With two large integrated nonprofit systems. When I say integrated, employment models, closed flow systems, that had been moving away and pushing out and canceling MA contracts. We're the lone independent kind of surgical facility along with an independent primary care base. We didn't react fast enough to the fact that we were the MA access point, and that we were not doing a good enough job of saving capacity for commercial patients. When you think about that, it may sound simple, but keep in mind our physician partners are not employed by us, and the primary care base is not employed by us. Some of this stuff is coordination that we're gonna have to tighten up when you look at payer mix.
Again, in the six years I've been here, we haven't had that dynamic change. That was one market that we, y ou know, I would say that's not gonna be an overnight thing. We did not expect that to bounce back overnight, but we are going to go work on that. That's a marketplace where we've consistently earned and taken commercial market share. We've got the best value product. We got great physicians. I have every expectation we'll recover that over time. The second market is an anomaly that I still struggle with. We had a market where we grew our acuity, high acuity procedures by 18%. If you would have told me in this market we're the leading market share provider of orthopedics in a relatively good-sized MSA.
If you'd have told me we grew high acuity procedures by 18%, I'd say we had a fantastic quarter. Unfortunately, in that particular marketplace, all of that growth was Medicare. That's the only market, and I'll point out, we don't have a lot of HIX exchange patients. Exchange patients tend to access the healthcare system through the ER, and we are primarily an elective business, and so we don't tend to get a lot of exchange patients. In this particular market, we did have exchange pressure with, you know, the Affordable Care Act subsidies going away for the exchange patients. Within our commercial base, we also had pressure. I had a market that grew 18% on high acuity patients that actually had less net revenue with 18% more cases.
I'll come back to that. You can imagine our physicians had a lot of questions around working that hard and not seeing that come through their dividends. The good news about our business is we are perfectly connected. The third market was a rural market where it really was about physician transitions. We had some retirement timing around new recruits that didn't match up particularly well. We also had some docs that were out for personal reasons. The fact that I'm up here talking about a handful of docs is probably surprising. In a rural market that big can have a big impact, and those physicians are already back. There's a mix of reasons in there. Those three markets really drove the entire difference on the earnings line. We feel like we've ring-fenced it.
The question was, that I talked to you about, is what are we gonna do about it? First and foremost, those specialists we sit with every day, and they look at the Q4 and say, "My margins were compressed. I'm gonna get my lower dividends." You know, we have a real opportunity to talk to them about a bunch of things. Number one is taking out cost. We are already, we've been actively taking out costs, getting more efficient. These surgical hospitals, if any of you have been to them, these are the facilities you would wanna go to get care. It's where you'd send your grandparents. These are kind of our physicians built their Taj Mahal.
I would say in many ways, these are really high patient experience facilities, often the top 5% in the country, great outcomes. You know, when things are going really well, physicians, they tend to wanna have a little extra staffing. They don't wanna be pushed on their physician preference items. You know, if you're growing and you've got great margins and you can have a great case, you probably get a little more leeway. Those doctors that have felt the pressure, we've got their attention. The payer mix has changed. We have to do some things on cost. We have to change our approach on anesthesia. If you think about anesthesia coverage, you know, we have obviously a payment difference between commercial and Medicare that's pretty large. Anesthesia, it's three to four times, right?
For anesthesia, you know, we had subsidies in place that were higher because of that mix. The doctors are now more aware of that. I would just say on the anesthesia point, often physicians don't wanna move away from an MD model. They don't wanna move away from the coverage they're used to on flip rooms unless they have to, unless there's a compelling reason. We now have a compelling reason. We've taken action on cost in those markets. We've made some leadership changes. Clearly, these are dynamics we need to make sure we react to quickly. I'm excited about also our new Chief Operating Officer that we've added to the company, Justin Oppenheimer, who's very focused on these dynamics.
