of our three remaining ASCs that were not accredited as of December 31, 2014 are actively pursuing accreditation. We believe that accreditation is the quality

10


benchmark used by commercial payors for inclusion of a facility in their network. Some payors may not include a facility in their network unless the facility is accredited.

Billing and Payment

Our affiliated facilities derive their net patient revenues by collecting fees from patients, insurance companies, government programs and other third-party payors in exchange for providing the facility and related services for surgical procedures. The surgeons and, in most cases, anesthesiologists and CRNAs at our affiliated facilities bill their patients or relevant other payors directly for their professional services; therefore, such services are not included in our billing for a procedure.

Each affiliated facility uses a patient accounting system to manage scheduling, billing and collection, accounts receivable management and other essential operational functions. We have implemented systems to centralize financial data from most affiliated facilities into our corporate data systems. These systems support our access to information on a timely basis and enhance our ability to provide each affiliated facility with financial statements and other financial data services.

Revenues at our affiliated facilities consist primarily of net patient service revenues that are recorded based upon established billing rates less allowances for contractual adjustments. Revenues are recorded during the period in which the healthcare services are provided, based upon the estimated amounts due from patients and third-party payors, including commercial health plans, commercial insurance companies, employers, workers’ compensation plans and federal and state agencies (under the Medicare and Medicaid programs). We utilize the payment history specific to each affiliated facility by payor to record estimated contractual allowances, and we employ other analytical tools to ensure the appropriateness of these estimates. Third-party payor contractual payment terms are generally based upon predetermined rates per procedure or discounted fee-for-service rates.

It is our general practice, where possible, to verify a patient’s insurance and collect estimated co-payments prior to rendering services. Claims are submitted electronically if the payor accepts electronic claims. We require claims submitted to third-party payors to be paid within timeframes that are generally consistent with industry standard practices, which vary based upon payor type.

In general, we or our health system partners negotiate contracts directly with non-governmental third-party payors and employers. The rates paid by governmental third-party payors are set by such payor and are not subject to negotiations. We market our affiliated facilities directly to non-governmental third-party payors and employers in order to communicate the cost advantages of surgery centers versus hospitals. Payor marketing activities are conducted by reimbursement teammates and facility administrators, with important assistance from our physician partners. We emphasize the high-quality healthcare, cost advantages and convenience of our affiliated facilities.

Patients are generally not responsible for the difference between our established charges and amounts reimbursed for such services under Medicare, Medicaid and negotiated third-party payor contracts, but they are responsible for any exclusions, deductibles, co-payments or coinsurance features of their coverage.

Clinical and Operating Systems

We have developed a number of tools to track and compare results from our affiliated facilities and across our network. We believe these systems are an important strength and provide us data to improve results, training and efficiency across our affiliated facilities.

Our clinical systems allow detailed benchmarking of clinical outcomes endorsed by the National Quality Forum, patient satisfaction and accreditation inspection readiness. We have extensive tools to prepare for regulatory surveys. We strongly encourage all of our ASCs and surgical hospitals to seek and to maintain accreditation by an independent agency, either The Joint Commission or the AAAHC. All of our facilities that have sought such accreditation have successfully completed the survey process and have received a three-year term of accreditation, which is only provided after the accrediting organization has concluded that the facility is in substantial compliance with the relevant organizational standards. Our clinical education system, the CEU, offers education programs tailored to our approximately 3,200 clinical teammates, as of December 31, 2014, across the country.

Our operating systems provide detailed benchmarking of key operational measures (including on-time starts, turn-times, staffing ratios and supply expense metrics). Management uses these tools to measure operating results against target thresholds and to identify, monitor and adjust areas such as case mix, staffing, operating costs, teammate expenses and accounts receivable management.

Our case-costing system, the ECOSystem™, provides detailed labor cost, supply cost and contribution margin data by procedure code, physician, facility and payor. This ECOSystem™ data allows us to work with our physicians to benchmark their performance on a detailed level and show them precise steps they can take to optimize clinical, operational and financial results. We also have a dedicated supply chain team that works with our facilities and affiliated physicians across the country to aggregate the approximately $288 million spent on surgical supplies in 2014 and to use that purchasing power to negotiate more favorable company-wide contracts with vendors.

