Thomas Cowhey - CFO Wayne DeVeydt - CEO.

Ana Gupte - Leerink Partners Kevin Fischbeck - Bank of America Merrill Lynch. Chad Vanacore - Stifel Nicolaus Brian Tanquilut - Jefferies Bill Sutherland - The Benchmark Company.

Thank you for standing by. This is the conference operator. Welcome to the Surgery Partners, Inc. Third Quarter 2018 Earnings Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Tom Cowhey, Chief Financial Officer. Please go ahead..

Good morning, and welcome to Surgery Partners' third quarter 2018 earnings call. This is Tom Cowhey, Chief Financial Officer. Joining me today is Wayne DeVeydt, 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 filed with the SEC. The company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call, the company 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 Web site at surgerypartners.com and in our most recent quarterly report, when filed. With that, I'll turn the call over to Wayne.

Wayne?.

pruning the asset base, consolidating our platforms, and investing in the business. Starting with pruning the asset base, we've taken a data-driven approach in analyzing strategic opportunities and challenges across our portfolio and are divesting or closing those assets that are not aligned with our growth goals.

As we discussed on our second quarter call, we initially focused on our ancillary and ASC asset base, and we're evaluating the best path forward for optical business.

In the third quarter, we closed three additional physician practices and completed the sale of three additional ASCs, bringing our year-to-date total to 19 physician practices and five ASCs that have been closed or sold.

We also successfully executed on the sale of our Family Care Vision practice and our optical laboratory at favorable multiples relative to our development pipeline.

While we are still exploring strategic options for our remaining optical business and a few of our ASCs that are not centered on our targeted-growth specialties, we believe we have made meaningful strides in repositioning our ancillary and ASC asset base.

We're also evaluating our short-stay surgical hospitals to ensure that we are focused on assets that can meet our short- and long-term growth goals. During the third quarter, we largely completed the integration of the NSH business into Surgery Partners, allowing us to accelerate this portfolio optimization analysis.

Our review has identified further opportunities to reprioritize investments against our highest-returning opportunities and limit lower-return investments. There is still much work to do here as we continue to evaluate the best path forward to maximize the value creation of this acquisition.

While pruning our asset base creates short-term headwinds, we believe this is the right long-term decision for our company. Turning to our second key strategic bucket, consolidating our platforms, we are firm believers that real value creation is generated from platform consolidation.

In addition to eliminating execution distractions and providing data analytics that enable agility in decision-making, there is measurable value creation in our ability to effectively leverage our platforms for G&A efficiencies and capturing meaningful synergistic value from future acquisitions.

Some insights regarding our progress to date; starting with revenue cycle management, we have successfully migrated over 2/3 of our facilities to a standardized clearinghouse for claim submissions and expect to be substantially complete with this migration by the end of the year.

We've also made meaningful progress in our post-adjudication workflow process and should be on a single platform at our Tampa Shared Service facility by the end of the year.

These successful migrations will substantially enhance our revenue cycle management efforts by enabling us to identify and quickly mitigate issues associated with revenue leakage across our organization.

Moving to patient accounting and reporting platforms; 75% of our facilities have been migrated to our destination platform with significant progress expected to be made on converting outstanding facilities by the end of the year. The migrations of these platforms create efficiencies for our organizations, while improving the patient experience.

Patient safety and satisfaction are core to what we do each and every day, and standardizing these platforms on an important aspect of improving on that experience. Last but not least, the ability to leverage platform investments to generate meaningful data analytics is contingent on our ability to centralize our data into a single data warehouse.

As of today, we have successfully migrated 90% of our surgical facilities to a single-data warehouse, covering approximately 70% of our revenue, and we continue to convert additional facilities to increase our visibility into their performance.

These migrations are already providing operating insights that allow us to identify opportunities for both revenue and margin improvements across our business. The final strategic bucket, I'd like to discuss today, is investing in the business.

