Surgery Partners, Inc. first quarter of 2022 earnings call. At this time, all participants are in a listen-only mode. A question- and- answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I'll now turn the conference over to your host, David T. Doherty, CFO. You may begin.
Good morning, and welcome to Surgery Partners' first quarter 2022 earnings call. This is Dave Dougherty, Chief Financial Officer. Joining me today are Wayne DeVeydt, Surgery Partners' Executive Chairman, and Eric Evans, Surgery Partners' Chief Executive Officer. As a reminder, during this call we will make forward-looking statements. Risk factors that may impact those statements and could cause actual future results to differ materially from currently projected results are described in this morning's press release and the reports we file with the SEC. The company does not undertake any duty to update such forward-looking statements. Additionally, during today's call, we will discuss certain 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 these measures 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, when filed. With that, I'll turn the call over to Wayne. Wayne?
Thank you, Dave. Good morning, and thank you all for joining us today. Before we begin the call, I would like to acknowledge and thank our colleagues and frontline caregivers for their relentless focus in supporting our patients and communities. We are humbled by their efforts and commitment in living Surgery Partners' core values. On behalf of the board of directors and the executive management team, thank you for everything you do. Turning to our first quarter results, we are pleased to report first quarter 2022 adjusted EBITDA of $77.1 million, a 6% increase as compared to the prior year period, and a 22% increase when excluding CARES grants.
In the quarter, we performed just over 142,000 surgical cases, nearly 14% more than 2021, resulting in net revenue of approximately $600 million or 16.4% higher than the comparable prior year quarter. We're especially encouraged by these results as the first quarter experienced several macro challenges, including the impact of the Omicron variant and broader inflationary pressures. As we've previously stated, we are not immune to such challenges, but our business model continues to demonstrate its durability and resiliency. As an example, we saw case volumes impacted in January and early February as a result of the Omicron variant. However, the impact was muted as it affected fewer of our communities, was shorter in cycle, and much of our affected surgical case volume was rescheduled within a short period of time.
This is most evident when you look at our year-over-year case volume growth. We ended the quarter with strong momentum and are optimistic that we can continue to navigate any future waves. We are also very closely monitoring and managing inflation risk, whether in labor or supply costs. Our working environment and tenacious focus on supply chain management have insulated us from the significant effects of these pressures. As a reminder, our business model is a preferred workplace setting with flexible workday hours, generally no weekends, and a culture built on attaining the highest clinical quality and operating performance. We believe this is a competitive advantage, and that consistent with our experience prior to and before the pandemic, our first quarter results again demonstrate and reinforce how our business model is uniquely positioned both now and for future growth.
Dave will share more details regarding our financial results, but a few highlights. Same facility revenues increased by 8.2% compared to the prior year quarter, with 6.3% case growth and 1.7% higher net revenue per case. These statistics are days adjusted for the number of business days in each quarter and represent both volume and specialty mix returning to a more normalized level. New physician recruiting efforts yielded almost 150 new recruits to our facilities in the first quarter, with recruits spanning all of our core high growth specialties. More importantly, our recruiting cohorts continue to demonstrate strong year-over-year growth with first quarter recruits from our 2020 and 2021 cohorts generating over 35% and 20% more revenue, respectively, in the current year quarter as compared to the prior year comparable period.
Finally, the transition of procedures out of traditional acute care inpatient settings continues to accelerate. Joint replacements in our ASCs were up 52% as compared to the prior year quarter and over 730% since 2018, when we started to anticipate this shift in site of care. This momentum gives us confidence in our plans for expansion in other key specialties like cardiac procedures. We continue to believe that our strong financial results reflect the numerous macro tailwinds associated with the benefit of performing procedures in a high quality, lower cost patient and physician-centric setting. With a total addressable market of over $150 billion, our company was built for this moment in time. Moving to capital deployment. Our M&A pipeline continues to be robust.
In the first quarter, we deployed approximately $35 million on two ASCs focused on our high growth musculoskeletal specialties. Our business development team consistently manages an active pipeline that remains strong with more than $200 million in potential transactions currently under LOI. I would like to briefly touch on a new partnership we announced this morning with ValueHealth. This partnership will combine the strength of our exceptional short stay surgical facility management services with ValueHealth's proven value-based care reimbursement model. In conjunction with this new partnership, Surgery Partners has the opportunity to acquire interest in select ValueHealth markets where we have clear operational growth and strategic synergies, and ValueHealth has the opportunity to expand their value-based care business across our national portfolio for the benefit of our physicians, patients, and payers.
Additionally, we have the exclusive right to acquire in-development de novo investments that are primarily focused on orthopedic surgeries. This new relationship will allow us to further accelerate our organic growth engine while providing an attractive pipeline of acquisition opportunities in our targeted markets and specialties. Eric will speak further to this partnership and how we expect to benefit both immediately and going forward. Our balance sheet remains strong, and we believe this new partnership, coupled with our existing acquisition pipeline, further enhances our long-term growth trajectory. On the strength of our first quarter results, we are raising our outlook guidance for 2022 Adjusted EBITDA to a range of $375 million-$385 million. This outlook is inclusive of the potential headwinds that we see associated with the pandemic, including labor and supply cost pressures.
With that, let me turn the call over to Eric. Eric?
Thank you, Wayne, and good morning. I will focus my comments on a couple of areas that will explain my continued optimism for the company and our updated guidance for the year. First, I will provide a few additional highlights from our first quarter results, including statistics about our key organic growth initiatives. I will share more details about the new partnership we've entered into with ValueHealth, the initial centers we acquired from them, and the exciting de novo activity we have underway. We are very pleased with our first quarter results, especially in light of the macro challenges Wayne highlighted. The company continues its positive trajectory as it emerges from the pandemic, with surgical case growth across our multiple specialties at levels consistent with pre-pandemic levels.
