A.J. Rice: Okay.
Saum Sutaria: The calendar effect question — I don’t know, if you want to address that Sun. I mean — yes, I mean, of course, we spend a lot of time, in particular, because USPI functions on a workday, weekday — workday type of schedule focused on those issues from year-to-year. It does cause some effect on the business and the volumes that are there. So we’re — I guess I would say we’re a little bit used to it that, that happens. And yes this year, it did have some effect in that arena. I would reiterate the longer-term message around the volumes. We are really pleased with the fact that what we saw in the first quarter helped to give us even more confidence that ’23 was not just a one-time rebound year. It was a year in which we can build upon that volume strength, unnaturally high volume strength from last year.
And as the year progresses, look to build volume growth off of what were some very tough comps from ’23. But again, fundamentally, the first quarter gives us a great sense of relief that we’ve established that there is strength and the tailwinds for this business are real.
Operator: Thank you. And our next question comes from the line of Andrew Mok with Barclays. Please proceed with your question.
Andrew Mok: Hi, good morning. Just wanted to follow up on the 45 ASCs that you acquired in the quarter. I think you said in your prepared remarks that you are expecting $80 million of EBITDA contribution from these centers. When I look at the acquisition and development activity line in your ASC bridge, I think the revision was closer to $30 million over three quarters. I’m not sure if there was any contribution quarter. So if so — that implies a pretty material step-up in 1Q ’25. Just want to make sure I’m understanding about this business and the cadence of synergies that should materialize in 2025. Is that the right way to think about it? Thanks.
Sun Park: Andrew, I’ll try to address the different parts of your question. So first of all, in Saum’s comments, he mentioned $80 million that is a first 12 months of ownership number. So in our ’24 guidance, we had nine months contribution. And I would assume that as happening in Q2 through Q4. The other piece I’d say, is that when we posted original guidance in our last call of $71 million of acquisition and development activity for USPI. Obviously, some of the activity that we accomplished in Q1 goes towards that. So what you are seeing with our new number of 101 in acquisition development activity for USPI calculates that and assumes that our parts, a lot of the acquisition of top in Q1 goes towards the original guidance.
So that’s part one. Part 2 is we won’t comment on 2025 impact yet. But what we feel confident in is that over the long term, over the next three year outlook that we will work hard to achieve 6 times to 7 times multiple EBITDA minus NCI of that acquisition. Thanks for your question.
Saum Sutaria: Yes. This is an attractive portfolio of assets. Again, diversity of service lines, nice opportunities to realize improvement in performance over the first — the first three years that will build and grow earnings and importantly, EBITDA minus NCI as well. And as I indicated, all consolidated from the beginning, not creating a buy up set of — a work plan set related to buy-up sell. So we like the portfolio of assets that we picked up and will digest over the course of the year.
Operator: Thank you. Our next question comes from the line of Sarah James with Cantor Fitzgerald. Please proceed with your question.
Sarah James: Thank you. So a couple of times today, you’ve touched on your strategy of growing off of a new higher base for USPI volume. I’m wondering if you’ve done any analysis on that to see were there just stronger market trends? Or did you guys gain share? And if it is share gain, are you able to tell, was that due to partnerships and referrals or growing catchment area, sort of what was behind it? Thanks.
Saum Sutaria: Yes. Thanks, Sarah. So a couple of things. I mean, the ASC environment is not necessarily as a general market as data-rich as some of what you see on the hospital side, right? So we too have to use proxies to understand and forecast where we are going with the business. Obviously, the number one thing we do is we do bottoms-up center-by-center business planning every year that is built upon our understanding of our strategies, how successful they are pulling the physician partners, et cetera. I mean, it’s a pretty simple but relatively comprehensive process. And when you look at that — and then you also, as I indicated in our fourth quarter call, just simply measure how busy some of these individual physicians were in 2023 and I think I may have even noted some of these people worked incredibly hard to take care of patients at a level of productivity that we have not seen them deliver in prior years.
Of course, you are left with the question despite our best efforts at forecasting, whether or not a significant portion of what we saw last year, especially being post-pandemic was simply one-time deferred care. So that’s why I elaborate on it because — in the first quarter, we sort of knew from our bottoms-up planning that we believe volume growth would build over the year. Of course, there is always a risk that planning wasn’t entirely accurate. And there would be a volume retreat based upon deferred care being the real reason for the growth last year. And that’s why I commented on it because I’m not as focused on quarters individually. I’m focused on the broad-based tailwinds that drive USPI and our ability to drive earnings growth over a longer period of time.
And that’s maybe why I elaborate on that point a few times, as it gives us more confidence that we are building solidly for the long-term. The only other statistic that we are able to look at across the Board is our rate of addition of new physicians and being able to measure how they ramp up. And so one of the reasons we had a little bit of confidence this year that we would see growth as the year went on was despite the busy year last year, we did add physicians to the USPI portfolio. And it usually takes them nine months to 18 months to ramp into their comfort level in an ASC. And so we thought, okay, based upon those additions, we ought to see some growth above and beyond where we were in the latter part of the year. So I don’t know, maybe that’s more color than you wanted.
But — that’s kind of how this — how the planning for this business shapes up.
Sarah James: That’s very helpful. Thank you.
Operator: Thank you. Our next question comes from the line of Cal Sternick with JPMorgan Chase & Company. Please proceed with your question.
