Greetings and welcome to the Surgery Partners Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Mike Doyle, CEO for Surgery Partners. Thank you. You may begin.

Thank you, operator. I’d like to welcome everyone to Surgery Partners’ third quarter 2016 earnings call. Joining me on the call today is Teresa Sparks, our Executive Vice President and Chief Financial Officer. I’ll now turn it over to Teresa to review the Safe Harbor statements.

Thanks Mike. Before we begin, let me remind everyone that during this call Surgery Partners’ management may make certain statements that constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectation, anticipation, believes, estimates, plans and prospects. Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the company’s earnings release posted on the website, provided in our Form 10-K and subsequently filed Form 10-Q as filed with the Securities and Exchange Commission. The company does not undertake any duty to update such forward-looking statements. Additionally, during today’s call, the company will discuss 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 adjusted EBITDA and adjusted net income to net earnings calculated under GAAP can be found in our earnings release, which is posted on our website at surgerypartners.com and in our most recent Form 10-Q. With that, I’ll turn the call back over to Mike.

Thanks, Teresa. Surgery Partners continues to focus on our differentiated model that strategically aligns physicians through employment and partnership opportunities. Our value proposition is uniquely positioned as physicians again access to our surgical facility and our ancillary services, creating the most economical health care delivery system for our patients. The continued expansion of high-deductible health plans has accelerated the focus of players and patients to seek care in lower-cost settings. With the broad acceptance of the high quality of care that is provided on an outpatient basis, we continue to solve for the most challenging healthcare issue, which is cost. Through our relationships with payers and physicians, we provide a much-needed solution for patients who face higher co-pays and deductibles and are absorbing a higher percentage of the increasing cost of healthcare. We appreciate the hard work of our dedicated physicians and employees who provide outstanding care to our patients in an accessible and affordable setting. In the third quarter, we generated 18% growth in total revenue and 10.3% growth in same facility revenue. Our total cases increased 9.1%, and our same facility case growth was 4.3%, compared to the third quarter of 2015. Revenue per case increased 8.1% in total and 5.8% on a same facility basis. The growth in the quarter was lower than experience in the first half of the year, largely due to the softer than expected volumes in July. While we do not usually break out results by month, July results very uniquely impacted by physician vacation schedules concentrated in fewer working days in the prior year in addition to the timing of holidays and compressed summer vacation schedules in the Southeast. The results of the month of July were temporarily, as our volume growth resumed a normal pace in August and September. Our business…

Thanks Mike. As Mike mentioned, our underlying business trends remain solid. During the quarter, revenue increased 18% to $282.7 million, as compared to $239.6 million in the prior year. Total cases increased 9.1% for the quarter. Our same facility revenue increased 10.3%, reflecting a balanced mix of case growth of 4.3%, and revenue per case growth of 5.8%, despite a softer than normal July. Our average same facility revenue growth over the last seven quarters is 11.5%. Adjusted EBITDA increased 12.3% to $44.7 million, compared to $39.9 million in the third quarter last year. Our expectations for the quarter included an EBITDA contribution from generic new development of approximately $2 million. We closed the component of this expected new development at the end of the quarter and we are on track to close the remainder of our expected annual development by the end of the year. From an adjusted EBITDA margin perspective this quarter is 15.8%, compared to 16.6% last year. The lab rate reimbursement impacted our adjusted EBITDA margin in the quarter by 100 basis points, ultimately in line with the prior year on a comparative basis. On a year-to-date basis, revenue increased 20.5% to $839.4 million, as compared to $696.6 million in the prior year. Total cases increased 10% for the year. Our same facility revenue increased 12.8%, driven by case growth of 7.8% and revenue per case growth of 4.6%. Adjusted EBITDA on a year-to-date basis increased 13% to $129.2 million from $114.3 million in the prior year. Our adjusted EBITDA margin is 15.4% for the year or 16.4% adjusted for the lab rate impact, also in line with the prior year. Turning to our guidance for the full year, we're affirming our full year revenue guidance at the mid-to-high end of our original range of $1.12…