As we exited the first quarter, we are seeing a stabilization of our case mix, which is another data point that we have resumed business as usual. In the first quarter, we experienced Omicron in many of our facilities. After dealing with this pandemic for nearly two years, our facilities, physicians, and patients have learned how to navigate these outbreaks with less disruption to normal life. In some affected areas, if the virus affected a patient, their physician, or the facility, most cases were rescheduled within a few weeks rather than being canceled. To support this point, we performed over 142,000 surgical cases in the first quarter, approximately 14% more than the prior year quarter. On a same facility basis, cases grew 6.3%.
Our organic growth initiatives, coupled with acquisitions completed in mid- to late 2021, translated into strong top-line growth of over 16%. Adjusted EBITDA came in at $77.1 million with a 12.9% margin in line with our target for the first quarter. As we mentioned on our last call, we closely monitor inflationary impacts to our labor and supply costs. Over the past year, we have enhanced our reporting of labor and supply costs, allowing us to identify any new trends early and to react accordingly. On the labor front, we closely monitor the use of premium labor to ensure these costs are justified and to proactively reduce it whenever possible. Benchmarking such data points across our portfolio to identify outliers has also yielded positive outcomes.
We have seen that labor rates in particular markets have experienced significant increases, which can be explained by the enormous pressure the Omicron variant has had on our healthcare system. With improved data analysis, we can evaluate if the use of such labor is the best option for a particular facility versus other options, helping avoid some cost pressures. Premium labor as a percentage of our total salaries, wages, and benefits in the first quarter of 2022 is consistent with this ratio in pre-pandemic periods. As Wayne commented, we believe our workplace environment provides a unique hedge against these pressures as we benefit from high retention levels of key talent in our facilities. We are also working with our GPO and key suppliers to understand inflationary factors that could impact our businesses.
In the first quarter, suppliers were approximately 29% of net revenue, consistent with the first quarter of last year. Given the global environment and continued disruptions to the supply distribution chain, we acknowledge the potential for increased costs moving forward. At this point, we're not seeing unusually large price increases in commodities, implant costs, or deliveries, but we remain vigilant in managing this risk. Moving on to our organic growth levers. We continue to benefit from our relentless focus on physician recruitment and targeted facility level and service line expansions that contribute to higher overall revenue per case rates and generate the highest contribution margin for our portfolio. Our physician recruiting team has been meeting the increased demand for new physicians in our short stay facilities by targeting the highest quality physicians. In the first quarter, we added nearly 150 new physicians spanning our key specialties.
These physicians are bringing a higher case count than first quarter 2021 cohort, generating 38% more net revenue in their first quarter with us. As Wayne highlighted, each of our recruiting cohorts continue to drive strong year-over-year growth, and we are encouraged by the early strength of our current quarter recruiting class. All of this has helped fuel our growth in MSK procedures, particularly total joint cases in our ASCs. We performed approximately 25,600 orthopedic procedures this year, 16% more than prior-year quarter. We do not see this growth slowing. As we have discussed, we are preparing for the next wave in cardiac procedures that we expect to migrate to outpatient settings.
With an increasing share of orthopedic and cardiac procedures moving into lower cost, high quality, short stay surgical facilities, we are evaluating all options to capture our fair share, including investing in equipment and renovations of existing facilities, increasing our M&A pipeline, and the development of de novo facilities. As Wayne mentioned this morning, we are announcing a new strategic partnership with ValueHealth. This partnership brings together the complementary strengths of both companies, combining our deep expertise in short-stay surgical facility management services with ValueHealth's proven value-based care surgical programs and de novo development expertise. For example, through this unique partnership, we anticipate launching ValueHealth's VBC program in several of our facilities in the coming months, bringing enhanced value to our physician partners, patients, and participating payers. To be clear, we fully understand that value-based care has different connotations and implications, particularly as it relates to profitability.
The guiding principle that influenced our partnership with Privia also applies to ValueHealth. Specifically, our short-stay surgical facilities offer a compelling value to the ecosystem relative to the traditional acute care setting. We can create win-win relationships with responsible VBC players, such as ValueHealth, who are uniquely able to apply innovative tools and strategies to design bundles, which drives to our facilities incremental referrals and volumes, and therefore profit dollars to Surgery Partners. Working with ValueHealth's existing portfolio of surgical facilities, where we can help a facility grow disproportionately over time, we will assume management services and acquire a minority interest stake with the likely opportunity to buy up in the future. We are pleased to announce today that we are initially acquiring the management services and ValueHealth's minority interest in three existing orthopedic and GI-focused ASCs that will be immediately accretive to our results.
In addition to its proven VBC programs, ValueHealth has an effective de novo growth strategy, having built, owned, and managed over 150 surgical facilities. As part of our partnership, we acquired their interest in 4 fully syndicated ASC facilities for approximately $14 million. These facilities join our existing pipeline of in-process de novo projects, which shorten the time to full operations by at least 12 months. These transactions represent the first step in a number of other opportunities we are exploring to maximize our combined strengths and capitalize on the rapid migration of high acuity cases to high-quality short-stay facilities that we own and operate. We look forward to providing more updates on this important partnership in future calls. As we have discussed previously, in-market development of de novo facilities is a core strategic growth pillar for the company.
The cost of capital for these facilities is low when compared to traditional M&A, but the time it takes to syndicate and build out the centers often exceeds 18 months. In addition to the four syndicated projects that we're acquiring from ValueHealth, we have four other de novos in development across our portfolio. We anticipate that the number of de novo development projects underway will expand to at least 15 in 2022. As Wayne mentioned earlier, we have completed two acquisitions through the first quarter, primarily focused on orthopedic cases. We continue to evaluate strong assets with a pipeline of opportunities under LOI in excess of $200 million. This pipeline, coupled with our ValueHealth partnership, gives us very high confidence in our commitment to deploy at least $200 million in capital in 2022.
Given the results we reported this morning, we are raising our Adjusted EBITDA guidance to a range of $375 million-$385 million. This guidance prudently considers that we are still in a pandemic environment and in a period of inflation that could pressure margins. As you can see from our first quarter results, we are confident that we can manage through these risks. Our teams are highly aligned, and we are executing on our initiatives across business development, recruiting, managed care, procurement, revenue cycle, and operations to achieve our goals. In summary, I am very proud of the team's accomplishments this quarter. Our company provides a cost-efficient, high quality, and patient-centered environment in purpose-built short-stay surgical facilities that provide meaningful value to all the key stakeholders in the healthcare environment.