Cal Sternick: Thanks. I wanted to ask about the 45 centers. Were there any large portfolio deals in that quarter in that part of the 45? I know you mentioned that the additions were pretty broad-based across markets. And just any other color on sort of what the acuity or case mix is for those centers. And maybe more broadly, just what you’re seeing in terms of the M&A pipeline?
Saum Sutaria: Yes. Hi, Cal. So a few things. One, the centers were, in fact as I said, broad-based biographically, majority of the centers did come through a single transaction for multiple centers. We just closed the deal, right? So assessing the case mix and the acuity and all that stuff, other than what we learned in diligence that gave us comfort is not really something I’m prepared to talk about in any great detail. Our priority and focus, of course, is continuing to acquire assets at attractive multiples, adding value to them from a quality, safety, compliance, growth standpoint to increase access to lower-cost care in the communities in which we acquire them using the USPI management skills and ultimately improving the returns to the levels that Sun and I described on — in a typical fashion by year three.
We think these things will be very nice additions to the earnings for USPI. In terms of the broader M&A pipeline and de novo pipeline, they both remain strong. We anticipate continuing to progress through that agenda as the year goes on.
Cal Sternick : Great. Thanks.
Operator: Thank you. Our next question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.
Brian Tanquilut: Hi, good morning. Congrats on a solid quarter. Maybe some — my question for you. As I think about revenue per case related to all the comments you made on USPI, right? I mean, obviously, it was strong this quarter, but if we think about the mix of ortho continue to grow, the impact of the new ASCs that you just acquired, and maybe the comment you made on payer rate bumps, how should we be thinking about your view on the sustainability of — or the right level of revenue case growth, number one. And maybe some color you can share with us on the payer rate comment you made earlier in your prepared remarks. Thanks.
Saum Sutaria: Yes, sure. Well, I mean I think the main driver of revenue per case is obviously the mix acuity, right? I mean it is the case mix and acuity and strategically, our objective is to grow that. It’s also important just because the more that we grow in that dimension, the more we are creating value for the system by reducing the cost of similar care that could be done in a more expensive setting, which is obviously important to our payer and government reimbursement stakeholders so that’s how we think about that and why we are focused on that. The exit of low acuity business helps that statistic in net revenue per case. But it also, over time helps us create some more capacity in our ASCs. As I’ve talked about, it is always a headwind to same-store growth.
When you lose or move out or whatever, low acuity pain cases where you can do 10 of them at the same time, you can do one joint surgery that is what it is and we obviously are going to continue down the path of our service line mix improvements that we believe in, regardless of the impact on same-store, it is obviously our objective to continue to build the same store. However, as we have said in our guidance. From a mix perspective, even in the ASC business, I think that some of the benefit of the exchange population growth, we are seeing that flow through. It is not just the hospitals. We’re seeing that flow through in the ASC business. What’s different in the ASC business is there, isn’t as much Medicaid. So you are not seeing — you’re not seeing the reduction necessarily like you would in the hospital segment and the growth in the exchange business, but you are seeing the exchange segment growth on the ASC side.
Brian Tanquilut: And it’s not just the impact of the acquisitions. Does that dilute it? Or how should we be thinking about that?
Saum Sutaria: Yes, that’s a good question. And I mean other than providing the numbers around, I mean, again, we just closed on a lot of these centers in the past quarter, and most of them frankly, were towards the end of the quarter to Sun’s point around they really are an impact in Q2 through Q4 and as opposed to having had any impact in Q1. The centers we acquire generally speaking, will be lower margin and dilutive to earnings from a margin standpoint until USPI fully implements its program of improvements, which is how the year three multiples can be forecast over time that obviously comes with earnings improvement and therefore margin improvement. And so that’s definitely the case. We haven’t gotten into them enough to know whether there is some that we are going to need to do some partners restructuring or other things.
We’ll provide more visibility as we get into it next quarter in terms of what impact it may have on volumes, earnings, any refinement to the earnings. But we feel pretty good about the projection that we’ve given on these centers for the first 12 months of EBITDA and also what the long-term impact or benefit to the company will be.
Brian Tanquilut: Okay, thank you.
Saum Sutaria : Thanks.
Operator: And our next question comes from the line of Ann Hynes with Mizuho Securities. Please proceed with your question.
Ann Hynes: Hi, good morning. So I just want to focus on divestitures. Obviously, they’ve been a very nice source of debt repayment on the acute care side. How do you view divestitures going forward? And can you remind us what goes into decision-making on whether to strategically keep or divest a hospital or a market? Thanks.
Saum Sutaria: Yes. I mean, — and I appreciate the question. I think that strategically, our choices about divestitures are dependent upon a few different things. Obviously, one is — does it impact our overall corporate strategy in a positive or negative way or do we have the ability to provide leadership and ongoing growth in the markets that we were serving based upon our business model, capital needs and other things that those assets may have and what we might forecast the return on those capital investments may be versus other things that we could spend the money on. And then finally the ability to generate proceeds that fully value what we have built in these assets, which is again what we were focused on because these assets underwent a lot of work over the last five years and we wanted to ensure that we captured full value for them in our transaction.
That’s how we think about those are the criteria that we have thought about. We are — as I’ve said before, we’re very comfortable with the portfolio we have today and the positions that we hold today and our ability to build and grow in the markets — in the markets that we are in.
Operator: Thank you. And we have reached the end of the question-and-answer session. And this also concludes today’s conference, and we do thank you for your participation, and you may disconnect your lines at this time.