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Our detailed data also allows us to work in partnership with payors to optimize the cost of surgery for their covered members. Surgery is one of the largest components of medical costs, typically representing approximately 30% of total medical spending for individuals with commercial insurance, according to our estimates. Because of this, we are increasingly focused on working with commercial payors, Medicare Advantage plans and capitated physician groups to help them reduce the total medical spend (or rate of medical spend growth) for their population while maintaining or improving the quality of care.

Facility Level Ownership Structure

Almost all of our affiliated facilities are owned in partnership with local physicians. As of December 31, 2014, we had approximately 2,000 physician partners. While the amount of physician ownership in our facilities ranges widely based on local market conditions, it typically ranges from 26% to 55%. When we partner with a health system in a three-way joint venture with physicians, we typically hold a non-controlling ownership interest in a holding company that owns a majority or controlling ownership interest in the facility, and the health system partner holds the controlling interest in the holding company.

Our facilities are organized as limited partnerships (“LPs”) or general partnerships, limited liability companies (“LLCs”) or limited liability partnerships (“LLPs”). In ventures that do not include a health system partner, we typically serve as the general partner (or its equivalent) of the entity, as well as the day-to-day manager of the facility owned by the entity. In our three-way joint ventures that include a health system partner, we typically serve as a noncontrolling member of an LLC that is co-owned with the health system, and that LLC serves as the general partner (or its equivalent) of the facility. In such three-way ventures, we typically enter into a management agreement to handle most of the day-to-day management functions for the facilities owned by the LLC, and the health system negotiates fee schedules with payors and provides other miscellaneous services.

Our affiliated facilities typically pay a monthly management fee to us and, where we have an ownership interest, a monthly or quarterly pro rata distribution of cash in excess of current obligations, less amounts held in reserve for working capital and certain other anticipated expenditures. The partnership and LLC agreements typically provide for, among other things, limited voting rights for our limited partners and limited rights to transfer ownership interests. We have developed a “model” agreement that includes provisions to restrict a physician partner from owning an interest in a competing surgery center or surgical hospital during the period in which the physician owns an interest in our facility and for a period of two years after they no longer own an interest in our facility. Similarly, our model agreement for ASCs requires our physician partners to certify that they are using the applicable facility in a way that is consistent with the regulatory guidance on what constitutes use of the facility as an “extension of their office practice.” In multi-specialty ASCs, this means, among other things, that at least one-third of their eligible cases are performed at our facility. These provisions give us (or our health system partner) the right to repurchase equity from physician partners who do not meet this threshold. Our agreements also typically give us the right, but do not require us, to repurchase equity interests from physician partners who retire or trigger certain other repurchase provisions in the agreements. However, some of our agreements do not include some or any of these model provisions.

Many of our operating agreements have termination dates upon which the agreement expires by its terms.  Most of these termination dates are many years in the future. In situations where a termination date is approaching, if we wish to continue the business, we attempt to negotiate an extension of the agreement. See “Risk Factors — Risks Related to Our Business — Certain of our partnership and operating agreements contain termination dates that will require us to amend and possibly renegotiate such agreements if we want to continue the business.”

In addition, certain of our agreements contain provisions that give our partners or other members rights that include, but are not limited to, rights to purchase our interest, rights to require us to purchase the interests of our partners or other members or rights requiring the consent of our partners and other members prior to our transferring our ownership interest in a facility, or prior to a change in control of us or certain of our subsidiaries.

Almost all of our partnership and operating agreements contain restrictions on actions that we can take, even though we may be the general partner or the managing member, including rights of our partners and other members to approve the sale of substantially all of the assets of the entity, to dissolve the partnership or LLC, and to amend the partnership or operating agreement. Many of our agreements also restrict our ability in certain instances to compete with our existing facilities or with our partners. Where we hold only a limited partner or a non-managing member interest, the general partner or managing member may take certain actions without our consent, although we typically have certain protective rights to approve major decisions, such as the sale of substantially all of the assets of the entity, the dissolution of the partnership or LLC, and the amendment of the partnership or operating agreement. See “Risk Factors — Risks Related to Our Business — Certain of our partnership and operating agreements contain provisions giving rights to our partners and other members that may be adverse to our interests.”