I'm excited about our new partnership with ValueHealth and the strength of our de novo and M&A pipeline. With that said, I will turn the call over to Dave, who will provide additional color on our financial results and our outlook. Dave?
Thanks, Eric. I will first talk about our first quarter financial results and liquidity before providing additional perspective on our outlook for the remainder of the year. Starting with the top line, we performed over 142,000 surgical cases in the first quarter of 2022, 13.7% more than the same period last year. This growth was experienced across all of our specialties. When we evaluate our surgical case volume compared to the first quarter of 2021, we are reminded that the impact of the pandemic was still being felt broadly across our portfolio, but more significantly in our GI and ophthalmology specialties. We believe this was due to the timing of how vaccines were rolled out across the United States. Those specialties have returned to normalized levels in the first quarter of 2022.
As Eric highlighted, we did experience some cancellations and delays in January and February that we attribute to the Omicron variant of the virus. That was short-lived and isolated to certain markets. As we ended the first quarter, COVID-19 was not an influencer of our results. Although new variants may emerge, we are pleased with our case mix and the momentum each carries into 2022. Largely attributed to this case growth, we saw revenues rise 16.4% over last year to $596 million. This growth is a combination of the organic growth factors that Eric described and contributions from acquisitions completed in 2021.
On a same-facility basis, which we report on a days adjusted basis, total revenue increased 8.2% in the first quarter, with case growth at 6.3%. As a point of reference, same facility case growth is 8.0% using calendar days, and net revenue growth is 9.9% on this basis. Net revenue per case was approximately 1.7% higher than the prior year period, driven by the return of lower acuity contributions from GI and ophthalmology cases returning from the pandemic, in line with our expectations. Adjusted EBITDA was $77.1 million in the first quarter, which included approximately $1 million of benefits from the recognition of grant income from recent CARES Act grants.
As a reminder, Adjusted EBITDA for the first quarter of 2021 included a meaningful contribution from grants of $10.7 million. Adjusted EBITDA margins were at 12.9% for the quarter. As I've mentioned before, we are diligently watching for inflationary pressures affecting our labor and supply costs. Although not immune to such factors, these were not material in the results we are reporting this morning. Our salaries, wages, and benefit costs were generally in line with the prior year and our expectations. Given the market dynamics, we will continue to carefully monitor these cost factors, deploying cost mitigation tactics to help offset this pressure, but it does represent a risk to future results that we are incorporating into our updated guidance for 2022. Moving on to cash flow and liquidity.
We ended the quarter with approximately $379 million of cash, which includes approximately $42 million of Medicare advanced payment, which are recorded as deferred revenue on our balance sheet. Recoupment of these funds from future Medicare revenue will continue through the second quarter. We reported positive free cash flows in the first quarter, with just under $80 million of cash flows from operations, $54 million of distributions to our partners in CapEx, and $18 million of repayments of Medicare advanced payments. This positive cash flow benefited from the receipt of a portion of the shareholder lawsuit and an earn-out of a prior asset sale. Excluding these items, we remained free cash flow positive, consistent with our expectations.
Year to date through April, and excluding our de novo investments, we have deployed approximately $70 million on 5 ASC transactions at a sub-8x multiple. These centers are primarily focused on orthopedic procedures and are well positioned to support and strengthen our same store growth trends in future years. Our pipeline for future acquisitions from ValueHealth and traditional acquisitions positions us well to be able to exceed our targeted $200 million of annual capital deployment. The company's ratio of total net debt to EBITDA at the end of the first quarter, as calculated under the company's credit agreement, was 5.9 times. We expect this leverage to float in the upper 5 to lower 6 times range in the near term as we continue to deploy capital for accretive assets.
As a reminder, the company has an appropriately flexible capital structure with no financial covenants on the term loan or our senior notes. Our $210 million revolver remains available to us if necessary. We are closely monitoring the debt capital markets for stability in light of the current inflationary measures being taken by the government and the heartbreaking conflict in Ukraine. Based on these conditions, we may opportunistically approach the market to refinance our senior unsecured notes. With the first quarter results we released this morning, we remain optimistic about 2022 and are raising our guidance for 2022 total revenue to a range of $2.5 billion-$2.6 billion.
In addition, we are raising our guidance for 2022 Adjusted EBITDA to a range of $375 million-$385 million from our previous range of $370 million-$380 million. We are confident about 2022, but believe this range is prudent given the risks associated with new variants of the COVID-19 virus and the potential for increasing labor and inflation costs, which we have successfully navigated so far. We continue to anticipate the seasonal pattern of our financial results will be relatively consistent with pre-pandemic levels, with the second quarter earnings representing between 22% and 23% of our projected full year performance. As we evaluate risks versus opportunities in 2022, we are confident in our annual outlook and continue to see strength and momentum across multiple product lines and geographies.
With that, I'd like to turn the call back over to the operator for questions. Operator?
At this time, we'll be conducting a question- and- answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In addition, we ask that you please limit to one question followed by one follow-up question. One moment please while we poll for questions. Our first question is from Kevin Fischbeck with Bank of America. Please proceed with your question.
Okay, great. Thanks. Wanted to go into the ValueHealth announcement today. They take, you know, I guess they do value-based arrangement. Are you actually taking risks there, or are you just kind of the subcontractor still getting paid on a fee-for-service basis trying to understand the upside potential there?
Yeah. Hey, Kevin. Thanks for the question. No, they put together the bundles through their value-based arrangements, typically 60-, 90-day bundles. They have lots of different approaches to it. They're able to fully adjudicate those through a TPA. Basically, they give the capability for us to partner with payers, large employers to do things that they often don't have the capabilities to do. In general, as far as risk goes, we're not taking risks with these assessments. They are fully based on taking advantage and capturing more of the value we create versus the alternatives.
