10-K 1 amsg-2015123110k.htm 10-K 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION             
Washington, D.C. 20549
 
FORM 10-K
 
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2015
Commission File Number 001-36531
 
AMSURG CORP.
(Exact Name of Registrant as Specified in Its Charter)
 
Tennessee
 
62-1493316
(State or Other Jurisdiction of Incorporation)
 
(I.R.S. Employer
 Identification No.)
 
 
 
1A Burton Hills Boulevard
 
 
Nashville, Tennessee
 
37215
(Address of Principal
Executive Offices)
 
(Zip Code)
 
Securities registered pursuant to Section 12(b) of the Act:              
Common Stock, no par value

5.250% Mandatory Convertible Preferred Stock, Series A-1, no par value
(Title of class)
Nasdaq Global Select Market
(Name of each exchange on which registered)
 
Registrant’s telephone number, including area code:  (615) 665-1283
 
Securities registered pursuant to Section 12(g) of the Act:  None 
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X]                    No [  ]
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [   ]                   No [X]
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]                    No [  ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]                    No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [  ]
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer [X]   Accelerated filer [  ]   Non-accelerated filer [  ]   Smaller reporting Company [  ]
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes [  ]                     No [X]
 
As of February 24, 2016, 54,720,648 shares of the Registrant’s common stock were outstanding. The aggregate market value of the shares of common stock of the Registrant held by nonaffiliates on June 30, 2015 (based upon the closing sale price of these shares as reported on the Nasdaq Global Select Market as of June 30, 2015) was approximately $3,318,935,487. This calculation assumes that all shares of common stock beneficially held by executive officers and members of the Board of Directors of the Registrant are owned by “affiliates,” a status which each of the officers and directors individually may disclaim.
 
Documents Incorporated by Reference
Portions of the Registrant’s Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 26, 2016, are incorporated by reference into Part III of this Annual Report on Form 10-K.






Table of Contents to Annual Report on Form 10-K for the Year Ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




i


Part I

Item 1.  Business

Company Overview

Founded in 1992, we believe we are a leading, physician-centric surgical center and physician services company with a diversified, complementary business mix. We believe our complementary business segments, ambulatory surgery services and outsourced physician services, well-position our Company to address the healthcare challenges facing physicians, health systems, payors and communities and our scale allows us to leverage administrative and support infrastructure that enable us to effectively recruit and retain physicians and provide services at lower costs.

Through our ambulatory services segment, we acquire, develop and operate ambulatory surgery centers (ASCs, surgery centers, or centers) in partnership with physicians. Through our physician services segment, we provide outsourced physician services in multiple specialties to hospitals, ambulatory surgery centers and other healthcare facilities, primarily in the areas of anesthesiology, radiology, children’s services and emergency medicine. We are one of the largest owners and operators of ASCs in the United States based upon total number of facilities, and are a leading provider of outsourced physician services in the specialties we serve. At December 31, 2015, we operated 257 ASCs in 34 states and the District of Columbia in partnership with approximately 2,000 physicians, and provided physician services to more than 450 healthcare facilities in 29 states, employing more than 3,800 physicians and other healthcare professionals.

In July of 2014, we acquired Sheridan Healthcare (Sheridan), a leading national provider of multi-specialty outsourced physician services to hospitals, ASCs and other healthcare facilities. We believe the combination of our ambulatory surgery services and our outsourced physician services allows for a strategy that can accomplish the following:

improve integration of anesthesia and surgery in the ambulatory episode of care;
expand relationships with health systems and payors;
create physician services segment new contract win opportunities at our surgery centers;
increase revenue opportunities within our gastroenterology and multi-specialty facilities; and
increase new hospital/ASC joint ventures.

For the year ended December 31, 2015, approximately 48% and 52% of our revenues were generated by our ambulatory services segment and physician services segment, respectively. For information about our reportable segments, please read “Note 20 - Segment Reporting” to our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data in this report.

Ambulatory Services

Our surgery centers are typically located adjacent to or in proximity to the medical practices of our partner physicians. We generally own a majority interest, primarily 51%, in the facilities we operate. We also own a minority interest in certain centers in partnerships with leading health systems and physicians and intend to continue to pursue such partnerships.

Our surgery centers primarily provide elective, high volume, lower-risk surgical procedures across multiple specialties, including, among others, gastroenterology, ophthalmology, and orthopaedics. Our ASCs are designed with a cost structure that creates significant savings for patients and payors when compared to surgical services performed in hospital outpatient departments (HOPDs). We acquire, develop and operate ASCs through the formation of strategic partnerships with physicians to better serve the communities in the markets we serve. Since physicians are critical to the delivery of healthcare, we have developed our operating model to encourage physicians to affiliate with us. We believe we attract physicians because we design our facilities and adopt staffing, scheduling and clinical systems and protocols with the goal of increasing physician efficiency. We believe that our focus on physician satisfaction combined with providing safe, high-quality healthcare in a friendly and convenient environment for patients will continue to make our ASCs an attractive alternative to HOPDs for physicians, patients and payors. We believe our facilities, when compared to HOPDs, (1) enhance the quality of care for our patients, (2) provide significant administrative, clinical and efficiency benefits to physicians, and (3) offer a low cost alternative for patients and payors.


1


Item 1.  Business - (continued)

The types of procedures performed at each surgery center depend on the specialty of the practicing physicians that use the surgery center. The procedures most commonly performed at our surgery centers are:
 
gastroenterology - colonoscopy and other endoscopy procedures;
ophthalmology - cataracts and retinal laser surgery; and
orthopaedic - knee and shoulder arthroscopy and carpal tunnel repair.

The following table presents the number of our surgery centers by specialty and revenue mix for the years ended December 31, 2015, 2014 and 2013.
 
 
Specialty Count
 
Revenue Mix
 
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Gastroenterology
 
151

 
150

 
149

 
51.6
%
 
51.6
%
 
50.9
%
Multispecialty
 
58

 
51

 
44

 
29.3

 
29.7

 
30.5

Ophthalmology
 
39

 
37

 
35

 
13.5

 
12.1

 
11.5

Orthopaedic
 
9

 
8

 
8

 
5.6

 
6.6

 
7.1

Total
 
257

 
246

 
236

 
100.0
%
 
100.0
%
 
100.0
%

The following table presents certain information with respect to our ambulatory services segment for the years ended December 31, 2015, 2014 and 2013. An ASC is deemed to be under development when a limited liability company (LLC) or limited partnership (LP) has been formed with the physician partners to develop the ASC.
 
2015
 
2014
 
2013
Procedures
1,729,262

 
1,645,350

 
1,609,761

Centers in operation, end of period (consolidated)
236

 
237

 
233

Centers in operation, end of period (unconsolidated)
21

 
9

 
3

Average number of continuing centers in operation, during period
238

 
233

 
230

New centers added, during period
11

 
10

 
6

Centers discontinued, during period

 
6

 
3

Centers under development, end of period
1

 
2

 

Centers under letter of intent, end of period
5

 
5

 
5

Average revenue per center (in thousands)
$
5,174

 
$
4,755

 
$
4,594

Same center revenues increase (consolidated)
6.0
%
 
0.7
%
 
0.6
%
Surgical hospitals in operation at end of period (unconsolidated)
1

 

 


Ambulatory Services Industry Overview
 
For many years, government programs, private insurance companies, managed care organizations and self-insured employers have implemented cost containment measures intended to limit the growth of healthcare expenditures. These cost-containment measures, together with technological advances, have contributed to the significant shift in the delivery of healthcare services away from traditional inpatient hospital settings to more cost-effective alternate sites, including ASCs. ASCs have been widely viewed as a successful way to increase efficiency by improving the quality of, and access to, healthcare and increasing patient satisfaction, while simultaneously reducing costs. According to data issued by the Centers for Medicare and Medicaid Services (CMS) during 2015, there are approximately 5,400 Medicare-certified ASCs. We believe that approximately 65% of those ASCs performed procedures in a single specialty and approximately 35% performed procedures in more than one specialty (multispecialty). Among the single specialty centers, we believe over 2,000 are in our preferred specialties of gastroenterology, ophthalmology, orthopaedic, ear, nose and throat (ENT), and urology, while the remainder are in specialties such as plastic surgery, podiatry and pain management. Of our preferred specialties, we believe approximately 70% of single specialty ASCs and 30% of multi-specialty ASCs are independently owned.
 
We believe the following factors have contributed to the increased migration of procedures to outpatient surgical facilities:
 
Cost‑Effective Alternative.  Ambulatory surgery is generally less expensive than hospital-based surgery for a number of reasons, including lower facility development costs, more efficient staffing and space utilization, and a specialized operating environment focused on cost containment. Accordingly, charges to patients and payors by ASCs are generally less than hospital charges.

2


Item 1.  Business - (continued)

Physician and Patient Preference.  We believe many physicians prefer ASCs because these surgery centers enhance physicians’ productivity by providing them with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases, allowing them to perform more surgeries in a defined period of time. In contrast, HOPDs generally serve a broader group of physicians, including those involved with emergency procedures, which can result in postponed or delayed surgeries for non-emergency procedures. Many patients prefer ASCs as a result of more convenient locations, shorter waiting times and more convenient scheduling and registration than HOPDs.

New Technology.  New technology and advances in anesthesia, which have been increasingly accepted by physicians and payors, have significantly expanded the types of surgical procedures that can be performed in ASCs. Lasers, enhanced endoscopic techniques and fiber optics have reduced the trauma and recovery time associated with surgical procedures. Improved anesthesia has also shortened recovery time by reducing post­operative side effects thereby avoiding overnight hospitalization. 

Competitive Strengths for our Ambulatory Services
 
We believe our ambulatory services segment is distinguished by the following competitive strengths:
 
Market Leading ASC Provider with Broad Geographic Presence. We are one of the largest outpatient surgical facility operators in the United States based upon the total number of facilities. We operate 257 surgery centers in 34 states and the District of Columbia. We believe our geographic diversification provides us with a strong competitive position within the highly fragmented ASC industry, and our national scale and position as a large, public company ASC operator makes us an attractive partner for physicians.
 
Attractive Demographic Trends. We believe we are the market leader in the specialties of gastroenterology and ophthalmology. More gastroenterology and ophthalmology procedures are performed in our surgery centers than any other ASC operator. These specialties in particular have a higher concentration of older patients (50 years and older) than other specialties, such as orthopaedics or ENT. We believe the aging demographics of the United States population will continue to act as a source of growth for gastroenterology and ophthalmology procedures at our ASCs. Additionally, we believe the growing overweight and obese population in the United States will drive procedure growth in gastroenterology, ophthalmology, and orthopaedics. We believe our market strategy is well aligned to respond to these demographic trends.
 
Diversified Procedure and Payor Mix. At our 257 ASCs, our physician partners perform a number of different types of surgical procedures. For the year ended December 31, 2015, 52% of our ambulatory services segment revenues were generated at our gastroenterology centers, 29% of our revenues were generated at our multi-specialty centers, which includes our orthopaedic centers, and 14% of our revenues were generated at our ophthalmology centers. For the year ended December 31, 2015, we derived approximately 74% of our ambulatory services segment revenues from commercial and private payors. Over the same period, we derived approximately 26% of our ambulatory services segment revenues from governmental healthcare programs, primarily Medicare. Medicaid represents less than 2% of our ambulatory services segment revenues. Generally, each of our ASCs contracts individually with the payors in its market area. This contracting diversification reduces our risk with respect to the termination of payor contracts. Because of our payor mix and the non-emergent nature of procedures performed in our ASCs, our ambulatory services segment bad debt expense has averaged less than 2% of our ambulatory services segment revenues over the last three years. For information about our classification of bad debt expense for our ambulatory services segment, please read “Note 3 - Accounts Receivable” to our consolidated financial statements included in this report.
 
While we cannot predict how changes in reimbursement trends will impact our ambulatory services segment, we believe we are well positioned with respect to possible changes in Medicare reimbursement for several reasons:
 
Low Cost Provider: The delivery of healthcare will continue to be directed to low cost venues, including ASCs; therefore, we believe governmental healthcare programs will favor ASCs compared to hospitals because of the lower reimbursement rates for the procedures performed in our surgery centers.

Reimbursement of Procedures Performed in ASCs Comprise a Small Percentage of the Overall Medicare Budget: Reimbursement for procedures performed in ASCs make up less than 1% of the overall Medicare budget, and any future Medicare ASC rate cuts would not likely generate meaningful savings for governmental healthcare programs.
 
Proven Ability to Identify and Rapidly Integrate Acquisitions. We pursue acquisitions of ASCs through transactions involving single ASCs as well as acquisitions of companies that own and manage multiple ASCs. In the last five years, we have acquired an ownership interest in over 60 ASCs for a combined acquisition price of more than $750 million. A majority of these ASCs were acquired in individual transactions; however, we also pursue the acquisition of companies that own and operate multiple ASCs. We also have a dedicated team responsible for the integration of acquired centers. This team is responsible for converting acquired ASCs to our

3


Item 1.  Business - (continued)

reporting, staffing, clinical quality and other operating systems. Once an acquisition is consummated, the acquired surgery center is generally fully integrated within 60 days.

Focus on clinical excellence. We are focused on achieving the best clinical outcomes for the patients of our ambulatory services. We have adopted a quality strategic plan that is intended to deliver innovative and patient-focused experiences and outcomes through education, leadership development, benchmarking, error prevention initiatives and deployment of best practices. We provide both centralized and field-based quality and clinical resources to our centers. Resources include policies, toolkits, educational offerings and reports that enables the quality focus to remain on the patient at the center level. Resources incorporate quality standards of care and industry best practices, and quality metrics and benchmarking reports are provided to support each center’s quality plan, as well as center compliance with regulatory and accreditation standards. CMS quality reporting is also supported by centralized quality staff.

We are a member of the ASC Quality Collaboration and support national efforts related to ASC quality. Included in that support is participation in new measure development and testing, as well as our centers’ participation in a national patient safety program designed specifically for ambulatory care.
 
Ambulatory Services Strategy

We believe we are a leader in the acquisition, development and operation of ASCs. The key components of our strategy are to:
 
attract and retain physicians that are leaders in their specialty and community;
increase same-center revenues and profitability at our existing surgery centers;
expand our national network of ASCs by selectively acquiring both single-specialty ASCs and multi-specialty ASCs, and developing new ASCs in partnership with physicians and health systems; and
pursue the acquisition of companies that own and operate multiple ASCs.
 
Attract and Retain Physicians that are Leaders in Their Specialty and Community. Physicians are critical to the delivery of healthcare and are a valuable component of our operating model. At December 31, 2015, we operated 257 ASCs with approximately 2,000 physician partners and approximately 1,000 non-partner physicians who utilize our centers. We typically structure partnerships with physicians in a 51% / 49% ownership relationship, whereby we are the majority member. We believe this structure is mutually beneficial to us and our physician partners. Under our partnership structure, AmSurg provides management services, including clinical and regulatory support, financial reporting, performance measurement, group purchasing, contracting, and marketing services. According to Syndics Research Corporation, our net promoter score, as defined by their most recent annual survey to measure overall physician satisfaction, was 86% and exceeded industry benchmarks for physician satisfaction. We believe our focus on physician satisfaction, combined with providing safe, high quality healthcare in a patient friendly and convenient environment helps us attract and retain physician partners.
 
Increase Same-Center Revenue Growth. We grow revenues in our existing centers primarily through increasing procedure volume by (1) increasing the number of physicians performing procedures at our centers, (2) marketing our centers to referring physicians, payors and patients, and (3) achieving efficiencies in center operations. For the year ended December 31, 2015, we achieved same-center revenue growth of 6%.
 
Growth in the Number of Physicians Performing Procedures. The most effective way to increase procedure volume and revenues at our ASCs is to increase the number of physicians who use our centers through:
 
the physicians affiliated with the ASCs recruiting new physicians to their practices;
identifying additional physicians to join the partnerships that own the ASCs; and
recruiting non-partner physicians in the same or other specialties to use the ASCs.
 
Marketing Our Centers to Referring Physicians, Payors and Patients. We market our ASCs to referring physicians and payors by emphasizing the quality, high patient satisfaction and lower cost at our ASCs. We have a dedicated business development team that is responsible for negotiating contracts on behalf of our centers with third party payors. They are responsible for obtaining new contracts for our ASCs with payors that do not currently contract with us and negotiating increases to reimbursement rates pursuant to existing contracts. We also increase awareness of the benefits of our ASCs with employers and patients through public awareness programs, health fairs and screening programs, including programs designed to educate employers and patients as to the health and cost benefits of our services.
 

4


Item 1.  Business - (continued)

Achieving Efficiencies in Center Operations: We have dedicated teams with business and clinical expertise that are responsible for implementing best practices within our ASCs. The implementation of these best practices allows the ASCs to improve operating efficiencies through:
 
physician scheduling enhancements;
improved patient flow; and
improved operating room turnover.
 
We also enhance the profitability of our ASCs through benefits we receive from economies of scale such as group purchasing, staffing and clinical efficiencies, and cost containment initiatives. We also track center performance relative to certain benchmarks in order to maximize center-level revenues and profitability. The information we gather and collect from our ASCs and ambulatory services segment operations team members allows us to develop best practices and identify those ASCs that could most benefit from improved operating efficiency techniques and cost containment measures.
 
Expand Our National Network of ASCs. While we have been an active acquirer of ASCs historically, the market remains fragmented, providing many opportunities for additional acquisitions. We target ownership in single-specialty ASCs that perform gastrointestinal endoscopy, ophthalmology and orthopaedic procedures, as well as multi-specialty ASCs that are equipped and staffed to perform surgical procedures in more than one specialty. As of December 31, 2015, approximately 65% of our ambulatory services segment revenues were from single-specialty centers that perform gastroenterology or ophthalmology procedures. These specialties have a higher concentration of older patients than other specialties, such as orthopaedics or ENT. We will also pursue the acquisition of companies that own and operate multiple ASCs when those opportunities arise.

We also plan to continue expanding our network of ASCs through partnerships with hospitals and hospital systems. As a result of recent trends in the healthcare industry, in part influenced by the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or the Health Reform Law, many hospitals and hospital systems are seeking to enter or improve their operations within the ASC market in order to offer a complete continuum of care as well as to establish better relationships with physicians who have a need to operate in both in-patient and out-patient environments. We believe the relationships we have established with either a hospital or a hospital-owned entity bring both quality and efficiency to such relationships as a result of our deep experience in ASC operations. We also have many markets in which we currently own existing fully developed centers that are located at or near existing hospital systems which could result in a network of expanded providers benefiting the hospital partner, our existing physician partners and the patients we collectively serve. Additionally, we seek to collaborate with our hospital partners on the identification of opportunities for the acquisition or development of new facilities.
 
We typically look to acquire ASCs that meet the following criteria:
 
Diversified Physician Group: ASCs that have eight to ten (or more) physicians. In order to manage succession planning, we look to acquire ASCs where physicians vary in age in order to limit the risk of several physicians exiting the practice in a short period of time.
Market Leader: ASCs that are market leaders for the procedures performed in that facility.
Contracts with Payors: ASCs that contract with all or most of the major commercial payors in their market.
History of Growth: ASCs with a track record of consistent case and revenue growth.

The development staff of our ambulatory services segment identifies existing centers that are potential acquisition candidates and physicians who are potential partners for new center development. We begin our acquisition process with a due diligence review of the target center and its market. We use experienced teams of operations and financial personnel to conduct a review of all aspects of the center’s operations, including the following:
 
quality and reputation of the physicians affiliated with the center;
market position of the center and the physicians affiliated with the center;
payor and case mix;
competition and growth opportunities in the market;
staffing and supply review;
equipment assessment; and 
opportunities for operational efficiencies.
 
In presenting the advantages to physicians of developing a new ASC in partnership with us, our development staff emphasizes the proximity of a surgery center to a physician’s office, the simplified administrative procedures, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the rapid turnaround time between cases, the high technical competency of

5


Item 1.  Business - (continued)

the center’s clinical staff and the state-of-the-art surgical equipment. We also focus on our expertise in developing and operating centers, including contracting with vendors and third-party payors. In a development project, we provide services, such as financial feasibility pro forma analysis, site selection, financing for construction, equipment and build out, and architectural oversight. Capital contributed by the physicians and our company plus debt financing provides the funds necessary to construct and equip a new surgery center and initial working capital.
 
As part of each surgery center acquisition or development transaction, we generally form an LLC or LP, which are referred to herein as “partnerships” where certain states require and enter into an operating agreement or a LP agreement with our physician partners. We generally own 51% of the partnerships. Under these agreements, we receive a percentage of the net income and cash distributions of the entity equal to our percentage ownership interest in the entity and have the right to the same percentage of the proceeds upon a sale or liquidation of the entity. In the LP structure, as the sole general partner, one of our affiliates is generally liable for the debts of the LP. However, the physician partners are generally required to guarantee their pro rata share of any indebtedness or lease agreements to which the limited partnership is a party in proportion to their ownership interest in the LP.
 
Except in limited instances, we manage each partnership and oversee the business office, contracting, marketing, financial reporting, accreditation, clinical, regulatory and administrative operations of the surgery center. The physician partners provide the center with a medical director and performance improvement chairman and may provide certain other specified services such as billing and collections, transcription and accounts payable processing. In addition, the partnership may lease the services of certain non-physician personnel from entities affiliated with the physician partners, who will provide services at the center. Certain significant aspects of the partnership's governance are overseen by an operating board, which is typically comprised of equal representation by AmSurg and our physician partners. We work closely with our physician partners to increase the likelihood of a successful partnership.
 
A majority of the operating agreements and LP agreements for our surgery centers provide that, if certain regulatory changes take place, we will be obligated to purchase some or all of the noncontrolling interests of our physician partners. The regulatory changes that could trigger such obligations include changes that: (i) make the referral of Medicare and other patients to our surgery centers by physicians affiliated with us illegal; (ii) create the substantial likelihood that cash distributions from the partnership to the affiliated physicians will be illegal; or (iii) cause the ownership by the physicians of interests in the partnership's to be illegal. There can be no assurance that our existing capital resources would be sufficient for us to meet the obligations, if they arise, to purchase these noncontrolling interests held by physicians. The determination of whether a triggering event has occurred generally would be made by the concurrence of our legal counsel and counsel for the physician partners or, in the absence of such concurrence, by independent counsel having expertise in healthcare law chosen by both parties. Such determination therefore would not be within our control. The triggering of these obligations could have a material adverse effect on our financial condition and results of operations. See “– Government Regulation.”
 
