Executive Summary / Key Takeaways

• Pure-play ASC model in a $150 billion procedure migration opportunity: Surgery Partners is the last remaining independent, publicly traded pure-play ambulatory surgery center operator, positioned to capture the massive shift of surgical procedures from hospitals to outpatient settings, where costs are 40-60% lower and patient preference is structurally aligned.

• 2025 guidance cut reflects execution gaps, not demand destruction: The revised full-year outlook ($3.275-3.3B revenue, $535-540M adjusted EBITDA) stems from slower M&A deployment ($71M vs. $200M+ target), de novo ramp delays, and softer volume trends—not a fundamental breakdown in the ASC growth thesis. This is a timing issue that prioritizes disciplined capital allocation over short-term growth.

• Margin resilience demonstrates operational leverage despite headwinds: Despite a 160 basis point shift in payer mix toward government payers and softer-than-expected same-facility volumes, adjusted EBITDA margins held flat at 16.6% in Q3 2025. Supply costs fell 70 basis points and G&A expenses dropped to 2.7% of revenue, proving the business can flex costs to preserve profitability.

• Scale disadvantage versus integrated giants is the central tension: With ~2.1% ASC market share, Surgery Partners lacks the negotiating power and referral networks of Tenet Healthcare (THC)'s USPI (8.1% share) and UnitedHealth Group (UNH)'s Optum (8.9% combined). The company's physician partnership model creates loyalty but may not be enough to overcome the operational and financial advantages of larger, vertically integrated competitors.

• Critical variables to monitor: The investment thesis hinges on three factors: whether management can accelerate M&A deployment in 2026 while maintaining its sub-8x EBITDA purchase multiple discipline; whether the nine de novos under construction can ramp to breakeven within 12-18 months; and whether the company can stabilize commercial payer mix above 50% to protect revenue per case growth.

Setting the Scene: The Last Independent Standing

Surgery Partners, incorporated in Delaware in 2004 and headquartered in Brentwood, Tennessee, operates a national network of over 200 ambulatory surgery centers and surgical hospitals through a physician partnership model that has become increasingly rare in today's consolidated healthcare landscape. The company generates revenue primarily from patient service contracts, with ancillary services like anesthesia and physician practice management providing additional streams. This pure-play ASC focus concentrates all strategic resources on capturing the outpatient migration trend, unlike hospital-centric competitors who must balance inpatient and outpatient priorities.

The industry structure is highly fragmented, with the top five operators controlling less than 25% of the approximately 6,000 Medicare-certified ASCs in the United States. The total addressable market for short-stay surgical procedures exceeds $40 billion today and is projected to grow beyond $150 billion as CMS and commercial payers aggressively shift cases from hospital outpatient departments (HOPDs) to ASCs. This migration is driven by compelling economics: ASCs deliver equivalent clinical outcomes at 40-60% lower cost per procedure, a value proposition that resonates with patients, physicians, and payers simultaneously—a rarity in healthcare services.

Surgery Partners occupies a mid-tier position with roughly 2.1% market share, making it the last independent publicly traded pure-play ASC operator. Tenet Healthcare's USPI joint venture leads with 8.1% share, UnitedHealth's Optum division (combining SCA Health and AmSurg) holds 8.9%, and HCA Healthcare (HCA) operates 2.3% through its hybrid hospital-ASC model. This positioning creates a fundamental strategic tension: Surgery Partners' focused model allows for agile decision-making and deeper physician relationships, but its smaller scale limits payer negotiating leverage, supply chain efficiencies, and referral network density compared to integrated giants.

Technology, Products, and Strategic Differentiation

Surgery Partners' core differentiation lies in its physician partnership model and technology-enabled capability to perform increasingly complex procedures in an outpatient setting. The company has invested in 69 surgical robots across its portfolio as of Q2 2025, enabling physicians to perform higher-acuity orthopedic, spine, and cardiovascular procedures that were historically confined to hospitals. Each step up the acuity ladder increases revenue per case by 20-40% while maintaining the cost advantage over HOPDs. The robot count grew by 14 in 2024 alone, demonstrating active investment in clinical capabilities that attract top-tier surgeons.