Okay, great. As far as this guidance goes, just wanna make sure that when we think about 2023 and 2024, this new guidance is the right base to be thinking of. There's nothing to back out of. I guess, in particular, wanna understand the de novo growth that you're really accelerating. You've talked about, you know, some startup costs and things like that. Is there? How should we think about those? Are those a drag to kind of the long-term growth? Are those in the numbers? How should we think about that?
Hey, Kevin, this is Wayne. First of all, good morning. Relative to 2023 and 2024, you should review our current guidance that we provided, as the new kind of foundational base. The growth rates that we've stated previously will continue, and we continue to target long-term, mid-teens growth rates. We believe that is highly achievable. Relative to the de novo strategy, you know, the way I would like to frame this up for folks to think about is, it really creates very little drag in the current year beyond the fact that we are accelerating these, and we put more resources on that. But the way I like to look at it is, you know, we really have three legs to our growth engine.
Two of those legs are heavy on the organic side. One being what we've been doing for the last 4-plus years, which is the physician recruiting, the managed care, supply chain management, rev cycle, and kind of the specialty expansion programs. The second one being the de novo engine. As you know, we've been building de novos each and every year. But if you look at kind of national statistics now, de novos are growing at over 4% a year. There is a massive need where orthopedic surgeon, cardiovascular surgeons and others are trying to find a way to separate from the current, you know, acuity environment to this outpatient setting, and they wanna participate in it. Really what this announcement today does is it simply accelerates those de novo investments.
Don't view them as a drag on earnings, but just the opposite. View them as an enhancer to that organic growth engine that's associated with the de novos. You'll begin to see these things start to produce value next year, albeit more de minimis because these things take, you know, about 18 months to get to full run rate. Nonetheless, by creating this pipeline this year, where we think we will get up to 15 of these things up and running, both what we were doing plus this new relationship, that we'll start churning out 15-20 of these de novos a year. That creates a very long pipeline then of further organic enhancement or growth opportunities as we get out into 2023 and 2024.
Then finally, the last, you know, leg of that stool is the M&A pipeline, and that is just humming. We are not gonna abandon that at all. We still expect to deploy at least $200 million a year in capital. We wanted to be in a situation where we could continue to consolidate, you know, the existing ASCs, but really participate in this new wave of those that wanna own their own ASCs and be able to partner with those physicians.
Great. Thanks.
Our next question is from Brian Tanquilut with Jefferies. Please proceed with your question.
Hey, good morning, guys. Congrats on a solid quarter. Wayne, I guess my first question for you know, as I think about all the docs that you've brought on over the last, you know, put it two to three years, and also the ones that have started bringing cases to your ASCs as the pandemic started, anything you can share with us in terms of the stickiness of those, docs and how their volumes are ramping up or have stayed stable? Or, you know, any color you can share with us in terms of just the volumes that they're bringing?
Yeah. So Brian, appreciate the question. One of the things we talked about when we implemented this kind of data-driven approach to recruiting four years ago was that, you know, the value creation of these recruits really has a multiple year compounding effect, you know. At the four-year mark, we can still tell you we are still seeing even revenue growth from those that were recruited back in 2018. It's pretty exciting to see how the compounding effect of these recruiting classes, kind of cohorts, as we refer to them, you know, grow.
One of the things I, you know, I stated in my prepared remarks is just to give you even an environment like this first quarter, where we know that certain of our communities were affected by the Omicron variant, and we actually either had nurses or surgeons or patients who were ill. Despite that, even though we got many of these rescheduled in the March and April timeframe, what's really exciting is if you look at that this quarter of this year and you compare it to two years ago cohort, it's up 35% on revenue from two years ago. The idea being that last year you were getting more of that run rate going and you grow quite a bit, but in the subsequent year even more. Of course, last year's cohort is up another 20%.
The thing that's most interesting is if you look at kind of a full year, kind of a per annum basis, these general per annum recruiting classes generally create about 50% more revenue in year two than they did in year one. It's usually around 20 or 25% in year three than they did, you know, over year two. It even grows from there. You start eventually by year 5 or so, we think, we're only in our 5th year now, but we believe we're gonna start seeing more of that mid-single digit growth. The reality is, there's a multiple year compounding effect. As we continue to expand through M&A, we get to overlay that organic growth engine into those then and kind of repeat this. We think it's become highly scalable.
Our team has done an exceptional job, and it's one of the reasons we think we can perform at the high end of that kind of low single-digit, you know, potentially high double-digit organic growth range over time.
That makes sense. Then I guess my follow-up, just any color you can share in backlog as we look at the second quarter, what you're seeing in terms of volumes?
Sure, Brian, thanks for the question. You know, I don't know. It's always hard, you know, to know who didn't come to your facility and why. I would say that with Omicron, we've rescheduled most of those within the quarter. You know, some of those might have gone into April. Clearly what we saw in the first quarter was the return of GI and ophthalmology to normal levels. So if you remember last year, the timing of the vaccines actually kind of held people back, I think, a bit. So you really saw the most acute stuff and now you're seeing people this year really come back for GI and ophthalmology. So that's. It's nice to see those returning to normal run rates.
I'm sure there's still some backlog out there from the last couple of years, but I don't know that it's that meaningful because we're back to a run rate that, you know, is meeting our expectations. You know, there could be certain service lines that haven't fully gotten back there, but I don't think it's a major impact going forward.
Awesome. Thank you, guys.
Thanks, Brian. Our next question is from Lisa Gill with JPMorgan. Please proceed with your question.
Thanks very much. Good morning, everyone. I just really wanted to understand the reimbursement environment. Wayne, you made a comment around the organic growth, and I know that you've been growing your managed care relationships. Then, you know, the first question was asked about bundles and you're not taking risks. I just really wanna understand two things. One, as we think about the growth in these value-based contracts, how do we think about reimbursement over time? Then secondly, where are you when we think about managed care contracting?
