10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________________

Form 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Commission file number:  001-37576

Surgery Partners, Inc.

(Exact name of registrant as specified in its charter)

Delaware	47-3620923
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

40 Burton Hills Boulevard, Suite 500

Nashville, Tennessee 37215

(Address of principal executive offices and zip code)

(615) 234-5900

(Registrant’s telephone number, including area code)

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  o

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  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No  x

As of November 9, 2017, there were 48,769,296 shares of the registrant’s common stock outstanding.

SURGERY PARTNERS, INC.

FORM 10-Q

TABLE OF CONTENTS

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets (Unaudited)	1
	Condensed Consolidated Statements of Operations (Unaudited)	2
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	3
	Condensed Consolidated Statements of Stockholders' Equity (Unaudited)	4
	Condensed Consolidated Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	61
Item 4.	Controls and Procedures	61
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62
Item 3.	Defaults Upon Senior Securities	62
Item 4.	Mine Safety Disclosures	62
Item 5.	Other Information	62
Item 6.	Exhibits	63

PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands, except shares and per share amounts)

	Successor			Predecessor
	September 30, 2017			December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	199,701		$	69,699
Accounts receivable, less allowance for doubtful accounts of $2,045 and $29,872, respectively	271,140			220,594
Inventories	44,523			28,777
Prepaid expenses and other current assets	53,724			32,014
Acquisition escrow deposit	4,571			10,871
Total current assets	573,659			361,955
Property and equipment, net	388,697			204,253
Intangible assets, net	56,507			48,023
Goodwill	3,270,309			1,555,204
Investments in and advances to affiliates	64,427			34,980
Restricted invested assets	315			315
Long-term deferred tax assets	209,207			83,793
Long-term acquisition escrow deposit	19,600			—
Other long-term assets	19,133			16,435
Total assets	$	4,601,854		$	2,304,958
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	73,251		$	49,766
Accrued payroll and benefits	42,439			29,273
Acquisition escrow liability	4,571			10,871
Other current liabilities	106,279			68,993
Current maturities of long-term debt	48,472			27,822
Total current liabilities	275,012			186,725
Long-term debt, less current maturities	2,144,862			1,414,421
Long-term tax receivable agreement liability	68,148			122,351
Long-term acquisition escrow liability	19,600			—
Other long-term liabilities	116,799			76,266
Non-controlling interests—redeemable	271,416			180,521
Redeemable preferred stock - Series A, 310,000 shares authorized, issued and outstanding, redemption value of $326,882 at September 30, 2017; no shares were authorized issued or outstanding at December 31, 2016.	326,882			—
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares issued or outstanding	—			—
Common stock, $0.01 par value, 300,000,000 shares authorized, 48,769,296 shares issued and outstanding at September 30, 2017; 48,488,616 shares issued and outstanding at December 31, 2016	488			485
Additional paid-in capital	704,054			320,543
Retained deficit	(9,140		)	(311,351		)
Total Surgery Partners, Inc. stockholders' equity	695,402			9,677
Non-controlling interests—non-redeemable	683,733			314,997
Total stockholders' equity	1,379,135			324,674
Total liabilities and stockholders' equity	$	4,601,854		$	2,304,958

See notes to unaudited condensed consolidated financial statements.

1

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands, except shares and per share amounts)

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Revenues	$	132,258		$	174,079		$	282,682		$	748,615		$	839,437
Operating expenses:
Salaries and benefits	41,784			61,240			85,724			241,149			266,401
Supplies	35,028			48,078			65,907			193,322			196,484
Professional and medical fees	11,254			14,229			20,856			57,931			60,813
Lease expense	6,858			9,203			13,204			36,503			38,712
Other operating expenses	8,000			11,022			15,703			43,267			44,539
Cost of revenues	102,924			143,772			201,394			572,172			606,949
General and administrative expenses (1)	7,777			12,601			14,985			46,797			42,205
Depreciation and amortization	3,330			7,599			9,713			30,124			28,984
Provision for doubtful accounts	3,690			4,834			8,514			16,297			15,931
Income from equity investments	(712		)	(896		)	(1,167		)	(3,148		)	(3,007		)
Loss on disposal or impairment of long-lived assets, net	333			114			572			1,715			1,697
Merger transaction and integration costs	2,983			2,343			1,864			5,584			6,361
Loss on debt refinancing	—			18,211			3,595			18,211			11,876
Gain on litigation settlement	—			—			—			(3,794		)	—
Gain on acquisition escrow release	—			(1,000		)	—			(1,000		)	—
Electronic health records incentive expense (income)	7			(3		)	364			(305		)	269
Other (income) expense	—			—			—			(2		)	97
Total operating expenses	120,332			187,575			239,834			682,651			711,362
Operating income (loss)	11,926			(13,496		)	42,848			65,964			128,075
Gain on amendment to tax receivable agreement	1,098			15,294			—			15,294			—
Tax receivable agreement expense	—			—			(3,733		)	—			(3,733		)
Interest expense, net	(15,883		)	(18,147		)	(26,475		)	(68,929		)	(74,863		)
(Loss) income before income taxes	(2,859		)	(16,349		)	12,640			12,329			49,479
Income tax (benefit) expense	(211		)	(20,718		)	(1,694		)	(18,089		)	2,496
Net (loss) income	(2,648		)	4,369			14,334			30,418			46,983
Less: Net income attributable to non-controlling interests	(6,492		)	(8,813		)	(16,672		)	(42,087		)	(54,392		)
Net loss attributable to Surgery Partners, Inc.	$	(9,140	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)
Net loss per share attributable to common stockholders (2)
Basic	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Diluted (3)	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Weighted average common shares outstanding
Basic	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706
Diluted (3)	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706