Returning to sustainable, long-term growth beginning in 2019 is a critical component of our strategy that we are laser focused on delivering. We believe our business is capable of achieving double-digit growth once we've made all of our necessary investments. Our investment initiatives centered on several simple core areas to drive growth.

First, we need to grow organically. Our organic growth goal is to grow by 4% to 6% per year by increasing surgical case volume 2% to 3% and achieving rate increases of 2% to 3%. Our revenue cycle management efforts could also provide further upside to these metrics. Let me walk through our volume and rate dynamics separately.

Starting with volume, as previously discussed, physician recruitment is a key component in driving our surgical case volume. To date, we've recruited over 20% more physicians than at this time last year and have been focused on our core high-growth specialties.

As a result, our case volume and revenue from our newly recruited physicians is more than double as compared to recruits from a year ago, and our direct contribution dollar per case specialty has also improved. A measurable result of these efforts is that same-store metrics have improved each and every quarter this year.

We are extremely pleased with our results to date, and the third quarter represents our first quarter of year-over-year growth in 2018. While still very early in the fourth quarter, these trends have continued to improve when we look at our October case volumes. Moving to rate increases.

We are currently achieving blended commercial rates at the upper end of our targeted range as we head into 2019. As a reminder, many of our contracts have multiyear terms, and our ability to negotiate will generally occur over two-to-three year period.

Our blended rates represent our performance regarding our targeted goals for those contracts that have 2018 renewals, but reflect in the previous multiyear renewals that are below the low end of our targeted range. We are encouraged by our team's efforts to begin to improve rates and capture value for all our stakeholders.

We offer a superior clinical and patient-satisfaction product at lower cost and continue to believe that we should be able to participate in the value we create for the healthcare system. We continue to share our story with payers and believe it is a key component of our early successes.

Another major driver of growth on the organic front is to increase our franchise value by unlocking the economies that come from having our 125 surgical facilities across 32 states, while continuing to maximize the value related to the NSH acquisition. We refer to these initiatives as being fit for growth.

Specifically, we've made meaningful progress in becoming a more fit organization that should drive growth as we head into 2019. We believe we should be able to generate three to five percentage points of adjusted EBITDA growth through margin improvement over the next several years.

Some early examples, we implemented our new group purchasing contract in the third quarter and continue to make steady progress in getting improved pricing from our top 20 vendors as it relates to implant costs. We can easily measure the expected savings from these initiatives as they ramp up in the fourth quarter and move into 2019.

Another area fit for growth improvement that ramps up heading into 2019 relates to realizing synergies from our NSH acquisition that we completed in the third quarter last year.

As discussed on last call, we executed on our plans to close our NSH headquarters in Chicago and have begun the process of filling positions in our national headquarters for those that were replaced. We also realigned some of our businesses to simplify our reporting structure and span of control.

During the transition, we have maintained duplicate staffing for critical functions that require proper onboarding and training for our newly recruited employees. We expect many of these duplicate positions to be substantially eliminated by the end of the year, which will create run rate savings as we head into 2019.

These are just a few examples of the activities we are undertaking in 2018 to drive earnings improvement as we head into 2019. We have high confidence in these improvements as the majority of the activities to achieve these savings will have been executed in the third and fourth quarter of 2018.

The final major area of investment to drive growth is to rebuild our M&A pipeline with a series of transactions focused on our targeted high-growth specialties.

If we can deploy between $80 million and $100 million of capital per year related to M&A, at prevailing industry multiples, we should be able to generate between three and five percentage growth annually starting in 2019. As of the end of the third quarter, we had deployed over $50 million of capital.

Recently, we acquired three additional ASCs focused on orthopedics and spine that will push us to the upper end of our targeted 2018 M&A capital deployment goal. As you may have seen announced a few weeks ago, we also recently issued incremental term loans that will provide ample capital for us to execute against these and future M&A opportunities.

We have a robust pipeline as we head into 2019 and believe we will be able to achieve our 3% to 5% growth ascribed to our current and future acquisitions. As you can see, our success to date has increased my confidence that we have the right people and assets to drive meaningful long-term growth at Surgery Partners.