Thanks, Lisa. Let me unbundle the question, a couple different things there. First of all, on the managed care contracting, you know, I'd say we're kind of getting to the bottom of the third inning, you know, which may seem after four years in the seat here that this team's been together. You know, you may ask the question, "Well, I thought you'd be further along." But the thing we try to remind folks is we've been building a multi-year strategic approach to our renegotiations, and most contracts have a three-year renewal period associated with them. Kind of year one was reestablishing the base, the procedures we wanted to focus on and where we're going.
We're now entering into that next kind of innings four through six, where now that we've got our portfolio where we want it, we've got our markets where we want it, and we've got certain markets where we've gotten the scale now that really allows us to move that rate environment even further over time. We continue to see that as really an organic growth driver for us, you know, over time. Regarding the not taking risk, I think the point Eric wanted to emphasize is we fully expect to participate in value-based care, and we actually believe we are the value, the substantial value in the value-based care food chain, right?
I mean, it's our procedures that are the high cost procedures that really need to move out of the inpatient environment into a lower cost, high quality setting. What we don't wanna do, though, is be distracted from all of our other growth trajectories that we have. In this partnership with ValueHealth, they will actually take the risk on the bundle. We will get the referrals, and we will get more value creation for us and our physician partners. 'Cause for us to participate in this, we would expect to have a better return than what we receive today in a straight, you know, straightforward negotiation.
View this as, for us, both a value play, and an economic play, and recognizing that we really do believe in the value chain, we are one of the largest value creators, and we wanna get our fair share of that, but we wanna de-risk it by not losing focus on our strategy, and we wanna de-risk it that we don't need to take that risk. We can simply get the value creation.
Yeah. Lisa, I might add a couple of things there. You know, when you think about managed care and kind of progression of relationships, we are continuing to partner with managed care to think through a lot of ways to actually kind of grow the acuity. As we've talked about a lot of times, ortho and cardiac, the savings per procedure is so meaningful that we're really engaged with payers on how do we do that. That's really where, you know, ValueHealth comes in, and I'll grow on that in a second. We're working very closely with them to talk about creating the appropriate incentives, and that includes professional fee bumps for our physicians, you know, finding ways to make sure we're aligned on where value is created and that's an ongoing thing.
I am also very proud of our managed care team. The one thing they do is they're very proactive on getting ahead of our growth at facilities, making sure we're contracted for services we don't offer today, but we know we're gonna recruit for. We have a very proactive relationship. In many cases, we're working on national agreements. In some cases, it's regional. Those are ongoing. Of course, from a payer perspective, we're a preferred provider because we create so much value, happy patients, happy doctors. On value-based care, I guess maybe let me say the risk thing a little differently. With ValueHealth, while they will take some risks, the reality of it is they with us combined have a very specific clinical protocol they go through.
They have, you know, they've already done 4,000 of these enhanced bundles, over 4,000. They've done over 15,000 procedures in their hyper-specialties. What I would point to is when we follow those protocols, there isn't a lot of risk. It is truly just taking better care of patients, and we know that the savings is dramatic, even with the payer paying a higher rate on a bundle. It's just a chance really to use a different approach to create new incentives to move patients to the right side of care and actually have our facilities and our physicians share in that value creation. We're excited that, you know, to have ValueHealth's capabilities in that area.
should I think of Privia as being a similar relationship? You know, as you talked about only being in the third inning for managed care, are there incremental opportunities as I think about these other managed service organizations or other, you know, physician enablement companies that are similar to Privia?
Yeah, it's a great question. Privia is similar in some ways. I mean, Privia clearly, what we're doing with Privia is we are aligning with the primary care groups that are really focused on creating value and eventually moving to value-based care and capitation. With our savings being 30%-50% to traditional care or traditional acute care sites, clearly we are natural partners. You know, we started that relationship in Montana. We're gonna look at other markets. I think there are more opportunities. When you think about any of those kind of payviders or capitated primary care groups, we absolutely believe there's opportunity for us as the independent, right? As the independent player, we're not associated with big health systems in general.
We are not owned by another payer, and so we're kind of that opportunity for them to really drive out costs in an effective way. Yeah, we think there's more opportunities. Again, those, we'll be very careful with how we do them. I just remind you that even in a fee-for-service world, we're a value-based player. We start with that simple construct, and then where we can build upon that with the right partners, we will.
The way I would look at it, Lisa, as Eric said, is that the ValueHealth and Privia relationship provide another referral source to our facilities with an opportunity to participate in the upside. We're gonna be intentional and deliberate in how we roll these out, I can't emphasize that point enough, so that we don't distract from what our surgeons are doing today and our facilities are doing. This is something that Eric's been working on for a couple years now, and I am super excited how these things are all starting to hit now.
Great. Thank you for all the comments.
Thanks, Lisa.
Our next question is from Whit Mayo with SVB Securities. Please proceed with your question.
Hey, thanks. Eric, as we start to see the strategy around cardio come into focus, I think you referenced the need to put some capital around this. Any way to size it? I don't think the numbers are big, but just trying to really think about what you need to spend and build out, and invest in order to facilitate this initiative.
Sure, Whit. Great question. I appreciate the question on cardiac. If you think about, I think we've talked about this before, we have 60% of our facilities today who have fluoroscopy capabilities. For those facilities today, they can start EP and cardiac rhythm management procedures. You know, think about pacemakers, you know, lead extraction procedures. There's already a fair amount of our facilities that are capable of doing those. We plan to launch, I think, 9 or 10 of those programs this year. Getting cardiologists into our facilities using the existing equipment. As I go forward, every time we expand a facility, I would mention we do that all the time. We've had 3 new facility expansions this year, one that just opened this week.
Every time we're doing that, we're now scanning beyond just our typical recruits to look at the cardiology market and say, "Is this the time, you know, to think about putting in a cath lab?" Cath labs obviously are more expensive, but I would remind you know, we finance those facilities on the expansion, so it's not a huge capital drain. Because of the way cardiology has been protected, you know, there's a lot of margin, there's a lot of savings opportunity with acute care health systems over time that's dramatic. We think these are gonna be quite accretive. A lot of it comes down to getting doctors comfortable both that and kind of working through some structural impediments like employment.