Physician recruitment serves as the primary organic growth engine, with over 750 new physicians added in 2024 and nearly 300 in the first half of 2025. These recruits skew heavily toward orthopedic-focused surgeons who bring higher-acuity case volumes. The compounding effect is material: physicians recruited in the first half of 2024 brought 68% more cases and 121% more revenue in the first half of 2025 compared to their initial contribution. This creates a self-reinforcing cycle where each recruiting class builds a larger, more productive base of partner physicians, driving same-facility volume growth without incremental capital deployment.

The de novo development strategy targets this dynamic directly. Since 2022, Surgery Partners has opened 20 de novo facilities, with nine currently under construction and more than a dozen in the pipeline, the majority dedicated to orthopedics. These purpose-built facilities allow the company to reset payer discussions from the ground up, negotiating favorable rates for procedures migrating out of HOPDs. While de novos require 12-18 months to reach breakeven, those opened in 2024 are already turning profitable, validating the capital allocation strategy. The recent delays in regulatory approvals and construction timelines create near-term earnings pressure, but the strategic positioning in high-growth markets remains intact.

Financial Performance & Segment Dynamics

Third quarter 2025 results reveal a business navigating cross-currents. Revenue grew 6.6% to $821.5 million, while adjusted EBITDA increased 5.0% to $155.9 million, yielding a 16.6% margin that held flat year-over-year despite meaningful headwinds. Same-facility revenue rose 6.3%, driven by a 3.4% increase in case volumes and a 2.8% increase in revenue per case. This performance overcame the loss of 10,000 cases from divested facilities, demonstrating the underlying health of the retained portfolio.

The case mix shift tells a more nuanced story. Total joint procedures in ASCs grew 16% in Q3 and 23% year-to-date, with over 80% of facilities now capable of performing higher-acuity orthopedic procedures and nearly half performing total joints. This is up from 70% capability and 41% total joint penetration in 2024, showing rapid capability expansion. However, the payer mix moved 160 basis points away from commercial payers toward government sources, with commercial representing 50.6% of revenues. Commercial rates are typically 1.3-1.5x government rates, so every 100 basis point shift compresses blended revenue per case by approximately 0.5%. Management acknowledged "softer than expected same-facility volume growth in recent months," prompting a cautious Q4 outlook.

Cost discipline provided a critical offset. Supply costs fell 70 basis points to 25.4% of net revenue, reflecting procurement initiatives and scale benefits. General and administrative expenses dropped to 2.7% of revenue from 3.8% in the prior year, primarily due to lower stock-based and incentive compensation. This cost flexibility is the hallmark of a scalable platform: when volume growth disappoints, management can quickly adjust discretionary spending to preserve margins. The 30 basis point improvement in full-year 2024 adjusted EBITDA margins to 16.3% demonstrates this capability across longer cycles.

The balance sheet provides adequate but not abundant liquidity. As of September 30, 2025, Surgery Partners held $203.4 million in cash with $405.9 million of undrawn revolver capacity, totaling over $600 million in available liquidity.

Net leverage stands at 4.2x under the credit agreement, elevated by the timing of 2024 acquisitions but consistent with management's target range.

The company completed a repricing of its term loan and revolver in Q3, reducing spreads to SOFR plus 250 basis points, which will generate meaningful interest savings in 2026. However, the maturity of fixed-rate swaps in Q1 2025 created a headwind, with interest expense rising $24.9 million year-over-year in Q3 as the floating rate increased to approximately 4.4%.

Outlook, Management Guidance, and Execution Risk

Management's guidance revision in Q3 2025 crystallizes the execution challenges. Full-year revenue expectations were lowered to $3.275-3.3 billion and adjusted EBITDA to $535-540 million, down from prior guidance of $3.3-3.45 billion and $555-565 million. CEO Eric Evans attributed this to three factors: slower M&A deployment ($71 million year-to-date versus a target that had increased to $250 million after divestiture proceeds), lost earnings from three divested ASCs whose proceeds have not yet been redeployed, and softer volume/payer mix trends that push same-facility growth toward the midpoint of the 4-6% long-term target range rather than the high end.

This guidance cut reveals the tension between disciplined capital allocation and growth expectations. CFO Dave Doherty noted that the original guidance assumed at least $200 million of M&A at historical multiples of approximately 8x EBITDA using a midyear convention. With only $71 million deployed through Q3, the in-year earnings contribution will be materially lower than planned. However, Doherty emphasized that "our disciplined approach prioritizes long-term value over short-term gains," suggesting management will not chase overpriced assets to meet near-term targets. The M&A pipeline remains robust with over $300 million in opportunities under evaluation, but execution timing has been the challenge.