With the right strategic focus and are executing well on our initiatives to return Surgery Partners to sustainable, double-digit adjusted EBITDA growth beginning in 2019. More importantly, we are building a platform asset that is achieving industry-leading clinical quality, patient satisfaction and physician engagement.

With that, let me hand the call back over to Tom for an introduction and overview on our third quarter financial results..

Thank you, Wayne. Today I'll spend a few minutes on our third quarter and year-to-date 2018 financial performance starting with some of our key revenue drivers, then moving on to adjusted EBITDA and finally, some updates on cash flows.

Our third quarter revenue of $443.9 million reflects a 45% increase over the prior year quarter, primarily as a result of the acquisition of National Surgical Healthcare in the third quarter of 2017.

As a reminder, prior year results were impacted by a $15.6 million reserve adjustment book to revenue in the third quarter of 2017 and also suffered from the impacts of hurricanes on our operations, which were estimated to have lowered revenues by approximately $8 million in over 2,800 cases.

We have not normalized our results this quarter for the impact of hurricanes, nor are we normalizing any prior quarter comparisons, unless specifically noted. Surgical cases increased to approximately 127,000 in the quarter, which is a slight increase over the prior year period.

As a reminder, we typically experience our lowest-case volume in the third quarter of each year. On a same-store basis, total company revenue was up 11.4% from the prior year quarter, consisting of a 10.5% increase in net revenue per case and a 0.9% increase in case volume.

Year-to-date, our same-store revenue is now up 4.6%, driven by higher net revenue per case. Note that consistent with past practice, our same-store calculations are inclusive of revenues associated with our ancillary services business, which experienced higher revenue when compared to the prior year periods.

As Wayne mentioned previously, our strategic initiatives around physician recruitment are taking hold, which has been a key driver of our improving case volume. As a reminder, we've focused on getting the right docs in the right facilities rather than simply increasing our physician count.

As a result, we're seeing enhanced productivity out of our newly recruited physicians, a trend we expect to continue. And importantly, we are seeing a higher net revenue per case as compared to prior year, as we see higher production and higher-acuity cases, another positive trend for our business.

Turning to operating earnings, our third quarter 2018 adjusted EBITDA was $59 million, a 154% increase over the comparable period in 2017. Our adjusted EBITDA margin improved to 13.3% from 7.6% of revenue as compared to the third quarter of last year.

A large driver of the year-over-year margin increase is low adjusted EBITDA in the third quarter of 2017 due to the previously mentioned reserve adjustment as well as the impact of hurricanes.

During the quarter, we recorded nearly $7.5 million of transaction, integration and acquisition costs, including approximately $1.5 million associated with the closure of our Chicago office in September. As discussed last quarter, one-time merger and integration costs are beginning to subside, and we will provide updates on future calls.

Moving on to cash flow and liquidity, at the end of the third quarter, the company had cash balances of approximately $79 million and approximately $61 million of availability under our revolving credit facility.

Of note, during the third quarter, Surgery Partners had net operating cash inflow, defined as operating cash flow less distributions to non-controlling interest of approximately $5.1 million.

We deployed approximately $4.2 million for the acquisition of a majority interest in an ASC, we received approximately $7.5 million in proceeds from divestiture activity and we used approximately $19.5 million for payments on our long-term debt.

The ratio of total net debt to EBITDA at the end of the third quarter of 2018, as calculated under the company's current agreement, was approximately 7.75x, a result of substantial adjustments associated with the 2017 reserve and hurricane impacts rolling off, replaced by the quantification of multiple initiatives that the company has undertaken to improve performance in future periods, many of which Wayne specifically discussed as part of our fit-for-growth initiatives.

The company has an appropriately flexible capital structure with no financial covenant on the term loan or a senior unsecured note. Our total net debt-to-EBITDA ratio should naturally decline over the course of 2019 as our business continues to grow.