You know, the capital drain, if you think about those, I mean, cath labs are gonna be, you know, $1 million for the equipment. You've got the specialized room. In some cases, this goes back to the de novo strategy, one thing that's a little different about cardiology is, this is gonna be a nuance, but you don't have to go behind the red line. If they're coming into a traditional facility, they have to scrub in, they have to actually do all the things that normal surgeons do, which they're not used to doing always. As you think about building out these facilities, there are times for cardiology that increasingly those could be de novo, just to be more site specific.
We're also adding that capability into other facilities. It will not be a big capital drag, certainly not this year. I think as the years go along and we start putting true cath labs into these, and we have a couple of those in the pipeline, you know, that will be a little bit more capital intensive. Quite honestly, the savings that we drive per procedure and how accretive cardiology can be for us makes that ROI really, really strong.
Maybe just a follow-up. I think, Wayne, you said. Sorry, I'm moving a little slow this morning. 15 de novos a year, is that sort of the new target? If so, what's a good expectation around our expectation for startup losses? I think you get to adjust that in your bank definition of leverage, but it should presumably be a headwind on the income statement. I'm just trying to appropriately think about that.
Yeah. I wouldn't view it as much of a headwind with these ASCs, one of the things you should know in our relationship with ValueHealth that we find incredibly intriguing is that we are signing up these only when they are already started, syndicated with the docs that we believe are the right growth docs, and then we participate in our ownership. First and foremost, we have de-risked even the losses that come from the beginning of these de novos quite meaningfully. I don't really anticipate much of an adjustment on any of these kind of ASC size level de novos like we did with Idaho Falls, which as you know, was a very sizable $100+ million de novo investment in this example.
I don't think we would anticipate, and our outlook right now reflects what we view as kind of a run rate of de novo losses that we would expect both this year and going into next year. Then you should really see a rapid ramp-up. If we do have anything of any consequence, we would spike it out. I don't think you should look at it as anything we're carving out. I think we're gonna let that run into our core run rate.
Yeah. Whit, if you think about the doctors, we'll basically look when we syndicate something, we're looking at those physicians, what procedures they do today, what they think they're going to be able to bring to the facility. Obviously, we look at that very closely. We have a pretty good idea. Now there's always some timing around contracting. There's always some timing around startup stuff. Within a year, within that 12-month period, if we have syndicated this in the appropriate way in the right specialty, I think within a year any losses should be outrun. You know, you think about that first year, you might not have a lot of EBITDA. But as you go forward, then, you know, you're starting to ramp up month 12-24.
Of course, you know, the same store opportunity here is amazing. Yeah, I agree with Wayne. It's not gonna be a big number there, in the early years.
Okay. No, that's helpful. Thanks, guys.
Our next question is from Tao Qiu with Stifel. Please proceed with your question.
Hey, good morning. I wanted to ask about organic growth. You mentioned that case mix has returned to pre-pandemic levels. In terms of, you know, capacity utilization in your centers. For example, in the scheduling, how are they trending versus 2019 levels? Could you help us understand the potential productivity upside there? Thanks.
Yeah. Tao, let me take a shot at this. I think we have plenty of capacity, and where we don't, we're constantly addressing it. It's not a super huge capital lift to create capacity for our centers. In general, we are able to meet the ongoing demand, and we have plans. We always are planning to make sure that we don't run out of capacity to meet the demand that's coming. If you think about compared to 2019, clearly, you know, utilization percentages are going up when you see this kind of case growth.
What's interesting. You see this show up in the first quarter, because so much of the return in GI and ophthalmology is affecting kind of the overall growth, you know, we grew same store revenue by over 8%. We're proud of that. A lot more of it was in case growth than per case pricing than you're used to seeing. That's just a sign of the return of some of those lower acuity, really high margin procedures, because we're still, as we mentioned, we're still growing orthopedics quite strongly. I would say that we're not worried about capacity. We are constantly looking to add that. I mentioned we've probably had, I don't know, 6, 7 facility expansions in recent months, just to make sure we stay ahead of that.
As far as our ability to meet the growth and demand without much capital, without a big capital outlay, we're quite well-positioned.
Tao, one thing I would highlight is, we've already exceeded all pre-pandemic levels over the last several years. Like, we're back on core run rate from our perspective and growth. Obviously, what we saw in January and February of this year, you know, temporary with the variant, but it, you know, puts a little pressure, but that quickly gets rescheduled. The one thing I wanna highlight that Eric brought up though is, the capacity is there, and reminder, we don't generally do surgeries on Saturdays and Sundays. Right now, that has played very well to our advantage, as it relates to retaining staff and our nurses, and the flexible environment we have for work.
If we ever got to what I would call a capacity issue, we always have the ability, like we generally do around the December timeframe, to open up on weekends, on Saturdays and Sundays. Again, we don't think we need to pull that lever. We've got enough capacity still to grow in our facilities. We've always got that extra kind of two days a week we could always implement if we ever felt like we were getting to a point that there was so much demand that we needed to open up on Saturdays and Sundays. Some patients love that opportunity if that was available to them. Right now, we haven't made that available, but it is another flex point that we have.
Sounds good. That makes sense. My second question, my follow-up is really on the kind of the interesting environment we're in today. You know, you mentioned that you're probably looking to refinance the senior unsecured note opportunistically. I think with the fast increase of interest rate, you know, what kind of rate do you expect to get if you refinance that today?
Well, let me start by saying at the current rate environment, especially in the high yield market, it's virtually a non-existent market right now. We would expect it to open up again at some point. From our perspective, it's opportunistic for us. We have, between our revolver and cash at parent, over half a billion dollars. We have no debt coming due for another three years. I'm gonna let Dave highlight for you know, what we've done around the variable portion of our debt, because we took a number of initiatives in the last several years that has positioned us well for exactly this moment in time. The issue for us on our 10% debt is simple.
It's a 105 call, and where rates are versus the economics of a 105 call, it doesn't make sense right now. We'll be patient. It could make sense as early as a month from now or 6 months from now, and we'll see. That call premium goes down over time, but we'll be opportunistic. It's hard to say where we would finance today, but I think it's gonna get better over time and markets will start to generally right themselves. Dave, maybe highlight though how we've de-risked the portfolio on the variable debt we have.