⁽¹⁾Includes contingent acquisition compensation expense of $605,000 for the one month ended September 30, 2017(Successor), $1.2 million and $5.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $1.5 million and $3.1 million for the three and nine months ended September 30, 2016, respectively.

⁽²⁾Includes the impact of amounts allocated to participating securities. See Note 6. "Earnings Per Share" for the calculation of net loss per share attributable to common stockholders.

⁽³⁾The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in those periods.

See notes to unaudited condensed consolidated financial statements.

2

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited, amounts in thousands)

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Net (loss) income	(2,648		)	4,369			14,334			30,418			46,983
Other comprehensive income	—			—			—			—			—
Comprehensive (loss) income	$	(2,648	)	$	4,369		$	14,334		$	30,418		$	46,983
Less: Comprehensive income attributable to non-controlling interests	(6,492		)	(8,813		)	(16,672		)	(42,087		)	(54,392		)
Comprehensive loss attributable to Surgery Partners, Inc.	$	(9,140	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)

See notes to unaudited condensed consolidated financial statements.

3

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited, amounts in thousands, except shares)

	Common Stock				Additional Paid-in Capital			Retained Deficit			Non-Controlling Interests— Non-Redeemable			Total
	Shares		Amount
Predecessor
Balance at December 31, 2016	48,488,616		$	485	$	320,543		$	(311,351	)	$	314,997		$	324,674
Net (loss) income	—		—		—			(11,669		)	32,472			20,803
Issuance of restricted and unrestricted shares	355,607		3		(3		)	—			—			—
Equity-based compensation	—		—		3,697			—			—			3,697
Cancellation of restricted shares	(33,908	)	—		(790		)	—			—			(790		)
Acquisition of NSH	—		—		—			—			172,645			172,645
Acquisition and disposal of shares of non-controlling interests, net	—		—		3,483			—			(5,629		)	(2,146		)
Distributions to non-controlling interests—non-redeemable holders	—		—		—			—			(38,875		)	(38,875		)
Balance at August 31, 2017	48,810,315		$	488	$	326,930		$	(323,020	)	$	475,610		$	480,008
	Common Stock				Additional Paid-in Capital			Retained Deficit			Non-Controlling Interests— Non-Redeemable			Total
	Shares		Amount
Successor
Balance at September 1, 2017	48,810,315		$	488	$	720,118		$	—		$	684,480		$	1,405,086
Net (loss) income	—		—		—			(9,140		)	5,438			(3,702		)
Issuance of restricted and unrestricted shares	—		—		—			—			—			—
Equity-based compensation	—		—		1,683			—			—			1,683
Cancellation of restricted shares	(41,019	)	—		—			—			—			—
Preferred dividends	—		—		(2,633		)	—			—			(2,633		)
Mark to redemption adjustment	—		—		(15,566		)	—			—			(15,566		)
Acquisition and disposal of shares of non-controlling interests, net	—		—		452			—			(471		)	(19		)
Distributions to non-controlling interests—non-redeemable holders	—		—		—			—			(5,714		)	(5,714		)
Balance at September 30, 2017	48,769,296		$	488	$	704,054		$	(9,140	)	$	683,733		$	1,379,135

See notes to unaudited condensed consolidated financial statements.