Ambulatory Services Revenues
Revenues from our ASCs are derived from facility fees charged for surgical procedures performed and, at certain of our surgery centers (primarily centers that perform gastrointestinal endoscopy procedures), charges for anesthesia services provided by medical professionals employed or contracted by our centers. These fees vary depending on the procedure, but usually include all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications. Facility fees do not include professional fees charged by the physicians that perform the surgical procedures. Revenues are recorded at the time of the patient encounter and billings for such procedures are made on or about that same date. At the majority of our centers, it is our policy to collect patient co-payments and deductibles at the time the surgery is performed. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors.
ASCs depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for substantially all of the services rendered to patients. We derived approximately 26%, of our ambulatory services segment revenue in the year ended December 31, 2015, and 25% of our revenues in the years ended December 31, 2014 and 2013 from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles. The Medicare program currently pays ASCs in accordance with predetermined fee schedules. Our surgery centers are not required to file cost reports and, accordingly, we have no unsettled amounts from governmental third-party payors.
ASCs are paid under the Medicare program based upon a percentage of the payments to HOPDs pursuant to the hospital outpatient prospective patient system and reimbursement rates for ASCs are updated annually based on changes in the consumer price index (CPI). The Health Reform Law provides for the annual CPI increases applicable to ASCs to be reduced by a productivity adjustment, which is based on historical nationwide productivity gains. In 2013, ASC reimbursement rates increased by 0.6%, which positively impacted our 2013 ambulatory services revenues by approximately $2.5 million and our net earnings per diluted share by $0.02. In

6


Item 1.  Business - (continued)

2014, ASC reimbursement rates increased by 1.2%, which positively impacted our 2014 ambulatory services revenues by approximately $6.5 million and our net earnings per diluted share by $0.05. In 2015, ASC reimbursement rates increased by 1.9%, which positively impacted our 2015 ambulatory services revenues by approximately $9.0 million and our net earnings per diluted share by $0.10. Centers for Medicare and Medicaid Services (CMS) has announced that ASC reimbursement rates will increase by 0.3% for 2016, which we estimate will not have a significant impact our 2016 ambulatory services revenues. There can be no assurance that CMS will not revise the ASC payment system or that any annual CPI increases will be material. 
The Budget Control Act of 2011 (BCA) requires automatic spending reductions of $1.2 trillion for federal fiscal years (FFY) 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. The percentage reduction for Medicare may not be more than 2% for a FFY, with a uniform percentage reduction across all Medicare programs. These BCA-mandated spending cuts are commonly referred to as “sequestration.” These reductions have been extended through FFY 2025. We cannot predict with certainty what other deficit reduction initiatives may be proposed by Congress, whether Congress will attempt to restructure or suspend sequestration or the impact sequestration may have on our surgery centers.
CMS is increasing its administrative audit efforts through the nationwide expansion of the recovery audit contractor (RAC) program. RACs are private contractors that have historically conducted post-payment reviews of providers and suppliers that bill Medicare to detect and correct improper payments for services. We maintain policies and procedures to respond to RAC requests and payment denials. Currently, there are significant delays in the assignment of new Medicare appeals to Administrative Law Judges. In April 2015, the Office of Medicare Hearings and Appeals estimated that assignment of requests for hearings could be delayed for up to 28 months. Thus, we may experience a significant delay in appealing any RAC payment denials. The Health Reform Law expands the RAC program’s scope to include Medicaid claims. In addition to RACs, other contractors, such as Medicaid Integrity Contractors, perform payment audits to identify and correct improper payments. We could incur costs associated with appealing any alleged overpayments and be required to repay any alleged overpayments identified by these or other administrative audits.
We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. CMS has promulgated three national coverage determinations that prevent Medicare from paying for certain serious, preventable medical errors performed in any healthcare facility, such as surgery performed on the wrong patient or the wrong site. Several commercial payors also do not reimburse providers for certain preventable adverse events. CMS established a quality reporting program for ASCs under which ASCs that fail to report on certain required quality measures will receive a 2% reduction in reimbursement. We have implemented programs and procedures at each of our centers to comply with the quality reporting program prescribed by CMS and all of our centers received the full payment update for 2016 based on quality measure reporting. Further, as required by the Health Reform Law, U.S. Department of Health and Human Services (HHS) reported to Congress on its plan for implementing a value-based purchasing program for ASCs that would tie Medicare payments to quality and efficiency measures. As required by the Health Reform Law, HHS studied whether to expand to ASCs its current policy of not paying additional amounts for care provided to treat conditions acquired during an inpatient hospital stay and reported to Congress that it may not be feasible to expand the policy in its current form, but that further exploration of other payment policies aimed at this same goal should be undertaken.
In addition to payment from governmental programs, ASCs derive a significant portion of their revenues from private health insurance plans. These plans include both standard indemnity insurance programs as well as managed care programs, such as preferred provider organizations and health maintenance organizations. The strengthening of managed care systems nationally has resulted in substantial competition among providers of surgery center services that contract with these systems. Further, most of the plans offered through the health insurance exchanges provide for narrow networks that restrict the number of participating providers or tiered networks that impose significantly higher cost sharing obligations on patients who obtain services from providers in a disfavored tier. Exclusion from participation in a managed care network or assignment to a disfavored tier could result in material reductions in patient volume and revenues of our ambulatory services segment. Some of our competitors may have greater financial resources and market penetration than we do. We believe that all payors, both governmental and private, will continue their efforts over the next several years to reduce healthcare costs and that their efforts will generally result in a less stable market for healthcare services. While no assurances can be given concerning the ultimate success of our efforts to contract with healthcare payors, we believe that our position as a low-cost alternative for certain surgical procedures should enable our centers to compete effectively in the evolving healthcare marketplace.
 

7


Item 1.  Business - (continued)

Ambulatory Services Competition

We encounter competition in our ASC business in three separate areas: competition with other providers for physicians to utilize our surgery centers, patients and managed care contracts; competition with other companies for acquisitions of surgery centers; and competition for joint venture development of new centers.
Competition for Physicians to Utilize Our Surgery Centers, Patients and Managed Care Contracts. We compete with hospitals and other surgery centers in recruiting physicians to utilize our surgery centers, for patients and for the opportunity to contract with payors. In some of the markets in which we operate, there are shortages of physicians in certain specialties. In several of the markets in which we operate, hospitals are recruiting physicians or groups of physicians to become employed by the hospitals, including primary care physicians and physicians in certain specialties. In many cases the hospitals have restricted those physicians’ ability to refer patients to physicians and facilities not affiliated with the hospital. In addition, physicians, hospitals, payors and other providers may form integrated delivery systems that restrict the physicians who may treat certain patients or the facilities at which patients may be treated, and payors may utilize plan structures, such as narrow networks and tiered networks, that further restrict patient facility choice. Competition with hospitals and other surgery centers may limit our ability to contract with payors or negotiate favorable payment rates.
Competition for Acquisitions. There are several companies that compete with us for the acquisition of existing ASCs and companies that own and manage ASCs, including HCA Healthcare Corporation, Surgery Partners Inc., Surgical Care Affiliates, Inc. and United Surgical Partners, Inc., a subsidiary of Tenet Healthcare Corporation. We may also compete with other national healthcare providers or local or regional hospitals under certain circumstances. Some of these competitors may have greater resources than we have. The principal competitive factors that affect our and our competitors’ ability to complete acquisitions are price, experience and reputation, and access to capital.

Competition for Joint Venture Development of Centers. We believe that we do not have a direct corporate competitor in the development of single-specialty ASCs across the specialties of gastroenterology and ophthalmology. There are, however, several publicly and privately held companies that develop multi-specialty surgery centers, and these companies may compete with us in the development of multi-specialty centers. Further, many physicians develop surgery centers without a corporate partner, utilizing consultants who typically perform these services for a fee and who take a small equity interest or no equity interest in the ongoing operations of the surgery center. We also compete with national, regional and local hospital systems for the development of new surgery centers.

Accreditation
 
Managed care organizations in certain markets will only contract with a facility that is accredited by either the Accreditation Association for Ambulatory Health Care (AAAHC) or The Joint Commission. We believe that undergoing and maintaining voluntary accreditation signifies our commitment to quality. Currently, all of our centers are accredited by AAAHC or The Joint Commission and have received three-year certifications.

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Item 1.  Business - (continued)

Ambulatory Services Locations

The size of our typical single-specialty ASC is approximately 3,000 to 6,000 square feet. The size of our typical multi-specialty ASC is approximately 8,000 to 12,000 square feet. Each center typically has two to three operating or procedure rooms with areas for reception, preparation, recovery and administration. Each surgery center is specifically tailored to meet the needs of its physician partners. Our surgery centers perform an average of approximately 7,200 procedures per year, though there is a wide range among centers from a low of approximately 1,000 procedures per year to a high of approximately 31,000 procedures per year. 

The following table details the location and specialty of our surgery centers as of December 31, 2015:
State Location
 
Gastroenterology
 
Multispecialty
 
Ophthalmology
 
Orthopaedic
 
Total
Alabama
 

 

 
1

 

 
1

Arizona
 
7

 
3

 
2

 
2

 
14

Arkansas
 
1

 
1

 
1

 

 
3

California
 
14

 
12

 
1

 
1

 
28

Colorado
 

 
1

 
1

 

 
2

Connecticut
 
2

 
1

 
2

 

 
5

Delaware
 
3

 
1

 

 

 
4

Florida
 
18

 
11

 
5

 
1

 
35

Idaho
 

 
1

 
1

 

 
2

Illinois
 
3

 

 

 

 
3

Indiana
 
2

 

 
1

 

 
3

Kansas
 
3

 

 
3

 
1

 
7

Kentucky
 
2

 

 
2

 

 
4

Louisiana
 
4

 
2

 
2

 

 
8

Maryland
 
13

 
1

 
1

 

 
15

Massachusetts
 
3

 
3

 

 
1

 
7

Michigan
 
1

 

 
1

 
1

 
3

Minnesota
 

 
1

 
3

 

 
4

Missouri
 
3

 
1

 

 
2

 
6

Nevada
 
1

 

 
1

 

 
2

New Hampshire
 

 
1

 

 

 
1

New Jersey
 
7

 
7

 
1

 

 
15

New Mexico
 
1

 

 

 

 
1

North Carolina
 
5

 

 

 

 
5

Ohio
 
9

 
1

 
2

 

 
12

Oklahoma
 
2

 

 
1

 

 
3

Oregon
 
1

 
3

 
1

 

 
5

Pennsylvania
 
8

 
2

 
1

 

 
11

South Carolina
 
4

 
1

 
1

 

 
6

Tennessee
 
8

 
1

 
3

 

 
12

Texas
 
18

 
3

 
1

 

 
22

Utah
 
1

 

 

 

 
1

Washington
 
5

 

 

 

 
5

Washington D.C.
 
1

 

 

 

 
1

Wyoming
 
1

 

 

 

 
1

Total
 
151

 
58


39


9

 
257



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Item 1.  Business - (continued)


Physician Services

Sheridan is a leading national provider of multi-specialty outsourced physician services to hospitals, ASCs and other healthcare facilities. At December 31, 2015 we provided physician services, primarily in the areas of anesthesiology, radiology, children’s services and emergency medicine services, to more than 450 healthcare facilities in 29 states and employed more than 3,800 physicians and other healthcare professionals. Our physician services segment operates with a significant presence in Florida, California, Arizona and New Jersey. We believe our scale and ability to leverage administrative and support infrastructure enable us to effectively recruit and retain physicians and provide physician services at lower costs. Sheridan has grown organically through same-contract revenue growth and new contract wins, as well as through acquisitions of complementary medical practice groups.

The following table presents the revenue mix from our primary physician services specialties for the year ended December 31, 2015 and for the period from July 16, 2014 through December 31, 2014.
 
Revenue Mix
 
Year Ended December 31, 2015
 
Period from July 16, 2014 - December 31, 2014 (1)

Anesthesiology services
71.0
%
 
75.0
%
Radiology services
12.4

 
6.5

Children's services
7.3

 
7.8

Emergency medicine services
5.9

 
6.3

Office based and other
3.4

 
4.4

Total
100.0
%
 
100.0
%
                                   
(1)
On July 16, 2014, we completed the acquisition of Sheridan. Accordingly, historical amounts for periods prior to that date are not included.

Anesthesiology services

We are one of the two largest and most experienced providers of outsourced anesthesia services in the United States. We have many long standing customer relationships, some of which have a history of over 50 years of continuously provided anesthesia services. During 2015, our approximately 2,900 anesthesia professionals serviced over 1.25 million anesthetic cases at more than 320 facilities. Our anesthesia care teams provide anesthesiology services to hospitals, ASCs and other healthcare facilities in 19 states. These teams are comprised of board-certified or board-eligible physicians and allied health professionals which include certified registered nurse anesthetists (CRNAs) and Anesthesia Assistants. Our anesthesiologists are a key part of the effective management and productivity of hospital surgery departments, ASCs and other healthcare facilities. Anesthesiology services involve the selection and delivery of drugs in order to induce a state of unconsciousness or numbness, in preparation for medical and surgical procedures, as well as for pain management purposes. Anesthesia services are provided by anesthesiologists, as well as other healthcare professionals, who are typically CRNAs. They are responsible for selecting the correct anesthesia drug and dosage for each patient and, typically, for administering the anesthesia and monitoring the patient.

Radiology services

We are a leading provider of radiology services, including diagnostic, interventional and teleradiology services, to hospitals, imaging centers and physician group practices in the United States. In 2015, our radiologists interpreted approximately 3.5 million studies. All of our radiologists are fellowship-trained or board-certified, locally licensed physicians based in the United States. Many of our radiologists provide their services at healthcare facilities where they interpret all modalities of radiology images and can consult directly with attending physicians, providing prompt, accurate interpretations, which promotes the professional development of our radiologists as they interact constantly with the physicians at our clients’ facilities. The practice of radiology involves the interpretation of images of the human body to aid in the diagnosis and treatment of diseases, conditions and injuries. Diagnostic radiologists correlate findings from imaging procedures with clinical information and other medical examinations to make diagnoses or recommend further examinations or treatments in consultation with the patient’s attending physician. Interventional radiology, which is also referred to as vascular and interventional radiology, is a sub-specialty of radiology that utilizes minimally-invasive image-guided procedures to diagnose and treat diseases in nearly every organ system. Teleradiology is the process whereby digital radiologic images are sent from one point to another, which allows hospitals to have 24/7 access to full-time radiology support even when access to on-site radiologists may be limited. We provide teleradiology services from remote reading facilities staffed by

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Item 1.  Business - (continued)

radiologists from our affiliated practice groups to improve the productivity of our radiologists and expand access to 24/7 diagnoses and interpretations (also known as “studies”) and increase availability of sub-specialty consultations.

Children’s services

We are one of the largest providers of children’s services in the United States. In 2015, we supported over 80 children’s services programs in 14 states with approximately 250,000 patient days. We principally provide neonatal management services, specializing in acute inpatient care and treatment of infants. We continue to increasingly expand our provision of children’s services in pediatric hospitalist, pediatric intensivist and pediatric emergency medicine subspecialties. Our children’s services teams, led by dedicated on-site medical directors, consist of physicians and Advanced Registered Nurse Practitioners (ARNPs) who collaborate with community obstetricians, pediatricians, hospital nursing staff and hospital administration. These teams staff the neonatal intensive care units (NICUs) at our clients’ facilities. We also provide specialists in pediatric intensivist services in pediatric emergency department settings and pediatric intensivist care units in hospitals. Additionally, our children's services staff administers our universal newborn hearing screening program called Healthy Hearing.

Neonatologists are pediatricians that have additional training and certifications to care for premature or newborn infants with low birth weight or other potential medical complications. Our neonatologists are staffed in NICUs and are responsible for daily rounds, ongoing newborn care, and coverage of all neonatal and pediatric emergencies, including C-sections and deliveries. We also employ perinatologists that are obstetricians that have additional training and certifications to care for women with high risk or complicated pregnancies and their unborn babies.

Emergency medicine services

We are a leading provider of emergency medicine services to hospitals. These services are performed by physicians with emergency department specializations and other healthcare professionals such as ARNP's and Physician Assistants. In 2015, we had annual volume of approximately 315,000 visits in six states. We continue to provide high-quality care that is also cost-effective, supporting our clients’ facilities as well as their communities.

Emergency medicine services involve the immediate diagnosis and treatment of patients. The emergency department is one of the most challenging areas to manage given the immediate and often acute nature of patients’ conditions and the required treatment. Emergency departments are an essential access point for medical services and are a primary source of patient admissions. Consequentially, hospitals require efficient and effectively operated emergency departments, often turning to providers of outsourced physician services with greater experience and resources.

Other services

We operate a small group of office-based medical practices in South Florida and Texas that primarily focus on women’s health and provide services in the areas of gynecology and obstetrics. We maintain and operate our office-based practices in communities where the practices support and integrate with our facilities-based specialties, providing additional value to our healthcare facility clients through coordination of care.

We provide management services to our joint ventures, affiliated physician group practices and other office-based practices and specialties. Under our management services agreements, we typically manage all aspects of the practice other than the provision of medical services except in jurisdictions where we are permitted to also provide clinical management services. In exchange for these services, we are paid a management fee.

Key Constituents

We are dedicated to achieving the best outcomes for our patients. Sheridan has been able to successfully and profitably grow its business by delivering strong and consistent value to two key constituents.

Clients, Including Hospitals, ASCs and Other Healthcare Facilities. Our physicians usually lead the daily operations of their specialty departments and integrate themselves into the clinical leadership at our clients’ facilities. This integration allows us to collaborate with hospitals, ASCs and other healthcare facilities to improve their operations. We believe our national scale and footprint enable us to provide better coordination of care, better physician coverage, stronger recruiting services, more professional and experienced management and improved patient throughput and outcomes as compared to smaller independent physician groups or directly affiliated facility practices with which we compete.


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Item 1.  Business - (continued)

Physicians and Other Healthcare Professionals. We employ approximately 3,800 healthcare professionals nationwide, including approximately 2,000 physicians. We provide clinical resources and handle administrative support functions for our healthcare professionals, allowing them to focus on providing quality medical care. We employ approximately 1,800 non-clinical support staff to manage these administrative functions, including client and payor contracting, billing and reimbursement, employee benefits, technology support, regulatory compliance, professional liability and other administrative activities associated with supporting a modern-day physician group practice. Our healthcare professionals receive competitive compensation, job stability and the opportunity for upward career mobility on our physician management teams. We believe that the level of clinical autonomy, attractive compensation and infrastructure support we provide to our healthcare professionals makes us a more attractive alternative in comparison to smaller provider groups.

Physician Services Industry Overview

The growing complexity of the healthcare delivery system has led many healthcare facilities to increasingly outsource medical coverage and administrative functions to improve productivity, increase the overall quality of care and reduce administrative costs. We believe the primary clinical areas we serve, which include anesthesiology, radiology, children’s services and emergency medicine, are specialties that are extremely important lines of service for the overall provision of care. The market for outsourced services in our specialties tends to be highly fragmented and is predominantly served by small group practices.

We believe our physician services segment is well-positioned to benefit from certain industry trends including the following:

Shift towards national providers of physician outsourcing. Hospitals, ASCs and other healthcare facilities are increasingly utilizing national providers of outsourced healthcare professionals as a means of reducing operating expenses; achieving targeted physician coverage levels, including by addressing difficulties in hiring and retaining physicians; and increasing operational efficiency to improve patient flow, reduce wait times, coordinate care, shorten lengths of stay and reduce readmission rates, all of which lead to lower costs and promote improved patient care. Historically, hospitals, ASCs and other healthcare facilities have relied on local practice groups to provide outsourced physician services, but an increasing number have been turning to national outsourced physician groups to meet their increasingly complex needs. We are a direct beneficiary of this continuing shift from smaller local groups to larger national provider organizations.

Consolidation of healthcare providers. Historically, healthcare has predominantly been provided through smaller, fragmented local provider groups. However, due to changes in reimbursement, increasing regulatory compliance requirements and growing client demands for quality measurement and cost efficiencies, hospitals, ASCs and other healthcare facilities, in some instances, are increasingly consolidating with one another, provider groups are consolidating into larger groups and individual physicians are seeking larger partners. A significant portion of our growth has come from consolidation with regional provider groups, other acquisitions of smaller physician group practices and new contract wins, all of which have in part been driven by these industry consolidation trends.

Opportunities created by healthcare reform. We believe the Health Reform Law and other measures of healthcare reform should increase the number of people with access to health insurance over time. These measures are expected to reduce the number of uninsured and underinsured, which we believe will in turn lead to increased demand for healthcare services. The Health Reform Law also increases the obligation of healthcare providers to provide coordinated care and holds provider accountable for showing measurable patient outcomes. As a national provider group, we believe that we are in a favorable position to serve the expected growth in patient populations and to meet our clients’ needs for increased coordination and outcomes measurement.

Increased competition for specialty physicians. With a growing and aging population in the United States, demands for specialty physician services are increasingly outpacing the supply of qualified practitioners. We believe there will be a shortage of physicians occurring in the next ten years, including shortages in anesthesiology, radiology, children's services and emergency medicine. This growing shortage has led to increasing challenges in recruiting and retaining specialty physicians among hospitals, ASCs and other healthcare facilities, which we believe we can service in part by utilizing other healthcare professionals, such as CRNAs, ARNPs and physician assistants. Given our expertise in recruiting healthcare professionals in our specialty fields and the attractiveness of our business model to such specialists, we believe we are well-positioned to continue to recruit and retain healthcare professionals and, thus, meet increasing demands for their services in the years to come.


12


Item 1.  Business - (continued)

Competitive Strengths of our Physician Services

We believe the following competitive strengths position our physician services segment favorably to capitalize on healthcare industry trends:

Leading multi-specialty provider with national scale. We are one of the largest providers of multispecialty outsourced healthcare services in the United States. Our multi-specialty offering positions us well to adapt to the particular needs of our clients by providing attractive economic solutions. Further, when a client contracts with us for more than one of our specialties, it helps alleviate their administrative burden of managing multiple physician group relationships. Our infrastructure not only improves productivity and quality of care while reducing the cost of care, but also provides operating leverage to drive economies of scale as we continue to expand. We believe our scale also enables us to achieve more favorable managed care contract terms and to efficiently manage the operations and billing and collections processes. While we have a national footprint serving more than 450 healthcare facilities in 29 states, we also have a strong local presence. Our local presence fosters our community-based relationships with healthcare facilities and administrators, which we believe results in high retention with both our clients and our physicians.

Proven ability to grow organically and through acquisitions. Sheridan has historically grown physician services segment revenue through (1) strong same-contract growth driven by increases in payment rates and patient volume, (2) new contract wins and (3) acquisitions. We have driven substantial new contract growth by bidding and competing for new contracts and providing existing clients with high-quality service. We believe our expertise in effectively managing and deploying physician resources, negotiating more favorable contracts with payors, providing high quality outcomes and delivering service more efficiently has contributed significantly to the organic growth of our physician services segment. In addition, given that the market for outsourced physician services is highly fragmented and predominantly served by small provider groups, we believe there is significant opportunity for further growth through new contract wins from smaller provider groups and through select, targeted acquisitions. Our physician services segment infrastructure allows us to successfully integrate new contract wins and newly acquired physician group practices while achieving economies of scale.

Focus on clinical excellence. Our physician services segment is focused on achieving the best clinical outcomes for our patients through the application of rigorous recruiting and credentialing standards, the promotion of a physician-led leadership structure and the monitoring of our clinical quality measures.

We are certified by the National Committee for Quality Assurance, a leading nationally recognized independent organization that evaluates the quality and credentials of physician organizations.
Through extensive clinical and leadership development programs, we train our healthcare professionals to continually enhance their skills. Our healthcare professionals are supported through our specialty-specific networks, which are led by our physician senior leadership. We provide internally developed continuing medical education accredited courses to our healthcare professionals, including instructor-led and on-line education sessions.
We have developed and implemented quality measurement systems which track multiple key indicators which assist our professionals in systematically monitoring, examining and analyzing outcomes and processes. These quality measurement systems are supplemented by our active peer review infrastructure designed to ensure the development and implementation of actionable items that will improve patient outcomes.

Our ability to deliver high levels of client service and patient care is a direct result of this focus, and helps us to attract and retain clients.

Proven ability to recruit and retain healthcare professionals. Sheridan has over 50 years’ experience of recruiting, credentialing and retaining qualified physicians and other healthcare professionals. We offer our physicians and other healthcare professionals the clinical autonomy of working in a group practice with the financial and administrative support of a large, national organization. This support allows them to focus on patients and quality of care, while we handle the demanding administrative burdens of a modern healthcare practice. We also offer our healthcare professionals scheduling and location flexibility, employment stability and competitive compensation.