Thirdly, we are very focused on working with our physician partners on having access in those offices to commercial patients, making sure we're really, really focused, not just at our level, because I do think ultimately, while we don't control those offices, our physicians do care deeply about competing for those patients, and we're very, very focused on that. You know, we leave that 2025 headed to 2026, you know, in a position where we feel like we've put together, you know, a great plan, a conservative plan for this year that we're excited about for 2026.
Great. Eric, one point I wanted to clarify was that, you know, total case volumes came in below expectations. There were some payer mix issues in the quarter that you just noted, yet you still exceeded the high end of revenue guidance. You know, how does that happen? How should we reconcile those events?
Yeah. No, it's very frustrating. I mean, I'm gonna go back to we had really strong acuity growth. We pointed out in the quarter versus a very tough comp from the prior year, we grew total joints by 15%. We created tremendous value for the healthcare system. Unfortunately, we didn't capture enough of that because of the mix of patients, right? It certainly was an acuity story. I'm proud of the team and our focus on orthopedics, particularly on high acuity cases, both total joint and spine. It was an acuity case where you're getting to the top line, but because of the mix of patients, your bottom line was impacted both by the fact that you're getting lower reimbursement and also by the need to subsidize anesthesiology.
Understood. While some of the issues you described earlier seem transitory in nature, you know, things like the ACA exchange, crowding out physician time off. Others may take time to address, you know, things like competitive dynamics, physician turnover. From a guidance standpoint, can you help us understand what's already expected to rebound and what would represent, you know, potential upside?
Yeah. I'll start with we did not assume it's just gonna bounce back, right? Our guidance takes into account the current trend. You know, there are some things that'll come back immediately, physicians that were gone that we know are back already, for personal reasons. Certainly the one-time HIX pressure with the subsidies going away, we don't expect that to happen again. Other things, like the dynamics around MA and commercial access, those will take time in coordination with our independent physician base. From a guidance standpoint, we did not expect and did not guide to a number that would bounce back to where we were.
We accepted kind of where we landed, allowed for a little bit of room on the trend to continue, but we have offset that with obviously cost actions. You know, I look back. I wanna remind everyone, our surgical hospitals are very highly managed care mix of facilities. So if you compare it to a traditional acute care hospital, you know, we're running 50% managed care. These are great payer mix places, so I wanna make sure despite the pressures we've had, these are facilities we're really excited about, and they're great parts of our organization. When we think about our ability to go compete for commercial lives, we're higher value, we have outstanding patient service. We've got independent physicians who are highly motivated to provide great care for patients.
We think we're well-positioned to maintain and build that back, but we did not assume that we're gonna get back there overnight, and we did let some of that bleed through into 2026.
Right. Sticking with guidance, you've taken a more conservative approach to 2026 guidance by excluding unannounced M&A, even as your capital deployment targets of at least $200 million remain unchanged. Can you walk us through the thinking behind that shift and how you're balancing conservatism in guidance with confidence in capital deployment?
For sure. You know, I think back, I'm going into year seven, it's hard to believe. I think back when I joined this company, we I think rightfully have included M&A in our guidance 'cause it's a big part of our story, right? We're in a very fragmented industry. There's over 12,000 ASCs, half of which are Medicare licensed, half of which are not. There's not that many players of scale. We think we're well-positioned to be a consolidator. We feel good about that. It's a big part of our story. I think for many years, it worked quite well for us. Over the last several years, I mean, as you guys know, timing on M&A can be quite fickle.
We had one year where we were way above our target, and that ended up with extra costs associated with integrating all those, which created issues for us. We had another year we finished below that, and we missed guidance just because of M&A timing. Then, of course, this year, I mean, we ended up the year close to our $200 million target, but it was very back-end loaded. I think just from a, the purpose of Dave and I both wanna be a meet-and-beat company, we have historically been that. You know, we don't wanna find ourselves again where we were sitting for the Q4 situation this year. We thought it was prudent just to say, "You know what? Our target hasn't changed.
We still wanna do $200 million+ of M&A, but we want that to be additive and not something that, you know, is built into guidance in quite the same way." We did a lot of research on growth companies in the marketplace, and we think this is certainly the most prudent approach going forward.