4

SURGERY PARTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

	Successor			Predecessor
	September 1 to September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016
Cash flows from operating activities:
Net (loss) income	$	(2,648	)	$	30,418		$	46,983
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	3,330			30,124			28,984
Amortization of debt issuance costs, discounts and premium	(103		)	5,091			5,295
Amortization of unfavorable lease liability	(27		)	(217		)	(323		)
Equity-based compensation	1,683			3,697			1,326
Loss on disposal or impairment of long-lived assets, net	333			1,715			1,697
Loss on debt refinancing	—			18,211			11,876
Gain on amendment to tax receivable agreement	(1,098		)	(15,294		)	—
Tax receivable agreement expense	—			—			3,733
Deferred income taxes	(465		)	(18,703		)	1,903
Provision for doubtful accounts	3,690			16,297			15,931
(Income) loss from equity investments, net of distributions received	(203		)	489			(138		)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(2,795		)	8,837			(38,480		)
Other operating assets and liabilities	(2,919		)	(12,947		)	14,076
Net cash (used in) provided by operating activities	(1,222		)	67,718			92,863
Cash flows from investing activities:
Purchases of property and equipment, net	(1,840		)	(18,773		)	(28,377		)
Payments for acquisitions, net of cash acquired	(1,163		)	(725,853		)	(126,018		)
Proceeds from divestitures	—			70			—
Net cash used in investing activities	(3,003		)	(744,556		)	(154,395		)
Cash flows from financing activities:
Principal payments on long-term debt	(3,609		)	(1,164,237		)	(453,957		)
Borrowings of long-term debt	—			1,805,966			580,945
Payments of debt issuance costs	(4		)	(58,591		)	(14,296		)
Penalty on prepayment of debt	—			—			(4,900		)
Proceeds from preferred stock issuance	—			310,000			—
Payments of stock issuance costs	—			(18,347		)	—
Distributions to non-controlling interest holders	(6,444		)	(50,343		)	(49,443		)
Receipts (payments) related to ownership transactions with non-controlling interest holders	30			(1,518		)	1,105
Financing lease obligation	(253		)	(796		)	(646		)
Other financing activities	—			(789		)
Net cash (used in) provided by financing activities	(10,280		)	821,345			58,808
Net (decrease) increase in cash and cash equivalents	(14,505		)	144,507			(2,724		)
Cash and cash equivalents at beginning of period	214,206			69,699			57,933
Cash and cash equivalents at end of period	$	199,701		$	214,206		$	55,209

See notes to unaudited condensed consolidated financial statements.

5

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

1. Organization

Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the “Company”), was formed on April 2, 2015, as a holding company for the purpose of facilitating an initial public offering (the “IPO”) of shares of common stock. Prior to September 30, 2015, the Company conducted business through Surgery Center Holdings, Inc. and its subsidiaries. Surgery Center Holdings, LLC was and is the sole indirect owner of the equity interests of Surgery Center Holdings, Inc. and has no other material assets.

On September 30, 2015, Surgery Partners, Inc. became the direct parent and sole member of Surgery Center Holdings, LLC (the "Reorganization"). In the Reorganization, all of the equity interests held by the pre-IPO owners of Surgery Center Holdings, LLC were contributed to Surgery Partners, Inc. in exchange for 33,871,990 shares of common stock of Surgery Partners, Inc. and certain rights to additional payments under a tax receivable agreement. After giving effect to the Reorganization, Surgery Partners, Inc. is a holding company, and its sole material asset is an equity interest in Surgery Center Holdings, LLC. On October 1, 2015, the Company completed its IPO of 14,285,000 shares of common stock at an offering price of $19.00 per share.