Thanks Teresa. Our strategy remains solid, and we look forward to continued growth of our existing operations and further expansion acquisition. While we are not giving specific guidance for 2017, we remain very comfortable with the expectations for double-digit adjusted EBITDA growth. As we look to next year, we will see relief from the Medicare lab rate cut, that was a significant headwind for us in 2016, and we will continue to benefit from the maturation of our 2015 and 2016 acquisitions. Regarding the lab rate cuts we experienced in 2016, we expect the revised rules for 2017 to add back approximately $2 million in revenue. In addition, the final Medicare ASC update was better-than-expected at 1.9%. As discussed on previous calls, the Affordable Care Act had little-to-no benefit to the company. Therefore we believe the election results will be a net positive for the company for the stronger focus on quality and the cost of care. Through our national network of facilities providing surgical and ancillary services, we remain well positioned to benefit from the further developing trends shifting procedures into the outpatient setting. Our network of high-quality integrated services continues to receive a strong response from patients, physicians, and payers. Thank you for your interest and support, and I’ll now turn the call back over to the operator to begin the question-and-answer session.

Thank you. The floor is now open for questions. [Operator Instructions] Our first question is coming from Brian Tanquilut of Jefferies. Please proceed with your question.

Hi, good morning guys. Mike, you touched on the physician services part of your business in your prepared remarks. I just wanting to see if you could give us some more discussion on how that side of your business is different from, say, AmSurg, Envision, TeamHealth, and Mednax, especially in anesthesiology, because obviously, some investors are worried about their exposure to the ACA. I know you say you don't have any exposure. But I just wanted to get some color on what you think differentiates you and how that drives your business as well.

Thanks Brian good morning. I think from our perspective as we mentioned on previous calls as we’ve had little to no exposure or benefit from the ACA, so although that didn't give us a tailwind or benefit in the past, it also doesn't give a headwind as a thought process of what’s going to happen with the ACA, how it’s going to change under the new administration and what that’s going to look like. So, I think as we think about physician services it is important to understand that our physician services are provided with surgical specialist that are providing services on an outpatient basis. So, we own the physician practice and they’re not providing services to a hospital. They are not in the receipt of exchange revenues, those types of arrangements that would, with a hospital that would be providing a service and having the similar payer mix as a hospital. So, from our perspective there is little impact from, again the benefit that we are we received from the ACA, and probably very little downside. And from an anesthesia perspective, the vast majority of the facility is that we provide anesthesia services to our own surgical facilities and surgical facilities in those same markets, so very little of our anesthesia revenue is coming from the hospital contracts.

All right. Got it. And then towards the end of your comments, you talked about your confidence in double-digit EBITDA growth next year. So, what's driving that? Is that primarily top-line driven? And then the follow-up to that is, if you don't mind just giving us some more commentary on the complex procedures, especially ortho. And how much room do you have there, given potential capacity constraints, substitution of high complexity versus lower complexity of procedures, and how should we be thinking about all those factors as we think about double-digit growth? Thanks.

Yes, thanks. So, I think as you take a look at from a growth perspective, there are so many levers for growth as we take a look at our business and continue to expand the programs at our facilities. We are again in the very early stages as we continue to stay with orthopedics on joints we now have over 20 facilities that are doing joints. We should not forget about complex find, we continue to get advancements from payers on what they will cover from a complex spine perspective, and we now have over 30 facilities doing the complex spine procedures and in the early stages, a few facilities now doing cardiac cases. And that continues to be some great places to grow. I think from a joint perspective as far as having a significant move in moving the needle significantly on the overall same-facility growth, it will be somewhat minimal over the next 12-months. The Medicare aspect of that business is going to be very important to see how we begin to get access to Medicare patients and when that will happen. Again, a lot more conversation communication about that and we’re very hopeful that that will happen, probably sooner than it did from our spine perspective. And I think we can't forget the basics and as we talked about bringing over 300 new physicians into our existing network of physicians some of those being employed, but a small portion of those being employed about 20 of the 300. And those 300 new physicians are bringing cases again, the slow ramp-up, but again these are physicians that will continue to bring cases on a year-over-year basis, so the physicians we recruit this year will have the ability to do more cases year-over-year due to the partial year impact that we have this year with them. And keeping that program and that team motivated from a facility capacity perspective, allowing them to recruit not only by a program, in a program nature, but also from a specialty perspective that a G.I. physician, a pain management physician, an orthopedic physician, on a per hour basis, they all have very similar characteristics. So we do look at it really on a net revenue and totality or year-over-year basis versus being fine-tuned on a case versus net revenue per case. There can be some fluctuations in that that are absolutely acceptable and are the right business decisions to grow your facilities.

