| Organization, Basis of Presentation and Significant Accounting Policies | Organization, Basis of Presentation and Significant Accounting Policies Organization Surgery Partners, Inc. , a Delaware corporation, acting through its subsidiaries, owns and operates a national network of surgical facilities and ancillary services. The surgical facilities, which include ambulatory surgery centers ("ASCs") and surgical hospitals, primarily provide non-emergency surgical procedures across many specialties, including, among others, gastroenterology ("GI"), general surgery, ophthalmology, orthopedics and pain management. The surgical hospitals also provide services such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care. Ancillary services are comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services and optical services. Unless context otherwise indicates, Surgery Partners, Inc. and its subsidiaries are referred to herein as the "Company." As of September 30, 2018 , the Company owned or operated a portfolio of 124 surgical facilities, comprised of 106 ASCs and 18 surgical hospitals in 32 states. The Company owns a majority of these facilities in partnership with physicians and, in some cases, healthcare systems in the markets and communities it serves. The Company owned a majority interest in 84 of the surgical facilities and consolidated 105 of these facilities for financial reporting purposes. Basis of Presentation The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair presentation of the Company's financial position and results of operations have been included. The Company’s fiscal year ends on December 31 and interim results are not necessarily indicative of results for a full year or any other interim period. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017 . The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, as well as interests in partnerships and limited liability companies controlled by the Company through its ownership of a majority voting interest or other rights granted to the Company by contract to manage and control the affiliate's business. All significant intercompany balances and transactions are eliminated in consolidation. In connection with the change of control effective August 31, 2017, the Company elected to apply “pushdown” accounting by applying the guidance in Accounting Standards Codification Topic ("ASC") 805, Business Combinations . Accordingly, the condensed consolidated financial statements of the Company for periods before and after August 31, 2017 reflect different bases of accounting, and the financial positions and results of operations of those periods are not comparable. Throughout the Company's condensed consolidated financial statements and the accompanying notes herein, periods prior to the change of control are identified as "Predecessor" and periods after the change of control are identified as "Successor." See Note 2. Acquisitions and Developments for further discussion of the change of control. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and footnotes. Examples include, but are not limited to, estimates of accounts receivable allowances, professional and general liabilities and the estimate of deferred tax assets or liabilities. Actual results could differ from those estimates. Variable Interest Entities The condensed consolidated financial statements include the accounts of variable interest entities ("VIEs") in which the Company is the primary beneficiary under the provisions of ASC 810, Consolidation . The Company has the power to direct the activities that most significantly impact a VIEs economic performance, and the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur. As of September 30, 2018 (Successor), the consolidated VIEs include four surgical facilities, three anesthesia practices and four physician practices. During the nine months ended September 30, 2018 (Successor), the Company divested of one surgical facility and acquired a physician practice, which were classified as VIEs. As of December 31, 2017 (Successor), the consolidated VIEs included five surgical facilities, three anesthesia practices and three physician practices. The total assets (excluding goodwill and intangible assets, net) of the consolidated VIEs included in the accompanying condensed consolidated balance sheets as of September 30, 2018 (Successor) and December 31, 2017 (Successor), were $6.5 million and $13.1 million , respectively, and the total liabilities of the consolidated VIEs were $3.4 million and $5.8 million , respectively. Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. The Company uses fair value measurements based on quoted prices in active markets for identical assets or liabilities (Level 1), inputs other than quoted prices in active markets that are either directly or indirectly observable (Level 2), or unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions (Level 3), depending on the nature of the item being valued. The carrying amounts reported in the condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, restricted invested assets and accounts payable approximate their fair values. A summary of the carrying amounts and fair values of the Company's long-term debt follows (in thousands): Successor Carrying Amount Fair Value September 30, December 31, 2017 September 30, December 31, 2017 2017 Senior Secured Credit Facilities: Revolver $ 11,000 $ — $ 11,000 $ — Term Loan $ 1,271,397 $ 1,280,532 $ 1,272,986 $ 1,267,189 Senior Unsecured Notes due 2021 $ 407,372 $ 409,235 $ 423,667 $ 422,535 Senior Unsecured Notes due 2025 $ 370,000 $ 370,000 $ 355,200 $ 346,413 The fair values of the Term Loan, Senior Unsecured Notes due 2021 and the Senior Unsecured Notes due 2025 were based on a Level 2 inputs using quoted prices for identical liabilities in inactive markets at September 30, 2018 (Successor) and December 31, 2017 (Successor). The carrying amounts related to the Company's other long-term debt obligations, including the Revolver, approximate their fair values. During the nine months ended September 30, 2018 (Successor), the Company entered into certain derivative financial instruments. A summary of the fair values of the Company's derivative financial instruments follows (in thousands): Successor Fair Value September 30, December 31, 2017 Derivative liabilities Interest rate swap agreement $ 1,389 $ — The fair value of the derivative financial instruments was based on a quoted market price, or a Level 2 computation. As of September 30, 2018 (Successor), the fair value of the derivative liabilities was included in other long-term liabilities in the condensed consolidated balance sheets. As of December 31, 2017 (Successor), the Company had no derivative financial instruments. The Company maintains a supplemental executive retirement savings plan (the "SERP") for certain executives. The SERP is a non-qualified deferred compensation plan for eligible executive officers and other key employees of the Company that allows participants to defer portions of their compensation. The fair value of the SERP asset and liability was based on a quoted market price, or a Level 1 computation. As of both September 30, 2018 (Successor) and December 31, 2017 (Successor), the fair value of both the assets and liabilities in the SERP were $1.6 million and were included in other long-term assets and other long-term liabilities in the condensed consolidated balance sheets. Revenues In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers . The Company adopted the new standard effective January 1, 2018, using the modified retrospective method. The adoption of the new standard did not have an impact on our recognition of net revenues for any periods prior to adoption. The majority of the “Provision for doubtful accounts” will continue to be recognized as an operating expense rather than as a direct reduction to revenues, given the Company’s practice of assessing a patient’s ability to pay prior to or on the date of providing healthcare services. After initial recognition, the Company’s accounts receivables are subject to impairment assessments periodically based on changes in credit risks using historical trends of cash collections, write-offs, accounts receivable agings and other factors. The Company's revenues generally relate to contracts with patients in which the performance obligations are to provide healthcare services. The Company recognizes revenues in the period in which our obligations to provide health care services are satisfied and reports the amount that reflects the consideration the Company expects to be entitled to. The Company's performance obligations are generally satisfied over a period of less than one day. The contractual relationships with patients, in most cases, also involve a third-party payer (Medicare, Medicaid, managed care health plans, employers and commercial insurance companies, including plans offered through the health insurance exchanges) and the transaction prices for the services provided are dependent upon the terms provided by (Medicare and Medicaid) or negotiated with (managed care health plans, employers and commercial insurance companies) the third-party payers. The payment arrangements with third-party payers for the services provided to the related patients typically specify payments at amounts less than the Company's standard charges. Medicare generally pays for services at prospectively determined rates based on clinical, diagnostic and other factors. Services provided to patients having Medicaid coverage are generally paid at prospectively determined rates per discharge, per identified service or per covered member. Agreements with commercial insurance carriers, managed care and preferred provider organizations generally provide for payments based upon predetermined rates per diagnosis, per diem rates or discounted fee-for-service rates. The Company continually reviews the contractual estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms resulting from contract renegotiations and renewals. A summary of revenues by service type as a percentage of total revenues follows: Successor Predecessor Successor Predecessor Three Months Ended September 30, September 1 to September 30, July 1 to August 31, Nine Months Ended September 30, January 1 to August 31, 2018 2017 2017 2018 2017 Patient service revenues: Surgical facilities revenues 93.2 % 94.0 % 95.5 % 93.2 % 91.4 % Ancillary services revenues 4.7 % 4.2 % 2.7 % 4.8 % 7.0 % 97.9 % 98.2 % 98.2 % 98.0 % 98.4 % Other service revenues: Optical services revenues 0.6 % 0.7 % 1.1 % 0.6 % 1.0 % Other revenues 1.5 % 1.1 % 0.7 % 1.4 % 0.6 % 2.1 % 1.8 % 1.8 % 2.0 % 1.6 % Total revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Patient service revenues. This includes revenue related to charging facility fees