On August 31, 2017, the Company completed its acquisition of NSH Holdco, Inc. (“NSH”). Pursuant to the terms of the Agreement and Plan of Merger, dated as of May 9, 2017, by and among the Company, SP Merger Sub, Inc., a wholly owned subsidiary of the Company, NSH, and IPC / NSH, L.P. (solely in its capacity as sellers’ representative), as amended by that certain Letter Amendment, dated as of July 7, 2017 (as amended, the “NSH Merger Agreement”), SP Merger Sub, Inc. merged with and into NSH with NSH continuing as the surviving corporation and a wholly owned subsidiary of Surgery Center Holdings, Inc. (the “NSH Merger”). Also on August 31, 2017, (i) the Company completed the sale and issuance of 310,000 shares of the Company's preferred stock, par value $0.01 per share, designated as 10.00% Series A Convertible Perpetual Participating Preferred Stock (the “Series A Preferred Stock”) to BCPE Seminole Holdings LP (“Bain”), an affiliate of Bain Capital Private Equity, at a purchase price of $1,000 per share in cash (the “Preferred Private Placement”) pursuant to the Securities Purchase Agreement, dated as of May 9, 2017, by and between the Company and Bain (the “Preferred Stock Purchase Agreement”), and (ii) Bain completed its purchase of 26,455,651 shares (the “Purchased Shares”) of the Company's common stock, par value $0.01 per share (the “Common Stock”) from H.I.G. Surgery Centers, LLC (“H.I.G.”) at a purchase price of $19.00 per share in cash (the “Private Sale”) pursuant to the Stock Purchase Agreement, dated as of May 9, 2017, by and among the Company, Bain, H.I.G. and H.I.G. Bayside Debt & LBO Fund II L.P. (for the purposes stated therein) (the “Common Stock Purchase Agreement” and together with the NSH Merger Agreement, the Preferred Stock Purchase Agreement and the other agreements and documents executed in connection therewith, including the TRA (as defined in Note 2. “Significant Accounting Policies - Income Taxes and Tax Receivable Agreement”), the “Transaction Agreements”). As of August 31, 2017, the Purchased Shares represented approximately 54.2% of the Company’s outstanding Common Stock. As a result of the Preferred Private Placement and the Private Sale, Bain became the controlling stockholder of the Company, holding Series A Preferred Stock and Common Stock that collectively represent approximately 65.7% of the voting power of all classes of capital stock of the Company as of August 31, 2017, and H.I.G. and its affiliated investment funds no longer own any capital stock of the Company.

In connection with the change of control effected by the Preferred Private Placement and the Private Sale, the Company elected to apply “pushdown” accounting by applying the guidance in Accounting Standards Codification Topic ("ASC") 805, Business Combinations, including the recognition of the Company’s assets and liabilities at fair value as of August 31, 2017, and similarly recognizing goodwill calculated based on the terms of the transaction and the fair value of the new basis of net assets of the Company. 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."

As of September 30, 2017 (Successor), the Company owned and operated a national network of surgical facilities and ancillary services in 32 states.  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 Company's surgical hospitals 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, optical services and specialty pharmacy services.

As of September 30, 2017 (Successor), the Company owned or operated a portfolio of 124 surgical facilities, comprised of 104 ASCs and 20 surgical hospitals. The Company owns 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 85 of the surgical facilities and consolidated 109 of these facilities for financial reporting purposes. In addition, the Company owned or operated a network of 60 physician practices.

2. Significant Accounting Policies

Principles of Consolidation

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.

6

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. 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 condensed consolidated balance sheet at December 31, 2016 (Predecessor) has been derived from the audited financial statements as of that date. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 (Predecessor). 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 accompanying notes. Actual results could differ from those estimates.

Non-Controlling Interests

The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.

Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the condensed consolidated financial statements within the equity section but separate from the Company's equity. However, in instances in which certain redemption features that are not solely within the control of the Company are present, classification of non-controlling interests outside of permanent equity is required. Consolidated net income attributable to the Company and to the non-controlling interests are identified and presented on the condensed consolidated statements of operations; changes in ownership interests in which the Company retains a controlling interest are accounted for as equity transactions assuming the Company continues to consolidate related entities. Certain transactions with non-controlling interests are classified within financing activities in the condensed consolidated statements of cash flows.

The condensed consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control.

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):

Predecessor
Balance at December 31, 2016	$	180,521
Net income attributable to non-controlling interests—redeemable	9,615
Acquisition and disposal of shares of non-controlling interests, net—redeemable	(3,323		)
Distributions to non-controlling interest—redeemable holders	(11,468		)
Acquisition of NSH	153,320
Balance at August 31, 2017	$	328,665
Successor
Balance at September 1, 2017	$	271,001
Net income attributable to non-controlling interests—redeemable	1,054
Acquisition and disposal of shares of non-controlling interests, net—redeemable	91
Distributions to non-controlling interest—redeemable holders	(730		)
Balance at September 30, 2017	$	271,416

Variable Interest Entities

The condensed consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary under the provisions of ASC 810, Consolidation. As of September 30, 2017 (Successor), the variable interest entities include five surgical facilities, three anesthesia practices and three physician practices. At December 31, 2016 (Predecessor), the variable interest entities included five surgical facilities, three anesthesia practices and two physician practices. The change is due to a physician practice acquired

7

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

during the three months ended June 30, 2017 (Predecessor). The Company has the power to direct the activities that most significantly impact a variable interest entity's economic performance. Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur. As of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), the condensed consolidated balance sheets of the Company included total assets of $90.1 million and $99.5 million, respectively, and total liabilities of $8.0 million and $10.7 million, respectively, related to the Company's variable interest entities.