Recurring diversified revenue stream from long-standing client base. Our physician services segment revenue is highly diversified across the broad base of medical services that we provide. Net revenue from our physician services segment in 2015 was derived from approximately 5.3 million patient encounters across more than 450 healthcare facilities. Many of our client relationships exceed 15 years, and our original physician services client has been with Sheridan for more than 50 years. In addition, our physician services segment has a well-diversified payor mix. For the year ended December 31, 2015, we estimate approximately 70% of our physician services net revenue was derived from commercial and managed care contracts, approximately 18% was from Medicare, Medicaid and approximately 12% was from other services and self-pay. Most of our significant managed care payors are under multi-year

13


Item 1.  Business - (continued)

contracts, which typically include contractual annual rate escalators. Importantly, although our strategy is to participate with all relevant payors, payment for our services is not contingent on us having a contract with any given payor; if we perform services for a patient who carries insurance from a payor with whom we have not contracted, we still bill and generally collect for those services.

Physician Services Strategy

We intend to capitalize on our competitive strengths and favorable industry trends to grow the revenue and profitability of our physician services segment by:

Delivering distinctive service to our existing client base to drive strong same-contract growth. The foundation of our physician services segment business lies in how we service our existing base of healthcare facilities. To ensure that we maintain and further strengthen these client relationships, we pursue the following key strategies:

expand our national physician services capabilities through increases in our internal physician recruiting, credentialing and onboarding organizations, further development of our provider quality metrics capabilities and investment in reimbursement technologies;
work with our clients to develop increased operating room efficiencies through the application of best
practice information regarding physician staffing and procedural turnaround; and
further advance our relationships with national managed care plans to facilitate favorable contract terms
and more efficient reimbursement.

Organically expanding through new contract wins. The market for outsourced physician services is highly fragmented and predominantly served by smaller local and regional provider groups. Such fragmentation creates significant opportunities for organic growth, as we believe that we can provide better solutions for hospitals, ASCs and other healthcare facilities than those that are offered by smaller provider groups. Our differentiated capabilities and market presence has enabled us to win contracts with both new and existing clients, and we expect to continue to capitalize on these trends within our industry. Within our existing client base, there is a significant opportunity to win new contracts by cross-selling additional specialties, as we currently provide two or more lines of service at only one in five clients. We have significantly invested in expanding the breadth and focus of our physician services segment business development functions. We believe our expanded efforts and dedicated internal resources will position us well to continue to win new contracts.

Executing acquisitions to augment our organic growth. As the physician services industry continues to consolidate, we believe we will have the opportunity to augment the organic growth of our physician services segment through opportunistic acquisitions of regional and local providers. We will target strategic “platform” practices to catalyze future growth in new markets and “in-market” practices in geographies where we have an established presence. In the last five years, Sheridan has successfully acquired and integrated 22 physician group practices for a combined acquisition price of approximately $1.2 billion, adding more than 1,200 physicians and healthcare professionals.

Enhancing profitability by achieving further operating efficiencies. We believe that we can improve the operating efficiency of our physician services segment as we grow. Our infrastructure is designed to achieve economies of scale by enhancing profitability with revenue growth without compromising the quality of operations or clinical care. We believe our processes related to managed care contracting, billing, coding, collection and compliance have driven a track record of strong revenue cycle management. We have made a significant investment in infrastructure including management information systems that we believe will continue to enable us to improve the clinical results and key client metrics while reducing the cost of providing patient care.

Physician Services Revenues

Our physician services segment revenue primarily consists of fee for service revenue and contract revenue and is derived principally from the provision of physician services to patients of the healthcare facilities we serve. Contract revenue represents income earned from the Company's hospital customers to supplement payments from third-party payors.

We record revenue at the time services are provided, net of a contractual allowance and a provision for uncollectibles. Revenue less the contractual allowance represents the net revenue expected to be collected from third-party payors (including managed care, commercial and governmental payors such as Medicare and Medicaid) and patients insured by these payors.

We also recognize revenue for services provided during the period but are not yet billed. Expected collections are estimated based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patients’ healthcare plan, mandated payment rates under the Medicare and Medicaid programs, and historical cash collections.

14


Item 1.  Business - (continued)

Our provision for uncollectibles includes the estimate of uncollectible balances due from uninsured patients, uncollectible co-pay and deductible balances due from insured patients and special charges, if any, for uncollectible balances due from managed care, commercial and governmental payors. We record net revenue from uninsured patients at its estimated realizable value, which includes a provision for uncollectible balances, based on historical cash collections (net of recoveries).

Many of our most significant managed care payor contracts in our physician services segment are for a term of three to five years, terminable only for cause. They often provide for annual increases in reimbursement rates. These contracts may be national or state-wide and are most often applicable to all lines of service. Most other payor contracts are terminable without cause with short term notice. We participate with most large managed care payors.

Our physician services segment performs substantially all of the billing for our affiliated physicians and employs a billing staff of approximately 600 employees. Additionally, we have invested in several applications that provide the foundation for the day-to-day operations of our physician services segment, including facilities-based billing and office-based billing.

We derive approximately 18% of our physician services segment net revenue from services rendered to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs. For the year ended December 31, 2015, we received approximately 13% and 5% of our physician services segment net revenue from Medicare and Medicaid, respectively. In addition, these programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, all of which may materially increase or decrease the payments we receive for our services as well as affect the cost of providing services. In recent years, Congress has consistently attempted to curb federal spending on such programs, including through sequestration, which is mandated by the BCA, and requires automatic spending reductions through FFY 2025. We cannot predict with certainty what other deficit reduction initiatives may be proposed by Congress, whether Congress will attempt to restructure or suspend sequestration or the impact sequestration may have on our physician practices.

Reimbursement to our physician services segment typically is conditioned on our providing accurate procedure and diagnosis codes and properly documenting both the service itself and the medical necessity for the service. Incorrect or incomplete documentation and billing information, or the incorrect selection of codes for the level of service provided, could result in non-payment for services rendered or lead to allegations of billing fraud. Moreover, third-party payors may disallow, in whole or in part, requests for reimbursement based on determinations that certain amounts are not reimbursable, were for services provided that were not medically necessary, lacked sufficient supporting documentation, or were disallowed for a number of other reasons.

Retroactive adjustments, recoupments or refund demands may change amounts realized from third party payors and retroactive adjustments to amounts previously reimbursed can and do occur on a regular basis as a result of reviews and audits. Additional factors that could complicate our physician services segment billing include:

disputes between payors as to which party is responsible for payment;
the difficulty of adherence to specific compliance requirements, diagnosis coding and various other procedures mandated by the government; and
failure to obtain proper physician credentialing and documentation in order to bill governmental payors.

Due to the nature of our business and our participation in the Medicare and Medicaid programs, we are involved from time to time in regulatory reviews, audits or investigations by government agencies of matters such as compliance with billing regulations and rules. We may be required to repay these agencies if a determination is made that we were incorrectly reimbursed, or we may lose eligibility for certain programs in the event of certain types of non-compliance. Delays and uncertainties in the reimbursement process adversely affect our level of accounts receivable, increase the overall cost of collection, and may adversely affect our working capital.

Medicare Physician Fee Schedule (MPFS). Medicare pays for all physician services based upon the MPFS which contains a list of uniform rates. The payment rates under the MPFS are determined based on: (i) national uniform relative value units for the services provided, (ii) a geographic adjustment factor, and (iii) a conversion factor. Payment rates under the MPFS are updated annually. Historically, a sustainable growth rate (SGR) formula tied to the U.S. gross domestic product (GDP) was used to calculate these annual updates. However, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) repealed the SGR formula while establishing annual fee updates through calendar year 2019 and outlining a new method for determining updates thereafter. Also, MACRA incentivizes the development of, and participation in, alternative payment models. A new merit-based incentive payment system will consolidate and replace several existing incentive programs beginning in 2019. There can be no assurance that Congress will not make further changes to physician payment methodology.


15


Item 1.  Business - (continued)

Physician Services Competition

The markets in which we compete are highly fragmented. We consider our primary competitors to be local physician group practices. On a regional and national basis, we compete with companies such as Envision Healthcare Holdings, Inc. (formerly Emcare), Mednax Inc., and Team Health Holdings, Inc.

Physician Services Locations

As of December 31, 2015 we served a diverse group of more than 450 healthcare facilities in 29 states with a concentration in Florida, New Jersey, Arizona and California. During the year ended December 31, 2015, Florida, New Jersey, Arizona and California accounted for approximately 85% of our physician services segment net revenue. There is limited concentration among existing clients, with the largest client accounting for less than 10% of our physician services segment net revenue; however, some of our clients are affiliated with one another or owned and operated by the same entity. Our physician services segment has contracts in the states of Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, North Carolina, New Jersey, New Mexico, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Vermont, Washington and West Virginia.

Government Regulation

The healthcare industry is subject to extensive regulation by a number of governmental entities at the federal, state and local level. Government regulation affects our business activities by controlling our growth, requiring licensure and certification for our facilities, regulating the use of our properties and controlling reimbursement to us for the services we provide.

Health Reform. The Health Reform Law represents significant change across the healthcare industry. The Health Reform Law contains a number of provisions designed to reduce Medicare program spending, including the annual productivity adjustment previously discussed, that reduces payment updates to ASCs and various initiatives that may reduce payments for physician services. However, the Health Reform Law also expands coverage of previously uninsured individuals through a combination of public program expansion and private sector health insurance reforms. For example, the Health Reform Law has expanded eligibility under existing Medicaid programs in states that have not opted out of the expansion, created financial penalties on certain individuals who fail to carry insurance coverage, established affordability credits for those not enrolled in an employer-sponsored health plan, resulted in the establishment of federal and state health insurance exchanges and allowed states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid. The Health Reform Law also required a number of private health insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit mandates, and increased dependent coverage.

We believe that health insurance market reforms under the Health Reform Law that expand insurance coverage have resulted in an increased volume for certain procedures at our centers or the facilities we serve. Medicare now covers and many health plans are required to cover, without cost-sharing, certain preventive services designated by the U.S. Preventive Services Task Force, including screening colonoscopies. States that provide Medicaid coverage of these preventive services without cost-sharing receive a one percentage point increase in their federal medical assistance percentage for these services. Our centers or the facilities we serve have also benefited from increased numbers of individuals with insurance. However, there can be no assurance the increased volume we have experienced will continue to occur. In addition, other aspects of the Health Reform Law could have a negative impact on our ambulatory services segment. For example, the Health Reform Law established a Medicare Shared Savings Program, which created Accountable Care Organizations (ACOs) to allow groups of providers, hospitals and suppliers to come together voluntarily to provide coordinated high quality care to Medicare patients. The formation of ACOs or other coordinated care models could make competing for patients more difficult and negatively impact our centers and the medical practices of our physician partners.

Within our physician services segment, we derive a significant portion of our revenue from payments made by government healthcare programs, including Medicare and Medicaid. CMS has implemented, or is implementing, a number of programs and requirements intended to transform Medicare from a passive volume-based payment system to an active purchaser of quality goods and services. These efforts directly impact hospitals, but may also affect the level of utilization of and payments received for our physician staffing services. These programs include financially rewarding hospitals that meet quality performance standards established by CMS, penalizing hospitals that do not meet those performance standards or experience “excess readmissions” for certain conditions, denying reimbursement for treatment of hospital acquired conditions (HACs) and reducing payments to hospitals with high rates of HACs. In addition, hospitals may be penalized for non-compliance with the admission and medical review criteria for inpatient services commonly known as the “two midnight rule.” The ultimate impact of these initiatives is not certain, but may lead to hospitals increasingly tying payments for our physician services to obtaining certain quality measures or negotiations to reduce payment rates

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for our physician services segment. Our physician services segment may also experience increased competition from ACOs and other coordinated care models.

It is unclear what the ultimate resulting impact of the Health Reform Law will be on the number of uninsured individuals or what the payment terms will be for individuals covered by the Medicaid expansion or who purchase coverage through health insurance exchanges. Further, the Health Reform Law remains subject to legislative efforts to repeal or modify the law, further delay and a number of court challenges to its constitutionality and interpretation. For example, the excise tax on high-cost employer-sponsored health insurance plans, commonly known as the Cadillac tax, has been delayed for two years and, therefore, will not take effect until 2020. Because of the many variables involved, including the law’s complexity, lack of comprehensive implementing definitive regulations or interpretive guidance, gradual or partially delayed implementation, court challenges, the possibility of amendments, repeal, or further implementation delays, uncertainty regarding how individuals and employers will respond to the choices afforded them by the law, we are unable to predict the net effect of the Health Reform Law. In addition, efforts to reform the healthcare industry continue to attract attention at both the federal and state levels.

Certification. We depend on third-party programs, including governmental and private health insurance programs, to reimburse us for services rendered to patients in our ASCs and by our outsourced physicians in various care settings. In order to receive Medicare reimbursement, each surgery center must meet the applicable conditions for coverage set forth by HHS relating to the type of facility, its equipment, personnel and standard of medical care, as well as its compliance with state and local laws and regulations, all of which are subject to change from time to time. ASCs undergo periodic on-site Medicare certification surveys. Each of our existing surgery centers is certified as a Medicare provider. Our outsourced physicians participate in Medicare, but are not subject to certification surveys or on-site inspections. While we intend for our outsourced physicians and centers to participate in Medicare and other government reimbursement programs, there can be no assurance that our physicians or centers will continue to qualify for participation.
Medicare-Medicaid Fraud and Abuse Provisions. The federal Anti-Kickback Statute prohibits healthcare providers and others from knowingly and willfully soliciting, receiving, offering or paying, directly or indirectly, any remuneration (including any kickback, bribe or rebate) in return for, or to induce, referrals or orders for services or items covered by a federal healthcare program. The Anti-Kickback Statute is very broad in scope, and many of its provisions have not been uniformly or definitively interpreted by case law or regulations. Courts have found a violation of the Anti-Kickback Statute if just one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. Furthermore, the Health Reform Law provides that knowledge of the law or intent to violate the law is not required to establish a violation of the Anti-Kickback Statute.
Violations may result in criminal penalties or fines of up to $25,000 or imprisonment for up to five years, or both. Violations of the Anti-Kickback Statute may also result in substantial civil penalties, including penalties of up to $50,000 for each violation, plus three times the amount claimed, and exclusion from participation in the Medicare and Medicaid programs. Exclusion from these programs would result in significant reduction in revenues and would have a material adverse effect on our business. The Health Reform Law provides that submission of a claim for services or items generated in violation of the Anti-Kickback Statute constitutes a false or fraudulent claim and may be subject to additional penalties under the federal False Claims Act (FCA). The Bipartisan Budget Act of 2015 requires civil monetary penalties, including those for violations of the Anti-Kickback Statute and those imposed under the FCA, to increase by up to 150% by August 1, 2016, and to increase annually thereafter based on updates to the Consumer Price Index.
Congress and HHS have published safe harbors that outline categories of activities that are deemed protected from prosecution under the Anti-Kickback Statute. Failure to meet the requirements of a safe harbor does not necessarily render the conduct or business arrangement illegal under the Anti-Kickback Statute. However, such conduct and business arrangements may lead to increased scrutiny by governmental enforcement authorities. In addition, the HHS Office of Inspector General (OIG) is authorized to issue advisory opinions regarding the interpretation and applicability of the federal Anti-Kickback Statute, including whether an activity constitutes grounds for the imposition of civil or criminal sanctions. Although advisory opinions are not binding on any entity other than the parties who submitted the requests, advisory opinions provide some guidance as to how the OIG would analyze a particular arrangement.
HHS has published regulations for safe harbors that relate to investment interests in general and to investments in certain types of ASCs. The limited partnerships and limited liability companies that own our surgery centers do not meet all of the criteria of a safe harbor. However, a business arrangement that does not substantially comply with a safe harbor is not necessarily illegal under the Anti-Kickback Statute.


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We believe that our surgery centers and the related limited partnerships and limited liability companies are in compliance with the current requirements of applicable federal and state law because, among other factors:

the limited partnerships and limited liability companies exist to effect legitimate business purposes, including the ownership, operation and continued improvement of high quality, cost-effective and efficient services to the patients served;
the limited partnerships and limited liability companies function as an extension of the practices of physicians who are affiliated with the surgery centers and the surgical procedures are performed personally by these physicians without referring the patients outside of their practice;
our physician partners have a substantial investment at risk in the limited partnerships and limited liability companies;
terms of the investment do not take into account the volume of the physician partners’ past or anticipated future services provided to patients of the centers;
the physician partners are not required or encouraged as a condition of the investment to treat Medicare or Medicaid patients at the centers or to influence others to refer such patients to the centers for treatment;
the limited partnerships, the limited liability companies, our subsidiaries and our affiliates do not loan any funds to or guarantee any debt on behalf of the physician partners with respect to their investment; and
distributions by the limited partnerships and limited liability companies are allocated uniformly in proportion to ownership interests.
The safe harbor regulations also set forth a safe harbor for personal services and management contracts. Certain of our limited partnerships and limited liability companies have entered into ancillary services agreements with our physician partners’ group practices, pursuant to which the practice may provide the center with billing and collections, transcription, payables processing, payroll and other ancillary services. The consideration payable by a limited partnership or limited liability company for certain of these services may be based on the volume of services provided by the practice, which is measured by the limited partnership’s or limited liability company’s revenues. Although these relationships do not meet all of the criteria of the personal services and management contracts safe harbor, we believe that the ancillary services agreements are in compliance with the current requirements of applicable federal and state law because, among other factors, we believe the fees payable to the physician practices are equal to the fair market value of the services provided.
 
In addition, certain of our limited partnerships and limited liability companies have entered into certain arrangements for professional services, including arrangements for anesthesia services. The OIG has issued advisory opinions in which it concluded that proposed arrangements between anesthesia groups and facilities, including, physician-owned ASCs could result in prohibited remuneration under the federal Anti-Kickback Statute. We believe our arrangements for anesthesia services are unlike those described in the OIG advisory opinions and are in compliance with the requirements of the federal Anti-Kickback Statute.

In connection with our outsourced physician services, we have a variety of financial relationships with physicians, hospitals, ASCs, and other healthcare services, including joint venture arrangements. These financial relationships do not meet all of the criteria of the personal services and management contracts safe harbor, but we believe that the arrangements are in compliance with the current requirements of applicable federal and state law because, among other factors, we believe the fees payable under the arrangements are consistent with fair market value of the services provided.

We believe we have structured our relationships with physicians and other providers to comply with the Anti-Kickback Statute, but we cannot assure you that a federal or state agency charged with enforcement of the Anti-Kickback Statute and similar laws might not assert a contrary position or that new federal or state laws might not be enacted that would cause these arrangements to become illegal, or result in the imposition of penalties on us or certain of our facilities. Even the assertion of a violation could have a material adverse effect upon us.
Many of the states in which we operate have adopted laws that prohibit payments to physicians in exchange for referrals similar to the federal Anti-Kickback Statute, some of which apply regardless of the source of payment for care. These statutes typically provide criminal and civil penalties as well as loss of licensure.
In addition to the Anti-Kickback Statute, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) provides for criminal penalties for healthcare fraud offenses that apply to all health benefit programs, including the payment of inducements to Medicare and Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner. Federal enforcement officials have numerous enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud.

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Evolving interpretations of current, or the adoption of new, federal or state laws or regulations could affect many of our arrangements. Law enforcement authorities, including the OIG, the courts and Congress, are increasing their scrutiny of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals or opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purposes of payments between healthcare providers and potential referral sources.
Prohibition on Certain Self-Referrals and Physician Ownership of Healthcare Facilities. The federal physician self-referral law, commonly referred to as the Stark Law, prohibits a physician from making a referral for a designated health service to an entity if the physician or a member of the physician’s immediate family has a financial relationship with the entity, unless an exception applies. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, civil money penalties of up to $15,000 per prohibited service provided and exclusion from the federal healthcare programs. The Bipartisan Budget Act of 2015 requires these penalties to increase by up to 150% in 2016, and annually thereafter as described above. Failure to refund amounts received as a result of a prohibited referral on a timely basis may constitute a false or fraudulent claim and may result in civil penalties and additional penalties under the FCA. The Stark Law applies to referrals involving the following services under the definition of “designated health services”: clinical laboratory services; physical therapy services; occupational therapy services; radiology and imaging services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. Through a series of rulemakings, CMS has issued final regulations interpreting the Stark Law. While the regulations help clarify the requirements of the exceptions to the Stark Law, it is difficult to determine how the government will interpret many of these exceptions for enforcement purposes.
A number of provisions of the Stark Law implemented regulations to limit how the Stark Law affects ASCs. Under these regulations, services that would otherwise constitute a designated health service, but that are paid by Medicare as a part of the surgery center payment rate, are not a designated health service for purposes of the Stark Law. The so-called ASC exemption to the Stark Law also applies to any radiology and imaging procedures that are integral to a covered ASC surgical procedure and that are performed immediately before, during, or immediately following the surgical procedure (that is, on the same day). Similarly, CMS has excluded from the Stark Law definition of “outpatient prescription drugs” any drugs that are “covered as ancillary services” under the revised ASC payment system. These drugs include those furnished during the immediate postoperative recovery period to a patient to reduce suffering from nausea or pain. CMS cautioned, however, that only those radiology, imaging and outpatient prescription drug items and services that are integral to an ASC procedure and performed on the same day as the covered surgical procedure will qualify for the ASC exemption. The Stark Law prohibition continues to prohibit a physician-owned ASC from furnishing outpatient prescription drugs for use in a patient’s home. In addition, there is a Stark Law exception covering implants, prosthetics, implanted prosthetic devices and implanted durable medical equipment provided in a surgery center setting under certain circumstances. Because of these exemptions, we believe the Stark Law does not prohibit physician ownership or investment interests in our surgery centers to which they refer patients.
 
With respect to our outsourced physician services, we contract with hospitals and other providers of designated health services. Our physician practices also provide services, such as imaging and laboratory services, that constitute designated health services. Thus, we are required to structure our financial relationships involving providers of designated health services in a manner that complies with a Stark Law exception. There are a number of exceptions that may apply to our outsourced physician services, including the exceptions for bona fide employment relationships, indirect compensation arrangements and in-office ancillary services. We attempt to structure our relationships to meet an exception to the Stark Law when required, but the regulations implementing the exceptions are detailed and complex, and we cannot guarantee that every relationship complies fully with the Stark Law.
Several states in which we operate have self-referral statutes similar to the Stark Law. Often these state laws are broad in scope and may apply regardless of the source of payment for care. Little precedent exists for the interpretation or enforcement of these state laws. We believe that physician ownership of surgery centers is not prohibited by these state self-referral statutes.
The Stark Law and similar state statutes are subject to different interpretations. Violations of the Stark Law and any state self-referral laws may result in substantial civil or criminal penalties, including large civil monetary penalties and exclusion from participation in the Medicare and Medicaid programs. Exclusion of our surgery centers or physician groups from these programs could result in significant loss of revenues and could have a material adverse effect on us. We can give no assurances that further judicial or agency interpretations of existing laws or further legislative restrictions on physician ownership or investment in, or financial relationships with, healthcare entities will not be issued that could have a material adverse effect on us.