in exchange for providing patient care. The fee charged for healthcare procedures performed in surgical facilities varies depending on the type of service provided, but usually includes all charges for usage of an operating room, a recovery room, special equipment, medical supplies, nursing staff and medications. The fee does not normally include professional fees charged by the patient’s surgeon, anesthesiologist or other attending physician, which are billed directly by such physicians to the patient or third-party payor. However, in several surgical facilities, the Company charges for anesthesia services. Ancillary service revenues include fees for patient visits to the Company's physician practices, pharmacy services and diagnostic tests ordered by physicians. Patient service revenues are recognized as performance obligations are satisfied. Performance obligations are based on the nature of services provided. Typically, the Company recognizes revenue at a point in time in which services are rendered and the Company has no obligation to provide further patient services. As the Company primarily performs outpatient procedures, performance obligations are generally satisfied same day and revenue is recognized on the date of service. The Company determines the transaction price based on gross charges for services provided, net of estimated contractual adjustments, discounts from third-party payors, including Medicare and Medicaid. The Company estimates its contractual adjustments and discounts based on contractual agreements, its discount policies and historical experience. Changes in estimated contractual adjustments and discounts are recorded in the period of change. During the three and nine months ended September 30, 2018 (Successor), the Company recognized an increase in patient service revenues as a result of changes in estimates to third-party settlements related to prior years of approximately $1.4 million for both periods. There were no adjustments as a result of changes in estimates to third-party settlements related to prior years for the one month ended September 30, 2017 (Successor). During the two and eight months ended August 31, 2017 (Predecessor), the Company recognized an increase to patient service revenues as a result of changes in estimates to third-party settlements related to prior years of approximately $0.6 million and $1.1 million , respectively. The following table sets forth patient service revenues by type of payor and as a percentage of total patient service revenues for the Company's consolidated surgical facilities (dollars in thousands): Successor Predecessor Three Months Ended September 30, September 1 to September 30, July 1 to August 31, 2018 2017 2017 Amount % Amount % Amount % Patient service revenues: Private insurance $ 230,718 53.1 % $ 72,930 56.2 % $ 80,166 46.9 % Government 166,880 38.4 % 46,162 35.5 % 73,734 43.1 % Self-pay 12,742 2.9 % 3,861 3.0 % 4,119 2.4 % Other (1) 24,345 5.6 % 6,883 5.3 % 12,909 7.6 % Total patient service revenues 434,685 100.0 % 129,836 100.0 % 170,928 100.0 % Other service revenues: Optical services revenues 2,699 888 1,905 Other revenues 6,548 1,534 1,246 Total revenues $ 443,932 $ 132,258 $ 174,079 Successor Predecessor Nine Months Ended September 30, September 1 to September 30, January 1 to August 31, 2018 2017 2017 Amount % Amount % Amount % Patient service revenues: Private insurance $ 682,479 53.3 % $ 72,930 56.2 % $ 360,092 48.9 % Government 493,362 38.6 % 46,162 35.5 % 308,993 42.0 % Self-pay 39,050 3.1 % 3,861 3.0 % 15,949 2.2 % Other (1) 64,075 5.0 % 6,883 5.3 % 51,374 6.9 % Total patient service revenues 1,278,966 100.0 % 129,836 100.0 % 736,408 100.0 % Other service revenues: Optical services revenues 8,437 888 7,629 Other revenues 18,673 1,534 4,578 Total revenues $ 1,306,076 $ 132,258 $ 748,615 (1) Other is comprised of anesthesia service agreements, auto liability, letters of protection and other payor types. Other service revenues. Optical service revenues consist of product sales from the Company's optical laboratories as well as handling charges billed to the members of the Company's optical products purchasing organization. The Company's optical products purchasing organization negotiates volume buying discounts with optical products manufacturers. The buying discounts and any handling charges billed to the members of the buying group represent the revenue recognized for financial reporting purposes. The Company satisfies the performance obligation and recognizes revenue when the orders are shipped to members. The Company bases its estimates for sales returns and discounts on historical experience and has not experienced significant fluctuations between estimated and actual return activity and discounts given. The Company's optical laboratories manufacture and distribute corrective lenses and eyeglasses to ophthalmologists and optometrists. The Company satisfies the performance obligation and recognize revenue when the product is shipped, net of allowance for discounts. Other revenues include management and administrative service fees derived from the non-consolidated facilities that the Company accounts for under the equity method, management of surgical facilities in which it does not own an interest, and management services provided to physician practices for which the Company is not required to provide capital or additional assets. These