Equity Method Investments

The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities. These investments are accounted for using the equity method of accounting. The total amount of these investments included in investments in and advances to affiliates in the condensed consolidated balance sheets was $64.4 million and $35.0 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

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. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.

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				Predecessor
	September 30, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
2014 Revolver Loan	$	—	$	—	$	85,000	$	85,000
2014 First Lien Credit Agreement, net of debt issuance costs and discount	$	—	$	—	$	911,784	$	917,528
2017 Senior Secured Credit Facilities:
Revolver	$	—	$	—	$	—	$	—
Term Loan	$	1,283,626	$	1,267,581	$	—	$	—
Senior Unsecured Notes due 2021 (1)	$	409,821	$	429,288	$	387,942	$	412,189
Senior Unsecured Notes due 2025	$	370,000	$	346,413	$	—	$	—

⁽¹⁾ The carrying amount in the Predecessor period is net of unamortized debt issuance costs and discount, which were eliminated with the application of pushdown accounting.

The fair values of the 2014 First Lien Credit Agreement, Term Loan, 2021 Unsecured Notes and the 2025 Unsecured Notes (in each case, as defined in Note 4. "Long-Term Debt") were based on a Level 2 computation using quoted prices for identical liabilities in inactive markets at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), as applicable. The carrying amounts related to the Company's other long-term debt obligations, including the 2014 Revolver Loan and the Revolver (in each case, as defined in Note 4. "Long-Term Debt"), approximate their fair values.

The Company maintains a supplemental executive retirement savings plan (the "SERP") for certain executive officers. 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 September 30, 2017 (Successor) and December 31, 2016 (Predecessor), the fair value of the assets in the SERP were $1.8 million and $1.7 million, respectively, and were included in other long-term assets in the condensed consolidated balance sheets. The Company had a liability related to the SERP of $1.8 million and $1.7 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, which was included in other long-term liabilities in the condensed consolidated balance sheets.

8

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

Revenues

The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances, which the Company estimates based on the historical trend of its cash collections and contractual write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics.

A summary of revenues by service type as a percentage of total revenues follows:

	Successor		Predecessor				Predecessor
	September 1 to September 30,		July 1 to August 31,		Three Months Ended September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016		2017		2016
Patient service revenues:
Surgical facilities revenues	94.0	%	95.5	%	90.4	%	91.4	%	90.6	%
Ancillary services revenues	4.2	%	2.7	%	8.0	%	7.0	%	7.5	%
	98.2	%	98.2	%	98.4	%	98.4	%	98.1	%
Other service revenues:
Optical services revenues	0.7	%	1.1	%	1.1	%	1.0	%	1.2	%
Other	1.1	%	0.7	%	0.5	%	0.6	%	0.7	%
	1.8	%	1.8	%	1.6	%	1.6	%	1.9	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Patient service revenues. 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 on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid. Changes in estimated contractual adjustments and discounts are recorded in the period of change. 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 $630,000, $1.1 million, respectively. 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).

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
	September 1 to September 30,				July 1 to August 31,				Three Months Ended September 30,
	2017				2017				2016
	Amount		%		Amount		%		Amount		%
Patient service revenues:
Private insurance	$	72,930	56.2	%	$	80,166	46.9	%	$	140,637	50.6	%
Government	46,162		35.5	%	73,734		43.1	%	111,929		40.2	%
Self-pay	3,861		3.0	%	4,119		2.4	%	5,389		1.9	%
Other (1)	6,883		5.3	%	12,909		7.6	%	20,240		7.3	%
Total patient service revenues	$	129,836	100.0	%	$	170,928	100.0	%	$	278,195	100.0	%
Other service revenues:
Optical service revenues	$	888			$	1,905			$	3,203
Other revenues	1,534				1,246				1,284
Total net revenues	$	132,258			$	174,079			$	282,682

9

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

	Successor				Predecessor
	September 1 to September 30,				January 1 to August 31,				Nine Months Ended September 30,
	2017				2017				2016
	Amount		%		Amount		%		Amount		%
Patient service revenues:
Private insurance	$	72,930	56.2	%	$	360,092	48.9	%	$	418,798	50.9	%
Government	46,162		35.5	%	308,993		42.0	%	331,041		40.2	%
Self-pay	3,861		3.0	%	15,949		2.2	%	13,814		1.7	%
Other (1)	6,883		5.3	%	51,374		6.9	%	59,313		7.2	%
Total patient service revenues	$	129,836	100.0	%	$	736,408	100.0	%	$	822,966	100.0	%
Other service revenues:
Optical service revenues	$	888			$	7,629			$	10,222
Other revenues	1,534				4,578				6,249
Total net revenues	$	132,258			$	748,615			$	839,437

(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. Revenue is recognized as 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. Revenue is recognized when 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. 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 services are rendered.