Further, some of our partnership and LLC agreements provide that the partnership, LLC, general partner or managing member, as applicable, will purchase all of the physicians’ ownership interests at fair market value if certain regulatory events occur, including, for example, if it becomes illegal for the physicians to own an interest in a facility, refer patients to a facility or receive cash distributions from a facility. See “Risk Factors — Risks Related to Healthcare Regulation — If laws or regulations governing

12


physician ownership of our facilities change, we may be obligated to purchase some or all of the ownership interests of our physician partners or renegotiate some of our partnership and operating agreements with our physician partners and management agreements with our surgical facilities.” From time to time, we may extend loans to the partnerships or LLCs on commercially reasonable and fair market value terms in order to fund capital expenditures, leasehold improvements or other cash requirements. See “Risk Factors — Risks Related to Our Business — We make significant loans to the partnerships and LLCs that own and operate certain of our facilities.”

Resyndications

We periodically provide physicians who use our facilities the opportunity to purchase ownership interests (or increase their ownership interests) in those facilities, which we call “resyndication.” We believe that periodic resyndication of ownership interests helps our facilities maintain a core group of physicians who actively use the facility as an extension of their office practice and are incentivized to ensure that the facilities make the necessary investments and follow the necessary practices to provide high-quality and cost-efficient patient care services.

In addition to selling our equity interest, a key component of our resyndication strategy is repurchasing equity interests from existing physician partners and re-selling that equity to non-partner physicians or to other existing physician partners. Where feasible, we seek to redistribute equity from existing to new physician partners before selling our own equity or new equity in our facilities. However, we will continue to sell portions of our existing ownership where we believe it is in our overall best interest.

Case and Payor Mix

We seek to maintain diversity of case mix in our portfolio to insulate us from potential negative effects that could stem from emphasizing one particular case type. The following chart breaks down our consolidated net patient revenues by specialty and by type of payor for the year-ended December 31, 2014.

 

Case Mix

 

 

 

 

 

 

 

Payor Mix

 

 

 

 

 

 

 

YEAR-ENDED

 

 

 

 

 

 

YEAR-ENDED

 

 

 

 

DECEMBER 31,

 

 

 

 

 

 

DECEMBER 31,

 

 

 

 

2014

 

 

 

 

 

 

2014

 

 

Orthopedic

 

 

37

%

 

 

 

Managed care and other discount plans

 

 

62

%

 

Ophthalmology

 

 

15

 

 

 

 

Medicare

 

 

20

 

 

Gastroenterology

 

 

10

 

 

 

 

Workers’ compensation

 

 

10

 

 

ENT

 

 

8

 

 

 

 

Patients and other third-party payors

 

 

5

 

 

Pain

 

 

7

 

 

 

 

Medicaid

 

 

3

 

 

General Surgery

 

 

23

 

 

 

 

 

 

 

 

 

 

Total

 

 

100

%

 

 

 

Total

 

 

100

%

 

Seasonality

In recent years, our facilities have experienced a disproportionate allocation of payor mix throughout the year. Our facilities typically see a relatively higher percentage of patients with governmental payors in the first half of the year and a relatively higher percentage of patients with commercial payors in the second half of the year. We believe this pattern is a result of the continuing trend of commercial payors and employer sponsored benefit plans increasing annual patient deductibles which is in turn causing some patients to delay surgery until later in the year, after their higher deductible has been met.

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Facilities

The following table sets forth information relating to our facilities and corporate offices as of December 31, 2014:

 

Facility

 

 

 

Location

 

Date of Acquisition or Affiliation (1)

 

Capacity (2)

ORs

 

 

Capacity (2)

PRs

 

 

Our Beneficial Ownership Percentage (3)

 

Alabama

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Birmingham Outpatient Surgery Center, Ltd.

 

Birmingham, AL

 

6/29/2007

 

8

 

 

1

 

 

 

31.0%

 

 

 

*Florence Surgery Center, L.P.