Yeah, sure. Geno, just as a reminder, the two and a half billion dollars that we carry at the parent company for debt, you know, a billion and a half, just over a billion and a half of that is in our term loan, which does carry a variable rate associated with it. A few years ago, we began a hedging program where we basically have swapped out the interest rate to a fixed rate coverage. 90% of that debt is now covered by that interest rate swap. The remaining portion of that is covered by interest rate caps that we put in place last year, which effectively limits our exposure to 75 basis points inside that term loan to changing rates.
Very pleased that we've captured, I think, a lot of the risk associated with that, which means the risk that we have right now really just comes down to the economics Wayne was just talking about. When does it make sense for us to take out that call premium? What do the rates need to look like? What does the market look like? You can be assured that we are monitoring that market to find when it does make sense. Again, it's opportunistic, so we'll be disciplined about it.
Got you. Thank you, everyone.
Thanks, Tao.
Our next question is from Jason Cassorla with Citi. Please proceed with your question.
Great. Thanks. Good morning. Just to piggyback on the questions around Privia and the ValueHealth relationships around value-based care. Just interested if this approach marks more of a shift away from conversations for JVs, specifically with hospital partners at this time, or how should we think about that hospital JV opportunity, I guess, in aggregate, just given the backdrop the acute care industry is kind of facing right now?
Yeah, thanks for the question, Jason. I don't think it is a shift away from that. I'd be clear, you know, ValueHealth actually has a lot of strong hospital relationships that we think we can build upon and potentially participate in. We are going to be opportunistic with partners that are as progressive as we are in how they think about this, because, you know, we want partners who are actually committed to the move, the transition, not just kind of playing defense. It's a tough thing for health systems. We are actually engaged in a lot of really meaningful conversations with health systems in the right markets. We take our independence seriously because we think that's an advantage for us with managed care players and others.
At the same time, there are like-minded health systems that wanna be part of the solution, and we've got ongoing conversations. I think some of those could happen because of the ValueHealth partnership because they do have strong relationships with some really, I think, forward-thinking payers or health systems from what we can see. And then we've got some other things that I think you'll find quite interesting as the year goes along. We haven't hit on that today. We've got enough to cover today, but certainly I wouldn't say we're moving away from that, but we are going to be selective, and it's gotta line up with how we think about the value-based transition. Got it. Thanks. That's helpful.
Just interested on your commentary around the de novo front and thinking about that 18 months lead time that you suggested and the opportunity there. Is that 18 months timeframe, I guess, negatively impacted by the labor environment to build these facilities and I guess just inflationary constructs that's happening right now? Or would you consider that 18 months more normalized as we think about de novo opportunities moving forward beyond the current backdrop? Just quickly on that, if these de novo builds are more on rounding out your current markets or is the focus of the de novos kind of on new market entry approach? Be helpful. Thanks.
Let me start with the economics, and then I'm gonna let Eric talk about the more strategic approach to how we're targeting markets and where we're going with this. First of all, in the economics, the current environment actually plays to our advantage, not our disadvantage, as crazy as that may sound. I would remind you, we don't own facilities. We don't. That's not our plan. We're not in the real estate business. Generally, most of the facilities that we build out on a de novo basis are generally around somebody else serving as the owner and us leasing the property and then fixing it so that it meets our needs to be able to run and operate our facilities.
In many cases, while that may put some pressure on those that have been building them, many of these, as we've entered into these partnerships, have already been down that path. They've already received their financing. They've already locked in on where they're gonna go. You know, over time, that may put some pressure on them around their economics, and that could affect us in terms of what we pay in a lease payment. But I just want you to be aware that from our perspective, there's a lot of properties becoming available in this new virtual environment that we're in, and that's actually putting positive pressure for us in terms of lease rents and where that could go over time when there's a lot more facilities available.
You know, net-net, call it neutral if you wanted to be a little bit conservative. You know, I don't necessarily see it though as a major headwind around what we're doing kind of prospectively around this. What I'm more excited about is that these doctors, we run through our data analysis, so we know their volume. We know exactly what they do in every market. We know exactly what specialties in, and they're already syndicated before we enter into our partnership. What you have to look at really that's unique here too is if anything, the model's been de-risked while accelerating over where we've been at historically. I think we'll have a shorter timeframe on getting to profitability, as Eric said.
I think we'll get there very quickly because of the doctors we know that exist. We'll be able to overlay on day one our kind of synergistic approach to our managed care rates, our revenue cycle management, et cetera, that we're now finding we can do at scale and do it quickly.
Yeah, maybe just to build strategically on this. Number 1, we're excited about having access to ValueHealth's team that's out there doing this every day. They've got a big pipeline. You know, we have a top-notch team at M&A, as you guys have seen. I put our team up against anyone. We win more than our fair share out in the market when we go to compete. De novos have been something we've done opportunistically, you know, a couple a year, never to this extent. Having an extension through a partnership of a team that does this every day and that brings the expertise ValueHealth does is quite attractive for us. I would say you asked the question around new markets or existing. It's both. I mean, certainly we like to.
We have a, you know, for example, we have a de novo we're building in North Carolina that complements our surgical hospital in Raleigh-Durham area. We do find those opportunities in existing markets. Honestly, in some markets where the acuity hasn't moved yet, you have to start with a de novo kind of strategy. It does open up some areas for us to play offense. I think that's both on that. To get to the timing, let's put aside a second the current supply chain issues and just say, you know, typically 12-18 months to build out once syndicated. There's a whole effort, and that syndication period can be quick if there's a group of docs really interested, or it can take 12-18 months, right?
Like, that whole period is a significant amount of time before you get to construction. Now we have in certain markets. Look, we've seen some states that have really struggled with permitting. They've gotten behind on certain things. We certainly see some supply pressures here and there. To Wayne's point, I don't see that. It's not gonna be something that's a detriment for us getting these done. You know, honestly, what we're trying to figure out is wherever we can, instead of doing completely greenfield, how do we do brownfield? How do we find facilities that may allow us to cut time off that? We're very, very focused on shortening that opening time as much as we can within some limits.