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The Federal False Claims Act and Similar Federal and State Laws. We are subject to state and federal laws that govern the submission of claims for reimbursement. These laws generally prohibit an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) for payment from Medicare, Medicaid or other third-party payors that is false or fraudulent. Penalties under these statutes include substantial civil and criminal fines, exclusion from the Medicare program, and imprisonment. The standard for “knowing and willful” often includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. One of the most prominent of these laws is the federal FCA, which may be enforced by the federal government directly, or by a qui tam plaintiff (or whistleblower) on the government’s behalf. There are many potential bases for liability under the FCA, including knowingly and improperly avoiding repayment of an overpayment received from the government and the knowing failure to report and return an overpayment within 60 days of identifying the overpayment. The Health Reform Law expanded the scope of the federal FCA to cover payments in connection to the exchanges created under the Health Reform Law, if those payments include any federal funds. When a private plaintiff brings a qui tam action under the FCA, the defendant often will not be made aware of the lawsuit until the government commences its own investigation or makes a determination whether it will intervene. The Health Reform Law provides that submission of claims for services or items generated in violation of the Anti-Kickback Statute constitutes a false or fraudulent claim under the FCA. In some cases, qui tam plaintiffs and the federal government have taken the position, and some courts have held, that providers who allegedly have violated other statutes, such as the Stark Law, have thereby submitted false claims under the FCA. When a defendant is determined by a court of law to be liable under the FCA, the defendant may be required to pay three times the amount of the alleged false claim, plus mandatory civil penalties of between $5,500 and $11,000 for each separate false claim. These penalties will increase by up to 150% by August 1, 2016, and will increase annually thereafter, as described above. The private plaintiff may receive a share of any settlement or judgment. We believe that we have procedures in place to ensure the accurate completion of claims forms and requests for payment. However, the laws and regulations defining proper Medicare or Medicaid billing are complex and have not been subjected to extensive judicial or agency interpretation. Billing errors can occur despite our best efforts to prevent or correct them, and we cannot assure you that the government will regard such errors as inadvertent and not in violation of the FCA or related statutes.
Every entity that receives at least $5.0 million annually in Medicaid payments must have written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the federal FCA, and similar state laws. A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own qui tam provisions whereby a private party may file a civil lawsuit in state court. States that enact false claims laws that are comparable to the federal FCA are entitled to an increased share of FCA recoveries.
Healthcare Industry Investigations. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including referral relationships and billing practices. The Health Reform Law includes additional federal funding of $350 million over 10 years to fight healthcare fraud, waste and abuse, including $30 million for FFY 2016. From time to time, the OIG and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Some of our activities could become the subject of governmental investigations or inquiries. For example, we have significant Medicare billings and we have joint venture arrangements involving physician investors. In addition, our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. We are not aware of any governmental investigations involving any of our facilities, our executives or our managers. A future adverse investigation of us, our executives or our managers could result in significant expense to us, as well as adverse publicity.
Privacy and Security Requirements. There are currently numerous legislative and regulatory initiatives at the state and federal levels addressing the privacy and security of patient health and other identifying information. The privacy and security regulations promulgated pursuant to HIPAA extensively regulate the use and disclosure of individually identifiable protected health information and require “covered entities,” including healthcare providers, to implement administrative, physical and technical safeguards to protect the security of such information. Violations of the regulations may result in criminal penalties and civil penalties of up to $50,000 per violation and a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. HHS enforces HIPAA and is required to perform compliance audits. State attorneys general are also authorized to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents. A covered entity may be subject to penalties as a result of a business associate (an entity that handles identifiable health information on behalf of a covered entity) violating HIPAA if the business associate is found to be an agent of the covered entity. Business associates are also directly subject to certain provisions of the HIPAA security and privacy regulations and may be penalized for violations of the regulations. Covered entities must report breaches of unsecured protected health information to affected individuals without unreasonable delay, but not to exceed 60 days following discovery of the breach by the covered entity or its agents. Notification must also be made to HHS and, in certain situations involving large breaches, to the media. There is a presumption that all non-permitted uses or disclosures of unsecured protected health information are breaches unless the covered

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entity or business associate establishes that there is a low probability the information has been compromised.
In addition, there are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns. Our facilities remain subject to any federal or state laws that encompass privacy concerns or the reporting of security breaches that are more restrictive than the regulations issued under HIPAA. These laws vary and could impose additional penalties. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving certain individually identifiable health or financial information. In some cases, the Federal Trade Commission uses its consumer protection authority to initiate enforcement actions in response to data breaches.
HIPAA Administrative Simplification Requirements. Pursuant to HIPAA, HHS has adopted regulations establishing electronic data transmission standards that all healthcare providers must use when submitting or receiving certain healthcare transactions electronically. HIPAA also requires that each provider use a National Provider Identifier. In addition, CMS requires the use of standard code sets to report certain medical diagnoses and procedures. As of October 1, 2015, the use of the ICD-10 code set is mandatory for all healthcare providers covered by HIPAA. Transitioning to the ICD-10 coding system involved significant administrative changes, including modifying our payment systems and processes. In addition to these upfront transition costs, any difficulty or delays in payors and other providers transitioning to this significantly more detailed code set could disrupt or delay payment due to technical or coding errors or other implementation issues. Further, the transition to the more detailed ICD-10 coding system could result in decreased reimbursement if the use of ICD-10 codes results in conditions being reclassified with lower levels of reimbursement than assigned under the previous system, however, we believe that the cost of compliance with these regulations has not had and is not expected to have a material adverse effect on our business, financial position or results of operations.
Obligations to Buy Out Physician Partners. Under many of our agreements with physician partners of our surgery centers, we are obligated to purchase the interests of the physicians at an amount as specified in the limited partnership and operating agreements in the event that their continued ownership of interests in the limited partnerships and limited liability companies becomes prohibited by the statutes or regulations described above. The determination of such a prohibition generally is required to be made by our counsel in concurrence with counsel of the physician partners or, if they cannot concur, by a nationally recognized law firm with expertise in healthcare law jointly selected by us and the physician partners. The interest we are required to purchase will not exceed the minimum interest required as a result of the change in the law or regulation causing such prohibition.
Certificates of Need (CONs) and State Licensing. CON statutes and regulations control the development of certain facilities and services, such as ASCs in certain states. CON statutes and regulations generally provide that, prior to the expansion of existing centers, the construction of new health care facilities, the acquisition of major items of equipment or the introduction of certain new services, approval must be obtained from the designated state health planning agency. In giving approval, a designated state health planning agency must determine that a need exists for expanded or additional facilities or services. Our development of ASCs focuses on states that do not require CONs. Acquisitions of existing surgery centers usually do not require CON approval.
 
State licensing of ASCs, is generally a prerequisite to the operation of each of our centers and to participation in federally funded programs, such as Medicare and Medicaid. Once a center becomes licensed and operational, it must continue to comply with federal, state and local licensing and certification requirements, as well as local building and safety codes. In addition, every state imposes licensing requirements on individual physicians, such as those who provide services in our ASCs or through our outsourced physician services, and many states impose licensing requirements on facilities and services operated and owned by physicians. Physician practices are also subject to federal, state and local laws dealing with issues such as occupational safety, employment, medical leave, insurance regulations, civil rights and discrimination and medical waste and other environmental issues.
Corporate Practice of Medicine. The laws of several states in which we operate or may operate in the future do not permit business corporations to practice medicine, exercise control over physicians who practice medicine or engage in various business practices, such as employing physicians and certain non-physician practitioners. Similarly, many states prohibit fee-splitting arrangements with physicians where professional fees of physicians are shared with other persons or entities. The physicians who perform procedures at the surgery centers or who perform contracted physician services are individually licensed to practice medicine. In most instances within our surgery center line of business, the physicians and physician group practices are not affiliated with us other than through the physicians’ ownership in the limited partnerships and limited liability companies that own the surgery centers and through the service agreements we have with some physicians. We directly employ nearly all of the physicians who provide outsourced services. The laws in many states regarding the corporate practice of medicine have been subjected to limited judicial and regulatory interpretation, and interpretation and enforcement of these laws vary significantly from state to state. Therefore, we cannot provide assurances that our activities, if challenged, will be found to be in compliance with these laws.

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Item 1.  Business - (continued)

Employees
 
As of December 31, 2015, we and our affiliated entities employed approximately 12,400 persons, approximately 9,000 of whom were full-time employees and 3,400 of whom were part-time employees. Of those employees, we lease the services of approximately 900 full-time employees and 500 part-time employees from entities affiliated with our physician partners. We employ approximately 1,700 corporate employees or other employees performing support functions, primarily based at our headquarters in Nashville, Tennessee and in Sunrise, Florida. In addition, none of these employees are represented by a union. We believe our relationships with our employees to be good.

Environmental Matters

We are subject to federal, state and local laws and regulations relating to hazardous materials, pollution and the protection of the environment. Such regulations include those governing emissions to air, discharges to water, storage, treatment and disposal of wastes, including medical waste, remediation of contaminated sites, and protection of worker health and safety. These laws and regulations frequently change and have become increasingly stringent over time. Non-compliance with these laws and regulations may result in significant fines or penalties or limitations on our operations or claims for remediation costs, as well as alleged personal injury or property damages. Certain environmental laws and regulations impose strict, and under certain circumstances joint and several, liability for investigation and remediation of the release of regulated substances into the environment. Such liability can be imposed on current or former owners or operators of contaminated sites, or on persons who dispose or arrange for disposal of wastes at a contaminated site.

Support Infrastructure and Technology

To support our clinical staff and client facilities, we maintain an infrastructure that provides clinical, administrative and business support services to physicians, other healthcare professionals and administrative staff. These support services include but are not limited to:

non-clinical operation management;
physician and allied care recruiting;
revenue cycle management;
compliance, education and oversight;
managed care contracting with third-party payors;
information technology;
human resources;
risk management;
quality improvement; and
credentialing.

These support services are critical to the success of our physician partners and employed healthcare professionals. We have a support staff that assists in the efforts to obtain accreditation at each of our ASCs. Personnel located at our corporate headquarters primarily provide these services, but we also have regional offices where we have substantial operations. These services allow us to leverage our operational excellence and existing infrastructure to provide services to our clients, employees and physician partners. Our infrastructure has enabled us to integrate newly developed or acquired ASCs or physician group practices while achieving significant economies of scale.

We have invested in and developed management information systems that support our current operations and that management believes will support our projected growth. We purchase hardware and software that has been customized for us, as well as develop our own technology in both our clinical and administrative areas, which we believe may provide a competitive advantage over local, regional and emerging national providers. There are several applications currently in use and under development that provide the foundation for our day-to-day operations, including:

Billing services- Billing systems that perform facilities-based revenue cycle management for each of the specialties in which we provide physician services, as well as for many of our ASCs.
Enterprise management- Enterprise-wide reporting systems that are used for all essential accounting and finance functions, which include both integrated human resource and payroll functions.
Recruitment and business development- A third-party database used by our business development departments and our physician recruitment subsidiary, Tiva Healthcare. This application is primarily used to develop a database of medical professionals that can be targeted in the recruitment process and also to manage other aspects of the recruitment and hiring process.

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Web-based applications- Our web-based comprehensive neonatal clinical electronic health record system, which is used in each of the facilities where we provide NICU and newborn nursery services to gather all pertinent clinical data from our patients to determine outcomes. Our web-based portal providing physician partners with access to financial information, financial and quality benchmarking reports along with best practices from the ambulatory services segment community of centers and peer, physician-to-physician, insights on latest technologies and therapies.

Insurance and Legal Proceedings

From time to time, we may be named a party to other legal claims and proceedings in the ordinary course of business. We are not aware of any claims or proceedings against us or our subsidiaries that we believe will have a material financial impact on our consolidated financial condition, results of operations or cash flows.
Our ambulatory services segment maintains professional and general liability insurance that, subject to certain deductibles, provides coverage on a claims-made basis of generally $1.0 million per incident and $3.0 million in annual aggregate coverage per surgery center, including the facility and employed staff. In addition, physicians who provide professional services in our surgery centers are generally required to maintain separate malpractice coverage with similar minimum coverage limits. We also maintain insurance for general liability, director and officer liability, business interruption and property damage, as well as an additional umbrella liability insurance policy in the aggregate amount of $25.0 million. Coverage under certain of these policies is contingent upon the policy being in effect when a claim is made regardless of when the events which caused the claim occurred.

Given the nature of the services provided, our physician services segment is subject to professional and general liability claims and related lawsuits in the ordinary course of business. We maintain professional insurance for our physician services segment with third-party insurers generally on a claims-made basis, subject to self-insured retentions, exclusions and other restrictions. A substantial portion of our professional liability loss risks are being provided by a third-party insurer which is fully reinsured by our wholly-owned captive insurance subsidiary. In addition, our wholly-owned captive insurance subsidiary provides stop loss coverage for the self-insured employee health program for employees of our physician services segment. The assets, liabilities and results of operations of our wholly-owned captive insurance subsidiary are included in our consolidated financial statements. The liabilities for self-insurance include estimates of the ultimate costs related to both reported claims on an individual and aggregate basis and unreported claims. 

Our reserves for professional liability claims are based upon periodic actuarial calculations. Our reserves for losses and related expenses represent estimates involving actuarial and statistical projections, at a given point in time, of our expectation of the ultimate resolution plus administration costs of the losses that we have incurred. Our reserves are based on historical claims, demographic factors, industry trends, severity and exposure factors and other actuarial assumptions calculated by an independent actuarial firm. The independent actuarial firm performs studies of projected ultimate losses on an annual basis and provides semi-annual updates to those projections. We refer to these actuarial estimates as part of our process by which we determine appropriate reserves. Liabilities for claims incurred but not reported are not discounted. The estimation of professional liabilities is inherently complex and subjective, as these claims are typically resolved over an extended period of time, often as long as ten years or more. We periodically reevaluate our accruals for professional liabilities, and our actual results may vary significantly from our estimates as the key assumptions used in our actuarial valuations are subject to constant adjustment as a result of changes in our actual loss history and the movement of projected emergence patterns as claims develop.

Antitrust

The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, market allocation, bid-rigging, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the health care industry is currently a priority of the Federal Trade Commission and the Department of Justice. We believe we are in compliance with such federal and state laws, but courts or regulatory authorities may reach a determination in the future that could adversely affect our operations.

Seasonality

Historically, the impact of seasonal effects on our revenues and operating results have been dampened due to growth from acquisitions as well as our geographic diversification. Without giving effect to these growth and diversification factors and with the exception of emergency medicine and children's services, our net revenue would fluctuate based on the number of business days in each calendar quarter, because the majority of medical services provided by our anesthesiology, office-based practices and ambulatory surgery centers consist of scheduled procedures and office visits that occur during business hours. Our net revenue would also be impacted by

23


Item 1.  Business - (continued)

unpredictable weather events such as snowstorms or hurricanes that reduce the number of days of operations as well as the number of patients. Revenue in the fourth quarter could also be impacted by an increased utilization of services as patients try to utilize their healthcare benefits before they expire at year-end. In addition, we incur a significantly higher payroll tax expense during the first and second quarters due to a significant number of our employees exceeding the level of taxable wages for social security contributions during the second half of the year.

Available Information
 
We file reports with the Securities and Exchange Commission (SEC) including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time.  The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  We are an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements and other information filed electronically. Our website address is:  http://www.amsurg.com.  We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.  In addition we use our Facebook page (https://www.facebook.com/AMSURG) and Twitter account (https://twitter.com/amsurgcorp) as channels of distribution of company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. The information provided on our website and social media channels is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this annual report on Form 10-K.

Executive Officers of the Registrant
 
The following table sets forth certain information regarding the persons serving as our executive officers.  Our executive officers serve at the pleasure of the Board of Directors.

Name
 
Age
 
Experience
Christopher A. Holden
 
51
 
Chief Executive Officer and Director since October 2007; Senior Vice President and a Division President of Triad Hospitals Inc. from May 1999 to July 2007.
Claire M. Gulmi
 
62
 
Executive Vice President since February 2006; Chief Financial Officer since September 1994; Director since May 2004; Senior Vice President from March 1997 to February 2006; Secretary since December 1997; Vice President from September 1994 through March 1997.
Robert J. Coward
 
51
 
President - Physician Services Division and Chief Development Officer since November 2014; President and Chief Operating Officer of Sheridan Healthcare from January 2010 to July 2014; Chief Financial Officer and Senior Vice President of Operations of Sheridan Healthcare from January 2000 to December 2009.
Phillip A. Clendenin
 
51
 
President - Ambulatory Services Division since November 2014; Executive Vice President-Operations since February 2013; Senior Vice President of Corporate Services from March 2009 to February 2013; Chief Executive Officer of River Region Health System, a hospital located in Vicksburg, Mississippi, from July 2001 to July 2008; Chief Executive Officer of Greenview Regional Hospital, a hospital located in Bowling Green, Kentucky, from November 1997 to June 2001.
Kevin D. Eastridge
 
50
 
Senior Vice President of Finance since July 2008; Vice President of Finance from April 1998 to July 2008; Chief Accounting Officer since July 2004; Controller from March 1997 to June 2004.


24


Item 1A.   Risk Factors


The following factors affect our business and the industry in which we operate. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also have an adverse effect on us. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.

Risk Related to Our Overall Business

Our physician services segment operates in a different line of business from our historical operations, and we may face challenges managing our physician services segment as a new business and may not realize anticipated benefits. As a result of the Sheridan acquisition, we are now significantly engaged in the outsourced physician services business, which is a new line of business for us. We may not have the expertise, experience, and resources necessary to successfully operate both our ambulatory services segment and physician services segment. The administration of our physician services segment will require implementation of appropriate operations, management, and financial reporting systems and controls. We may experience difficulties in effectively implementing these and other systems. The management of our physician services segment will require the focused attention of our management team, including a significant commitment of its time and resources. The need for management to focus on these matters could have a material and adverse impact on our revenues and operating results. If our physician services segment operations are less profitable than we currently anticipate or we do not have the experience, the appropriate expertise, or the resources to operate all businesses in the combined company, our results of operations and financial condition may be materially and adversely affected.

We have been and could become the subject of federal and state investigations and compliance reviews. Health care companies are subject to numerous investigations by various governmental agencies. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including referral and billing practices. Further, the federal FCA permits private parties to bring qui tam or “whistleblower” lawsuits against companies. Some states have adopted similar state whistleblower and false claims provisions.

From time to time, the OIG and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Some of our activities could become the subject of governmental investigations or inquiries.  For example, we have significant Medicare billings and we have joint venture arrangements involving physician investors. In addition, our executives and managers, some of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. Governmental agencies and their agents conduct audits of health care providers, and private payers may conduct similar audits, investigations and monitoring activities. An investigation or audit of us, our executives or our managers could result in significant expense to us, adverse publicity, and divert management’s attention from our business, regardless of the outcome, and could result in significant penalties. Depending on nature of the conduct and whether the underlying conduct under investigation or audit could be considered systemic, the resolution of any review could have a material adverse effect on our financial position, results of operations and liquidity.

We are unable to predict the impact of the Health Reform Law. The Health Reform Law represents significant change across the healthcare industry. The Health Reform Law expands coverage of uninsured individuals through a combination of public program expansion and private sector health insurance reforms, which we believe has resulted in an increased volume for certain procedures and in patients seeking care from us. The law also contains requirements and incentives that increase coverage, without cost-sharing, of certain preventive services performed at our centers, including screening colonoscopies. However, the impact of the increased volume in patients and procedures or additional coverage of our services by third-party payors could be offset by other provisions of the law. The Health Reform Law provides for reductions in reimbursement under the Medicare program, including an annual payment update, such as the annual productivity adjustment that reduces payments to ASCs and reductions in payments to hospitals, which could indirectly impact our physician services business. Further, ACOs or other coordinated care models may increase competition for patients and negatively impact our centers and medical practices. In addition, the law requires CMS to implement a number of programs and requirements intended to transform Medicare from a passive volume-based payment system to an active purchaser of quality goods and services. These efforts directly impact hospitals, but may also potentially reduce the level of utilization by, and payments received from, hospitals for our physician services business. We are unable to predict the net effect of the reductions in Medicare spending, potential increases in revenues from a rise in procedure volume and individuals with health insurance, and an increase in other models care delivery and service providers.

Further, the Health Reform Law remains subject to legislative efforts to repeal, modify or delay the law, and a number of court challenges to its constitutionality and interpretation. In addition, while most of the provisions of the Health Reform Law are in effect, certain delays have occurred. For example, the excise tax on high-cost employer-sponsored health insurance plans, commonly known as the “Cadillac Tax”, has been delayed for two years and, therefore, will not take effect until 2020.

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Item 1A.   Risk Factors - (continued)

Because of the many variables involved, including the law’s complexity, lack of comprehensive implementing definitive regulations or interpretive guidance, gradual or partially delayed implementation, court challenges, the possibility of amendments, repeal, or further implementation delays, uncertainty regarding how individuals and employers will respond to the choices afforded them by the law, and numerous other provisions in the law that may affect us, we cannot predict the full impact of the Health Reform Law on us at this time.

Treatment methodologies and governmental or commercial health insurance controls designed to reduce the number of surgical procedures may reduce our revenue and profitability. Controls imposed by Medicare and Medicaid, employer-sponsored healthcare plans and commercial health insurance payors designed to reduce surgical volumes, in some instances referred to as “utilization review,” could adversely affect our facilities and medical practices. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees may reduce our revenue and profitability. Additionally, trends in treatment protocols and commercial health insurance plan design, such as plans that shift increased costs and accountability for care to patients, could reduce our surgical volumes in favor of lower intensity and lower cost treatment methodologies, each of which could, in turn, have a material adverse effect on our business, prospects, results of operations and financial condition.

If we fail to implement our business strategy, our financial performance and our growth could be materially and adversely affected. Our future financial performance and success are dependent in large part upon our ability to implement our business strategy successfully. Our business strategy includes several initiatives, including maintaining our existing relationships with our physician partners at our surgery centers, our physician services segment clients and our employed healthcare professionals; acquiring additional surgery centers and physician practices; winning contracts with new physician services clients; pursuing joint ventures with local and regional health systems; capitalizing on organic growth opportunities in both our ambulatory services segment and physician services segment; and enhancing operational efficiencies. We may not be able to implement our business strategy successfully or achieve the anticipated benefits of our business strategy. Implementation of our business strategy could also be affected by a number of factors beyond our control, such as increased competition, regulatory developments, general economic conditions or increased operating costs or expenses. In addition, to the extent we have misjudged the nature and extent of industry trends or our competition, we may have difficulty in achieving our strategic objectives. If we are unable to execute our strategy, our long-term growth, profitability, and ability to service our debt will be adversely affected. Even if we are able to implement some or all of the initiatives of our business strategy successfully, our operating results may not improve to the extent we anticipate, or at all.

Our success depends on our ability to manage growth effectively. Even if we are successful in obtaining new business, failure to manage our growth could adversely affect our financial condition. We may experience extended periods of very rapid growth, and if we are not able to manage our growth effectively, our business and financial condition could materially suffer. Our growth may significantly strain our managerial, operational and financial resources and systems. To manage our growth effectively, we will have to continue to implement and improve our operational, financial and management controls, reporting systems and procedures. In addition, we must effectively expand, train and manage our employees. We will be unable to manage our businesses effectively if we are unable to alleviate the strain on resources caused by growth in a timely and successful manner.

We may make acquisitions which could divert the attention of management and may not be integrated successfully into our existing business. A portion of our growth has resulted from, and is expected to continue to result from, the acquisition of surgery centers, physician groups and other healthcare providers and businesses. We may continue to pursue acquisitions to increase our presence in existing markets, enter new geographic markets and expand the scope of services we provide. We have evaluated and expect to continue to evaluate possible acquisition targets on an ongoing basis, and such acquisition targets may be of significant size and involve operations in multiple jurisdictions. We cannot assure you that we will identify suitable acquisition candidates, acquisitions will be completed on acceptable terms, our due diligence process will uncover all potential liabilities or issues affecting our integration process, we will not incur break-up, termination or similar fees and expenses and/or we will obtain all necessary or expected consents from third parties. We cannot assure you that we will be able to integrate successfully the operations of any acquired business into our existing business. In particular, we may experience challenges relating to the retention of physicians and other healthcare professionals of our acquired businesses or the integration of such healthcare professionals. Furthermore, acquisitions into new geographic markets and services may require us to comply with new and unfamiliar legal and regulatory requirements, which could impose substantial obligations on us and our management, cause us to expend additional time and resources, and increase our exposure to penalties or fines for non-compliance with such requirements. The acquisition and integration of another business could divert management attention from other business activities. This diversion, together with other difficulties we may incur in integrating an acquired business and managing the cost of acquisitions could adversely affect our business, financial condition and results of operations.