 

Florence, AL

 

6/29/2007

 

4

 

 

 

 

 

 

50.0%

 

 

 

*Gadsden Surgery Center, Ltd.

 

Gadsden, AL

 

6/29/2007

 

4

 

 

2

 

 

 

57.5%

 

 

 

*Mobile-SC, LTD.

 

Mobile, AL

 

6/29/2007

 

4

 

 

3

 

 

 

33.0%

 

 

 

Surgery Center of Cullman, LLC

 

Cullman, AL

 

6/29/2007

 

4

 

 

3

 

 

 

33.3%

 

 

 

Surgicare of Mobile, Ltd.

 

Mobile, AL

 

6/29/2007

 

5

 

 

3

 

 

 

20.0%

 

 

 

*Tuscaloosa Surgical Center, L.P.

 

Tuscaloosa, AL

 

6/29/2007

 

5

 

 

7

 

 

 

30.0%

 

Alaska

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Alaska Spine Center LLC

 

Anchorage, AK

 

5/1/2014

 

3

 

 

 

 

 

 

37.9%

 

 

 

*Alaska Surgery Center, Limited Partnership

 

Anchorage, AK

 

6/29/2007

 

8

 

 

1

 

 

 

37.9%

 

Arizona

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Surgical Specialty Hospital of Arizona, LLC

 

Phoenix, AZ

 

12/31/2014

 

4

 

 

1

 

 

 

91.1%

 

California

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Los Angeles Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Antelope Valley Surgery Center, L.P.

 

Lancaster, CA

 

6/29/2007

 

4

 

 

2

 

 

 

80.6%

 

 

 

*Arcadia Outpatient Surgery Center, L.P.

 

Arcadia, CA

 

6/29/2007

 

4

 

 

 

 

 

 

40.0%

 

 

 

Barranca Surgery Center, LLC

 

Irvine, CA

 

8/1/2014

 

2

 

 

1

 

 

 

25.0%

 

 

 

Channel Islands Surgicenter, L.P.

 

Oxnard, CA

 

6/29/2007

 

3

 

 

2

 

 

 

25.4%

 

 

 

*Diagnostic and Interventional Surgical Center, LLC

 

Marina del Rey, CA

 

9/1/2014

 

3

 

 

 

 

 

 

51.0%

 

 

 

Digestive Disease Center, L.P.

 

Laguna Hills, CA

 

12/31/2012

 

 

 

 

3

 

 

 

25.0%

 

 

 

*DISC Surgery Center at Newport Beach, LLC

 

Newport Beach, CA

 

9/1/2014

 

2

 

 

 

 

 

 

51.0%

 

 

 

Glendale Endoscopy Center, LLC

 

Glendale, CA

 

10/1/2014

 

1

 

 

2

 

 

 

25.0%

 

 

 

*Glenwood Surgical Center, L.P.

 

Riverside, CA

 

6/29/2007

 

3

 

 

3

 

 

 

46.9%

 

 

 

*Golden Triangle Surgicenter, L.P.

 

Murrieta, CA

 

6/29/2007

 

3

 

 

1

 

 

 

67.5%

 

 

 

Greater Long Beach Endoscopy and Surgery Center, LLC

 

Long Beach, CA

 

6/29/2007

 

3

 

 

3

 

 

 

25.0%

 

 

 

Hoag Outpatient Centers, LLC

 

Newport Beach, CA

 

6/1/2013

 

 

 

 

3

 

 

 

24.6%

 

 

 

*Inland Surgery Center, L.P.

 

Redlands, CA

 

6/29/2007

 

4

 

 

1

 

 

 

44.5%

 

 

 

Kerlan-Jobe Surgery Center, LLC

 

Los Angeles, CA

 

6/29/2007

 

4

 

 

 

 

 

Managed-Only

 

 

 

MemorialCare Surgical Center at Orange Coast, LLC

 

Fountain Valley, CA

 

4/1/2013

 

3

 

 

 

 

 

 

25.0%

 

 

 

MemorialCare Surgical Center at Saddleback, LLC (Saddleback)

 

Laguna Hills, CA

 

12/27/2012

 

4

 

 

6

 

 

 

25.5%

 

 

 