agreements typically require the Company to provide recurring management services over a multi-year period which are billed and collected on a monthly basis. The fees derived from these management arrangements are based on a predetermined percentage of the revenues of each facility or practice and are recognized in the period in which management services are rendered and billed. Cash, Cash Equivalents and Restricted Cash The following table reconciles cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the totals shown within the condensed consolidated statement of cash flows (in thousands): Successor September 30, December 31, Cash and cash equivalents $ 79,123 $ 174,914 Restricted invested assets included in other long-term assets 315 315 Total cash, cash equivalents and restricted cash in the statement of cash flows $ 79,438 $ 175,229 Restricted invested assets included in other long-term assets on the condensed consolidated balance sheet represents restricted cash held in accordance with the provisions of the operating lease agreement at the Company's Chesterfield, Missouri facility. The Company has a deposit with the landlord that shall be held as security for performance under the Company's covenants and obligations within the agreement through January 2024. Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts With the Company's adoption of ASC 2014-09 on January 1, 2018, for those accounts in which the Company has an unconditional right to payment, subject only to the passage of time, the right is recorded as a receivable. Accounts receivable are recorded net of contractual adjustments and allowances for doubtful accounts to reflect accounts receivable at net realizable value. Accounts receivable consists of receivables from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies, employers and patients. Management recognizes that revenues and receivables from government agencies are significant to the Company's operations, but it does not believe that there is significant credit risk associated with these government agencies. Concentration of credit risk with respect to other payors is limited because of the large number of such payors. The Company had a net third-party Medicaid settlements liability of $7.7 million and $1.0 million as of September 30, 2018 (Successor) and December 31, 2017 (Successor), respectively, included in other current liabilities in the condensed consolidated balance sheets. The Company recognizes that final reimbursement of accounts receivable is subject to final approval by each third-party payor. However, because the Company has contracts with its third-party payors and also verifies insurance coverage of the patient before medical services are rendered, the amounts that are pending approval from third-party payors are not considered significant. The Company's policy is to collect co-payments and deductibles prior to providing medical services. It is also the Company's policy to verify a patient’s insurance prior to the patient’s procedure. Patient services of the Company are primarily non-emergency, which allows the surgical facilities to control the procedures for which third-party reimbursement is sought and obtained. The Company does not require collateral from self-pay patients. The Company analyzes accounts receivable at each of its facilities to ensure the proper aged category and collection assessment. At a consolidated level, the Company's policy is to review accounts receivable aging, by facility, to determine the appropriate allowance for doubtful accounts. Patient account balances are reviewed for delinquency based on contractual terms. This review is supported by an analysis of the actual revenues, contractual adjustments and cash collections received. An account balance is written off only after the Company has pursued collection with legal or collection agency assistance or otherwise has deemed an account to be uncollectible. The receivables related to the Company's optical products purchasing organization are recognized separately from patient accounts receivable, as discussed above, and are included in other current assets in the condensed consolidated balance sheets. Such receivables were $9.3 million and $7.6 million at September 30, 2018 (Successor) and December 31, 2017 (Successor), respectively. Goodwill Goodwill represents the fair value of the consideration provided in an acquisition over the fair value of net assets acquired and is not amortized. Additions to goodwill include amounts resulting from new business combinations and incremental ownership purchases in the Company's subsidiaries. A summary of the Company's acquisitions for the nine months ended September 30, 2018 is included in Note 2. Acquisitions and Developments. A summary of activity related to goodwill for the nine months ended September 30, 2018 (Successor) follows (in thousands): Successor Balance at December 31, 2017 $ 3,346,838 Acquisitions, including post acquisition adjustments 57,710 Divestitures and deconsolidations (31,942 ) Balance at September 30, 2018 $ 3,372,606 Other Current Liabilities A summary of other current liabilities follows (in thousands): Successor September 30, December 31, Interest payable $ 28,322 $ 20,537 Amounts due to patients and payors 22,400 18,096 Accrued expenses and other 72,216 71,311 Total $ 122,938 $ 109,944 Other Long-Term Liabilities A summary of other long-term