26


Item 1A.   Risk Factors - (continued)

Our substantial indebtedness could adversely affect our ability to raise additional capital to fund our growth strategy, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk to the extent of any variable rate debt, and prevent us from meeting our obligations under our indebtedness. As of December 31, 2015, our total indebtedness was approximately $2.4 billion, of which approximately $1.0 billion is exposed to variable rates and an additional $325.0 million available for borrowings under our senior secured revolving credit facility which is also subject to a variable rate. Our substantial indebtedness could have adverse consequences, including:

increasing our vulnerability to adverse economic, industry, or competitive developments;
requiring a substantial portion of our cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund acquisitions of additional surgery centers and physician practice groups, capital expenditures, and future business opportunities;
exposing us to the risk of increased interest rates to the extent of any future borrowings, including borrowings under our senior secured credit facility, at variable rates of interest;
making it more difficult for us to satisfy our obligations with respect to our indebtedness, including our senior secured credit facility, our 2020 senior notes and our 2022 senior notes, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under our senior secured credit facility, the indentures governing the notes and the agreements governing other indebtedness;
limiting our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, acquisitions, and general corporate or other purposes; and
limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less leveraged and who, therefore, may be able to take advantage of opportunities that our leverage may prevent us from exploiting.

Despite our indebtedness level, we and our subsidiaries will still be able to incur significant additional amounts of debt, including secured debt, which could further exacerbate the risks associated with our substantial indebtedness. We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although our senior secured credit facility and the indentures governing our senior notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to our and our subsidiaries’ existing debt levels, the related risks that we now face would increase. In addition, our senior secured credit facility and the indentures governing our senior notes will not prevent us from incurring obligations that do not constitute prohibited indebtedness thereunder.

Servicing our debt requires a significant amount of cash. Our ability to generate sufficient cash depends on numerous factors beyond our control, and we may be unable to generate sufficient cash flow to service our debt obligations. Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital, or restructure or refinance our indebtedness. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. The terms of existing or future debt instruments, including the senior secured credit facility, the indentures governing our senior notes, may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on our outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

Restrictive covenants in our senior secured credit facility and the indentures governing our senior notes may restrict our ability to pursue our business strategies, and failure to comply with any of these restrictions could result in acceleration of our debt. The operating and financial restrictions and covenants in our senior secured credit facility and the indentures governing our senior notes may adversely affect our ability to finance future operations or capital needs or to engage in other business activities. Such agreements limit our ability, among other things, to:
incur additional indebtedness or issue certain preferred equity;
pay dividends on, repurchase or make distributions in respect of our common stock, prepay, redeem, or repurchase certain debt or make other restricted payments;

27


Item 1A.   Risk Factors - (continued)

make certain investments;
create certain liens;
enter into agreements restricting our subsidiaries’ ability to pay dividends, loan money, or transfer assets to us;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
designate our subsidiaries as unrestricted subsidiaries.

A breach of any of these covenants could result in a default under one or more of these agreements, including as a result of cross default provisions and, in the case of the senior secured credit facility, permit the lenders to cease making loans to us. Upon the occurrence of an event of default under the senior secured credit facility or the indentures governing our senior notes, the creditors thereunder could elect to declare all amounts outstanding to be immediately due and payable and, in the case of our revolving credit facility, which is a part of the senior secured credit facility, terminate all commitments to extend further credit. Such action by our creditors could cause cross defaults under the indentures governing our senior notes.

If our operating performance declines, we may be required to obtain waivers from the lenders under the senior secured credit facility, from the holders of our senior notes or from the holders of other obligations, to avoid defaults thereunder. If we are not able to obtain such waivers, our creditors could exercise their rights upon default, and we could be forced into bankruptcy or liquidation.

Furthermore, if we were unable to repay the amounts due and payable under our secured obligations, the creditors thereunder could proceed against the collateral granted to them to secure our obligations thereunder. We have pledged a significant portion of our assets, including our ownership interests in certain of our directly owned subsidiaries, as collateral under our senior secured credit facility. If the creditors under our senior secured credit facility accelerate the repayment of our debt obligations, we cannot assure you that we will have sufficient assets to repay our senior secured credit facility, our senior notes and our other indebtedness, or will have the ability to borrow sufficient funds to refinance such indebtedness. Even if we were able to obtain new financing, it may not be on commercially reasonable terms, or terms that are acceptable to us.

We are a holding company and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations. We are a holding company, and our principal assets are the ownership interests in our subsidiaries that own substantially all of our operating assets. As a result, we are dependent on dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. If we are unable to obtain funds from our subsidiaries, we may be unable to meet our financial obligations.

If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations. The health care industry is heavily regulated and we are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to among other things:

billing and coding for services, including documentation of care, appropriate treatment of overpayments and credit balances, and the submission of false statements or claims;
relationships and arrangements with physicians and other referral sources and referral recipients, including self-referral restrictions, prohibitions on kickbacks and other non-permitted forms of remuneration and prohibitions on the payment of inducements to Medicare and Medicaid beneficiaries in order to influence their selection of a provider;
licensure, certification, enrollment in government programs and CON approval, including requirements affecting the operation, establishment and addition of services and facilities;
the necessity, appropriateness, and adequacy of medical care, equipment, and personnel and conditions of coverage and payment for services;
quality of care and data reporting;
restrictions on ownership of surgery centers;
operating policies and procedures;
qualifications, training and supervision of medical and support personnel;
fee-splitting and the corporate practice of medicine;
screening, stabilization and transfer of individuals who have emergency medical conditions;
workplace health and safety;
debt collection practices;
anti-competitive conduct;
confidentiality, maintenance, data breach, identity theft and security issues associated with health-related and other personal information and medical records; and
environmental protection.

28


Item 1A.   Risk Factors - (continued)

Because of the breadth of these laws and the narrowness of available exceptions and safe harbors, it is possible that some of our business activities could be subject to challenge under one or more of these laws. For example, failure to bill properly for services or return overpayments and violations of other statutes, such as the federal Anti-Kickback Statute or the federal Stark Law, may be the basis for actions under the FCA or similar state laws. Criminal penalties may be imposed for healthcare fraud offenses involving not just federal healthcare programs but also private health benefit programs.

Enforcement actions under some statutes, including the FCA, may be brought by the government as well as by a private person under a qui tam or “whistleblower” lawsuit. Federal enforcement officials have numerous enforcement mechanisms to combat fraud and abuse, including bringing civil actions under the Civil Monetary Penalty Law, which has a lower burden of proof than criminal statutes. 

If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including fines, damages, recoupment of overpayments, loss of licenses needed to operate, and loss of enrollment and approvals necessary to participate in Medicare, Medicaid and other government sponsored and third-party healthcare programs. Federal enforcement officials have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud. 

Many of these laws and regulations have not been fully interpreted by regulatory authorities or the courts, and their provisions are sometimes open to a variety of interpretations. Different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or require us to make changes in our operations, facilities, equipment, personnel, services, capital expenditure programs or operating expenses to comply with the evolving rules. Any enforcement action against us, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

The laws and regulations governing the provision of healthcare services are frequently subject to change and may change significantly in the future. We cannot assure you that current or future legislative initiatives, government regulation or judicial or regulatory interpretations thereof will not have a material adverse effect on us. We cannot assure you that a review of our business by judicial, regulatory or accreditation authorities will not subject us to fines or penalties, require us to expend significant amounts, reduce the demand for our services or otherwise adversely affect our operations.

Our relationships with referral sources and recipients, including healthcare providers, facilities and patients, are subject to the federal Anti-Kickback Statute and similar state laws. The federal Anti-Kickback Statute prohibits healthcare providers and others from knowingly and willfully soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for, or to induce, referrals or orders for services or items covered by a federal healthcare program. In addition, many of the states in which we operate also have adopted laws, similar to the federal Anti-Kickback Statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care. The federal Anti-Kickback Statute and similar state laws are broad in scope and many of their provisions have not been uniformly or definitively interpreted by case law or regulations.  Courts have found a violation of the federal Anti-Kickback Statute if just one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. Furthermore, the Health Reform Law provides that knowledge of the law or intent to violate the law is not required to establish a violation of the federal Anti-Kickback Statute. Congress and HHS have established narrow safe harbor provisions that outline practices deemed protected from prosecution under the federal Anti-Kickback Statute. While we endeavor to comply with applicable safe harbors, certain of our current arrangements, including the ownership structures of our surgery centers, do not satisfy all of the requirements of a safe harbor. Failure to qualify for a safe harbor does not mean the arrangement necessarily violates the federal Anti-Kickback Statute, but may subject the arrangement to greater scrutiny. Violations of the federal Anti-Kickback Statute and similar state laws may result in substantial civil or criminal penalties, exclusion from participation in the Medicare and Medicaid programs and loss of licensure, which could have a material adverse effect on our business.

If regulations or regulatory interpretations change, we may be obligated to buy out interests of physicians who are minority owners of our surgery centers. A majority of our limited partnership and operating agreements provide that if certain regulations or regulatory interpretations change, we will be obligated to purchase some or all of the noncontrolling interests of our physician partners. The regulatory changes that could trigger such obligations include changes that:

make the referral of Medicare and other patients to our surgery centers by physicians affiliated with us illegal;
create the substantial likelihood that cash distributions from the limited partnerships or limited liability companies to the affiliated physicians will be illegal; or
cause the ownership by the physicians of interests in the limited partnerships or limited liability companies to be illegal.

The cost of repurchasing these noncontrolling interests would be substantial if a triggering event were to result in simultaneous

29


Item 1A.   Risk Factors - (continued)

purchase obligations at a substantial number or at all of our surgery centers. The purchase price to be paid in such event would be determined as specified in each of the limited partnership and operating agreements, which also provide for the payment terms, generally over four years. There can be no assurance, however, that our existing capital resources would be sufficient for us to meet the obligations, if they arise, to purchase these noncontrolling interests held by physicians. The determination of whether a triggering event has occurred generally would be made by the concurrence of our legal counsel and counsel for the physician partners or, in the absence of such concurrence, by a nationally recognized law firm having an expertise in healthcare law jointly selected by both parties. Such determinations therefore would not be within our control. The triggering of these obligations could have a material adverse effect on our financial condition and results of operations. We believe physician ownership of ASCs as structured within our limited partnerships and limited liability companies is in compliance with applicable law, but from time to time, the issue of physician ownership in ASCs is considered by some state legislatures and federal and state regulatory agencies. We can give no assurances that legislative or regulatory changes will not occur that would have an adverse impact on us.

If we fail to successfully maintain an effective internal control over financial reporting, the integrity of our financial reporting could be compromised, which could result in a material adverse effect on our reported financial results. We have acquired entities that do not have any publicly traded debt or equity and therefore are not required to conform to the rules and regulations of the SEC, especially as it relates to internal control structure. As such, upon acquisition by us, such entities may not have had in place all the necessary controls as required by the Public Company Accounting Oversight Board. The integration of acquired entities into our internal control over financial reporting has required and will continue to require significant time and resources from our management and other personnel and will increase our compliance costs. We are required to include our assessment of the effectiveness of the internal controls over financial reporting of entities we acquire in our overall assessment. We plan to complete the evaluation and integration of internal controls over financial reporting and report our assessment within the required time frame. Failure to maintain an effective internal control environment could have a material adverse effect on our ability to accurately report our financial results, the market’s perception of our business and our stock price.

We depend on numerous complex information systems and processes, and any failure to successfully maintain them or implement new systems and processes could materially harm our business. We depend on complex, integrated information systems and procedures for operational, billing and financial information. We may experience unanticipated delays, complications and expenses in implementing, upgrading, integrating and operating our systems, which involve a variety of different processes. Any interruptions in operations during periods of implementation or upgrade would adversely affect our ability to properly allocate resources and process billing information in a timely manner, which could result in delayed cash flow. Additionally, unanticipated complications or disruptions in our systems or processes could delay or adversely affect our ability to report our required financial information in a timely and accurate manner, or we may not have the necessary resources to further enhance our information systems or implement new systems where necessary to handle our volume and changing needs. We also use the development and implementation of sophisticated and specialized technology to improve our profitability. The failure to successfully develop, implement and maintain operational, financial and billing information systems could have an adverse effect on our ability to obtain new business, retain existing business and maintain or increase our profit margins.

The transition to the ICD-10 coding system could adversely affect our operations. Health plans and providers, including our surgery centers and professionals, transitioned to the new ICD-10 coding system as of October 1, 2015. This coding system greatly expands the number and detail of billing codes used for third-party claims. Transition to the new ICD-10 system required significant investment in coding technology and software as well as the training of staff involved in the coding and billing process. In addition to these upfront costs of transitioning to ICD-10, it is possible that we could experience disruption or delays in payment due to technical or coding errors, processing and claims submission backlogs or other implementation issues involving our systems or the systems and implementation efforts of health plans and their business partners. Further, the extent to which the transition to the more detailed ICD-10 coding system could result in decreased reimbursement, because the use of ICD-10 codes results in conditions being reclassified to payment groupings with lower levels of reimbursement than assigned under the previous system, is unknown at this time.

If we are unable to effectively manage information security risks, or the security measures protecting our information technology systems are breached, we could suffer a loss of confidential data, which may subject us to liability, or a disruption of our operations. We rely on our information systems to securely transmit, store, and manage confidential data. A failure in or breach of our operational or information security systems as a result of cyber-attacks or information security breaches could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs or lead to liability under privacy and security laws, litigation, governmental inquiries, fines and financial losses. Information security risks have generally increased in recent years because of new technologies and the increased activities of perpetrators of cyber-attacks resulting in the theft of protected health information, business and financial information. Outside parties may also attempt to fraudulently induce employees to take actions, such as releasing confidential or sensitive information or making fraudulent payments, through electronic spamming, phishing or other tactics. As a result, we must continue to focus on cyber security and the continued

30


Item 1A.   Risk Factors - (continued)

development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access, and we must continue to focus on any security risks in connection with the transition and integration of information systems as we pursue our growth and acquisition strategy. Although we believe that we have appropriate information security procedures and other safeguards in place, there can be no assurance that we will not be subject to a cyber-attack. We continue to prioritize the security of our information technology systems and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from cyber-attack, damage or unauthorized access. As cyber threats continue to evolve due to the proliferation of new technologies and the increased activities by perpetrators of such attacks, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities or breaches.

Disruptions in our disaster recovery systems or management continuity planning could limit our ability to operate our business effectively. Our information technology systems facilitate our ability to conduct our business. While we have disaster recovery systems and business continuity plans in place, any disruptions in our disaster recovery systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations. Despite our implementation of a variety of security measures, our technology systems could be subject to physical or electronic break-ins, and similar disruptions from unauthorized tampering or weather related disruptions where our headquarters is located. In addition, in the event that a significant number of our management personnel were unavailable in the event of a disaster, our ability to effectively conduct business could be adversely affected.
Shortages of products, equipment and medical supplies and quality control issues with such products, equipment and medical supplies could disrupt our operations and adversely affect our operations and profitability. Our operations depend significantly upon our and our clients’ ability to obtain sufficient products, drugs, equipment and medical supplies on a timely basis. If we or our clients are unable to obtain such necessary products, or if we or our clients fail to properly manage existing inventory levels, we may be unable to perform certain surgeries or provide certain medical services, which could adversely affect our operations. In addition, as a result of shortages, we could suffer, among other things, operational disruptions, disruptions in cash flows, increased costs and reductions in profitability. At times, supply shortages have occurred in our industry, and such shortages may be expected to recur from time to time.

Medical supplies and services may be subject to supplier product quality control incidents and recalls. In addition to contributing to materials shortages, product quality can affect patient care and safety. National suppliers in our industry have experienced material quality control incidents in the past, which may occur again in the future for reasons beyond our control, and such incidents can negatively impact case volume, product costs and our reputation. In addition, we may have to incur costs to resolve quality control incidents related to medical supplies and services regardless of whether they were caused by us. Our inability to obtain the necessary amount and quality of products, equipment and medical supplies due to a quality control incident or recall could have a material adverse effect on our business, prospects, results of operations and financial condition.

We may become involved in litigation which could harm the value of our business. From time-to-time we are involved in lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, billing and marketing practices, employment disputes and contractual claims. We may become subject to future lawsuits, claims, audits and investigations that could result in substantial costs and divert our attention and resources and adversely affect our business condition. In addition, since our current growth strategy includes acquisitions, among other things, we may become exposed to legal claims for the activities of an acquired business prior to the acquisition. These lawsuits, claims, audits or investigations, regardless of their merit or outcome, may also adversely affect our reputation and ability to expand our business.

In addition, from time to time we have received, and expect to continue to receive, correspondence from former employees terminated by us who threaten to bring claims against us alleging that we have violated one or more labor and employment regulations. In certain instances former employees have brought claims against us and we expect that we will encounter similar actions against us in the future. An adverse outcome in any such litigation could require us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs.

We may be subject to liability claims for damages and other expenses not covered by insurance that could reduce our earnings and cash flows. Our operations and how we manage the Company may subject us, as well as our officers and directors to whom we owe certain defense and indemnity obligations, to litigation and liability for damages. Our business, profitability and growth prospects could suffer if we face negative publicity or we pay damages or defense costs in connection with a claim that is outside the scope or limits of coverage of any applicable insurance coverage, including claims related to adverse patient events, contractual disputes, professional and general liability, and directors’ and officers’ duties. We currently maintain insurance coverage for those risks we deem are appropriate. However, a successful claim, including a professional liability, malpractice or negligence claim which is in excess of any applicable insurance coverage, could have a material adverse effect on our earnings and cash flows.

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Item 1A.   Risk Factors - (continued)

In addition, if our costs of insurance and claims increase, then our earnings could decline. Market rates for insurance premiums and deductibles have been steadily increasing. Our earnings and cash flows could be materially and adversely affected by any of the following:

the collapse or insolvency of our insurance carriers;
further increases in premiums and deductibles;
increases in the number of liability claims against us or the cost of settling or trying cases related to those claims; or
an inability to obtain one or more types of insurance on acceptable terms, if at all.
If antitrust enforcement authorities conclude that our market share in any particular market is too concentrated, that our or our clients’ commercial payor contract negotiating practices are illegal, or that we otherwise violate antitrust laws, we could be subject to enforcement actions that could have a material adverse effect on our business, prospects, results of operations and financial condition. The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the healthcare industry is currently a priority of the Federal Trade Commission. We believe we are in compliance in all material respects with federal and state antitrust laws, but courts or regulatory authorities may reach a determination in the future that could have a material adverse effect on our business, prospects, results of operations and financial condition.

We may write-off intangible assets, such as goodwill. As a result of purchase accounting for our various acquisition transactions, our balance sheet at December 31, 2015 contained intangible assets designated as either goodwill or intangibles totaling approximately $4.0 billion in goodwill and approximately $1.6 billion in intangibles. Additional acquisitions that result in the recognition of additional intangible assets would cause an increase in these intangible assets. On an ongoing basis, we evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs.

Risks Related to Our Ambulatory Services Business

If payments from third-party payors, including government healthcare programs, decrease or do not increase as our costs increase, the operating margins and profitability of our surgery centers would be adversely affected. Our surgery centers depend on private and governmental third-party sources of payment for the services provided to patients. We derived approximately 26% of our ambulatory services segment revenues in 2015 from U.S. government healthcare programs, primarily Medicare. The amount our surgery centers receive for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including future changes to the Medicare and Medicaid payment systems and the cost containment and utilization decisions of third-party payors. Although the Health Reform Law expands coverage of preventive care and the number of individuals with healthcare coverage, the law also provides for reductions to Medicare and Medicaid program spending. It is impossible to predict how the various components of the Health Reform Law, some of which are not currently in effect, will affect our ambulatory services segment and the businesses of our physician partners. Several states are also considering healthcare reform measures. This focus on healthcare reform at the federal and state levels may increase the likelihood of significant changes affecting government healthcare programs in the future.

Managed care plans have increased their market share in many areas in which we operate surgery centers, which has resulted in substantial competition among healthcare providers for inclusion in managed care contracting. The trend toward increased consolidation among managed care plans may further limit the ability of healthcare providers to negotiate favorable payment rates. In addition, managed care payors may lower reimbursement rates in response to increased obligations on payors imposed by the Health Reform Law or future reductions in Medicare reimbursement rates. Further, payors may utilize plan structures, such as narrow networks or tiered networks that limit patient provider choices or impose significantly higher cost sharing obligations when care is obtained from providers in a disfavored tier. We can give you no assurances that future changes to reimbursement rates by government healthcare programs, cost containment measures by private third-party payors, including fixed fee schedules and capitated payment arrangements, or other factors affecting payments for healthcare services will not adversely affect our future ambulatory services segment revenues, operating margins or profitability.

Our ambulatory services business may be adversely affected by changes to the medical practices of our physician partners or if we fail to maintain good relationships with the physician partners who use our surgery centers. Our ambulatory services business depends on, among other things, the efforts and success of the physician partners who perform procedures at our surgery centers and

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Item 1A.   Risk Factors - (continued)

the strength of our relationship with these physicians. The medical practices of our physician partners may be negatively impacted by general economic conditions, changes in payment rates or systems by payors (including Medicare), actions taken by referring physicians, other providers and payors, and other factors impacting their practices. Adverse economic conditions, including high unemployment rates, could cause patients of our physician partners and our ASCs to cancel or delay procedures. Our physician partners that use our ASCs are not required to use our surgery centers and may perform procedures at other facilities. From time to time, we have had and may have future disputes with physicians who use or own interests in our surgery centers. The revenues and profitability of our ambulatory services segment may be adversely affected if a key physician or group of physicians stops using or reduces their use of our surgery centers as a result of changes in their physician practice, changes in payment rates or systems, or a disagreement with us. In addition, if the physicians who use our surgery centers do not provide quality medical care or follow required professional guidelines at our facilities or there is damage to the reputation of a physician or group of physicians who use our surgery centers, our business and reputation could be damaged.

If we are unable to increase procedure volume at our existing surgery centers, the operating margins and profitability of our ambulatory services segment could be adversely affected. Our growth strategy for our ambulatory services segment includes increasing our revenues and earnings primarily by increasing the number of procedures performed at our surgery centers. We seek to increase procedure volume at our surgery centers by increasing the number of physicians performing procedures at our centers, obtaining new or more favorable managed care contracts, improving patient flow at our centers, increasing the capacity at our centers, promoting screening programs and increasing patient and physician awareness of our centers. Procedure volume at our centers may be adversely impacted by economic conditions, high unemployment rates, natural disasters and physicians who no longer utilize our centers and other factors that may cause patients to delay or cancel procedures. We can give you no assurances that we will be successful at increasing or maintaining procedure volumes, revenues and operating margins at our centers.

If we are unable to effectively compete for physician partners, managed care contracts, patients and strategic relationships, our ambulatory services segment would be adversely affected. We compete with other healthcare providers, primarily hospitals and other surgery centers, in recruiting physicians to utilize our surgery centers, for patients and in contracting with managed care payors.  In some of the markets in which we operate, there are shortages of physicians in the targeted specialties of our surgery centers.  In several of the markets in which we operate, hospitals are recruiting physicians or groups of physicians to become employed by the hospitals, including primary care physicians and physicians in the targeted specialties of our surgery centers, and restricting those physicians’ ability to refer patients to physicians and facilities not affiliated with the hospital. In addition, physicians, hospitals, payors and other providers may form integrated delivery systems or utilize plan structures that restrict the physicians who may treat certain patients or the facilities at which patients may be treated. These restrictions may impact our surgery centers and the medical practices of our physician partners. Some of our competitors may have greater resources than we do, including financial, marketing, staff and capital resources, have or may develop new technologies or services that are attractive to physicians or patients, or have established relationships with physicians and payors.