In October, we issued $180 million of incremental borrowings under our term loan at terms consistent with our existing term loans, which will help fund an existing pipeline of accretive acquisitions and delever our balance sheet by driving earnings growth in fiscal 2019 and beyond.

In October, we already deployed approximately $50 million of these proceeds at attractive valuation multiples, and our development teams remain hard at work evaluating and negotiating additional strategic opportunities to deploy capital.

In addition, in September and October, we entered into three interest rate swaps, hedging our variable interest rate exposure on $900 million of debt and an effective LIBOR rate of 3.12%.

With these swaps in place, approximately 75% of our corporate debt is no longer tied to variable interest rate exposure, which we believe provides substantial protection for the enterprise as we continue to drive our growth agenda. With that, we'll open the call for Q&A.

Operator?.

We will now begin the question-and-answer session. [Operator Instructions] First question is from Ana Gupte of Leerink Partners. Please go ahead..

Good quarter, thank you. The first question was just on the pricing growth, which has impacted a lot. How long is this expected to continue? You say it's about acuity and it sounds like your mix -- pay mix is the same, but maybe your contract negotiations are proceeding well.

How should we think about the fourth quarter and into next year?.

Ana, thanks for the question.

So if you think about the organic growth engine, there's two key components, one being the case volume, which we are very encouraged with those results, and obviously while October, we just got a flash report on that, those trends do continue to be strong, even stronger than we posted year-to-date in terms of the trajectory.

So we think we're moving that in the right direction. But the other component is clearly on the revenue piece. If you look at our contracts, in general, they have renewals around three years, which is fairly typical for most contracts that we know from our experience in the managed-care side.

And so as a result, you think about -- you get about 1/3 of your renewals happening each year.

In the current year, for those that did renew, we actually were able to renew them at rates higher than our targeted range, which is very encouraging, along with a kicker in the out years that is commensurate with our targeted range that we know get a nice inflationary multiple.

But we've got 2/3 of the book that is still subject to the historical contracts, and those have historically been below that targeted range. All this being said, you'll see kind of a continual ramp-up. So, you'll start to see some of that value creation incrementally occur next year.

By mid next year, you end up getting about half of those now renegotiated, and then by the following year, you've got almost all of them through the cycle. So if we can continue the current trends, we should easily be able to be at the upper end of that targeted range, if not better..

Should we, for the next year, think about the second half of the year, the 1/3 of those contracts that you negotiated, annualizing for the full year, and then the remainder the other 2/3 of seeing the ramp-up so maybe, kind of, mid-single digit pricing growth instead of the 3% that you've guided..

The only thing I would caution on, as you know, is that we have a substantial government book in there as well, and obviously government falls below that percentage. So if you think about commercial being more mid-single digit, using a midyear convention, that's not unreasonable of where we're heading on the commercial book.

But then you had average in the government, although we are pleased with the recent CMS rates around Medicare and how they're going to basically treat ASCs in that process, and so that will actually improve a little bit as well.

So blending in though, I think we'll definitely be in the targeted range by next year with the buyers towards the higher end of that range. And then, of course, from there, we'd like to see that ramp-up.

Going into 2020, you start getting more full run rate benefit of 2/3 of the book being renewed with that remaining book, kind of, midyear convention in 2020..

Great, thanks, Wayne. I appreciate the color..

The next question is from Kevin Fischbeck, Bank of America Merrill Lynch. Please go ahead..

Great, thanks. Just wanted to follow up on your comment, I think you said that you expect to get back to double-digit EBITDA growth in 2019. Just wanted to make sure I understood that.

Is that correct? And if so, is that half of this 2018 guidance? Or is that, kind of, on a normalized number depending on how much you end up putting the portfolio and it's kind of a same-store number that we might see company-wide number a little bit less than that..

Yes, Kevin, good morning thanks for the question. Let me start by saying that what we try to lay out in our prepared remarks was the long-term growth framework.