There certainly are some places where we have some pressure because of the supply chain disruptions. Great. Thanks.
Our next question is from Ben Hendrix with RBC Capital Markets. Please proceed with your question.
Hey, guys. Thanks for squeezing me in here. Was curious about the performance of the Idaho Falls Community Hospital in the first quarter, what EBITDA contribution was there and how that facility fared through Omicron, specifically with regard to premium and agency labor utilization. Thanks.
Hey, Ben, good morning. I'm gonna let Eric really get into how it's performed operationally, especially during this unique environment and around some of the pressures we've seen on the labor front. Relative to expectations, it's performed better in the first quarter, slightly better than what we had expected, which we're encouraged by because of what we saw from the variant in January and February. I would say relative to where it's going for the remainder of the year, if trends continue, we're very optimistic about this driving the long-term value that we told our shareholders was there. Eric, maybe comment a little bit though on what we've seen on kind of the inflationary fronts and
Yeah. Well, as we've talked about before with Idaho Falls, this is a market we love. We're well-positioned in this market. We built this hospital because of the opportunity we had there to really make a difference in kind of the access to really lower cost care, high value care and capture market share. We still feel really good about this marketplace. Omicron or COVID in general did have a dramatic impact on this hospital, right? The strategy here was very ER-based, service line based, trauma-based. Some of those things are now coming to fruition, which is great to see, but there's no doubt, and we've talked about this, that you know, opening a new hospital, a new acute care hospital in the middle of a pandemic is not perfect timing.
With that said, we're right back onto the pace. We got delayed, but we're now starting to see the things that we expected to see when we started. The hospital was slightly profitable in Q1. We have that above the line. We've moved that up, I think it was fourth quarter of last year, and we expect it to stay there. We are working with local physicians there to really build out great programs, you know, whether that's our trauma designation or other higher acuity services like cardiology. As the COVID impact fades, our ability to get the state inspectors out, our ability to get the licensing done, our ability to recruit the physicians we need in has really been enhanced, and we're seeing real progress there.
I would tell you green shoots better than our expectations for Q1, and still feel really, really good about the market.
Thank you.
Our final question is from Sarah James with Barclays. Please proceed with your question.
Thank you. So we were viewing 2022 or 2023 as the year that you guys kind of flipped to self-generating cash flow to fill the $200 million commitment for M&A. I'm wondering if your timeline shifts on that at all given where you guys are with de novo commitments and the new JV?
Hey, Sarah, it's Dave. Let me take that. You're right. We did say in our last call that this was the year that we turned free cash flow positive based on our view of how the year is gonna roll. Basically, there's a magic number that turns us into that positive territory. As we finish the first quarter, as you can see from the results, we're starting to experience some of that favorability occur. We won't be in the position to be clear in 2022, to be able to fund all of that with free cash flow. However, I will remind you that we're north of $500 million of liquidity, as Wayne mentioned a little bit earlier.
We have a way to kind of bridge to get there, and we continue to grow. I'll say this in direct response to your question. There is nothing in the first quarter that suggests we are going down a different path than what we have previously said.
Yeah. I would add on this cash flow positive discussion. You know, it's great. It's a big milestone for the company this year. We do plan to be cash flow positive this year. That rapidly accelerates in the coming years, as we've discussed in the past, because you have things like the TRA agreement and other things that fall off. You know, we're excited to see the light at the end of the tunnel as far as when we start, you know, funding our own acquisitions fully. With that said, we've got, you know, amazing opportunities we're not gonna miss out on along the way, and cash flow is gonna follow that. We're excited about where we're going this year.
Making that step to positive cash flow is a big step that we committed to, and we feel good about our ability to deliver on that.
Great. Thank you. Just to clarify one of your earlier comments, you guys mentioned that you're seeing high retention of clinical labor and premium labor costs in line with pre-pandemic. Are there any numbers that you can offer around either of those stats, just so we can understand where you are on a comparative basis?
Yeah. Let me try to answer that. I would say that as far as numbers, let me just kind of ground you in this fact. We look at all the time premium labor. Now, premium labor, it bounces around from quarter to quarter. What we care most about is what is our core staff doing? Because if you think about how we staff, we strive to keep full-time people very stable to meet the core business. We have fluctuations throughout the year, throughout the quarter, where we use flexible labor, you know, PRN staff. That's the staff that's been hardest through the pandemic, and that's where you can get a lot of premium labor that you either have to use overtime with your existing staff or contract labor.
That percentage of workers we use to cover that is the same as it was pre-pandemic. I would just tell you that should give you great confidence that our core staff that really make it happen in our facilities are well positioned. You know, I won't give you a stat there because it does move around, but in general, we are back to where we were prior to that. I'd also just point out from a labor perspective, you know, Wayne describes this well, but when you think about our employees in our facilities, they get to work on just the specialty they wanna be in. They're not in a facility where they get pushed into lots of different things. If it's an orthopedic surgical nurse, they get to do all orthopedics.
They often have known our physician partners for years. They like the environment we have, which is very, very much a focus factory that's based on high quality, that's based on driving an extremely differentiated patient performance. You know, we feel like, again, that's a strength of ours. We're gonna watch it closely, and we continue to work on every opportunity we have to drive savings.
Thank you.
Okay, with that said, I think we've come to the end of the call, and before we conclude, I would like to just acknowledge, as Wayne did at the beginning, the significant efforts and focus of our 11,000 colleagues and 4,600 physicians. Collectively, we take to heart the responsibility for providing the best environment for physicians to perform exceptional procedures of the highest clinical quality for our patients. We know that more than 600,000 patients annually place their trust in us in what are often their most vulnerable moments. I'm privileged to work alongside my colleagues in the company, the physician partners we have as we work to more fully deliver on our mission, which is to enhance patient quality of life through partnerships. Just wanna thank you all for joining the call this morning, and have a great day.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.