We compete with public and private companies in the development and acquisition of ASCs. Further, many physician groups develop ASCs without a corporate partner. We can give you no assurances that we will be able to compete effectively in any of these areas or that our results of operations will not be adversely impacted.

Our surgery centers may be negatively impacted by weather and other factors beyond our control. The results of operations of our ambulatory services segment may be adversely impacted by adverse weather conditions, including hurricanes and widespread winter storms, or other factors beyond our control that cause disruption of patient scheduling, displacement of our patients, employees and physician partners, or force certain of our surgery centers to close temporarily. In certain geographic areas, we have a large concentration of surgery centers that may be simultaneously affected by adverse weather conditions or events. The future financial and operating results of our surgery centers may be adversely affected by weather and other factors that disrupt the operation of our surgery centers.

We are liable for the debts and other obligations of the limited partnerships that own and operate certain of our surgery centers.   In the limited partnerships in which one of our affiliates is the general partner, our affiliate is liable for 100% of the debts and other obligations of the limited partnership; however, the physician partners are generally required to guarantee their pro rata share of any indebtedness or lease agreements to which the limited partnership is a party in proportion to their ownership interest in the limited partnership. We also have primary liability for the bank debt that may be incurred for the benefit of the limited liability companies, and in turn, lend funds to these limited liability companies, although the physician members also guarantee this debt. There can be no assurance that a third-party lender or lessor would seek performance of the guarantees rather than seek repayment from us of any obligation of the limited partnership or limited liability company if there is a default, or that the physician partners or members would have sufficient assets to satisfy their guarantee obligations.


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Item 1A.   Risk Factors - (continued)

We have a legal responsibility to the minority owners of the entities through which we own our surgery centers, which may conflict with our interests and prevent us from acting solely in our own best interests. As the owner of majority interests in the limited partnerships and limited liability companies that own our surgery centers, we owe a fiduciary duty to the noncontrolling interest holders in these entities and may encounter conflicts between our interests and that of the minority holders. In these cases, our representatives on the governing board of each partnership or joint venture are obligated to exercise reasonable, good faith judgment to resolve the conflicts and may not be free to act solely in our own best interests. In our role as manager of the limited partnership or limited liability company, we generally exercise our discretion in managing the business of the surgery center. Disputes may arise between us and the physician partners regarding a particular business decision or the interpretation of the provisions of the limited partnership agreement or limited liability company operating agreement. The agreements provide for arbitration as a dispute resolution process in some circumstances. We cannot assure you that any dispute will be resolved or that any dispute resolution will be on terms satisfactory to us.

Risks Related to Our Physician Services Business

Our physician services segment bears the risk of changes in patient volume and patient mix. Our physician services segment bears the risk of changes in patient volume and the mix of patients for whom we provide services: uninsured and underinsured patients, patients covered by government healthcare programs and beneficiaries of commercial and employer insurance programs. A substantial decrease in patient volume, an increase in the number of uninsured or underinsured patients or an increase in the number of patients covered by government healthcare programs, as opposed to commercial plans that have higher reimbursement levels, could reduce the profitability of our physician services segment and adversely impact future growth.

Our physician services segment has several significant client relationships that result in concentration of revenue. Although we negotiate and enter into separate contracts with facilities to which we deliver physician services, many facilities are affiliated with one another or owned and operated by the same entity. As a result, although no single contract represents more than 10% of our physician services segment revenue, we have several significant client relationships with groups of affiliated facilities that result in concentration of revenue. The loss or reduction of business from any of our significant client relationships could materially adversely affect the revenues and results of operations of our physician services segment.

Our physician services segment revenue would be adversely affected if our contracts are canceled or not renewed or if we are not able to enter into additional contracts under terms that are acceptable to us. Substantially all of our physician services are provided under contracts with facilities, many of which have a limited duration. Many of our contracts, including contracts with several of our significant client relationships, are terminable upon notice of as little as 30 days. Furthermore, certain of our physician services contracts expire during each fiscal year. Any of those contracts may not be renewed or, if renewed, may contain terms that are not as favorable to us as our current contracts. We cannot assure you that we will be successful in retaining our existing physician services contracts or that any loss of contracts would not have a material adverse effect on the business, financial condition and results of operations of our physician services segment.

Our physician services segment is subject to potential decreases in our reimbursement rates, revenue and profit margin. We provide physician services through fee for service payor arrangements. Under these arrangements, we collect fees directly or through our affiliated physicians or through the entities where the physician services are provided. These arrangements accounted for approximately 90% of our physician services net revenue for the fiscal year ended December 31, 2015. Under these arrangements, we assume the risks related to changes in third party reimbursement rates.

We are dependent on the reimbursements by third-party payors, such as managed care payors and governmental payors, for the physician services we provide. There are significant private and public sector pressures to restrain healthcare costs and to restrict reimbursement rates for medical services and we believe that such pressures will continue. Both private insurers and government-sponsored programs have taken and may continue to take steps to control costs, eligibility for and use and delivery of healthcare services. During the past several years, major payors of healthcare, such as federal and state governments, insurance companies and employers, have undertaken initiatives to monitor healthcare costs, increase the cost sharing of individual patients and revise payment methodologies. Federal and state governments have also undertaken legislative and regulatory efforts to contain or reduce reimbursement rates for medical services for insurers and patients. As part of their efforts to contain healthcare costs, purchasers increasingly are demanding discounted or global fee structures or the assumption by healthcare providers of all or a portion of the financial risk through shared risk, capitation and care management arrangements, often in exchange for exclusive or preferred participation in their benefit plans. We expect efforts to impose greater discounts and more stringent cost controls by government and other payors to continue, thereby reducing the payments we receive for our physician services. Further, the ability of commercial payors to control healthcare costs may be enhanced by the increasing consolidation of insurance and managed care companies, which may reduce our ability to negotiate favorable contracts with such payors. We cannot assure you that we will be able to offset reduced operating margins through cost reductions, increased volume, the introduction of additional procedures or otherwise, and to the extent

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Item 1A.   Risk Factors - (continued)

we are not able to do so, such reductions in reimbursements could materially adversely affect our revenues, financial condition and results of operations.

Failure to timely or accurately bill for services could have a negative impact on our physician services segment net revenue, bad debt expense and cash flow. Billing for physician-related services is complex. The current practice of providing medical services in advance of payment or, in many cases, prior to assessment of ability to pay for such services, may have significant negative impact on our physician services segment net revenue, bad debt expense and cash flow. We bill numerous and varied payors, such as self-pay patients, managed care payors and Medicare and Medicaid. These different payors typically have different billing requirements that must be satisfied prior to receiving payment for services rendered. Reimbursement is typically conditioned on our documenting medical necessity and correctly applying diagnosis codes. Incorrect or incomplete documentation and billing information could result in non-payment for services rendered.

Additional factors that could complicate our physician services segment billing include:

disputes between payors as to which party is responsible for payment;
failure of information systems and processes to submit and collect claims in a timely manner;
variation in coverage for similar services among various payors;
the difficulty of adherence to specific compliance requirements, diagnosis coding and other procedures mandated by various payors; and
failure to obtain proper physician credentialing and documentation in order to bill various payors.

To the extent that the complexity associated with billing for our physician services segment causes delays in our cash collections, we may experience increased carrying costs associated with the aging of our accounts receivable as well as increased potential for bad debt expense.

Laws and regulations that regulate payments for medical services made by government healthcare programs could cause our physician services segment revenues to decrease. We derive a significant portion of our physician services segment net fee-for-service revenue from payments made to us by government healthcare programs such as Medicare and Medicaid. During the year ended December 31, 2015, Medicare and Medicaid represented approximately 13% and 5%, respectively, of our physician services segment net revenue. Further, the reimbursement rates of the Medicare program are increasingly used by certain private payors as benchmarks to establish their reimbursement rates and any adjustment in Medicare reimbursement rates may impact our reimbursement rates from such private payors as well. Government healthcare programs are subject to, among other things, statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, all of which could materially increase or decrease payments we receive from these government programs for our physician services in the future. Any change in reimbursement policies, practices, interpretations, regulations or legislation that places limitations on reimbursement amounts or practices could significantly affect hospitals, and consequently affect our operations unless we are able to renegotiate satisfactory contractual arrangements with our hospital clients. Reductions in amounts paid by government programs for physician services or changes in methods or regulations governing payment could cause our physician services segment revenues and profits to decline.

Physician services are reimbursed under the MPFS, which is updated annually. The CHIP Reauthorization Act of 2015 (MACRA) changed the method for updating the MPFS, effectively eliminating a scheduled payment reduction. The law provides for a 0.5% update to the MPFS for each calendar year through 2019.

Other changes to the Medicare program intended to implement Medicare’s new “pay for performance” initiatives may require us to make investments to receive maximum Medicare reimbursement for our physician services segment. These initiatives include the Medicare Physician Quality Reporting System which provides additional Medicare compensation to physicians who implement and report certain quality measures. MACRA requires the establishment of the Merit-Based Incentive Payment System beginning in 2019, under which physicians will receive payment incentives or reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities, and meaningful use of electronic health records.

In addition, we cannot assure you that federal, state and local governments will not impose reductions in fee schedules or mandate global fees or rate regulations applicable to our physician services segment in the future. Many states are continuing to collect less revenue than they did in prior years, and as a result may face ongoing budget shortfalls and underfunded pension and other liabilities. Deteriorating financial conditions in the states where we operate could lead to reduced or delayed funding for Medicaid programs, and we may experience reduced or delayed reimbursement for physician services provided. Any such reductions could have a material adverse effect on the business, financial condition or results of operations.


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Item 1A.   Risk Factors - (continued)

If we are unable to timely enroll our physician services segment providers in the Medicare and Medicaid programs, the collections and revenue of our physician services segment will be harmed. We are required to enroll our physician services segment providers who are not otherwise already enrolled with Medicare and Medicaid in order to bill these programs for the physician services they provide. With respect to Medicare, providers can retrospectively bill Medicare for services provided 30 days prior to the effective date of the enrollment. In addition, the enrollment rules provide that the effective date of the enrollment will be the later of the date on which the enrollment application was filed and approved by the Medicare contractor, or the date on which the provider began providing services. If we are unable to properly enroll physicians and other applicable healthcare professionals within the 30 days after the provider begins providing services, we will be precluded from billing Medicare for any services which were provided to a Medicare beneficiary more than 30 days prior to the effective date of the enrollment. With respect to Medicaid, new enrollment rules and whether a state will allow providers to retrospectively bill Medicaid for services provided prior to submitting an enrollment application varies by state. Failure to timely enroll providers could reduce our physician services segment net revenue and have a material adverse effect on the business, financial condition or results of operations of our physician services segment.

In addition, the Health Reform Law added additional enrollment requirements for Medicare and Medicaid. Those statutory requirements have been further enhanced through implementing regulations and increased enforcement scrutiny. Every enrolled provider must revalidate its enrollment at regular intervals and must update the Medicare contractors and many state Medicaid programs with significant changes on a timely basis. If we fail to provide sufficient documentation as required to maintain our enrollment, Medicare and Medicaid could deny continued future enrollment or revoke our enrollment and billing privileges.

We have partnerships with certain healthcare providers, including risk-based partnerships under the Health Reform Law. If this strategy is not successful, our physician services segment business could be adversely affected. We have strategic business partnerships with hospital systems to take advantage of commercial opportunities in our facility-based physician services business. However, joint venture and strategic partnership models may expose us to commercial risks that may be different from our other business models, including that the success of the joint venture or partnership may be only partially under our operational and legal
control and the opportunity cost of not pursuing the specific venture independently or with other partners. In addition, under certain joint venture or strategic partnership arrangements, the hospital system partner has the option to acquire our stake in the venture on a predetermined financial formula, which, if exercised, could lead to the loss of our associated revenue and profits which might not be offset fully by the immediate proceeds of the sale of our stake. Additionally, under certain joint venture partnership arrangements, the hospital system partner has the right of first refusal should we desire to acquire an unrelated provider who derives 40% or more of their revenues from services provided to that hospital system or its affiliates. Furthermore, joint ventures may raise fraud and abuse issues. For example, the OIG has taken the position that certain contractual joint ventures between a party which makes referrals and a party which receives referrals for a specific type of service may violate the Anti-Kickback Statute if one purpose of the arrangement is to encourage referrals.

In addition, we may take advantage of various opportunities afforded by the Health Reform Law to enter into risk-based partnerships designed to encourage healthcare providers to assume financial accountability for outcomes and work together to better coordinate care for patients, both in the hospital and after discharge. Advancing such initiatives can be time consuming and expensive, and there can be no assurance that our efforts in these areas would ultimately be successful. In addition, if we succeed in our efforts to enter into these risk-based partnerships but fail to deliver quality care at a cost consistent with our expectations, we may be subject to significant financial penalties depending on the program, and an unsuccessful implementation of such initiatives could materially and adversely affect the business, financial condition or results of operations of our physician services segment.

The high level of competition in our segments of the market for medical services could adversely affect our contract and revenue base for our physician services segment. The market for providing outsourced physician staffing and related management services to hospitals and clinics is highly competitive. Such competition could adversely affect our ability to obtain new facility contracts, retain existing contracts and increase or maintain profit margins. We compete with national and regional enterprises, some of which may have greater financial and other resources available, greater access to physicians or greater access to potential clients. We also compete against local physician groups and self-operated facility-based physician services departments that also provide staffing and scheduling services. Many of these competitors provide healthcare services that are similar in scope to the services we provide. Moreover, in certain regions, some of our competitors have already established a significant network of physician groups and it may be more difficult for us to compete in such areas.

Our physician services segment may not be able to successfully recruit and retain physicians, nurses and other clinical providers with the qualifications and attributes desired by us and our clients. Our ability to recruit and retain qualified physicians and other healthcare professionals to work in our physician services segment is critical for delivery of clinical services under our contracts. Our clients increasingly demand a greater degree of specialized skills and higher training and experience levels for the healthcare professionals providing services under their contracts with us. Moreover, because of the scope of the geographic diversity of our physician services segment operations, we must recruit healthcare professionals, and particularly physicians, to staff a broad spectrum

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Item 1A.   Risk Factors - (continued)

of contracts. We have had difficulty in the past recruiting physicians to staff contracts in some regions of the country and at some less economically advantaged hospitals due to limits on compensation, facility and equipment availability, reduced back-up staffing by other specialists, local cost of living and lifestyle preferences. In some instances, we may not be able to recruit physicians and healthcare professionals quickly enough to permanently staff all openings. Further, we compete with other providers of physician services for such qualified physicians and other healthcare professionals and must offer competitive wages and benefits. The anticipated expansion of new patients covered by health insurance resulting from implementation of the Health Reform Law may further constrain the markets for qualified physicians to staff our physician services segment operations. If we raise wages in response to wages increases of our competitors and are unable to negotiate for increased fees from our clients, such increases may adversely affect the business, financial condition and results of operations of our physician services segment. In addition, our ability to recruit physicians is closely regulated and limitations imposed by various federal and state statutes may create additional challenges in recruiting and retaining physicians. The physician population of each of our specialties is subject to unique supply and demand dynamics, including the demographics of the physician population and graduation rates for residency and fellowship programs. Our future success in retaining and winning new physician services contracts depends in part on our ability to recruit and retain physicians and other healthcare professionals to maintain and expand our physician services segment operations.

We may not accurately assess the costs we will incur under new contracts. Our new physician services contracts with hospitals and other health care facilities and health systems increasingly involve a competitive bidding process. As a result, it is critical for us to accurately assess the costs to be incurred in providing physician services in order to price new contracts accurately so that we may realize adequate profit margins and otherwise meet financial and strategic objectives. Increasing pressures from third-party payors to restrict or reduce reimbursement rates as well as pressures from healthcare facilities to eliminate or reduce contractual subsidies and income guarantees at a time when the costs of providing medical services continue to increase make assessing the costs associated with new contracts, as well as maintenance of existing contracts, more difficult. In addition, servicing new physician services contracts, particularly those in new geographic locations, could prove more costly, and could require more management time, than we anticipate. Our failure to accurately predict costs or to negotiate adequate profit margins could adversely affect the business, financial condition and results of operations of our physician services segment.

The margins in our physician services segment business may be negatively impacted by cross-selling to existing clients or selling bundled services to new clients. One of our growth strategies for our physician services business involves the continuation and expansion of our efforts to sell complementary physician services across our multi-specialty practice and related management services businesses. There can be no assurance that we will be successful in our cross-selling efforts. As part of our cross-selling efforts, we may need to offer a bundled package of physician services at a lower price point in general than individual services and such efforts may result in downward price pressure on our services. Such price pressure may have a negative impact on our operating margins. In addition, if a complementary service offered as part of a bundled package underperforms as compared to the other physician services included in such package, we could face reputational harm which could negatively impact our relationships with our clients and ultimately our results of operations.

Some jurisdictions preclude us from employing non-compete agreements with our physicians, and other non-compete agreements and restrictive covenants applicable to our physicians and other clinical employees may not be enforceable. Our physician services segment has contracts with physicians and other health professionals in many states. Some of our physician services contracts, as well as many of our physician services contracts with hospitals, include provisions preventing these physicians and other health professionals from competing with us both during and after the term of our contract with them. The law governing non-compete agreements and other forms of restrictive covenants varies from state to state. Some jurisdictions prohibit us from using non-compete covenants with our professional staff. Other states are reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to physicians and other healthcare professionals. There can be no assurance that our non-compete agreements related to affiliated physicians and other health professionals will be found enforceable if challenged in certain states. In such event, we would be unable to prevent former affiliated physicians and other health professionals from competing with us, potentially resulting in the loss of some of our hospital contracts and other business. Additionally, certain facilities have the right to employ or engage our providers after the termination or expiration of our contract with those facilities and cause us not to enforce our non-compete provisions related to those providers.

Unfavorable changes in regulatory, economic and other conditions could occur in the states where our operations are concentrated. During the year ended December 31, 2015, Florida, New Jersey, California and Arizona accounted for approximately 85% of our physician services segment net revenue. This concentration increases the risk that, should our physician services segment programs in these states be adversely affected by changes in law or regulatory, economic and other conditions, our physician services segment revenue and profitability could materially decline. Furthermore, a natural disaster or other catastrophic event could affect us more significantly than other companies with less geographic concentration.


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Item 1A.   Risk Factors - (continued)

Our physician services business could be subject to professional liability lawsuits, some of which we may not be fully insured against or reserved for. Physicians, hospitals and other participants in the healthcare industry are subject to lawsuits alleging medical malpractice and related legal theories. Many of these lawsuits involve large claims and substantial defense costs. We maintain professional insurance with third-party insurers generally on a claims-made basis, subject to self-insured retentions, exclusions and other restrictions. A substantial portion of our professional liability loss risks are being provided by a third-party insurer which is fully reinsured by our wholly-owned captive. In addition, our wholly-owned captive provides stop loss coverage for our self-insured employee health program related to our physician services segment. The assets, liabilities and results of operations of our wholly-owned captive insurance company subsidiary are included in our consolidated financial statements. The liabilities for self-insurance include estimates of the ultimate costs related to both reported claims on an individual and aggregate basis and unreported claims. We also obtain professional liability insurance on a claims-made basis from third party insurers for certain of our owned practices and employed physicians.

Our reserves for professional liability claims are based upon periodic actuarial calculations. Our reserves for losses and related expenses represent estimates involving actuarial and statistical projections, at a given point in time, of our expectation of the ultimate resolution plus administration costs of the losses that we have incurred. Our reserves are based on historical claims, demographic factors, industry trends, severity and exposure factors and other actuarial assumptions calculated by an independent actuarial firm. The independent actuarial firm performs studies of projected ultimate losses on an annual basis. We refer to these actuarial estimates as part of our process by which we determine appropriate reserves. Liabilities for claims incurred but not reported are not discounted. The estimation of professional liabilities is inherently complex and subjective, as these claims are typically resolved over an extended period of time, often as long as ten years or more. Our reserves could be significantly affected if current and future occurrences differ from historical claim trends and expectations. We periodically reevaluate our reserves for professional liabilities, and our actual results may vary significantly from our estimates as the key assumptions used in our actuarial valuations are subject to constant adjustment as a result of changes in our actual loss history and the movement of projected emergence patterns as claims develop. While we monitor claims closely when we estimate reserves, the complexity of claims and the wide range of potential outcomes may hamper timely adjustments to the assumptions we use in these estimates. Actual losses and related expenses may deviate, individually and in the aggregate, from the reserve estimates reflected in our combined consolidated financial statements. If we determine that our estimated reserves are inadequate, we will be required to increase reserves at the time of the determination, which would result in a reduction in the net income of our physician services segment in the period in which the deficiency is determined.

Our captive insurance company is subject to government regulation, and legislative or regulatory action may make our captive insurance company arrangement less feasible or otherwise reduce our profitability. We own a captive insurance company located in a foreign country. Insurance companies are subject to government regulation, the primary purpose of which is generally to protect policyholders and not necessarily to protect creditors and investors. The nature and extent of such regulation typically involve such items as: standards of solvency and minimum amounts of statutory capital surplus that must be maintained, regulation of reinsurance, methods of accounting and filing of annual and other reports with respect to financial condition and other matters. Such regulation may increase our costs of regulatory compliance, restrict our ability to access cash held in our captive insurance company and otherwise impede our ability to take actions we deem advisable.

Insurance regulators and other regulatory agencies regularly reexamine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and could materially and adversely affect our business, results of operations or financial condition. The use of captive insurance companies in particular has come under scrutiny by insurance regulators in the United States. Any regulatory action that prohibits or limits our use of or materially increases our cost of using our captive reinsurance company, either retroactively or prospectively, could have a material adverse effect on the financial condition or results of operations of our physician services segment.



38




Item 1B. Unresolved Staff Comments
 
Not applicable.

Item 2.    Properties
 
Our principal executive offices, which also house our ambulatory services segment's operations, are located in Nashville, Tennessee and contain approximately 110,000 square feet of office space, which we lease from a third-party pursuant to an agreement with an initial term expiring in February 2030. Our physician services segment operates from offices located in Sunrise, Florida and contains an aggregate of approximately 130,000 square feet of office space, which we lease from a third-party pursuant to an agreement in which the initial term expires in February 2024. We also lease office space for our regional offices in Tempe, Arizona; Miami, Florida; Conshohocken, Pennsylvania; Nashville, Tennessee and Dallas, Texas which include offices for both our regional operations and our central billing services. Our affiliated limited partnerships and limited liability companies lease space for their surgery centers ranging from 1,000 to 25,000 square feet, with expected remaining lease terms ranging from 1 to 20 years. 

On January 16, 2015, we entered into an agreement to lease approximately 222,000 square feet of office space in Plantation, Florida which we intend to be the future headquarters of our physician services operations. We took possession of the space in the fourth quarter of 2015 to begin tenant improvements on approximately 167,000 square feet of space, which we intend to occupy during the third quarter of 2016. In addition, we plan to begin tenant improvements on an additional 55,000 square feet of space during the third quarter of 2016, which we will occupy during the fourth quarter of 2016. Annual rent expense is expected to be approximately $2.9 million. The initial term of this lease agreement expires in February 2029.

Item 3.    Legal Proceedings
 
On November 1, 2013, the United States District Court for the Eastern District of California in Sacramento issued an order unsealing a qui tam lawsuit filed against the Company, Gastroenterology Associates Endoscopy Center, LLC (GAEC), an entity that owns and operates an ambulatory surgery center located in Redding, California in which the Company owns a majority ownership interest, and certain other defendants. The lawsuit was filed in August 2012 by two CRNAs who provided services as independent contractors to GAEC during the period from September 2010 through December 2010. GAEC terminated its contracts with the plaintiffs in December 2010. In the lawsuit, the plaintiffs assert claims pursuant to the Federal False Claims Act and the California False Claims Act relating to the alleged failure by GAEC to comply with applicable Federal and state regulatory requirements relating to pre-procedure medical histories and physical assessments. The lawsuit also asserts a claim for retaliatory discharge. According to the order entered by the District Court, both the United States and the State of California declined to intervene in the case. The plaintiffs filed an amended complaint in January 2014. The Company filed a motion to dismiss the case in March 2014, and the court issued an order denying the motion in December 2014. The Company believes the claims in the lawsuit have no merit, and intends to vigorously defend the lawsuit.