All right. Got it. Thanks, Mike.

Thanks Brian.

Thank you. Our next question is coming from Matthew Borsch of Goldman Sachs. Please proceed with your question.

Hi, this is Tejus Ujjani joining for Matt. On the anesthesia revenue, if I recall correctly, that's reported within the surgical facility segment? You'd mentioned that you're providing anesthesia at 47 centers, 38 of your own. Just curious, on that external client anesthesia revenue, does that come in through the surgical facility segment, or is it coming in through the ancillary segment?

It is coming, Tejus this is Teresa, it is coming through the surgical facilities segment.

Okay. So then, in terms of how you report revenue per case, that's total revenue per cases, but the case volume number is just your internal cases, so is there a way to think about external revenue, because it would be a mismatch in terms of your case volume denominator if that's external revenue, right?

The facilities or the transactions we picked up in the fourth quarter that were platform anesthesia companies. They primarily provide services to our facilities and then along with those transactions, we did pick up some contracts related to other providers, but that’s a minimal portion of that total revenue from the anesthesia practices. So, I think as we grow that component of the business, we certainly can break that out, but currently it’s included in surgical facility, just a very small component of the total.

Okay. That's helpful, thanks. And then since you added capacity at the toxicology lab in Tampa, can you give us a rough sense of the current capacity utilization there and any rough sense of how much the lab accounts for in your ancillary services revenue versus physician practice revenue, other things?

I’ll start with just the capacity of the physical plans and what we’ve been able to build there, and I guess from a lab perspective we have taken the approach of centralizing our capabilities and the logistics of centralizing those types of services have been very helpful and allowed us to keep down our overhead and providing those services and obviously have incremental margins from that type of a business. The capacity that we built out is, we’re currently running at about 25% capacity and the facility can very easily ramp up to handle obviously more tests and that’s really looking at a day shift, you could argue that there is capacity to run a nightshift in those types of facilities. We would put us at about a 25% capacity of that physical plant on our day shift. Then to increase that capacity it’s very minimal for a capital expenditure, usually it’s just adding a machine, our facility is for locking a better term free-wired for incremental machines and those run about 250 to 300 a machine. So, pretty economical way to expand that physical plant.

And as far as the lab is a percentage of total, it is about 2% of our total revenue.

Great. Thanks very much.

Thank you. Our next question is coming from Frank Morgan of RBC Capital Markets. Please proceed with your question.

Hi. A couple of questions here. First, just an update on the Symbion synergies, where you are today. And I think your goal was somewhere in the $30 million to $35 million range for either revenue or EBITDA synergies. Just any update there. And then my other question was, on these 50 practices that you have now, could you break out, give us maybe a revenue contribution from those? Thanks.

I think we are talking on the Symbion synergies and the revenue synergies. Obviously, we continue to have great progress there. Our goal has been to be substantially complete with those by fiscal year-end 2017 and we continue to move along that path, it will probably leak a little bit into 2018. But we've also had achieving these in multiple ways. They would have acquired anesthesia practices in Symbion markets. We are currently providing, I believe the latest update was and a nine markets where we've implemented our ancillary services in our Symbion market, so continue to have success there. Continuing in our pipeline and in our active projects file, which is other things that we're that we may not have to acquire, but we are implementing in Symbion markets. We continue to have a significant list of those both from a physician practice perspective and ancillary service perspective and an anesthesia perspective. So continuing to make great progress there. I would say largely on track and continue to find opportunities that are incremental to that original thought process.

And as we talk about the revenue contribution, we talked about - we've talked on previous calls that prior to the merger with Symbion, Surgery Partners had about 27% of its revenue from ancillary services, which as we speak to from that perspective includes anesthesia. Currently, we are - at post merger, we dropped down to about 10%, and then today we’re up to the 15% to 16% range. And then included in that, we touched on the lab, which was 2% to 3% on a year-to-date basis, and physician practices are roughly 5%, as in the balance anesthesia.