MemorialCare Surgical Center at Saddleback, LLC (Laguna Hills)

 

Laguna Hills, CA

 

12/31/2007

 

4

 

 

1

 

 

 

25.5%

 

 

 

MemorialCare Surgical Center at Saddleback, LLC (Laguna Niguel)

 

Laguna Niguel, CA

 

8/1/2014

 

2

 

 

1

 

 

 

25.5%

 

 

 

*Newport Beach Endoscopy Center, LLC

 

Newport Beach, CA

 

6/29/2007

 

2

 

 

2

 

 

 

24.6%

 

 

 

PS Center, LLC

 

Costa Mesa, CA

 

4/1/2014

 

8

 

 

 

 

 

Managed-Only

 

 

 

Santa Monica Surgical Partners, L.L.C.

 

Santa Monica, CA

 

11/1/2012

 

5

 

 

 

 

 

 

28.5%

 

 

 

*Surgicare of La Veta, Ltd., a California Limited Partnership

 

Orange, CA

 

6/29/2007

 

5

 

 

1

 

 

 

20.0%

 

 

 

*Thousand Oaks Endoscopy Center, LLC

 

Thousand Oaks, CA

 

6/29/2007

 

 

 

2

 

 

 

57.4%

 

 

 

*Upland Outpatient Surgical Center, L.P.

 

Upland, CA

 

6/29/2007

 

2

 

 

1

 

 

 

92.8%

 

 

14


Facility

 

 

 

Location

 

Date of Acquisition or Affiliation (1)

 

Capacity (2)

ORs

 

 

Capacity (2)

PRs

 

 

Our Beneficial Ownership Percentage (3)

 

     Sacramento Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fort Sutter Surgery Center, a California Limited Partnership

 

Sacramento, CA

 

6/29/2007

 

3

 

 

3

 

 

 

26.0%

 

 

 

Sacramento Surgery Center Associates, L.P.

 

Sacramento, CA

 

1/1/2011

 

2

 

 

2

 

 

 

25.3%

 

 

 

South Placer Surgery Center, L.P.

 

Roseville, CA

 

5/1/2012

 

2

 

 

1

 

 

 

25.0%

 

 

 

Sutter Alhambra Surgery Center, L.P.

 

Sacramento, CA

 

6/29/2007

 

3

 

 

 

 

 

 

25.0%

 

     San Diego Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Grossmont Surgery Center, L.P.

 

La Mesa, CA

 

6/29/2007

 

3

 

 

2

 

 

 

20.0%

 

 

 

*Pomerado Outpatient Surgical Center, L.P.

 

San Diego, CA

 

6/29/2007

 

4

 

 

1

 

 

 

60.8%

 

 

 

*San Diego Endoscopy Center

 

San Diego, CA

 

6/29/2007

 

 

 

 

3

 

 

 

45.0%

 

 

 

UCSD Ambulatory Surgery Center, LLC

 

San Diego, CA

 

11/30/2007

 

3

 

 

 

 

 

 

20.0%

 

     San Francisco Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

East Bay Endoscopy Center, L.P.

 

Emeryville, CA

 

7/1/2011

 

 

 

 

2

 

 

 

25.0%

 

 

 

Golden Gate Endoscopy Center, LLC

 

San Francisco, CA

 

7/1/2011

 

 

 

 

3

 

 

 

26.2%

 

 

 

Marin Health Ventures, LLC

 

Greenbrae, CA

 

8/1/2008

 

2

 

 

1

 

 

 

25.0%

 

 

 

Mountain View Endoscopy Center, LLC

 

Mountain View, CA

 

7/1/2011

 

 

 

 

1

 

 

 

20.0%

 

 

 

Peninsula Eye Surgery Center, LLC

 

Mountain View, CA

 

12/1/2012

 

2

 

 

 

 

 

 

26.6%

 

 

 

Presidio Surgery Center, LLC

 

San Francisco, CA

 

6/29/2007

 

5

 

 

1

 

 

Managed-Only

 

 

 

San Francisco Endoscopy Center LLC

 

San Francisco, CA

 

7/1/2011

 

 

 

 

3

 

 

 

8.0%

 

 

 

Santa Rosa Surgery Center, L.P.