And so while we're not giving 2019 guidance yet, and we don't want to get ahead of our board, I would say all those components of the framework we fully expect to achieve, not only over the long term, but we expect those to start in '19.

So while I think -- again, I don't want to get ahead of our budget process or our board in this process, I think our words in the script are intentional that we do believe will be double-digit growth next year..

Okay. And then when we think about the three things that caused you to take down Q4, maybe just provide a little bit more color into each of them.

And you said the seasonality didn't come in the way that you have forecasted, is there something that you're seeing in the business that now makes you less comfortable about? It sounds that you had some pretty positive commentary on October as far as the pruning efforts, do -- are you saying that there's, kind of, an acceleration than what you had previously? And then, I guess, continued growth investments, again, is that an acceleration in that, that made you think differently about the guidance today versus what you thought Q4 might look like when you provided guidance previously?.

Yes, yes. So let me break it into two buckets. If you would look at the change in guidance, I would break the first bucket as about 70% of it, it's just being cautious in the outlook. We have no reasons to believe at this point in time that we may not hit our payer mix or our acuity mix at this point in time.

I don't have my October revenue yet and yesterday was only day 4, but we do have our case volume reports and those are quite strong versus our expectation. So my only comment, I would say, is that having strong case volume but not having the detail behind case mix yet is one that I wanted to maintain a cautious posture.

The reasons for the cautious posture, this was my decision, I will tell you that, was that two reasons. One is, I'm new to this sector, and when you have 1/3 of your earnings all ramping up in one quarter, it's a little bit like retail, it's kind of like well is it happening, is it not happening.

And while the case volume is there, the mix is important. And as you know, we've been pruning the asset and then investing in recruitment into these higher-dollar, high-equity procedures such as MSK. And so for me it's more just the newness to the sector and maintaining that cautious posture.

And two is, what isn't new to me is the payer environment, and I've seen the strength that payers have posted for the first nine months of this year, and their [indiscernible] and the question is, is that the deductible issues that are occurring because of the high deductible.

And what we see that impact the fact that many of our procedures are elective in nature and will that directly affect our higher-acuity procedures in Q4. As of today, I don't have reasons that would create concern, but I am being intensely cautious and that's about 70% of the outlook change.

The other 30%, I'll let Tom go ahead and comment on, but it is around accelerating some of our pruning as well as some of the other items, but Tom?.

Yes, Kevin, the other thing I would just point out, as you look at the fourth quarter, it assumes an uptick in volumes, and we're encouraged by what we've seen in October. But you have to see the corresponding increase in, essentially EBITDA per case, right? And that jump, as we looked at it, was pretty steep.

And so -- and it was steep -- it's a little bit steeper than last year, which feels right, given the change in the business that has happened in our focus, but it really reflects a cautious outlook as we look at that ramp over the fourth quarter, it feels like we're half that is a little bit too far, which is why we pulled it back in the quarter.

Time will tell whether or not, we're being a little too cautious on that. As you look at the rest of the guidance change, this is a seasonal business, and we've made some pruning efforts throughout the year. And so you would expect that the impact of those efforts would be the greatest in the fourth quarter.

And beyond that, we have some underperforming assets that we're evaluating alternatives for. And as we looked at those and what we thought that they were going to contribute in the fourth quarter, it was clear to us that, that wasn't going to be achieved as well.

But I think that some of that is partially offset by the acquisitions that we've actually just done, and some of that -- and then the -- kind of the last thing that's in there is, we do have a little bit of investment in staff as we, kind of, transition some of our business from Chicago, as we try to work on some of our internal control environment, as we think about eliminating the material weaknesses that we've had in our controls over the course of the last couple of years.

And also, we're thinking about adding some additional staff in physician recruiting because we've seen such fabulous returns from that year-to-date. So as we looked at the mix of all those things, I'd say, Wayne's -- I'm completely concur with Wayne on how to think about the relativity of these.

It's mostly about the cautious posture, given the ramp in the fourth quarter, but there were some other specific items that made us think that perhaps it was prudent to pull down the guidance at this point..