I think one important part of that Frank is also that even though we’re focusing and looking at Symbion opportunities to continue to expand, our ancillary services and capture those revenues, there also continues to be a lot of room on the Surgery Partners legacy side and we have a little bit of trouble coming back to legacy. From our perspective, it’s been integrated and we look at from a market-by-market perspective and we can add services to an existing market, we tend to differentiate a little bit less whether it’s a Surgery Partners market or a Symbion market versus just being a good business decision at this point.

Got you. What about any color on - regionally, around the country, on the same store volume trends? I know you said July was a little soft, but was there any particular pockets where you saw any variation in volume trends? And then also, just an update on the ramp up of Great Falls. I know that one is still in a ramp-up phase, but any update there on the sequential improvement? Thanks.

Yes, I think from a - just looking at the same facility perspective really as we talked about in July, we had the Southeast stood out with the with the same-facility growth perspective. We had a combination of less days, a holiday in the month. With ophthalmology being a player in that region we had less Mondays as you know on Friday's ophthalmology is very difficult to do cases, due to the follow-up requirement on the day post surgical. And then from - as we looked at the data, just taking a look at the way the school year started, which is an unfortunate thing that is difficult to build into your planning, but with school starting in the Southeast in the first and second week of August, we really had a significant compression of the physician vacation schedules as those school started in the Southeast in that first and second week of August So that really did have an effect and as we looked at August and September, again back to our normal pace of low double digit same facility growth and that’s really where we got our same facility growth in the quarter. So again, we don't usually break out monthly, same facility growth. We look at it on a quarterly basis, but it was a very unique and - anomaly on the way July played out in this year.

And just touching on Great Falls, I mean we really saw the improvement as we transition from the first quarter into the second quarter. You could see that in the surgical facilities adjusted EBITDA margin line, and we continue to see improvement there and Great Falls has performed, in the sense of the relocation and the ramp up of services according to plan.

Thank you. Our next question is coming from Kevin Fischbeck of Bank of America. Please proceed with your question.

Good morning. This is actually Joanna Gajuk filling in for Kevin today. Thanks for taking the question. So, in terms of the outlook for the year where you said you'll reaffirm your view around the revenues, but then you reduced your EBITDA guidance, so can you help us reconcile why revenue is not impacted by the items that are impacting the EBITDA outlook?

Yes, so as we've tracked through the year, we have been at the high-end of the revenue guidance and consensus and been at the low-end from an EBITDA standpoint. The transition of our physician practices is one area that we’ve pointed to in terms of just some challenges related to margin and pull-through. The other areas that we pointed to in the first quarter, Great Falls as Frank mentioned earlier being one of those have done very well and improved according to plan. So as you look at that surgical facility’s, core areas there, those margins have improved sequentially and we've pointed out on the ancillary services side just - the physician practice integration and the impact there on a sequential basis. So we feel comfortable with our range of EBITDA for the remaining of the year remainder of the year and really does reflect the impact, primarily of the timing related to our new development. Those transactions that we had teed up in the third quarter, those transactions experiences similar trends that we experience in July. And so the prudent approach was to wait on the closing of those transactions to make sure that those trends follow the trend we saw in August and September and that those trends improved. And then August and September return to normalized levels. So that was a little bit of the timing delay in the third quarter with those transactions. And then as we mentioned, we are teed up and ready to close on the remainder of our M&A that we guided to for the year.

Okay, great. And then so in terms of the change in the EBITDA guidance, you said that the slower closing of deals is may be about $3 million or so, so can you quantify the impact of the hurricane?

Yes. So, as we just look to the lower end of the guidance or the high end of the revised EBITDA guidance at 1.84 to 1.79, as you mentioned about 3 million of that related to the timing of acquisitions and then the remainder, roughly 1.5 million to 2 million related to the Hurricane and what we’re seeing in October, obviously as we have some visibility into not the full picture from full income statement impact, but we certainly have visibility into closures and case counts and those type of things.

Great. And if I may squeeze the last one, on the ancillary margins, which were down year-over-year, you quantified a 100-basis-point impact. That's to the overall consolidated margin, or is it to the segment margin?

It was a 100 basis points to the total. So, we on a quarter over quarter basis, it was 100 basis points. We were 16.6% in 2015, and 15.8% this year. With the lab rate impact we were shown slight margin improvement. On a segment basis, quarter-over-quarter, the ancillary services the adjusted margin would have been normalized or adjusted to about 22% with the lab rate reduction.