liabilities follows (in thousands): Successor September 30, December 31, Facility lease obligations $ 138,116 $ 121,627 Other 109,195 100,853 Total $ 247,311 $ 222,480 At four of the Company's surgical facilities, the Company has financing obligations payable to the lessors of certain land, buildings and improvements. Payments are allocated to principal adjustments of the financing obligations and interest expense. The current portions of the financing obligations were $6.8 million and $6.3 million at September 30, 2018 (Successor) and December 31, 2017 (Successor), respectively, and were included in other current liabilities in the condensed consolidated balance sheets. The long-term portions of the financing obligations are included as facility lease obligations in the table above. In 2017, one of the Company's surgical facilities entered into a development agreement to construct a new hospital. Due to certain provisions of the agreement, the surgical facility is deemed the owner during construction, and as such, the Company records the ongoing costs as incurred as a deferred financing obligation. As of September 30, 2018 (Successor), the Company has recorded a total of $36.7 million of costs for this project, of which $23.1 million was recorded during the nine months ended September 30, 2018 (Successor). These project costs are included as non-cash additions to property and equipment, net in the condensed consolidated balance sheet and as a component of facility lease obligations. Derivative Instruments and Hedging Activities In accordance with ASC 815, Derivatives and Hedging (“ASC 815”), the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Non-Controlling Interests—Redeemable Each partnership and limited liability company through which the Company owns and operates its surgical facilities is governed by a partnership or operating agreement, respectively. In certain circumstances, the applicable partnership or operating agreements for the Company's surgical facilities provide that the facilities will purchase all of the physician limited partners’ or physician minority members’, as applicable, ownership if certain adverse regulatory events occur, such as it becoming illegal for the physician(s) to own an interest in a surgical facility, refer patients to a surgical facility or receive cash distributions from a surgical facility. The non-controlling interests — redeemable are reported outside of stockholders' equity in the condensed consolidated balance sheets. A summary of activity related to the non-controlling interests—redeemable follows (in thousands): Successor Balance at December 31, 2017 $ 299,316 Net income attributable to non-controlling interests—redeemable 20,528 Acquisition and disposal of shares of non-controlling interests, net—redeemable (1) 20,279 Distributions to non-controlling interest—redeemable holders (22,582 ) Balance at September 30, 2018 $ 317,541 (1) Includes post acquisition date adjustments. Recent Accounting Pronouncements In May 2014, the FASB issued ASU 2014-09, " Revenue from Contracts with Customers ," along with subsequent amendments, updates and an extension of the effective date (collectively the "New Revenue Standard"), which outlines a single comprehensive model for recognizing revenue and supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. This five-step process requires significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. The Company adopted this ASU on January 1, 2018 using the modified retrospective approach. The adoption of this standard did not have a significant impact on the recognition of net revenues for any period. Adoption of the standard resulted in the Company revising its related disclosures. In February 2016, the FASB issued ASU 2016-02, " Leases, " which will require, among other items, lessees to recognize most leases as assets and liabilities on the balance sheet. Qualitative and quantitative disclosures will be enhanced to better understand the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. In preparation of adopting the new standard, the Company has engaged outside consultants to assist in the identification of the Company's population of leases, implementing a new software for lease accounting and assisting in evaluating new accounting policy elections. The Company will adopt this ASU on January 1, 2019 and believes the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases with material increases in reported property and equipment and liabilities. The Company is still evaluating the effect of adoption on financial disclosures, policies, procedures and control framework. In November 2016, the FASB issued ASU 2016-18, " Statement of Cash Flows – Restricted Cash ," which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted this ASU on January 1, 2018 and retrospectively applied the guidance to all periods presented in the condensed consolidated statement of cash flows. The retrospective application to prior periods had no impact on the Company's cash flows from operating, investing and financing activities as previously disclosed. The adoption of this ASU resulted in the modification of the Company's presentation of the reconciliation of beginning-of-period and end-of-period total amounts shown on the condensed consolidated statement of cash flows to include restricted cash as discussed under the heading "Cash and Cash Equivalents" above. |