 

Santa Rosa, CA

 

6/29/2007

 

4

 

 

1

 

 

 

25.3%

 

 

 

Walnut Creek Endoscopy Center LLC

 

Walnut Creek, CA

 

7/1/2011

 

 

 

 

2

 

 

 

25.0%

 

     Other California Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auburn Surgical Center, L.P.

 

Auburn, CA

 

6/29/2007

 

2

 

 

1

 

 

 

42.5%

 

 

 

*Bakersfield Physicians Plaza Surgical Center, L.P.

 

Bakersfield, CA

 

6/29/2007

 

5

 

 

 

 

 

 

93.0%

 

 

 

Mirage Endoscopy Center, LP

 

Rancho Mirage, CA

 

6/1/2013

 

 

 

 

1

 

 

Managed-Only

 

 

 

North Coast Surgery Center, Ltd., a California Limited Partnership

 

Oceanside, CA

 

6/29/2007

 

4

 

 

 

 

 

 

27.3%

 

 

 

Redding Surgery Center, LLC

 

Redding, CA

 

10/1/2013

 

2

 

 

 

 

 

 

25.0%

 

 

 

San Luis Obispo Surgery Center, a California Limited Partnership

 

San Luis Obispo, CA

 

6/29/2007

 

3

 

 

 

 

 

 

45.9%

 

 

 

Santa Barbara Endoscopy Center, LLC

 

Santa Barbara, CA

 

7/1/2011

 

 

 

 

1

 

 

 

25.0%

 

 

 

*Santa Cruz Endoscopy Center, LLC

 

Santa Cruz, CA

 

7/1/2011

 

 

 

 

1

 

 

 

40.0%

 

Colorado

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Colorado Springs Health Partners Ambulatory Surgery Center

 

Colorado Springs, CO

 

6/29/2007

 

5

 

 

 

 

 

Managed-Only

 

 

 

Pueblo Ambulatory Surgery Center Limited Partnership

 

Pubelo, CO

 

6/29/2007

 

5

 

 

 

 

 

 

12.3%

 

 

 

Surgery Center of Fort Collins, LLC

 

Fort Collins, CO

 

6/29/2007

 

4

 

 

 

 

 

 

25.0%

 

 

 

Surgical Center at Premier, LLC

 

Colorado Springs, CO

 

6/29/2007

 

5

 

 

2

 

 

 

21.7%

 

Connecticut

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Connecticut Surgery Center, Limited Partnership

 

Hartford, CT

 

8/22/2007

 

2

 

 

1

 

 

 

65.0%

 

 

 

*Danbury Surgical Center, L.P.

 

Danbury, CT

 

8/22/2007

 

4

 

 

2

 

 

 

48.5%

 

 

 

*Hartford Surgery Center, LLC

 

Hartford, CT

 

8/22/2007

 

2

 

 

 

 

 

 

91.0%

 

 

 

Norwalk Surgery Center, LLC

 

Norwalk, CT

 

6/1/2013

 

2

 

 

2

 

 

 

4.8%

 

 

 

*Surgery Center of Fairfield County, LLC

 

Trumbull, CT

 

8/22/2007

 

4

 

 

2

 

 

 

38.9%

 

15


 

 

Facility

 

 

 

Location

 

Date of Acquisition or Affiliation (1)

 

Capacity (2)

ORs

 

Capacity (2)

PRs

 

 

Our Beneficial Ownership Percentage (3)

 

Florida

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Alliance Surgical Center, LLC

 

Lake Mary, FL

 

11/1/2014

 

2

 

3

 

 

 

62.1%

 

 

 

*Boca Raton Outpatient Surgery & Laser Center, LTD.

 

Boca Raton, FL

 

6/29/2007

 

6

 

2

 

 

 

30.0%

 

 

 

*Childrens Surgery Center LLC

 

Maitland, FL

 

8/1/2014

 

3

 

1

 

 

 

50.0%

 

 

 

*Citrus Regional Surgery Center, L.P.

 

Lecanto, FL

 

6/29/2007

 

5

 

1

 

 

 

56.0%

 

 

 

*E Street Endoscopy, LLC

 

Clearwater, FL

 

8/2/2010

 

1

 

2

 

 

 

51.0%

 

 

 

Emerald Coast Surgery Center, L.P.