Item 4.    Mine Safety Disclosures
 
Not applicable.


39



PART II
 
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Our common stock trades under the symbol “AMSG” on the Nasdaq Global Select Market.  The following table sets forth the high and low sales prices per share for the common stock for each of the quarters in 2014 and 2015, as reported on the Nasdaq Global Select Market:
  
 
1st
 
2nd
 
3rd
 
4th
  
 
Quarter
 
Quarter
 
Quarter
 
Quarter
2014:
 
  
 
  
 
  
 
  
High
 
$
47.75

 
$
52.81

 
$
54.48

 
$
55.65

Low
 
$
40.05

 
$
40.00

 
$
45.19

 
$
47.68

2015:
 
  
 
  
 
  
 
  
High
 
$
65.03

 
$
72.85

 
$
87.42

 
$
87.29

Low
 
$
52.42

 
$
60.43

 
$
54.11

 
$
58.37

 
At February 17, 2016, there were approximately 41,320 holders of our common stock, including approximately 260 shareholders of record.  We have never declared or paid a cash dividend on our common stock.  We intend to retain our earnings to finance the growth and development of our business and do not expect to declare or pay any cash dividends on our common stock in the foreseeable future.  The declaration of dividends is within the discretion of our Board of Directors, subject to certain covenants which limit, but may not restrict, our ability to pay dividends.


40


Item 6.   Selected Financial Data

The following tables summarize selected financial data and should be read in conjunction with our related consolidated financial statements and notes thereto. The 2015 columns in the tables below include results of operations for Sheridan Healthcare (Sheridan) and its consolidated subsidiaries for the entire year while the 2014 columns in the tables below include only include the results of operations for Sheridan and its consolidated subsidiaries effective July 16, 2014. Certain prior year amounts below have been reclassified to reflect the impact of discontinued operations.
  
Year Ended December 31,
  
2015
 
2014
 
2013
 
2012
 
2011
  
(In thousands, except per share and operating data)
Consolidated Statement of Earnings Data:
  
 
  
 
 
 
 
 
 
Net revenue (1)
$
2,566,884

 
$
1,621,949

 
$
1,057,196

 
$
899,245

 
$
748,447

Operating expenses
2,002,225

 
1,238,034

 
729,912

 
627,268

 
517,903

Net gain on deconsolidations (2)
36,694

 
3,411

 
2,237

 

 

Equity in earnings of unconsolidated affiliates
16,152

 
7,038

 
3,151

 
1,564

 
613

Operating income
617,505

 
394,364

 
332,672

 
273,541

 
231,157

Interest expense, net
121,586

 
83,285

 
29,525

 
16,950

 
15,311

Debt extinguishment costs

 
16,887

 

 

 

Earnings from continuing operations before income taxes
495,919

 
294,192

 
303,147

 
256,591

 
215,846

Income tax expense
113,790

 
48,103

 
48,654

 
40,893

 
33,457

Net earnings from continuing operations
382,129

 
246,089

 
254,493

 
215,698

 
182,389

Net earnings (loss) from discontinued operations
(1,013
)
 
(1,296
)
 
7,051

 
7,945

 
7,725

Net earnings
381,116

 
244,793

 
261,544

 
223,643


190,114

Less net earnings attributable to noncontrolling interests
218,169

 
191,092

 
188,841

 
161,080

 
140,117

Net earnings attributable to AmSurg Corp. shareholders
162,947

 
53,701

 
72,703

 
62,563

 
49,997

Preferred stock dividends
(9,056
)
 
(4,503
)
 

 

 

Net earnings attributable to AmSurg Corp. common shareholders
$
153,891

 
$
49,198

 
$
72,703

 
$
62,563

 
$
49,997

 
 
 
 
 
 
 
 
 
 
Amounts attributable to AmSurg Corp. common shareholders:
 
 
 
 
 
 
 
 
 
Earnings from continuing operations, net of tax
$
154,892

 
$
50,777

 
$
71,009

 
$
60,037

 
$
47,760

Earnings (loss) from discontinued operations, net of tax
(1,001
)
 
(1,579
)
 
1,694

 
2,526

 
2,237

Net earnings attributable to AmSurg Corp. common shareholders
$
153,891

 
$
49,198

 
$
72,703

 
$
62,563

 
$
49,997

Basic earnings per share attributable to AmSurg Corp. common shareholders:
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
3.22

 
$
1.29

 
$
2.27

 
$
1.95

 
$
1.57

Net earnings
$
3.20

 
$
1.25

 
$
2.32

 
$
2.03

 
$
1.64

Diluted earnings per share attributable to AmSurg Corp. common shareholders (3):
 
 
 
 
 
 
 
 
 
Net earnings from continuing operations
$
3.18

 
$
1.28

 
$
2.22

 
$
1.90

 
$
1.53

Net earnings
$
3.16

 
$
1.24

 
$
2.28

 
$
1.98

 
$
1.60

Weighted average number of shares and share equivalents outstanding:
  

 
 
 
 
 
 
 
 
Basic
48,058

 
39,311

 
31,338

 
30,773

 
30,452

Diluted (3)
51,612

 
39,625

 
31,954

 
31,608

 
31,211


41


Item 6.   Selected Financial Data - (continued)

  
Year Ended December 31,
  
2015
 
2014
 
2013
 
2012
 
2011
  
(In thousands, except operating data)
Consolidated Balance Sheet and Cash Flow Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
106,660

 
$
208,079

 
$
50,840

 
$
46,398

 
$
40,718

Working capital (4)
149,481

 
278,140

 
121,155

 
107,768

 
109,561

Total assets
6,546,482

 
5,501,062

 
2,177,944

 
2,044,586

 
1,573,018

Long-term debt and other long-term liabilities
2,501,313

 
2,321,629

 
608,801

 
646,677

 
476,094

Non-redeemable and redeemable noncontrolling interests (5)
647,016

 
602,783

 
539,056

 
486,360

 
302,858

AmSurg Corp. shareholders’ equity
2,293,463

 
1,679,547

 
764,197

 
689,488

 
616,245

Cash flows provided by operating activities
537,959

 
412,371

 
332,824

 
295,652

 
243,423

Cash flows used in investing activities
(1,016,825
)
 
(2,225,135
)
 
(98,738
)
 
(298,943
)
 
(254,367
)
Cash flows provided by (used in) financing activities
377,447

 
1,970,003

 
(229,644
)
 
8,971

 
17,515

Other Ambulatory Services Operating Data:
 
 
 
 
 
 
 
 
 
Continuing centers at end of year
257

 
246

 
236

 
231

 
215

Procedures performed during year
1,729,262

 
1,645,350

 
1,609,761

 
1,478,888

 
1,321,618

Same center revenues increase (consolidated)
6.0
%
 
0.7
%
 
0.6
%
 
2.5
%
 
0.7
%
                                   
(1)
Comparability of revenue is impacted by the acquisition of Sheridan on July 16, 2014 and other acquisitions. See Note 4 to the Consolidated Financial Statements included in Item 8 of this Form 10-K for the impact of acquisitions on net revenue.

(2)
The net gain on deconsolidations is driven by the number of entities in which we sold or contributed a portion of our equity interests into new unconsolidated investments. See Note 5 to the Consolidated Financial Statements” included in Item 8 of this Form 10-K.

(3)
See Note 15 to the Consolidated Financial Statements” included in Item 8 of this Form 10-K for a reconciliation of amounts used in diluted earnings per share.

(4)
Working capital has been impacted at December 31, 2015 and 2014 by the adoption of Financial Accounting Standards Board's (FASB) Accounting Standards Update (ASU) 2015-17 Balance Sheet Classification of Deferred Taxes,” which required all deferred tax assets and liabilities to be classified as non-current. See Note 1 to the "Consolidated Financial Statements", included in Item 8 of this Form 10-K.

(5)
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies.”

42


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations


Forward-Looking Statements

This report contains certain forward-looking statements (all statements other than statements with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in Item 1A. Risk Factors, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events. Forward-looking statements and our liquidity, financial condition and results of operations may be affected by the risks set forth in Item 1A. Risk Factors or by other unknown risks and uncertainties.

Executive Overview

We are one of the largest owners and operators of ASCs in the United States based upon total number of facilities, and are a leading provider of outsourced physician services. Through our ambulatory services segment, we acquire, develop and operate ambulatory surgery centers (ASCs, surgery centers, or centers) in partnership with physicians. Through our physician services segment, we provide outsourced physician services in multiple specialties to hospitals, ambulatory surgery centers and other healthcare facilities, primarily in the areas of anesthesiology, radiology, children’s services and emergency medicine.

Our operations consist primarily of two major segments, ambulatory services and physician services.

Ambulatory Services Overview

We acquire, develop and operate surgery centers in partnership primarily with physicians.  Our surgery centers are typically located adjacent to or in close proximity to the medical practices of our partner physicians. At December 31, 2015, we operated 257 ASCs in 34 states and the District of Columbia in partnership with approximately 2,000 physicians. We generally own a majority interest, primarily 51%, in the surgery centers we operate. We also own a minority interest in certain surgery centers in partnerships with leading health systems and physicians and intend to continue to pursue such partnerships.

Physician Services Overview

At December 31, 2015, we delivered physician services, primarily in the areas of anesthesiology, radiology, children’s services and emergency medical services, to more than 450 healthcare facilities in 29 states, with a significant presence in Florida, New Jersey, Arizona and California. At December 31, 2015, we employed more than 3,800 physicians and other healthcare professionals in our physician services business. We receive reimbursement from third-party payors for fee for service medical services rendered by our affiliated healthcare professionals and employees to the patients who receive medical treatment at these facilities. In addition to this primary form of reimbursement, in certain cases, we also receive contract revenue directly from the facilities where we perform our services through a variety of payment arrangements that are established to supplement payments from third-party payors. We also provide physician services and manage office-based practices in the areas of gynecology, obstetrics and perinatology.

Operating Environment

Our ASCs and physician practices depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for substantially all of the services rendered to patients. For the year ended December 31, 2015, we derived approximately 26% and 18%, respectively, of our ambulatory services and physician services net revenue from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles. The Medicare program currently reimburses physician services and ASCs in accordance with predetermined fee schedules. We are not required to file cost reports for our centers or physician services and, accordingly, we have no unsettled amounts from governmental third-party payors.

ASCs are paid under the Medicare program based upon a percentage of the payments to hospital outpatient departments pursuant to the hospital outpatient prospective patient system and reimbursement rates for ASCs are increased annually based on increases in the consumer price index (CPI). The Patient Protection and Affordable Care Act, as amended by the Health Care and Education

43


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Reconciliation Act of 2010 (together, the Health Reform Law), provide for the annual CPI increases applicable to ASCs to be reduced by a productivity adjustment, which is based on historical nationwide productivity gains. In 2013, ASC reimbursement rates increased by 0.6%, which positively impacted our 2013 ambulatory services revenues by approximately $2.5 million and our net earnings per diluted share by $0.02. In 2014, ASC reimbursement rates increased by 1.2%, which positively impacted our 2014 ambulatory services revenues by approximately $6.5 million and our net earnings per diluted share by $0.05. In 2015, ASC reimbursement rates increased by 1.9%, which positively impacted our 2015 ambulatory services revenues by approximately $9.0 million and our net earnings per diluted share by $0.10. Centers for Medicare and Medicaid Services (CMS) has announced that ASC reimbursement rates will increase by 0.3% for 2016, which we estimate will not have a significant impact our 2016 ambulatory services revenues. There can be no assurance that CMS will not revise the ASC payment system or that any annual CPI increases will be material. 

Physician services are paid under the Medicare program based upon the Medicare Physician Fee Schedule (MPFS), under which CMS has assigned a national relative value unit (RVU) to most medical procedures and services that reflects the various resources required by a physician to provide the services relative to all other services. Each RVU is calculated based on a combination of work required in terms of time and intensity of effort for the service, practice expense (overhead) attributable to the service and malpractice insurance expense attributable to the service. These three elements are each modified by a geographic adjustment factor to account for local practice costs and then aggregated. Historically, the aggregated amount was multiplied by a conversion factor calculated by the sustainable growth rate (SGR) to arrive at the payment amount for each service. In April 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) repealed the SGR physician payment methodology. Instead of tying payments to the SGR, MACRA provides for a 0.5% payment update for each calendar year through 2019. In addition, MACRA requires the establishment of the Merit-Based Incentive Payment System (MIPS) beginning in 2019, under which physicians will receive performance-based payment incentives or payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities, and meaningful use of electronic health records. MIPS will consolidate certain existing physician incentive programs, including payments to physicians for the meaningful use of electronic health records. MACRA also requires CMS beginning in 2019 to provide incentive payments for physicians and other eligible professionals that participate in alternative payment models, such as accountable care organizations.

In November 2012, CMS adopted a rule under the Health Reform Law that generally allows physicians in certain specialties who provide eligible primary care services to be paid at the Medicare reimbursement rates in effect in calendar years 2013 and 2014 instead of state-established Medicaid reimbursement rates (Medicaid-Medicare Parity). Generally, state Medicaid reimbursement rates are lower than federally established Medicare rates. Legislation was passed in certain states to extend Medicaid-Medicare Parity for calendar year 2015. Accordingly, our 2015 Medicaid program revenues were reduced by approximately $3.2 million compared to a full fiscal 2014. We do not expect further reduction in reimbursement rates in 2016 in those states which previously extended Medicaid-Medicare Parity.

The Budget Control Act of 2011 (BCA) requires automatic spending reductions of $1.2 trillion for federal fiscal years (FFY) 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. The percentage reduction for Medicare may not be more than 2% for a FFY, with a uniform percentage reduction across all Medicare programs. These BCA-mandated spending cuts are commonly referred to as “sequestration.” Sequestration began on March 1, 2013, and CMS imposed a 2% reduction on Medicare claims as of April 1, 2013. These reductions have been extended through FFY 2025. We cannot predict with certainty what other deficit reduction initiatives may be proposed by Congress, whether Congress will attempt to restructure or suspend sequestration or the impact sequestration may have on our business.

The Health Reform Law represents significant change across the healthcare industry and contains a number of provisions designed to reduce Medicare program spending. However, the Health Reform Law also expands coverage of uninsured individuals through a combination of public program expansion and private sector health insurance reforms. For example, the Health Reform Law has expanded eligibility under existing Medicaid programs in states that have not opted out of the expansion, created financial penalties on individuals who fail to carry insurance coverage, established affordability credits for those not enrolled in an employer-sponsored health plan, resulted in the establishment of, or participation in, a health insurance exchange for each state and allowed states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid. The Health Reform Law also required a number of private health insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit mandates and increased dependent coverage.

Many health plans are required to cover, without cost-sharing, certain preventive services designated by the U.S. Preventive Services Task Force, including screening colonoscopies. Medicare now covers these preventive services without cost-sharing, and states that provide Medicaid coverage of these preventive services without cost-sharing receive a one percentage point increase in their federal medical assistance percentage for these services.


44


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

We believe health insurance market reforms that expand insurance coverage have resulted in an increased volume of certain procedures at our centers. Most of the provisions of the Health Reform Law that are reducing the number of uninsured individuals are in effect. Including, as of January 1, 2016, the employer mandate, which requires firms with 50 or more full-time employees to offer health insurance or pay fines. Because of the many variables involved, including the law’s complexity, lack of implementing definitive regulations or interpretive guidance, gradual or partially delayed implementation, court challenges, amendments, repeal, or further implementation delays, we are unable to predict the net effect of the reductions in Medicare spending, the expected increases in revenues from increased procedure volumes, and numerous other provisions in the law that may affect us. We are further unable to foresee how individuals and employers will respond to the choices afforded them by the Health Reform Law. Thus, we cannot predict the full impact of the Health Reform Law on us at this time.

Recent Accounting Pronouncements
 
See Note 1 in the Notes to the Consolidated Financial Statements.

Critical Accounting Policies

Our accounting policies are described in the notes of our consolidated financial statements. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our financial statements and the uncertainties that could impact our results of operations, financial condition and cash flows.

Principles of Consolidation

Ambulatory Services

The consolidated financial statements include our accounts, our subsidiaries' accounts, and the accounts of the consolidated limited liability companies (LLCs) and limited partnerships (LPs). Consolidation of such LLCs and LPs is necessary as our wholly-owned subsidiaries have primarily 51% or more of the financial interest, are generally the general partner or majority member with all the duties, rights and responsibilities thereof, are responsible for the day-to-day management of the LLCs and LPs, and have control of the entities. The responsibilities of our noncontrolling partners (limited partners and noncontrolling members) are to supervise the delivery of medical services, with their rights being restricted to those that protect their financial interests, such as approval of the acquisition of significant assets or the incurrence of debt which they are generally required to guarantee on a pro rata basis based upon their respective ownership interests. Intercompany profits, transactions and balances are eliminated. We also have an ownership interest of less than 51% in 23 of our LLCs and LPs, 2 of which we consolidate as we have substantive participation rights and 21 of which we do not consolidate as our rights are limited to protective rights only.

We identify and present ownership interests in subsidiaries held by noncontrolling parties in our consolidated financial statements within the equity section but separate from our equity. However, in instances in which certain redemption features that are not solely within our control are present, classification of noncontrolling interests outside of permanent equity is required. The amounts of consolidated net income attributable to us and to the noncontrolling interests are identified and presented on the face of the consolidated statements of earnings; changes in ownership interests are accounted for as equity transactions; and when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary and the gain or loss on the deconsolidation of the subsidiary is measured at fair value. Lastly, the cash flow impact of certain transactions with noncontrolling interests is classified within financing activities.

Upon the occurrence of various fundamental regulatory changes, we would be obligated under the terms of our partnership and operating agreements to purchase the noncontrolling interests related to a majority of our partnerships. We believe that the likelihood of a change in current law that would trigger such purchases was remote as of December 31, 2015, and the occurrence of such regulatory changes is outside of our control. As a result, these noncontrolling interests that are subject to this redemption feature are not included as part of our equity and are classified as noncontrolling interests – redeemable on our consolidated balance sheets.

Center profits and losses are allocated to our partners in proportion to their ownership percentages and reflected in the aggregate as net earnings attributable to noncontrolling interests. The partners of our center partnerships typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each partner shares in the pre-tax earnings of the center in which it is a partner. Accordingly, the earnings attributable to noncontrolling interests in each of our consolidated partnerships are generally determined on a pre-tax basis. Total net earnings attributable to noncontrolling interests are

45


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

presented after net earnings. However, we consider the impact of the net earnings attributable to noncontrolling interests on earnings before income taxes in order to determine the amount of pre-tax earnings on which we must determine our tax expense. In addition, distributions from the partnerships are made to both our wholly-owned subsidiaries and the partners on a pre-tax basis.

Physician Services

Our consolidated financial statements include the accounts of Sheridan and its wholly-owned subsidiaries along with the accounts of affiliated professional corporations (PCs) with which Sheridan currently has management arrangements. Sheridan's agreements with these PCs provide that the term of the arrangements is permanent, subject only to termination by us, except in the case of gross negligence, fraud or bankruptcy by us. The professional corporation structure is primarily used in states which prohibit the corporate practice of medicine. The arrangements are captive in nature as a majority of the outstanding voting equity instruments of the PCs are owned by nominee shareholders appointed at our sole discretion. The nominee shareholder is generally a medical doctor who is generally one of our senior corporate employees. We have a contractual right to transfer the ownership of the PCs at any time to any person we designate as the nominee shareholder. We have the right to all assets and to receive income, both as ongoing fees and as proceeds from the sale of any interest in the PCs, in an amount that fluctuates based on the performance of the PCs and the change in the fair value of the interest in the PCs. We have exclusive responsibility for the provision of all non-medical services required for the day-to-day operation and management of the PCs and establishes the guidelines for the employment and compensation of the physicians and other employees of the PCs which is consistent with the operation of our wholly-owned affiliates. Based on the provisions of these agreements, we have determined that the PCs are variable interest entities and that we are the primary beneficiary as defined in the Financial Accounting Standards Board's Accounting Standards Codification 810 Consolidations.

In both our ambulatory services segment and physician services segment, the investments in unconsolidated affiliates in which we exert significant influence but do not control or otherwise consolidate are accounted for using the equity method. These investments are included as investments in unconsolidated affiliates in our consolidated balance sheets. Our share of the profits and losses from these investments are reported in equity in earnings of unconsolidated affiliates in our consolidated statement of earnings. We monitor each investment for other-than-temporary impairment by considering factors such as current economic and market conditions and the operating performance of the company and record a reduction in carrying value when necessary.

Revenue Recognition

Ambulatory Services

Our ambulatory services revenues, net of adjustments, are derived from facility fees charged for surgical procedures performed in our centers and, at certain of our centers (primarily centers that perform gastrointestinal endoscopy procedures), charges for anesthesia services provided by medical professionals employed or contracted by our centers.  These fees vary depending on the procedure, but usually include all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications.  Facility fees do not include professional fees charged by the physicians that perform the surgical procedures.  Revenues are recorded at the time of the patient encounter and billings for such procedures are made on or about that same date. At the majority of our centers, it is our policy to collect patient co-payments and deductibles at the time the surgery is performed. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors. Our billing and accounting systems provide us historical trends of the centers’ cash collections and contractual write-offs, accounts receivable agings and established fee adjustments from third-party payors. These estimates are recorded and monitored monthly for each of our centers as revenues are recognized. Our ability to accurately estimate contractual adjustments is dependent upon and supported by the fact that our centers perform and bill for limited types of procedures, the range of reimbursement for those procedures within each surgery center specialty is very narrow and payments are typically received within 15 to 45 days of billing. These estimates are not, however, established from billing system generated contractual adjustments based on fee schedules for the patient’s insurance plan for each patient encounter.

Revenues from ambulatory services are recognized on the date of service, net of estimated contractual adjustments from third-party medical service payors including Medicare and Medicaid. During the years ended December 31, 2015, 2014 and 2013, we derived approximately 26%, 25% and 25%, respectively, of our ambulatory services revenues from governmental healthcare programs, primarily Medicare and managed Medicare programs.  Concentration of credit risk with respect to other payors is limited due to the large number of such payors.

Physician Services

Physician services revenue primarily consists of fee for service revenue and contract revenue and is derived principally from the provision of physician services to patients of the healthcare facilities we serve. Contract revenue represents income earned from our hospital customers to supplement payments from third-party payors.

46


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Fee for service revenue is billed to patients for services provided, and we receive payments for these services from patients or their third-party payors. Payments for services provided are generally less than our billed charges. We recognize fee for service revenue, net of contractual adjustments and provision for uncollectibles, at the time services are provided by healthcare providers. Services provided but not yet billed are estimated and recognized in the period services are provided. We record revenue net of an allowance for contractual adjustments, which represents the net revenue we expect to collect from third-party payors (including managed care, commercial and governmental payors such as Medicare and Medicaid) and patients insured by these payors. These expected collections are based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patient's healthcare plans, mandated payment rates in the case of Medicare and Medicaid programs, and historical cash collections (net of recoveries).

Our provision for uncollectibles includes our estimate of uncollectible balances due from uninsured patients, uncollectible co-pay and deductible balances due from insured patients and special charges, if any, for uncollectible balances due from managed care, commercial and governmental payors. We record net revenue from uninsured patients at its estimated realizable value, which includes a provision for uncollectible balances, based on historical cash collections (net of recoveries).