And then also, the ancillary margins were actually also down sequentially, so is that because of the seasonality and the July month being slow for that business as well that explains the sequential deceleration, or rather, a worsening of margins in that segment?

I would say it really points to two things; one, the slower July volumes, which also impacted our physician practices in the lab, not just concentrating with our surgical facilities. And then just the continued integration of our physician practices when we isolate that on a standalone basis we definitely have shown improvement and those facilities - those practices are continuing to integrate and transition very well, but that did continue to some degree in the third quarter.

Great. Thank you.

Thank you. Our next question is coming from John Ransom of Raymond James. Please proceed with your question.

Hi good morning. On the lab stuff, why wouldn't the commercial rates be helped somewhat by the Medicare rates? In other words, do you have an idea of what percentage of your commercial lab rates are based on Medicare rates?

John it’s a little bit all over the board on that piece of it. From a commercial perspective, we have and have historically had commercial payers paying a somewhat under Medicare, we've had some paying us better than Medicare, and it really circles right around that Medicare rate. So, our thought process and as we take a look at the overall picture of rates and how the commercial players are working through that, we feel we do have some continued ability to have conversations with the payers and work more towards this new Medicare rate. So as they continue to absorb and really we’ve focused on starting those conversations once thought rule is finalized we are in the middle of that piece of it on having conversations with those players and looking at the rates, but again I think at the end of the day it may be a slight positive, but as you take a look across all the payers, you have some paying you below, some paying you above and I think the normalization will not have a significant impact like they did on the Medicare.

Okay. And Teresa, you know this is my favorite question, but if we look at your year-to-date M&A spending, approximately how much revenue have you bought? What's the margin on that revenue? And how should we think about next year in terms of the progression of that EBITDA in terms of ability to drive even more margin through the machine?

Yes, so let me just kind of recap just a little bit. So, we spent the first half of the year, we've spent $117 million and we acquired $18 million of EBITDA and so that is obviously included in our numbers for the year. We realize about, that’s where we will realize about $11 million. So that was about a 6.5 times and then as we roll into the rest of the year, again we will spend the full CapEx as identified 160, and again we talked about on the last call that the spend has about 17 million of contingent acquisition considerations that we will reflect in next year, in the following as it’s played out. So that $11 million that we will realize in EBITDA for this year we will have revenue associated with it, probably in the $50 million to $55 million range of realized EBITDA, I mean sorry revenue.

So, $50 million and $11 million. And what's the annualized $11 million, or is that - I'm confused. If we annualize the $11 million, what's the full-year effect of that? Or am I missing that?

Yes. So the - actually the $11 million is what we will realize with third. First, second, third and then what we are planning on in the fourth quarter, which will be very little EBITDA recognition just with the timing. So that will get to roughly $11 million $12 million of realized EBITDA from transactions this year, and sorry that’s going on - let's just take it all the way through the end of the year that would be about $63 million in revenue, $60 million, $63 million.

So $11 million is full-year run rate? Or that's just what you're realizing this year? I'm sorry; I'm thick.

That’s what we are realizing this year and the $63 million is what we would realize in revenue this year.

So if we were to think about next year, what's a good way to think about the impact on calendar 2018 versus calendar 2017?

Calendar 18, did you say?

I'm sorry. Excuse me. Calendar 2017 over calendar 2016. Sorry. It's been a long week.

Yes it has.

We understand.

Wile, as we look at next year our spend would be in the $60 million to $70 million, will be kind of more on a normalized approach to M&A. We will have revenue acquired - if we breakout that split between 4 to 5 surgery centers and 8 to 10 physician practices that would be roughly $60 million of revenue acquired and probably about $8 million of revenue EBITDA acquired.

But I'm saying the $11 million, that's not a 12-month number. That's just what you realized this year. So if we take into account timing, so you'd add $8 million for next year and then add a little bit for timing for full-year affected, and maybe getting some more margin. That's what I was trying to figure out.

Okay. So, I gave you let’s just recap, because I gave you the - what we will realize this year from the transactions. That will be about $20 million of acquired EBITDA.

So, $11 million realized this year, but $20 million if you do the full-year effect?

Right, that is right.

So, the way we should think about next year is if you get the additional $8 million and then maybe buy another, say, $10 million in EBITDA, so it should be something in the range of $15 million to $20 million of EBITDA from full year this year and acquired EBITDA next year?