Okay, thanks..

[Operator Instructions] The next question is from Chad Vanacore with Stifel. Please go ahead..

Good morning all..

Good morning..

Good morning, Chad..

All right. So just thinking about your acquisition targets for the year, you opted for the high end of the range, $100 million from the EBITDA, $100 million that you laid out.

How much of that did you -- say you completed year-to-date, was that $50 million?.

Yes, so through the third quarter, we have completed $50 million. Recently -- as recent as last week, we actually were able to deploy an additional $50 million on three acquisitions that we're quite excited about.

So our goal, Chad, is to get those integrated over the next couple of months, and then we should start seeing the full run rate benefits of those acquisitions as we go into next year. So we should -- our confidence in the 3% to 5% growth from M&A is high at this point.

Now we still have to be able to continue to deploy throughout next, but the pipeline's been rebuilt, and we've got some pretty interesting prospects that we're working with right now..

Chad, when you get the Q, I think year-to-date number, we did one small deal in fact in the number, it's actually going to be $55 million, it will be in the cash flow statement..

Okay, all right.

On those acquisitions, should we expect that maybe margins are little bit lower than your core portfolio if that ramp-up over times, is that the right way to think about them?.

Yes, you get a little bit of that initial integration cost that we're trying to do. We'll get them on our platform. So you get the margins tapped down a little bit. It takes us good two to three months to get them integrated just into the SP strategic operations.

And then you get a little bit more ramp-up in as the year progresses as we start migrating into our new purchasing platforms that we have and the value creation there.

And then we start introducing to them our physician recruiting team, which then start creating even more, kind of, margin performance because then we get fixed cost leverage off the facility as you bring in new docs, new procedures..

All right. And then just on the disposition side.

Year-to-date, how many more divestitures you plan through the year? I think you might have had an additional two practices and three ASCs that you disposed of this quarter?.

Three optical businesses -- two of the three optical businesses; the third, we've continued to explore alternatives on and hope to execute on that in the near term, but M&A is obviously fickle. And then we also talked about there are some other items that we're evaluating alternatives for that are underperforming relative to our expectations..

I think, Chad, the one thing I would highlight is, I think every year good businesses look at their asset base for regular pruning and then how to redeploy in the high-growth businesses.

I think it's very fair to say that in 2018, as we joined the company and the fact that this company was built over 20 years of acquisitions, but there were substantially more than normal pruning required, so we've been fairly aggressive in that to date with roughly 19 clinics to date.

Obviously we said, we've got almost five ASCs to date, and of course, we've got two of the three optical businesses now sold, which we're very encouraged by and look to prune the remaining asset. And so I think the heavy-lift pruning has happened this year.

I think it'll -- there'll be -- there'll still be some trail off on, what I call, the more than normal probably between now and second quarter. But I think we're getting to the end of where we want to be on that..

The next question is from Brian Tanquilut with Jefferies. Please go ahead..

Good morning..

Good morning, guys.

Wayne, just going back to your comments about long-term organic growth, how do I balance that with idea that you are going higher acuity, you're doing a lot more development in MSK, which typically have longer surgical times, right? So as I think about that 2% to 3% volume outlook, and then also the track record that we've seen over the last four or five quarters, I mean, how do you -- where do you get the confidence that we can get to the 2% to 3% volume range?.

Brian, thanks for the question. It's actually a quite intuitive question, we've asked it as well. Now let me start to by the fact and if you look at the history of the company, there was a fair amount of investments in, what I would call, pain over time.

And as you know, with pain came many procedures, including injectables that recur, we have been shying away from that meaningfully in our rebuild of it, and so that creates a pretty heavy headwind on case flow.

But just to give you an example of how that's translating, fairly our case volume that we reported for the quarter is inclusive of that headwind as we move from those into these higher-dollar, higher-cost procedures.