 

Fort Walton Beach, FL

 

6/29/2007

 

5

 

3

 

 

 

10.0%

 

 

 

*Indian River Surgery Center, Ltd.

 

Vero Beach, FL

 

6/29/2007

 

4

 

2

 

 

 

92.0%

 

 

 

*Melbourne Surgery Center, LLC

 

Melbourne, FL

 

6/29/2007

 

4

 

1

 

 

 

69.3%

 

 

 

*Orlando Center for Outpatient Surgery, L.P.

 

Orlando, FL

 

6/29/2007

 

4

 

1

 

 

 

55.3%

 

 

 

*Sand Lake SurgiCenter, LLC

 

Orlando, FL

 

9/1/2014

 

3

 

2

 

 

 

49.5%

 

 

 

*Sarasota Endoscopy Center, L.P.

 

Sarasota, FL

 

6/29/2007

 

1

 

2

 

 

 

82.1%

 

 

 

*The Brevard Specialty Surgery Center, LLC

 

Melbourne, FL

 

10/1/2013

 

3

 

4

 

 

 

69.3%

 

 

 

*Winter Park Surgery Center, L.P.

 

Winter Park, FL

 

6/29/2007

 

4

 

2

 

 

 

18.1%

 

Georgia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Atlanta Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Perimeter Center for Outpatient Surgery, L.P.

 

Atlanta, GA

 

6/29/2007

 

4

 

2

 

 

 

70.0%

 

     Other Georgia Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Gainesville Surgery Center, L.P.

 

Gainesville, GA

 

6/29/2007

 

4

 

3

 

 

 

42.6%

 

Hawaii

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Aloha Surgical Center, L.P.

 

Kahului, HI

 

6/29/2007

 

4

 

 

 

 

 

94.8%

 

 

 

Castle Ambulatory Surgery Center, LLC

 

Kailua, HI

 

6/1/2013

 

2

 

2

 

 

 

10.0%

 

 

 

Honolulu Surgery Center, L.P.

 

Honolulu, HI

 

6/29/2007

 

5

 

2

 

 

 

48.4%

 

Idaho

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Treasure Valley Hospital Limited Partnership

 

Boise, ID

 

6/29/2007

 

4

 

 

 

 

 

40.4%

 

 

 

Treasure Valley Surgery Center - Nampa, LP

 

Nampa, ID

 

6/28/2012

 

5

 

 

 

 

 

25.2%

 

Illinois

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Chicago Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Hawthorn Place Outpatient Surgery Center, L.P.

 

Vernon Hills, IL

 

2/1/2008

 

3

 

1

 

 

 

38.0%

 

 

 

*Loyola Ambulatory Surgery Center at Oakbrook, L.P.

 

Oakbrook Terrace, IL

 

2/1/2008

 

3

 

 

 

 

 

45.0%

 

 

 

*Northwest Surgicare, Ltd., an Illinois Limited Partnership

 

Arlington Heights, IL

 

2/1/2008

 

5

 

1

 

 

 

63.0%

 

     Other Illinois Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Belleville Surgical Center, Ltd., an Illinois Limited Partnership

 

Belleville, IL

 

2/1/2008

 

4

 

 

 

 

 

76.2%

 

 

 

*Belleville Surgical Center, Ltd., an Illinois Limited Partnership (West Lincoln)

 

Belleville , IL

 

9/1/2014

 

1

 

1

 

 

 

76.2%

 

 

 

*Joliet Surgery Center Limited Partnership

 

Joliet, IL

 

11/1/2009

 

4

 

1

 

 

 

52.4%

 

16


 

 

Facility

 

 

 

Location

 

Date of Acquisition or Affiliation (1)

 

Capacity (2)

ORs

 

 

Capacity (2)

PRs

 

 

Our Beneficial Ownership Percentage (3)

 

Indiana

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Indianapolis Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beltway Surgery Centers, L.L.C. - Glen Lehman Endoscopy Suite

 

Indianapolis, IN

 

2/15/2012

 

 

 

 

8