Yes. That's correct.

That was what I was trying to figure out. That wasn't that hard.

Well, I’m always trying to decipher exactly where you're headed John, you never know. So that.

When you figure that out, please let me know where my head is at any point in time. The other thing I was wondering, if you look at stuff in the pipeline, Mike, what are you looking at now, and what's the mix of surgery centers versus physician practices? And frankly, where are you seeing the best returns? And are you seeing any change in the competitive environment for physician practices just given the fact that your - that some of the staffing companies are going through a lot of mergers and leveraging and other things like that.

Yes, I think we are seeing - from a physician practice perspective to start with that, we continue to have a significant pipeline. We are returning to focus on really three areas. New surgical facilities both in existing and new markets. Physician practices, when it’s free physician practices only we're looking for surgical specialists and we are ensuring that they are in existing markets. And then we’ve really began to develop a pretty healthy pipeline around a third category, which are physician practices that are on the market in combination with maybe some ancillary services and a surgery center. So, as we take a look at just physician practice with some ancillary services in a new market, we’re not as necessarily as interested in that, but when it’s combined with an ASC and they can put the three of them together, those have continued to grow as a piece of our pipeline. As we take a look at the pipeline and it is probably even distributed, a third, a third, a third between each of those types of entities from a competition perspective - from a competition perspective it is about the same on the ASC side, the physician services has been pretty light on competition, and that really hasn't changed. We’re not going after the same assets as a team and to share than in those types of providers because we’re very focused on surgeons and providing cases to our existing facilities.

Okay. And then my last question, I'm really intrigued. I know it's a small piece today, but your deal that you're doing with the payer in Florida, the way I understand it is you can bundle the surgery, the anesthesiologist, the surgeon, and the post-acute care. And so in doing that, what procedures, and how much do you think you're saving the payer, and are you making money on the risk side of doing this, or is it something you feel like is just a necessary evil to keep your market share.

Well. I think it's a couple of important points. The types of cases that we're doing these types of arrangements on are new cases. They're cases that are higher acuity that we didn't have capabilities under the managed care contracts to do. So, we're bringing in the higher-acuity cases, negotiating a specific rate. It takes different forms. They'll have inclusions of different pieces of the services, probably to a lesser extent, not as much on the rehab side unless we're working with physicians that have that capability within their offices. But from the physician, anesthesia, implant, and surgical perspective, those are things that the payers are very interested in, so we're really focused on being able to bring those types of cases in. They're new, so were actually gaining market share in a new service. It's not something that we're accepting and saying, oh, it's just a necessary evil to do. It's actually incremental business. And from as savings perspective, we're saving about 50% on these cases on what they would be paying, from a payers perspective, be paying to a hospital or an inpatient setting. So, there's significant savings for the payer. I think that the head scratcher has been and will probably be for some time, I think we're gaining some momentum on the - been making the smart business decisions, but it's been head scratcher for quite a while on why payers will pay for the same procedure in a hospital twice as much as they'll pay for a surgery center roughly. So, I think as that seems to be a motivator and has gotten the spotlight more recently, we continue to see a lot of momentum there and a lot of opportunity there.

Great. Thanks so much.

Thank you. Our next question is coming from Josh Raskin of Barclays. Please proceed with your question.

Hi. This is in Rachna [ph] on for Josh. This quarter, a few providers have highlighted labor pressures. Are you seeing any of that? Is getting more expensive to recruit new doctors?

I think as you take a look from a salary perspective, we had talked about our first quarter having a little bit more of that due to the anesthesia business. But we continue to have, from a labor perspective, a big piece of our labor is coming from our nursing staff, our clinical staff. We continue to be the provider of choice and the employer of choice in those types of jobs. So, as you work in a surgery center as a nurse or a clinical staff person, there's no nights, there's no weekend, there's no call. That is a preferable situation for many nurses and clinical staff. From a physician perspective, we're not seeing any increases in the cost of recruitment. What we have seen is a little bit of overlap as we're bringing in physicians and replacing or retiring physicians or physicians that are moving out of the area. But pretty stable, I think, from a - we're performing as expected on that area.

Okay. Great. If I could just ask you one quick one, going back to the ACA, is there a way for you to track if a patient is on an exchange plan versus a regular commercial plan?