While the procedures take more time, the direct contribution on a per minute in dollars is better than what we could make before as we look at our business shift and what we're doing. So we look at how do we use our surgical space in the most optimal way possible, we think this is the right strategy.

What's kind of an interesting sight would be, if you would actually look at our same store, it's actually performed well in the quarter versus, kind of, how we're trying to regrow the growth. October has continued that trend much better than what we've seen so far.

But in the quarter, this is a point of reference, where we had heavy, kind of what I'll call, low-dollar, but high-margin procedures, injectables et cetera, in that particular market, we actually had volume declination which, of course, is offset by other markets around the countries.

But we actually outperformed our revenue expectations and outperformed our EBITDA expectations. And so there is going to be this dynamic shift in how you measure case volume in the shorter term. I expect that shift to continue between now and first half of next year, but we did a pretty heavy load of it this year.

And so I'd like to see that we're going to start seeing same-store growth, actual same-store growth happening each quarter from this point forward. And I actually expect that with that you'll actually start to see the margin improvement begin to occur in early next year.

And you'll actually see the actual dollar value of these longer-time procedures, but higher DCM per minute..

That makes a lot of sense. My follow-up, Wayne, just to that last part of your comment too.

As I think about EBITDA margins and all the puts and takes and the efforts that you've put into improve efficiencies and do integration work, where do you think margins could go over time? Like what's the optimal margin target for all the initiatives that you've put in place through 2018?.

Brian, I wish I could tell you that answer today. I don't -- honestly, I don't know it yet. One of the things I've been discussing with the board has been opportunities where I think we can invest some of our overperformance along the way.

The board has been very supportive of those decisions to date, which is why they've allowed us to actually ramp up even more recruiters in the fourth quarter this year than we had originally budgeted or planned for.

So one of the things I'm trying to figure out is when do we hit that curve, if you will, where you no longer get the [indiscernible], but you maximize those margins. But I think we should see in the next couple of years a few points, two or three points of just absolute improvement of things.

I would say, we have high confidence in, and then the question is, do you reinvest above that back into the business for even longer-term growth? We have a very good pipeline point of view of the next three years, and those frameworks we gave on long-term growth, we think over the three-year period, we ought to build a bias towards the higher end of that range during that time frame.

And then the only question is to the extent that we exceed that do we redeploy it.

So Tom, I don't know if you want to expand of that?.

No, I think that what you've said -- I agree with what you've said.

I think the -- I would point out there's two dynamics here, right? The first would be that as we shift the business towards the higher proportion of MSK that the -- those businesses and those procedures inherently have the implant cost that we get passed through, and so we've talked about this a lot.

And so as you shift the business into that higher-dollar, higher-implant business, and then you see that business, which is actually supposed to grow in that targeted market actually faster than the overall business.

That actually is going to put pressure on the gross margins, if you want to think of them that way because of that shift that's inherent to both, our growth strategy and where we're targeting growth, but also where we're naturally going to see more growth.

Offsetting that is going to be some of the things that we're doing, specifically in that fit-for-growth bucket, right? As you think about some of those initiatives there, though should drop to the bottom line and help to improve the overall margins, and it's going to be the, kind of, the combination of the two that, I would say, margin should continue to go up over time from where we are today.

But there's going to be a little bit of a natural fight between those two line items..

I appreciate that. Thanks, guys..

Thanks, Brian..

[Operator Instructions] The next question is from Bill Sutherland with The Benchmark Company. Please go ahead..

Hey, thanks, good morning guys.

Hey, Wayne, I might have missed some of this discussion, but maybe an update on your efforts on payer alignment and initiatives there?.

Good morning, Bill. I'm very excited about our efforts to date on payer alignment. I would bucket it into a couple of different categories.

One is, we've been exploring, what I would call, some nontraditional partnerships with a number of both national carriers and we're also getting some good -- we're getting some good tailwinds in terms of local blues that, I would call, kind of, mono state blues that are not part of the national carrier programs.