Right. Understood. Last Friday, the BLS released the weak jobs report with negative February headline numbers and downward revisions to prior months. Commercial mix is a meaningful part of your business, which leads to strong reimbursement, but also introduces economic sensitivity. Can you speak to the changes in employment trends and consumer confidence on commercial mix or utilization? How are you positioning the business in the event of a broader slowdown in employment?
Yeah. I mean, I think we're all reading the same jobs reports, right? In our local markets, we haven't seen a tremendous change in employment. I've been in the business long enough. I think for those of you who were here the last time we had potential economic uncertainty in the rapid increase outside of COVID, the financial crisis, it actually led to an increase in procedures. Patients who, you know, if you recall, they were worried about getting it done while they still had care before they got, you know, before COBRA ran out. You actually saw a spike the last time you had this. I don't know if that'll be the case today. You've obviously got the exchanges, you've got more safety nets. Historically, that has not been a huge headwind for us.
Clearly, you know, I think that one of the benefits of our business model is we don't have the downside exposure that traditional acute care does to a payer mix change, meaning we're not gonna see uninsured, we're not gonna see Medicaid's a very small part of our business. Payer mix deterioration is not gonna be an issue. We're not really exposed to that. From the commercial side, even in a world where there might be less covered lives, I'm gonna go back to my point, we feel like we're really well-positioned being a value player, right? If you think about across our portfolio, 40%-60% cheaper, when you think about our procedures, really great service, really great quality.
In an economic position where people are really concerned about paying for it, where the healthcare system needs savings, we think we're well-positioned there. You know, look, again, it's hard to predict what exactly happens 'cause sometimes it's counterintuitive. The only other thing I'd mention is the procedures we do, think about, you know, 50% of our business is MSK, knees, hips, cataracts, GI procedures. Most of those things, you might be able to put off, you know, a bad knee or a cataract for a while, but they're not elective is probably not the right term over the long term. There's pretty, you know, pretty strong demand, and there's a timeframe around those. We don't see that as a huge headwind for us, and if it does happen, we think because of our value position, we're extremely well-positioned.
Great. Let's move on to some of your portfolio optimization efforts. Surgical hospitals have always been an important and strategic part of your business, right? Can you help us understand the current exposure to surgical hospitals within the portfolio and the rationale for exploring divestitures now?
Of course. Let me start by saying I love surgical hospitals. There are only 240 or so of them in the U.S. There won't be any more that are physician-owned. These are JV physician hospitals pre-moratorium. What's amazing about these assets is they allow us to have physician partnership across the acuity spectrum. Almost all of our surgical hospitals have ASCs, an ASC network we've built around them, 'cause we can't expand these hospitals, right? They're a unique asset. They're a set moment in time.
The idea with our physician partners is let's keep their higher acuity patients in a facility they own and can have control of the quality, have control of the experience, and then let's decant ourselves and build ASCs to pull that lower acuity stuff out. We love the model. Surgical hospitals in general have payer mix that's very similar to ASCs. The traditional surgical hospital, just so you guys can picture it, 10 ORs, 15 beds, right? May or may not have an ER. A lot of them don't. A few do. Even if they have an ER, not a very busy ER, right? Payer mix and procedural mix that looks a lot like an ASC. We really like them.
Now, with that said, going to portfolio optimization, one of the points of feedback we've had over the last several years is we do have a few markets that go beyond just short-stay surgical, right? These are markets where they're still attractive markets, but we've expanded beyond that core ethos. We hear from our investors, "Gosh, we really love the short-stay surgery space. We would like you to be even more pure-play," right? That's one thing we've heard. The second thing we've heard is, "We'd like you to de-lever faster. We'd like you to drive free cash flow faster." What led to the portfolio optimization work is we think there's an opportunity to do all of those things, right?