It's difficult, but we've worked through that piece of it through - in early implementation, we had seen an influx of patients coming in looking for authorization on these types of plans and these exchange plans and had difficulties as this was being implemented to get those types of patients authorized. And so we have a great way of identifying them as they come in. And we've had to put in systems and processes to flush out the thought process. Do they have the types of benefits that cover the types of procedures that we're going to provide in an ambulatory surgery center or in our physician practices? And again, it's the ACA-type revenues are probably more concentrated in California than they are anywhere else, and they're probably less than - right around 1% or less than 1% of our total revenues.

Okay, great. Thank you.

Thank you. Our next question is coming from Ralph Giacobbe of Citi. Please proceed with your question.

Thanks, good morning. Can you give the month-to-month volume just given how unique it was in the third quarter? And then just wanted to go back to the timing of the deals. Obviously, impacted 3Q; impacted the guidance as well. Just want to make sure - I understand that this is nothing more than timing. Is there anymore competition? Are you finding any more difficult to close deals, or are valuations moving up, et cetera, just any context there.

I'll start with the last part first. Then I'll let Teresa talk about the breakout. From a competition perspective, again, the competition has not been any greater, but by no means, any less than usual. We're not having any difficulty closing these types of transactions. I'll talk to the surgery center piece of it to start with. Those multiples are staying about the same. Competition is staying about the same. And obviously, we're very experienced in closing those types of transactions. As we take a look at the physician practice transactions, again, very limited change in the competition of those practices. I think what we're doing is spending a little bit more time around up-front preparation and evaluation of the ability to integrate these practices quickly and what that plan should look like. So, we are changing some structures of the physician practice acquisitions and the end-market transactions in that area. But taking a look more at joint venture arrangements with physician practices and large physician practices instead of just doing some of these contingent purchase prices that are showing up in not-so-great places on our income statement. So from our perspective, we see some changes there, but it's not delaying us from getting these things closed. I think we've just taken a little bit of a different structure on some of these larger practices.

And just from an M&A perspective, so we were scheduled to close roughly on $45 million of M&A capital in the third quarter. We actually closed about $17 million, and so that was the delay there. As we mentioned, as we looked at those facilities, they had a similar result for July, and so it made a lot of sense to make sure that their trends returned to normal just like ours did. And on that note, for us, our July same-facility revenue was essentially flat, and then we averaged about 13.6% in August and September. So, August was a really good month for us, and September was good as well, but August was the better of the two months, which is, again, not unusual, but they average to about 13.6% same-facility revenue.

Okay. All right that's helpful. And then just my last one, hoping that you could maybe talk through the final hospital outpatient site-neutral rule, how it may or may not impact you. Do you think it will hamper at all some of the relationships you've talked about on the payer side in the future? And then maybe on the other side, how it may or may not impact discussions or partnerships with hospitals going forward.

Yes. It's a unique dynamic. So as they look at the neutrality and having the same payment structure, you're seeing that dynamic between - you've always had a difficult time on having hospitals empty their ORs on their hospital campuses and move these types of cases to a lower-cost setting and decrease their revenue. There's been, obviously, some motivating factors for them to do that. And it's really a health-system-by-health-system approach on whether that's something that they're interested and motivated and have a strategy around doing. So from a payer perspective, I think they still have the competence on not only the surgical aspect of it, but the other pieces of care that are associated with it on being in a lower-cost setting if you are on an outpatient basis and that continues to be a focus from payers that we're speaking with and having those relationships, and I think it really turns into more of an opportunity. A lot of these health systems have had difficulties in operating even under the higher rates. Now they have a situation where they're going to be and have the potential to be operating under lower rates and trying to provide the same type of services and have these facilities run very efficiently. And in the third quarter, we signed one agreement to complement the outpatient strategy of a health system in Florida. That's been going very well. And we've found multiple inbounds from health systems that are taking a little bit of a different approach and don't necessarily need to have a three-way joint venture and don't necessarily feel that it's an issue for us to employ physicians in the market and provide the ancillary services, that they see that as an advantage versus a threat, and that tide has been changing a little bit for us. So it is an exciting area for us, and we continue to see more opportunity there from a growth perspective.

Okay, great. Thank you.

Thank you. Our last question today will be coming from Chad Vanacore of Stifel. Please proceed with your question.