The de novo ramp delays compound this dynamic. Evans stated that "several recently opened de novos have turned profitable, while others are still ramping and have not reached breakeven as quickly as anticipated, primarily due to construction and regulatory approval delays." While this creates "modest near-term pressure on earnings," these facilities are "strategically positioned in high growth and are expected to be highly accretive and profitable moving forward." The key question is whether the 12-18 month breakeven timeline will hold for the nine facilities under construction, or if regulatory bottlenecks will persist.

Management's commentary on the regulatory environment provides important context. Evans believes site neutrality legislation will have "immaterial to slightly positive impact" on Surgery Partners, with the worst-case scenario affecting just 1% of net revenue. The company has less than 5% exposure to Medicaid and no material tariff risk. More importantly, CMS's proposal to add 276 procedures to the ASC covered list and remove 271 from the inpatient-only list in 2026 represents a tailwind that will "drive more procedures to the ASC site of care and remove barriers for surgeons." This policy shift could accelerate case migration, disproportionately benefiting pure-play operators like Surgery Partners that can move faster than hospital-integrated competitors.

Risks and Asymmetries

The most material risk is the scale disadvantage versus integrated competitors. Tenet's USPI and UnitedHealth's Optum can leverage hospital relationships and payer networks to drive referral volumes and negotiate higher rates. When a commercial payer pushes for lower ASC reimbursement, these giants can counter with system-wide volume commitments across hospitals, ASCs, and physician practices. Surgery Partners lacks this multi-site leverage, making it more vulnerable to rate pressure. The 160 basis point commercial payer mix decline in Q3 may reflect this dynamic, as larger systems capture more attractive commercial cases while leaving government cases for independent operators.

Execution risk manifests in multiple forms. The slower M&A deployment could indicate that attractive acquisition targets are becoming scarcer or more expensive, forcing Surgery Partners to either accept lower returns or cede growth to competitors. De novo ramp delays suggest that regulatory approvals and certificate-of-need processes are lengthening, which could compress returns on the $71 million invested in 2025 development projects. If these facilities take 24-30 months to breakeven instead of 12-18 months, the IRR on de novo capital falls below the 15-20% target range.

Payer mix deterioration creates a structural headwind. Government payers (primarily Medicare) represent a growing share of the aging population, and their reimbursement rates typically increase only 1-2% annually while costs rise 3-4%. Without the ability to shift case mix toward higher-paying commercial procedures, Surgery Partners faces multi-year margin compression. The company's observation that "we're seeing a little bit weaker commercial trend this year" could signal that macroeconomic pressures are causing patients to delay elective surgeries or shift to lower-cost insurance plans with narrower networks.

Interest rate exposure remains a near-term cash flow headwind. The replacement of fixed-rate swaps with interest rate caps limits the variable component to 5% but exposes the company to rising SOFR rates. With $2.2 billion in outstanding corporate debt and no maturities until 2030, Surgery Partners has duration safety but faces $15-20 million in incremental annual interest expense if rates remain elevated. This directly reduces cash available for de novo investment and physician recruitment.

On the positive side, regulatory tailwinds create meaningful asymmetry. If CMS accelerates its site neutrality timeline or expands the ASC procedure list faster than expected, Surgery Partners could capture cases from HOPDs at an accelerated rate. The company's estimate that total joints are still performed 3:1 in HOPDs versus ASCs indicates a conversion opportunity that could drive same-facility growth above the 4-6% target range. Additionally, if the de novo pipeline delivers on schedule and the M&A pipeline converts at historical multiples, the company could exceed its long-term growth algorithm of double-digit expansion.

Competitive Context and Positioning

Surgery Partners competes in a landscape where scale determines economics. Tenet's USPI operates over 500 facilities with 8.1% market share, generating $20.7 billion in system-wide revenue and $4 billion in adjusted EBITDA. Its integrated model allows seamless patient transitions from hospitals to ASCs, capturing referrals that Surgery Partners must earn through direct physician relationships. USPI's 8.6% same-facility revenue growth in Q4 2024 outpaced Surgery Partners' 6.3% in Q3 2025, reflecting superior density and payer contracting leverage.

UnitedHealth's Optum division presents an even more formidable competitor. With 8.9% ASC market share and $253 billion in 2024 revenue across its healthcare services platform, Optum can steer its 50 million+ health plan members toward its own ASCs, creating a captive demand stream. This vertical integration eliminates payer mix risk and enables data-driven optimization that independent operators cannot replicate. Surgery Partners' physician partnership model fosters loyalty but cannot match the structural advantages of owning both the payer and provider.