So these are -- as I mentioned even in the first quarter call, this is, kind of, long ball on these things. These are long digestive periods that you, kind of, work through the strategies and what you're going to be moving forward.

But on the strategic partnerships in that -- this first bucket, we've been really encouraged, not only at the meetings we've had to date and some of the strategies we're working on, but what probably the more encouraging has been the pre-backward getting about more and more authorities wanting to actually meet with us to discuss some of this creative.

I actually spent Monday night in a blue state with the CEO and their head of managed care around some meeting partnership opportunities.

And candidly, I will tell you, they all recognize in their markets where they need leverage and they don't have it, and they recognize that our product is a high-value, high-patient satisfaction, great clinical quality leverage point.

And so we're looking at not only ways to actually take joint ownership in some facilities together right now or some of the payers, but other ways. Another bucket I would highlight is around bundling, and we made a very good progress in a couple of our markets with two large national carriers, and we've been very specific in certain markets.

So as an example, many of the payers have come and we've been working with them around ideas of our how can we take not just a bundle for the day, which is what our focus has been so far, but we're actually now exploring opportunities to bundle many of these procedures over potentially a 90-day window, and we're looking at partners.

Obviously, we don't perform past the surgical facility, it's what we do, it's what we're good at. But we like the idea of getting that initial bundle and then working with others that do a lot of post-rehab care and finding ways there. So we're working with other companies in that space about the collective partnerships.

In the interim though, our bundle payments were getting in our Florida markets, our Southern California markets, will actually result in meaningful EBITDA and margin improvement of what we have today.

We've had for the first time in five of our procedures, total knees and hips being done in them as a result of these bundle payments, because now we can offer a better prof fee than what those docs were getting before. And so they're actually moving their procedures to our facilities.

Now we're in the second inning, if you will, of that, kind of, realization since many of these programs we rolled out in Q3. But the fact that we've got five facilities starting to do total knees and hips is very encouraging for us and we expect that ramp up.

So I would say that's the second category on the payroll front that we feel very encouraged about. And then finally, we just start to telling our story.

I mean, we think we've got the high heel on this one, right? We're in a good spot, and we want to make sure people understand, not just on the payer side, but even on the provider side that we'd like to partner with you, but the focus is taking cost out of the system..

So Wayne, your -- is there a risk component to the bundling that you're talking about, particularly in Florida and California?.

No, great, great question.

So today there's really not a risk component, because what we've done is we've been able to negotiate new bundles at rates that are much higher than we would have gotten before, meaningfully higher in one case as much as 5x higher than what we received before, but substantially less cost than what they paid today in the hospital environment.

And so for us, the idea that we're able to move these over what we've done is created bundling that is specific to the procedure and the day. So in essence, we get a flat fee. We need to essentially cover anesthesia with that, but nothing of any consequence that isn't difficult to manage, and that's what we have today.

So that really take the prof fee out, pay the anesthetists, pay our surgeons and then the rest goes to facility. What we are exploring is whether or not we want to take risk over time on an even enhanced bundle that goes over a 90-day window.

And in that case, we would mitigate our risk, in theory, by working with the right partner to basically take our fees of the top, because, again, we don't want to expand the outlook we're great at, and then allow another partner who is great at something else, which would be that post-rehab care to take that portion of the bundle.

That is our -- I would call, our innovative next step that we're looking at doing..

Great, thanks a lot for the color..

This concludes the question-and-answer session. I would like to turn the conference back over to Wayne DeVeydt, Chief Executive Officer of Surgery Partners, for any closing remarks..

Great, thank you. Before we conclude our call, I do want to take a moment to say thank you to the 10,000-plus associates for their contribution. This year has been a very heavy lift for the team, and I know we all feel privileged to be able to participate in this journey of improving health care and making it more affordable to Americans.

As we execute against our goal to become the preferred partner for operating short-stay surgical facilities across the U.S., it is the daily efforts of each and every Surgery Partners employee that will get us there. Thank you for joining our call this morning, and have a great day..

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day..