Good morning. So Mike, whatever happened to kids starting school around Labor Day? A - Mike Doyle I don't know. I came from the North, and the day after Labor Day was the most dreaded day of the year. And it seems that that's moved to into August, which where I grew up, if you had to go back to school in August, you missed your summer.

Yes. I just figured it would be way too hot down in the Southeast to start in August. So, you went through the same store revenue impact. Can you quantify what the impact of the slowdown in July was on EBITDA from your expectations?

Yes. So as we look at just compared to consensus, it's about a $2.6 million miss, $2.5 million, $2.6 million, and so roughly $2 million of that was from the timing of acquisitions, and then the balance was related to the softness in July primarily.

Okay. Thanks, Teresa. And then right at the end of prepared statements, you talked about 1.9% increase, and I missed it. Was that on your ASCs overall, or was that just the labs and they've … go ahead.

I'm sorry. I thought you were done. Go ahead.

No. Go ahead. So, what was the 1.9% increase specifically?

So at the end of the remarks, we really talked about two things. We talked about the lab rate. Obviously, significant headwinds in 2016 that we faced. And somewhat unheard of, Medicare has given their final ruling that they will increase the testing rate, so some form of an admission that they cut too deep, and we'll see $2 million to $3 million of revenue increase on same testing on a year-over-year basis in the lab. And then Medicare had - the CMS ruling for the rate increase in the ASCs was initially put out there at 1.2%, and that has been adjusted to 1.9%. So again, I don't think we'll get used to having our expectations exceeded by CMS, but we're in a situation this year that we are obviously getting a lot of surprises, so we'll take both of those. Both of those are welcome news.

It's always nice when you get the revised up. In comparison to the 1.9% Medicare rate increase, what are commercial rates increasing at?

We continue to see those happening in that 3%, 4% range. It gets a little bit complicated because we take a look at it as a blended rate across all CPT codes or all types of procedures. And in some places, we're getting better results than that because we're adding some of these higher-acuity procedures, and we're sharing that cost savings for the payer on those larger, higher-acuity cases across the full spectrum of our other procedures. So, as we save them money in one area, they're willing to be favorable in some of the other types of cases that we're doing and not necessarily completely localizing that benefit in just one procedure code, but spreading it throughout the types of procedures we do at our facility. So those continue to be very successful. We find ourselves in conversations on increasing rates with payers. We don't find ourselves in situations where they're looking at making cuts, so that's been helpful.

Okay great. And then just one last one for me, what kind of EBITDA multiples are acquisitions being done at now, and can you separate it from ASCs versus physician practices?

Yes. ASCs have been - just continue to be consistent. They've been in that seven to eight times range, six to eight times range, depending on specialty location, whether they have a CON or not. So that's been very consistent. We don't find ourselves in situations where we're finding abilities to pick up surgery centers at five times, I think as we saw softness in the economy, we had tried that, and even with the softness in the economy, there's an unwillingness of physicians to transact surgery centers at lower levels. With that said, the industry has been very disciplined, and we don't see people coming in, with the rare exception of a hotly contested location that health system may be involved in as well, we rarely see them, those multiples, move up, so they've been very consistent. On the physician practice side, again, very consistent. We're seeing in that four to six times range as we integrate and bring those into our system. We're finding that we're getting a turn or two better on an effective multiple once we bring them and integrate them. That integration is probably taking a little bit longer than we expected. We had expected to be able to do that within six months. We're finding that it's probably taking us closer to 12 months to get those practices fully mature post acquisition. So again, very stable. As we take a look at more of the platform transactions where we're refining a surgery center and a physician practice in the same in the same space, we'll break those - the valuation between the two components. Maybe a little bit of a benefit on the physician practice by having that integrated model, but pretty minimal change in those types of assets.

All right. Thanks a lot. A - Mike Doyle No problem.

Thank you. At this time, I would like to turn the floor back over to management for additional or closing comments.

Thanks, operator. Appreciate everyone joining us today. Again, we continued to have great success in growing our facilities despite our softness in July. Again, having that same-facility low-double-digit growth has been something that we've been very focused on, continuing our strategy of both acquisitions, and having great visibility into our pipeline is something that we’re excited to continue to talk about as we get into the new year. And appreciate you guys joining today.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time, and have a wonderful day.