HCA Healthcare's hybrid approach—operating both hospitals and over 150 ASCs—provides a different competitive threat. HCA can use its hospital network to feed complex cases to ASCs while keeping emergency and high-acuity work in-house, creating a continuum of care that appeals to commercial payers seeking one-stop contracting. Surgery Partners' pure ASC focus delivers lower cost per procedure but lacks the referral security of an integrated system.

Surgery Partners' competitive moats are real but narrower. The physician partnership model creates alignment that reduces turnover and drives case volume growth—physicians recruited in early 2024 delivered 68% more cases in early 2025. Regulatory licenses and CON approvals create barriers to entry, protecting existing facilities from new competition. Ancillary service integration increases revenue per case by 10-15% while improving patient capture. However, these advantages are operational, not structural. They require continuous execution to maintain, whereas competitors' scale advantages are self-reinforcing.

Valuation Context

Trading at $17.19 per share, Surgery Partners carries a market capitalization of $2.22 billion and an enterprise value of $5.91 billion, reflecting net debt of approximately $3.7 billion. The stock trades at 1.80x enterprise value to revenue and 8.83x enterprise value to adjusted EBITDA. These multiples compare favorably to HCA Healthcare (2.14x EV/revenue, 10.54x EV/EBITDA) but represent a premium to Tenet Healthcare (1.38x EV/revenue, 6.43x EV/EBITDA), which generates superior same-facility growth and scale efficiencies.

The company is not profitable on a net income basis, posting a -5.21% profit margin over the trailing twelve months due to high interest expense and acquisition-related amortization. However, cash flow metrics tell a different story. Surgery Partners trades at 7.88x price to operating cash flow and 11.45x price to free cash flow, with TTM operating cash flow of $300 million and free cash flow of $210 million. These multiples are attractive relative to the mid-teens EBITDA growth profile, suggesting the market is pricing in execution risk rather than structural decline.

The balance sheet presents manageable leverage but limited flexibility. Net debt to adjusted EBITDA stands at 4.2x under the credit agreement, elevated by the $400 million deployed in 2024 acquisitions. With $2.2 billion in corporate debt and no maturities until 2030, the company has duration safety, but interest expense consumes approximately 35% of adjusted EBITDA. The recent repricing to SOFR plus 250 basis points will save an estimated $8-10 million annually, providing modest relief.

Comparing unit economics reveals the scale penalty. Surgery Partners generates approximately $15 million in adjusted EBITDA per facility, while Tenet's USPI achieves closer to $8 million per facility but operates at 2.5x the facility count. The higher per-facility profitability reflects Surgery Partners' focus on higher-acuity cases, but the lower absolute scale limits total earnings power and diversification. This dynamic explains why the company trades at a discount to its growth rate—execution risk and competitive pressure offset the attractive market opportunity.

Conclusion

Surgery Partners stands at an inflection point where its pure-play ASC model offers clear strategic advantages in a market structurally shifting toward outpatient care, yet its execution missteps in 2025 have exposed the vulnerabilities of operating at sub-scale. The guidance revision reflects timing issues—slower M&A, delayed de novo ramps, softer volumes—not a breakdown in the core thesis that procedures will continue migrating from hospitals to ASCs. Margin resilience in the face of payer mix deterioration demonstrates operational leverage that will amplify earnings when volumes recover.

The central question for investors is whether Surgery Partners can achieve sufficient scale to compete effectively with integrated giants without sacrificing the physician-centric culture and capital discipline that define its differentiation. The $300 million M&A pipeline and nine de novos under construction provide visible growth catalysts, but execution must improve to justify the company's valuation premium to Tenet and discount to HCA. If management can deploy capital at historical sub-8x EBITDA multiples while de novos ramp on schedule, the company should return to its double-digit growth algorithm in 2026.

The key variables to monitor are same-facility volume trends in Q4 2025 and early 2026, commercial payer mix stabilization above 50%, and M&A deployment velocity. A recovery in any of these metrics would likely drive multiple expansion from current levels, while further deterioration would confirm competitive disadvantage. For now, Surgery Partners remains a show-me story—attractive market positioning burdened by execution risk that management must resolve to unlock shareholder value.