Subsequent to the Preferred Private Placement, the Company, as part of a review of operations undertaken to create a solid foundation to support the Company's long-term growth objectives, incurred a non-recurring adjustment to revenue of $15.6 million, which was attributable to an increase in reserves for certain accounts receivable during the two months ended August 31, 2017 (Predecessor). The increase in reserves resulted from certain known events and actions during the two months ended August 31, 2017 (Predecessor) related to select payors primarily in the Company’s ancillary services segment. Upon consideration of such additional information, related receivables were determined to have a low likelihood of collection. The majority of this adjustment related to receivables with balances from the first quarter of 2016 and prior. The Company believes it has accounted for all necessary reserve adjustments at this time.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.

Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts

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. As of September 30, 2017 (Successor), the Company had a net third-party Medicaid settlements liability of $1.4 million compared to a net third-party Medicaid settlements receivable of $454,000 at December 31, 2016 (Predecessor).

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 72 hours 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.

10

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

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 $8.4 million and $7.0 million at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

Inventories

Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.

Prepaid Expenses and Other Current Assets

A summary of prepaid expenses and other current assets follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Prepaid expenses	$	18,418	$	11,158
Receivables - optical product purchasing organization	8,369		7,042
Insurance recoveries	2,837		2,476
Tax refund receivable	8,618		—
Other current assets	15,482		11,338
Total	$	53,724	$	32,014

Property and Equipment

Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized.

A summary of property and equipment follows (in thousands):

	Successor			Predecessor
	September 30, 2017			December 31, 2016
Land	$	20,880		$	8,082
Buildings and improvements	181,237			118,172
Furniture and equipment	14,242			14,670
Computer and software	21,708			29,902
Medical equipment	140,198			117,418
Construction in progress	13,161			2,396
Property and equipment, at cost	391,426			290,640
Less: Accumulated depreciation	(2,729		)	(86,387		)
Property and equipment, net	$	388,697		$	204,253

The Company also leases certain facilities and equipment under capital leases. Assets held under capital leases are stated at the present value of minimum lease payments at the inception of the related lease. Such assets are depreciated on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.The carrying values of assets under capital lease were $19.2 million and $15.4 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, net of accumulated depreciation of $0.7 million and $11.6 million, respectively.

11

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

Intangible Assets

The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management agreements and customer relationships. Physician income guarantees are amortized into salaries and benefits costs in the condensed consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the service lives of the agreements, typically ranging from two to five years for non-compete agreements and 15 years for the management rights agreements. Customer relationships are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years.

A summary of the activity related to intangible assets for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Predecessor
Balance at December 31, 2016	$	813		$	21,290		$	16,457		$	3,780	$	3,704		$	1,979		$	48,023
Additions	445			26,900			92			745		—			130			28,312
Recruitment expense	(380		)	—			—			—		—			—			(380		)
Amortization	—			(1,154		)	(3,715		)	—		(733		)	(438		)	(6,040		)
Balance at August 31, 2017	$	878		$	47,036		$	12,834		$	4,525	$	2,971		$	1,671		$	69,915
	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Successor
Balance at September 1, 2017	$	878		$	41,600		$	8,024		$	5,078	$	—		$	1,170		$	56,750
Additions	—			—			41			25		—			—			66
Recruitment expense	(38		)	—			—			—		—			—			(38		)
Amortization	—			(138		)	(84		)	—		—			(49		)	(271		)
Balance at September 30, 2017	$	840		$	41,462		$	7,981		$	5,103	$	—		$	1,121		$	56,507

12

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

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 activity related to goodwill for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

Predecessor
Balance at December 31, 2016	$	1,555,204
Acquisitions	858,323
Divestitures	(175		)
Purchase price adjustments	1,220
Balance at August 31, 2017	$	2,414,572
Successor
Balance at September 1, 2017	$	3,269,225
Acquisitions	1,214
Divestitures	—
Purchase price adjustments	(130		)
Balance at September 30, 2017	$	3,270,309

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist in accordance with Accounting Standards Codification (ASC) 350, Intangibles- Goodwill and Other. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise. 