We have a handful of facilities, let's call it less than five, that are meaningful in size, that are material, that tend to have higher debt loads, right? These are bigger facilities. Unlike our ASCs, they're not as easy to move or just expand. You're gonna be in that facility for a while. They tend to have finance leases that goes on the books as debt. They tend to have a lower free cash flow conversion, a little higher, a little bit higher cash needs than our typical short-stay surgical business. The whole goal here is making moves that lower our leverage, increase our free cash flow conversion, increase our growth profile going forward. You know, as we said on the call, we're in advanced discussions in one of those markets that's meaningful.
You know, our goal would be to address all of those opportunities within the year. We do think it's meaningful for investors. Again, we understand that there's a real need for us to de-lever faster and drive free cash flow in the business, and we think this is an opportunity to do that.
Right. The board also authorized a repurchase program.
Yeah.
which gives you some optionality for capital allocation. Could you see the company buying back shares in advance of a hospital transaction, or is the thinking that the authorization will give you flexibility soon after receiving those proceeds?
Yeah, it's a great question. There's certainly nothing that keeps us from buying shares in advance. I would say you should read a couple things into the board's decision to approve a shareholder buyback of a reasonable size, $200 million. One is, that's a pretty good sign that we think we're gonna have funds coming in from portfolio optimization, right? Because the idea, we know we have to de-lever. There's no plans to lever up to buy back shares. That should be a sign, I think, of the confidence we have in our portfolio optimization work. I think secondly, we're really disciplined around how we think about capital allocation, right?
I mean, obviously everybody believes this, but we believe our shares are certainly undervalued with where they sit today. As we look at that cost of shares, we compare that to our other options, right? Deleveraging, M&A. We have a very attractive M&A profile. Typically can buy at 8x or less, take a turn off within 12 months. From a capital allocation standpoint, we wanna make sure we have all those levers at our disposal, and we will be opportunistic, right? If it's the right use of capital, that's most accretive for our shareholders to create shareholder value, we'll go after it.
Great. Maybe moving on to some of the policy items. Site neutral payment has been an ongoing conversation in Washington. If hospital outpatient reimbursement were to move closer to ASC rates for similar procedures, how do you ensure that ASCs continue to differentiate and retain their value proposition?
Yeah. First of all, let me just say from site neutrality in general, it's like, it's basically the whole thesis of our company, right? Which is we believe care should be delivered in the right place at the right time at the right cost. Again, our sites of care, even our surgical hospitals, we typically don't have health system partners in those, and we're, you know, 30% cheaper than traditional acute care. We are deep believers in site of care and site neutrality as far as being part of the answer. With that said, I think that even if you had site neutrality on the Medicare side, there's so much cross-subsidy that happens with the commercial side, it's hard to imagine.
It's hard to imagine a world where you could move those payments fast enough to actually cause a real true difference. Number one, I think it's unlikely you get that kind of overall payer pressure on an ASC. With ASCs being 40%-60% cheaper already, I don't think that's gonna be a cost competitive fight. The other thing I would say, people who are close to the ASCs and our surgical hospitals would know this, but if you survey physicians, like why are they invested in our ASCs? Why do they come to our places? Yes, there's the financial impact, but that's not number one on their list. Number one is convenient block time that's not disrupted, right? Do they have control of their day?
Look, having run big surgical hospitals my life, it's almost impossible when you have busy ER and you're trying to be all things to all people. It's almost impossible to be as efficient as we can be in our surgical facilities, right? They're time machines for physicians. Physicians don't have a lot of time. They wanna get six procedures done in the morning, and they wanna go to their office and not have to cancel it. That doesn't happen very well in the acute care setting. Outside of the issue around price, these are time machines that are great for their lifestyle. They also like to have a voice. You know, I've run hospitals that have a couple thousand docs from the medical staff.