We also recognize revenue for services provided during the period but are not yet billed. Expected collections are estimated based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patients’ healthcare plan, mandated payment rates under the Medicare and Medicaid programs, and historical cash collections.

Estimating physician services net revenue is a complex process, largely due to the volume of transactions, the number and complexity of contracts with payors, the limited availability, at times, of certain patient and payor information at the time services are provided, and the length of time it takes for collections to fully mature. In the period services are provided, we estimate gross charges based on billed services plus an estimate for unbilled services based on pending case data collected, we estimate contractual allowances based on our contracted rates and historical or actual cash collections (net of recoveries), when available, and we estimate our provision for uncollectibles based on historical cash collections (net of recoveries) from uninsured patients. The relationship between gross charges and the allowances for both contractual adjustments and provision for uncollectibles is significantly influenced by payor mix, as collections on gross charges may vary significantly depending on whether and with whom the patients we provide services to in the period are insured, and the contractual relationships with their payors. Payor mix is subject to change as additional patient and payor information is obtained after the period services are provided. We periodically assess the estimates of unbilled revenue, contractual adjustments, provision for uncollectibles and payor mix for a period of at least one year following the date of service by analyzing actual results, including cash collections, against estimates. Changes in these estimates are charged or credited to the consolidated statement of earnings in the period that the assessment is made.

We derived approximately 18% of our physician services segment net revenue from services rendered to beneficiaries of Medicare, Medicaid and other government-sponsored healthcare programs during the year ended December 31, 2015. Concentration of credit risk with respect to other payors is limited due to the large number of such payors.

Allowance for Contractual Adjustments, Provision for Uncollectibles and Bad Debt Expense

We manage accounts receivable by regularly reviewing our accounts and contracts and by providing appropriate allowances for contractual adjustments and uncollectible amounts. Some of the factors considered by management in determining the amount of such allowances are the historical trends of cash collections, contractual and bad debt write-offs, accounts receivable agings, established fee schedules, contracts with payors, changes in payor mix and procedure statistics. Assessment of actual collections of accounts receivable in subsequent periods may require changes in the estimated contractual allowance and provision for uncollectibles. We routinely test our analysis by comparing cash collections to net patient revenues and monitoring self-pay utilization. In addition, when actual collection percentages differ from expected results, for each facility or contract, supplemental detailed reviews of the outstanding accounts receivable balances may be performed by us to determine whether there are facts and circumstances existing that may cause a different conclusion as to the estimate of the collectability of that contract’s accounts receivable from the estimate resulting from using the historical collection experience. We may also supplement our allowance for doubtful accounts policy for our physician services division using a hindsight calculation that utilizes write-off data for all payor classes during the previous periods to estimate the allowance for doubtful accounts at a point in time. Material changes in estimate may result from unforeseen write-offs of patient or third party accounts receivable, unsuccessful disputes with managed care payors, adverse macro-economic conditions which limit patients’ ability to meet their financial obligations for the care provided by physicians, or broad changes to government regulations that adversely impact reimbursement rates for services provided by us. Significant changes in payor mix, specialty mix, acuity, business office operations, general economic conditions and health care coverage provided by federal or state governments or private insurers may have a significant impact on our estimates and significantly affect our results of operations and cash flows.


47


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Due to the nature of our ambulatory services segment operations, we are required to separate the presentation of the bad debt expense on the consolidated statement of earnings. We record the portion of our bad debts associated with our physician services segment as a component of net revenue in our consolidated statement of earnings, and the remaining portion, which is associated with our ambulatory services segment, is recorded as a component of other operating expenses in our consolidated statement of earnings. The bifurcation is a result of our ability to assess the ultimate collection of the patient service revenue associated with our ambulatory services segment before services are provided. Our ambulatory services segment is generally able to verify a patient's insurance coverage and ability to pay before services are provided as those services are pre-scheduled and non-emergent. Our ability to accurately estimate contractual adjustments is dependent upon and supported by the fact that our surgery centers perform and bill for limited types of procedures, that the range of reimbursement for those procedures within each surgery center specialty is very narrow and that payments are typically received within 15 to 45 days of billing. In addition, our surgery centers are not required to file cost reports, and therefore, we have no risk of unsettled amounts from governmental third-party payors. Except in certain limited instances, these estimates are not, however, established from billing system-generated contractual adjustments based on fee schedules for the patient’s insurance plan for each patient encounter.

While we believe that our allowances for contractual adjustments, provision for uncollectibles and bad debt expense are adequate, if the actual contractual adjustments and write-offs are in excess of our estimates, our results of operations may be overstated. During the years ended December 31, 2015, 2014 and 2013, we had no significant adjustments to our allowances for contractual adjustments, provisions for uncollectibles and bad debt expense related to prior periods. At December 31, 2015 and 2014, our allowances for doubtful accounts was $167.4 million and $113.4 million, respectively and the increase is primarily a result of operations from acquisitions completed during the year ended December 31, 2015.

Business Combinations

We record tangible and intangible assets acquired and liabilities assumed in business combinations under the acquisition method of accounting. Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill. If the fair value of the assets acquired exceeds our purchase price, the excess is recognized as a gain. Significant management judgments and assumptions are required in determining the fair value of acquired assets and liabilities, particularly acquired intangible assets. The valuation of purchased intangible assets is based upon estimates of the future performance and cash flows from the acquired business. Each asset is measured at fair value from the perspective of a market participant. If different assumptions are used, it could materially impact the purchase price allocation and adversely affect our results of operations and financial condition.

Intangible Assets

Goodwill is evaluated annually for impairment during our fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. The first step of the two-step process involves a comparison of the estimated fair value of a reporting unit to its carrying amount, including goodwill. In performing the first step, we determine the fair value of a reporting unit using a discounted cash flow (DCF) analysis. The cash flows are projected based on a year-by-year assessment that considers historical results, estimated market conditions, internal projections, and relevant publicly available statistics. The cash flows projected are then used as the basis for projecting cash flows for the remaining years in our model. Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. The significant judgments are typically based upon Level 3 inputs, generally defined as unobservable inputs representing our own assumptions. The cash flows employed in the DCF analysis are based on our most recent budgets and business plans and, when applicable, various growth rates are assumed for years beyond the current business plan period. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. The discount rate is mainly based on judgment of the specific risk inherent within the reporting unit. The variables within the discount rate, many of which are outside of our control, provide our best estimate of all assumptions applied within the model.

If the carrying amount of a reporting unit exceeds its estimated fair value, then the second step of the goodwill impairment test must be performed. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with its carrying amount to measure the amount of impairment loss, if any. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination (i.e., the estimated fair value of the reporting unit is allocated to all of the assets and liabilities of that reporting unit, including any unrecognized intangible assets, as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid). If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of the reporting unit's goodwill, an impairment loss is recognized in an amount equal to that excess.

48


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

As of December 31, 2015, the ambulatory services segment and the physician services segment each had approximately $2.0 billion of goodwill. Each segment represents a reporting unit that was evaluated during our annual impairment test as required as of October 1, 2015. Our analysis determined that it is not necessary to recognize impairment in our indefinite lived intangibles as the fair value of our reporting units are substantially in excess of their carrying value. To perform this evaluation, we obtain valuations at the reporting unit level prepared by third party valuation specialists which utilize a combination of the income, market and cost approaches to determine an estimated fair value.

In order for the estimated fair values to decrease below the carrying values for all of our reporting units, we would need to experience a significant decrease in future profitability projections coupled with a significant increase in the weighted average cost of capital, both of which we believe is unlikely to occur during the year ended December 31, 2016.

We test our finite-lived intangibles, other than goodwill, for impairment whenever events or circumstances indicate that it is more likely than not that the carrying amount may not be recoverable. Our policy is to recognize an impairment charge when the carrying amount is not recoverable and such amount exceeds fair value. To determine whether it is more likely than not that the carrying amount may not be recoverable, we assessed various factors including, but not limited to, our financial performance, any contemplated strategic changes to our lines of business, or any changes to the macroeconomic environment in which we operate. During the year ended December 31, 2015, there were no events or circumstances that indicated a potential impairment in our finite-lived intangibles.

We evaluate our indefinite lived intangibles, which consist primarily of the Sheridan trade name, for impairment at least on an annual basis. Impairment of the carrying value will also be evaluated more frequently if certain indicators are encountered. Indefinite lived intangibles are required to be tested at the reporting unit level, defined as an operating segment or one level below an operating segment (referred to as a component), with the fair value of the reporting unit being compared to its carrying amount, including indefinite lived intangibles. If the fair value of a reporting unit exceeds its carrying amount, the indefinite lived intangibles of the reporting unit are not considered to be impaired. During the year ended December 31, 2015, there were no events or circumstances that indicated a potential impairment in our indefinite lived intangibles.

Accrued Professional Liabilities

Given the nature of the services provided, we are subject to professional and general liability claims and related lawsuits in the ordinary course of business. We maintain professional insurance with third-party insurers generally on a claims-made basis, subject to self-insured retentions, exclusions and other restrictions. A substantial portion of our professional liability loss risks are being provided by a third-party insurer which is fully reinsured by our wholly-owned captive. In addition, our wholly-owned captive provides stop loss coverage for our self-insured employee health program related to our physician services division. The assets, liabilities and results of operations of our wholly-owned captive insurance company subsidiary are included in our consolidated financial statements.

The liabilities for self-insurance include estimates of the ultimate costs related to both reported claims on an individual and aggregate basis and unreported claims. We also obtain professional liability insurance on a claims-made basis from third party insurers for certain of our owned practices and employed physicians.

Our reserves for professional liability claims within the self-insured retention are based upon periodic actuarial calculations. Our reserves for losses and related expenses represent estimates involving actuarial and statistical projections, at a given point in time, of our expectation of the ultimate resolution plus administration costs of the losses that we have incurred. Our reserves are based on historical claims, demographic factors, industry trends, severity and exposure factors and other actuarial assumptions calculated by an independent actuarial firm. The independent actuarial firm performs studies of projected ultimate losses on an annual basis. We refer to these actuarial estimates as part of our process by which we determine appropriate reserves. Liabilities for claims incurred but not reported are not discounted. The estimation of professional liabilities is inherently complex and subjective, as these claims are typically resolved over an extended period of time, often as long as ten years or more. We periodically reevaluate our accruals for professional liabilities, and our actual results may vary significantly from our estimates if future claims differ from expected trends. The key assumptions used in our actuarial valuations are subject to constant adjustment as a result of changes in our actual loss history and the movement of projected emergence patterns as claims develop.

49


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Results of Operations

Our consolidated statements of earnings include the results of both our ambulatory services segment and our physician services segment. Our consolidated revenues consist of both facility fees charged for surgical procedures performed in our ASCs and fee for service revenue, contract revenue and other revenue derived principally from the provision of physician services to patients of the healthcare facilities we serve through our physician services segment. Additionally, at certain of our centers (primarily centers that perform gastrointestinal endoscopy procedures), we charge for anesthesia services provided by medical professionals employed or contracted by our centers. As it relates to our ambulatory services segment, we generally own a controlling interest, primarily 51%, in our centers, and our consolidated statements of earnings include 100% of the results of operations of each of our consolidated entities, reduced by the noncontrolling partners’ share of the net earnings or loss of the surgery centers. The noncontrolling ownership interest in each LP or LLC is generally held directly or indirectly by physicians who perform procedures at the center. We generally own 100% of the entities included in our physician services segment with the exception of our affiliated professional corporations which we consolidate as they are variable interest entities and we are the primary beneficiary. On a consolidated basis, our share of the profits and losses of non-consolidated entities is reported in equity in earnings of unconsolidated affiliates in our consolidated statements of earnings.

Our revenues are influenced by national surgery trends, hospital specific factors, and other factors affecting patient needs for medical services. National surgery trends can change based on changes in patient utilization, population growth and demographics, weather related disruptions, as well as general economic factors. Hospital-specific elements include changes in local availability of alternative sites of care to the patient, changes in surgeon utilization of the facility, construction and regulations that affect patient flow through the hospital. We believe patient utilization can be affected by changes in the portion of medical costs for which the patients themselves bear financial responsibility, by general economic conditions, and by other factors.

Our ambulatory services revenues are directly related to the number of procedures performed at our centers. Our overall growth in ASC procedure volume is impacted directly by the number of centers in operation and the procedure volume at existing centers. We increase our number of centers through acquisitions, joint venture partnerships and developments. Procedure growth at an existing center may result from additional contracts entered into with third-party payors, increased numbers of procedures performed by our physician partners, additional physicians utilizing the center and/or scheduling and operating efficiencies gained at the surgery center.

Our physician services revenues consist of fee for service revenue, contract revenue and other revenue. Fee for service revenue is primarily generated through the provision of anesthesiology, radiology, children's services and emergency medical services at the facilities we serve. Contract revenue reflects payments received or receivable directly from certain of the facilities where we provide medical services to supplement payments from third-party payors. We also earn other revenue for certain ancillary services performed.

Expenses associated with our ambulatory services segment relate directly and indirectly to procedures performed and include: clinical and administrative salaries and benefits, supply cost and other operating expenses such as linen cost, repair and maintenance of equipment, billing fees and bad debt expense. The majority of our salary and benefits cost is associated directly with the number of centers we own and manage and tends to grow in proportion to the growth in our number of centers in operation. We also incur operating expenses resulting from our corporate oversight which includes salaries and benefits of our operators and administrative support infrastructure. Our centers also incur costs that are more fixed in nature, such as lease expense, legal fees, property taxes, utilities and depreciation and amortization.

Salaries and benefits expense is a significant component of the total expenses associated with our physician services segment and includes compensation and benefits for our employed physicians and other professional providers as well as the salaries and benefits of our administrative support staff. Other operating expenses of our physician services segment includes professional liability costs, costs of business development and marketing, information technology, dues and licenses, occupancy costs and other administrative functions that are indirectly related to the operations of our physician group practices. Our professional liability costs include provisions for paid and estimated losses for actual claims and estimates of claims likely to be incurred in the period, based on our past loss experience and actuarial analysis provided by a third party, as well as actual direct costs, including investigation and defense costs, and other costs related to provider professional liability. We plan to continue to expand our investment in administrative support initiatives as a result of our planned future growth from new contracts and acquisitions.

Our depreciation expense primarily relates to charges for equipment and leasehold improvements. Amortization expense primarily relates to intangible assets recorded for customer relationships, computer software, and other technologies arising from acquisitions that we have made.

Our interest expense results primarily from our borrowings used to fund acquisition and development activity, as well as interest incurred on capital leases and the amortization of deferred financing costs.

50


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

The effective tax rate on pre-tax earnings as presented is approximately 23% for the year ended December 31, 2015. However, after removing the earnings attributable to non-controlling interest, our adjusted effective tax rate generally increases to approximately 40%. We file a consolidated federal income tax return and numerous state income tax returns with varying tax rates which reflects the blending of these rates.

Profits and losses are allocated to our noncontrolling partners, all of which relate to our ambulatory services segment, in proportion to their individual ownership percentages and reflected in the aggregate as total net earnings attributable to noncontrolling interests. The noncontrolling partners are typically organized as general partnerships, LPs or LLCs that are not subject to federal income tax. Each noncontrolling partner shares in the pre-tax earnings or loss of the entity of which it is a partner. Accordingly, net earnings attributable to the noncontrolling interests in each of our LPs and LLCs are generally determined on a pre-tax basis, and pre-tax earnings are presented before net earnings attributable to noncontrolling interests have been subtracted.

Consolidated Operations
 
The following table shows certain statement of earnings items expressed as a percentage of revenues for the years ended December 31, 2015, 2014 and 2013. The operating results of Sheridan are included in our operating results effective July 16, 2014.
  
2015
 
2014
 
2013
Net revenue
100.0
 %
 
100.0
 %
 
100.0
%
Operating expenses:
  
 
  
 
  
Salaries and benefits
51.2

 
42.8

 
31.0

Supply cost
7.2

 
10.1

 
14.5

Other operating expenses
15.5

 
17.6

 
20.5

Transaction costs
0.3

 
2.1

 

Depreciation and amortization
3.8

 
3.7

 
3.1

Total operating expenses
78.0

 
76.3

 
69.0

Net gain on deconsolidations
1.4

 
0.2

 
0.2

Equity in earnings of unconsolidated affiliates
0.6

 
0.4

 
0.3

Operating income
24.1

 
24.3

 
31.5

Interest expense
4.7

 
5.1

 
2.8

Debt extinguishment costs

 
1.0

 

Earnings from continuing operations before income taxes
19.3

 
18.1

 
28.7

Income tax expense
4.4

 
3.0

 
4.6

Net earnings from continuing operations
14.9

 
15.2

 
24.1

Net earnings (loss) from discontinued operations

 
(0.1
)
 
0.7

Net earnings
14.8

 
15.1

 
24.7

Net earnings attributable to noncontrolling interests
8.5

 
11.8

 
17.9

Net earnings attributable to AmSurg Corp. shareholders
6.3
 %
 
3.3
 %
 
6.9
%


51


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Year Ended December 31, 2015 Compared to Year Ended December 31, 2014

We experienced significant changes in our consolidated operations primarily due to the following factors:

our operating results for the year ended December 31, 2015 include the operating results of Sheridan for a full fiscal year. Our prior year results only include Sheridan from July 16 through December 31, 2014;
we incurred additional interest expense associated with the debt financing consummated in July of 2014 to complete the acquisition of Sheridan;
we completed acquisitions in both our ambulatory services and physician services segments; and
we experienced a positive increase in our same center and same contract organic growth during the current year.

Net revenue increased $944.9 million, or 58.3%, to $2.6 billion in 2015 from $1.6 billion in 2014. Our consolidated net revenue was impacted during 2015 primarily due to the following:

an increase of $824.8 million associated with the acquisition of Sheridan and subsequent acquisitions in our physician services segment; and
an increase of $120.1 million associated with our ambulatory services segment.

Operating income increased $223.1 million, or 56.6%, to $617.5 million during the year ended December 31, 2015, from $394.4 million in 2014. Our operating income was impacted during the year ended December 31, 2015 primarily due to the following:

an increase of $100.1 million associated with the acquisition of Sheridan and subsequent acquisitions in our physician services segment; and
an increase of $123.1 million associated with results from our ambulatory services segment which includes a $39.8 million increase in the net gain on deconsolidations.

Net interest expense increased to $121.6 million in the year ended December 31, 2015 from $83.3 million in 2014, primarily due to having the full year impact of the increased indebtedness which resulted due to the financings consummated during 2014 to complete the acquisition of Sheridan. In addition, during 2014 we recorded $12.8 million in interest expense in the accompanying statements of earnings related to fees paid to obtain a commitment for bridge financing in order to effect the Sheridan transaction. During 2014, we were able to obtain permanent financing and therefore expensed the commitment fee. See “- Liquidity and Capital Resources.” for additional information.

On July 3, 2014, we redeemed our senior secured notes due 2020 (the Senior Secured Notes) and terminated our obligation under our revolving credit facility utilizing proceeds received from our common and preferred stock offerings. As a result, we recognized debt extinguishment costs of $16.9 million, which included an early termination fee of approximately $12.4 million to the holders of the Senior Secured Notes and the write-off of net deferred loan costs of approximately $4.5 million primarily related to the existing revolving credit facility.

We recognized income tax expense of $113.8 million for the year ended December 31, 2015, compared to $48.1 million in the year ended December 31, 2014. Our increase in tax expense for the year ended December 31, 2015 is due to having a full twelve months of operating activity from our physician services segment as compared to approximately six months in the prior year and due to the reduction in transaction cost in the current year, which were higher in the prior year due the acquisition of Sheridan. Our effective tax rate during the year ended December 31, 2015 was approximately 23% of earnings from continuing operations. This differs from the federal statutory income tax rate of 35% primarily due to the exclusion of the noncontrolling interests’ share of pre-tax earnings and the impact of state income taxes. However, after removing the earnings attributable to non-controlling interest, our adjusted effective tax rate generally increases to approximately 40%. For the year ended December 31, 2015, our adjusted effective tax rate was approximately 41%.

Noncontrolling interests in net earnings for the year ended December 31, 2015 increased $27.1 million from the year ended December 31, 2014, primarily as a result of noncontrolling interests in earnings at surgery centers recently added to operations. Due to the inclusion of Sheridan's revenue in the years ended December 31, 2015 and 2014, noncontrolling interests in earnings as a percentage of revenues decreased to 8.5% during 2015 from 11.8% during 2014.


52


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
 
We experienced significant changes in our consolidated operations primarily due to the following factors:

operating results of Sheridan for the period from July 16, 2014 through December 31, 2014;
transaction costs associated with the acquisition of Sheridan;
additional interest expense and related charges associated with the new debt financing required to complete the acquisition of Sheridan; and
acquisitions of ASCs and growth in same-center results.

Net revenue increased $564.8 million, or 53.4%, to $1.622 billion in 2014 from $1.057 billion in 2013. Our consolidated net revenue was impacted during 2014 primarily due to the following:

an increase of $512.0 million associated with the acquisition of Sheridan on July 16, 2014; and
an increase of $52.7 million associated with our ambulatory services segment.

Operating income increased $61.7 million, or 18.5%, to $394.4 million during the year ended December 31, 2014, from $332.7 million in 2013. Our operating income was impacted during the year ended December 31, 2014 primarily due to the following:

an increase of $76.7 million associated with the acquisition of Sheridan on July 16, 2014; and
a decrease of operating income due to transaction costs primarily associated with the acquisition of Sheridan of $33.9 million for the year ended December 31, 2014.

Interest expense increased to $83.3 million in the year ended December 31, 2014 from $29.5 million in 2013, primarily due to increased indebtedness as a result of the financings associated with the acquisition of Sheridan during the year ended December 31, 2014. 

On July 3, 2014, we redeemed our Senior Secured Notes and terminated our obligation under our existing revolving credit facility utilizing proceeds received from our common and preferred stock offerings. As a result, we recognized debt extinguishment costs of $16.9 million, which included an early termination fee of approximately $12.4 million to the holders of the Senior Secured Notes and the write-off of net deferred loan costs of approximately $4.5 million primarily related to the existing revolving credit facility.

We recognized income tax expense of $48.1 million for the year ended December 31, 2014, compared to $48.7 million in the year ended December 31, 2013. Our reduction in tax expense for the year ended December 31, 2014 is due to the fact we recorded a loss attributable to the recognition of certain of the Sheridan transaction costs in which the tax benefit substantially offset the tax expense derived from our physician services segment. Our effective tax rate during the year ended December 31, 2014 was approximately 16% of earnings from continuing operations. However, after removing the earnings attributable to non-controlling interest, our adjusted effective tax rate generally increases to approximately 40%. For the year ended December 31, 2014, our effective tax rate was 46% which differs from our historical percentage of approximately 40% due to the non-deductibility for tax purposes of certain transaction costs as well as other deferred tax adjustments resulting from the Sheridan transaction and from the impact of gains and losses from the deconsolidation and disposals of certain of our centers which were recognized during the year.

Noncontrolling interests in net earnings for the year ended December 31, 2014 increased $2.3 million from the year ended December 31, 2013, primarily as a result of noncontrolling interests in earnings at surgery centers recently added to operations. All of the results of operations related to noncontrolling interests relate to our ownership of ambulatory services. Due to the inclusion of Sheridan's revenue in 2014, noncontrolling interests in earnings of surgery centers as a percentage of revenues decreased to 11.8% in the year ended December 31, 2014 from 17.9% in 2013.

53


Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Ambulatory Services Operations

The following table presents the number of procedures performed at our continuing centers and changes in the number of ASCs in operation, under development and under letter of intent for the years ended December 31, 2015, 2014 and 2013. An ASC is deemed to be under development when a LLC or LP has been formed with the physician partners to develop the ASC.
 
2015
 
2014
 
2013
Procedures
1,729,262

 
1,645,350

 
1,609,761

Centers in operation, end of period (consolidated)
236