Restricted Invested Assets

Restricted invested assets of $315,000 as of both September 30, 2017 (Successor) and December 31, 2016 (Predecessor) were related to a requirement under the operating lease agreement at the Company's Chesterfield, Missouri facility. In accordance with the provisions of the lease agreement, 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.

Other Long-Term Assets

A summary of other long-term assets follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Notes receivable	$	2,853	$	716
Deposits	2,794		4,196
Assets of SERP	1,804		1,725
Debt issuance costs	—		1,488
Insurance recoverable	6,835		6,835
Other	4,847		1,475
Total	$	19,133	$	16,435

13

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

Other Current Liabilities

A summary of other current liabilities follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Interest payable	$	23,777	$	19,206
Current taxes payable	6,731		2,622
Insurance liabilities	10,287		6,625
Amounts due to patients and payors	15,087		12,221
Tax receivable agreement liability	837		999
Contingent acquisition compensation liability	7,866		4,589
Contingent proceeds payable	8,618		—
Other accrued expenses	33,076		22,731
Total	$	106,279	$	68,993

Other Long-Term Liabilities

A summary of other long-term liabilities follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Facility lease obligations	$	90,052	$	52,653
Medical malpractice liability	13,453		10,453
Liability of SERP	1,804		1,725
Unfavorable lease liability	7,893		1,671
Other long-term liabilities	3,597		9,764
Total	$	116,799	$	76,266

At four of the Company's surgical facilities, the Company has facility lease obligations payable to the lessor of each facility. Payments are allocated to principal adjustments of the lease obligations and interest expense. The current portions of the lease obligations were $1.5 million and $1.3 million at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, and were included in other current liabilities in the condensed consolidated balance sheets. The long-term portions of the lease obligations, included in the table above, were $90.1 million and $52.7 million at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively. The increase is due to facility lease obligations assumed with the NSH Merger.

Operating Leases

The Company leases office space and equipment for its surgical facilities, including surgical facilities under development. The lease agreements generally require the lessee, or the Company, to pay all maintenance, property taxes, utilities and insurance costs. The Company accounts for operating lease obligations and sublease income on a straight-line basis. Contingent obligations of the Company, as defined by each lease agreement, are recognized when specific contractual measures have been met, typically the result of an increase in the Consumer Price Index. Lease obligations paid in advance are recorded as prepaid rent and included in prepaid expenses and other current assets on the condensed consolidated balance sheets. The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is recorded as deferred rent and included in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets.

Equity-Based Compensation

Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. The Company applies the Black-Scholes-Merton method of valuation in determining share-based compensation expense for option awards. 

The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. In connection with the Reorganization, the Company’s board of directors and stockholders adopted the Surgery Partners, Inc. 2015 Omnibus Incentive Plan from which the Company’s future equity-based awards will be granted.

14

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

Professional, General and Workers' Compensation Insurance

The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis.

The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the condensed consolidated balance sheets. Total professional, general and workers' compensation claim liabilities as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor) are $16.6 million and $13.8 million, respectively. The balance includes expected insurance recoveries of $9.1 million and $9.3 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

Income Taxes and Tax Receivable Agreement

The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If a net operating loss carryforward exists, the Company makes a determination as to whether that net operating loss ("NOL") carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.

The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners.

The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2014 or state income tax examinations for years prior to 2012.

On May 9, 2017, the Company and H.I.G., in its capacity as the stockholders representative, entered into an agreement to amend that certain Income Tax Receivable Agreement, dated September 30, 2015 (as amended, the “TRA”), by and between the Company, H.I.G. (in its capacity as the stockholders representative) and the other parties referred to therein, which amendment became effective on August 31, 2017. The TRA was initially entered into in connection with the reorganization undertaken to facilitate the Company’s initial public offering. Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G. in its capacity as the stockholders representative pursuant to a fixed payment schedule. The amounts payable under the TRA are calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent. The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next six years and are not dependent on the Company’s actual tax savings over such period. The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that the Company is unable to make payments under the TRA and such inability is a result of the terms of credit agreements and other debt documents that are materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of such credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.

As a result of the amendment to the TRA, the Company was required to value the liability under the TRA by discounting the fixed payment schedule using the Company’s incremental borrowing rate. During the two and eight month periods ended August 31, 2017 (Predecessor), the Company recognized a reduction in the carrying value of the liability under the TRA of $43.9 million, with $15.3 million of the reduction recorded to a gain on amendment of TRA and $28.6 million recorded as a reduction to the goodwill recorded in connection with the application of pushdown accounting related to the change of control (discussed in Note 1. "Organization").