For me to say that any individual doc actually has a say is not really truthful, right? In our surgical facilities, we're trying to do a few things, do them exceptionally well, and our docs really do have a voice. Those two things matter a lot. We allow physicians to stay independent by giving them another source of income. That's certainly part of it. There's the price difference, which is meaningful, and I don't think actually that bridge can be bridged given the cross-subsidy requirements of the acute care space. Even further, it's really just about physicians' efficiency and time.
Right. Another disruptive policy item ongoing is the expiration of enhanced ACA subsidies. I know the ACA is a relatively small part of your overall mix, which is why I found it somewhat surprising that, you know, an isolated incident inside one of your surgical hospitals could contribute towards the Q4 miss. Maybe help us understand, you know, what's going on there. Is the mix of ACA procedures just different from a typical commercial patient, or are the reimbursement differentials that significant?
Yeah. It's kind of a combination of all those things. I think, again, most of our business is not through an ER. We don't have ERs at over half our surgical hospitals. Obviously, our ASCs are completely elective. That flow of referrals tends to be a different flow than HIX or exchange patients. A lot of those patients do access the healthcare system through an ER in a more emergent way. That's one of the reasons. Honestly, we just, our facilities and physicians have never really had that connection, so we haven't had a ton of that business. It was really a state-driven thing. You know, in the market we were talking about, pretty big MSA, we're 40% of the market.
I think as these patients realized they were up against the deadline, there were so many of them, that it did impact what came into the offices. Interestingly enough, when you think about exchange patients, they often come in under some kind of commercial plan. I don't think that our offices, our independent physician offices, were always sophisticated enough to realize that this commercial patient's not a commercial patient, is not a commercial patient. In our world, when you think about exchange patients, they pay very, very close to Medicare versus commercial. I do think that was. Again, it's one market. Big picture, just like Medicaid is less than 4% of our business. HIX is a very small % of our business, but in that particular market was meaningful in the Q4 .
Right. Maybe circling back to one of the cost items we talked about earlier, you've highlighted a linkage between labor and anesthesia costs and shifts in government payer mix. Can you walk us through that relationship in more detail and explain how changes to payer mix translate to higher anesthesia costs?
Yeah. I gave a little detailed answer on this earlier, but just a reminder, anesthesiologists have not had an increase from Medicare pay increase for a long, long time. They've had a lot of challenges, obviously, on reimbursement with the No Surprises Act. Look, depending on who you talk to, there's no tears shed for anesthesiologists based on their payment, but it's been a real challenge on having enough capacity, both for the anesthesiologist and CRNAs. Going back to my earlier comment, when I ran big hospitals, the way I'd bring my anesthesia subsidy down was to allow them to get the coverage of ASCs and surgical hospitals. You know, we have a preferred side of care.
Even with that, there's such a challenge on capacity that in order to ensure we have coverage, we often do have to enter into agreements that say there's gonna be some kind of minimum collections to cover their expenses. For the most part, a couple interesting points on anesthesiology. You guys may all know this, but I find it fascinating. Anesthesiologists do really well in lower acuity ASC. So think about GI-only centers, ophthalmology. Those are fantastic places for anesthesiologists. They love them because of what they're paid, because of the mix of patients, because of their efficiency. Unfortunately, it's not quite as good on orthopedics, which is where our focus is, right? So you have a mismatch of our economics and their economics that sometimes flows through.
When you get into the pay rate differences, they're probably one of the most exposed specialties on just how different. I think their Medicare rate is something like $22 a unit, and it's, you know, easily three to five times higher on commercial. That difference creates. You know, you can imagine if you're in a 70% Medicare facility versus a 30% Medicare facility, I mean, your revenue is dramatically swinging. They have choices on where to go. We often have to enter into agreements that give them some kind of collections guarantee. When we see swings, it not only does it hurt our revenue and increase kind of our cost statistics as a % of revenue, but it requires then that we subsidize anesthesia coverage in a way that sometimes is counterintuitive.
Right. Understood. Well, with that, we're out of time. Eric, thank you so much for joining today.
My pleasure.
Please enjoy the rest of the conference.
Good to see you.
Great.
Thank you. Appreciate the time.