Assuming the Company’s effective tax rate is 38% throughout the term of the TRA, the Company estimates that the total amounts payable under the TRA will be approximately $120.5 million. Prior to the effectiveness of the amendment to the TRA, the amounts payable under the TRA varied depending upon a number of factors, including the amount, character and timing of the taxable income of Surgery Partners, Inc. The Company estimated the total amounts payable would be approximately $123.4 million, if the tax benefits of related deferred tax assets were ultimately realized. The amounts payable were recognized during 2015 in conjunction with the release of the Company's valuation allowance recorded against the deferred tax assets.

15

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

On September 8, 2017 (Successor), in connection with the resignation of the Company's former Chief Executive Officer, Michael Doyle, Mr. Doyle entered into a TRA Waiver and Assignment Agreement (the “CEO TRA Assignment Agreement”) with the Company, pursuant to which the Company accepted the assignment of 50% of Mr. Doyle’s (and his affiliates’) interest in future payments to which such parties were entitled pursuant to the TRA, in exchange for an upfront payment of approximately $5.1 million, in the aggregate, as set forth in the CEO TRA Assignment Agreement. On September 15, 2017 (Successor), certain of the Company’s employees entered into TRA Waiver and Assignment Agreements with the Company (collectively, the “Employee TRA Assignment Agreements” and together with the CEO TRA Assignment Agreement, the “TRA Assignment Agreements”), pursuant to which the Company made upfront payments of approximately $4.8 million in the aggregate, in exchange for the assignment of 100% of each such employee’s interest in future payments to which such employee was entitled pursuant to the TRA. During the period from September 1 to September 30, 2017 (Successor), the Company recognized an aggregate gain of $1.1 million as a result of the TRA Assignment Agreements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure about the nature, amount, timing and uncertainty of revenue. The provisions of the New Revenue Standard are effective for annual periods beginning after December 15, 2017, including interim periods within those years by applying either the full retrospective method or the modified retrospective approach upon adoption. The Company will adopt this ASU on January 1, 2018. The Company currently plans to adopt using the modified retrospective method, including providing all requisite disclosures under such method.

In preparation for the adoption of the New Revenue Standard, the Company continues to evaluate and refine its estimates of the anticipated impacts the New Revenue Standard will have on its revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures and control framework. Specifically, the Company is continuing to evaluate its accounting policies and internal controls under the New Revenue Standard, as well as analyzing all of the potential effects of the New Revenue Standard, particularly with respect to non-patient service revenue sources. Upon further evaluation, the Company anticipates that the majority of its 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.

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 Company believes the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases.

In March 2016, the FASB issued ASU 2016-07, “Investments- Equity Method and Joint Ventures,” which allows investments that now meet equity method treatment that were previously accounted for under a different method to apply the equity method prospectively from the date the investment qualifies for equity method treatment. ASU 2016-07 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial position, results of operations, cash flows and financial disclosures.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies the classification of certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact this new guidance may have on the condensed consolidated cash flows.

In October 2016, the FASB issued ASU 2016-17, “Interests Held through Related Parties That Are under Common Control,” which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a VIE through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. ASU 2016-17 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial position, results of operations, cash flows and financial disclosures.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” which will require the reconciliation of restricted cash in the statement of cash flows. ASU 2016-18 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company's condensed consolidated cash flows.

16

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

In January 2017, the FASB issued ASU 2017-01, “Business Combinations – Clarifying the Definition of a Business,” which narrows the definition of a business when evaluating whether transactions should be accounted for as asset acquisitions or business combinations. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for annual and interim periods after January 1, 2017. The Company early adopted this ASU on January 1, 2017. The adoption of ASU 2017-04 only impacts the Company's financial statements in situations where an impairment of a reporting unit’s assets is determined.

3. Acquisitions and Developments

The Company accounts for its business combinations in accordance with the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer can be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control. The assets acquired, liabilities assumed and any non-controlling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. Any goodwill recognized is determined as the excess of the fair value of the consideration conveyed plus the fair value of any non-controlling interests in the acquisition over the fair value of the net assets acquired. Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.

Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and professional liabilities. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. Fair value attributable to non-controlling interests is based on a Level 3 computation using significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of non-controlling interests, primarily from acquisitions of surgical facilities. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. Fair value attributable to the property and equipment acquired is based on Level 3 computations using key inputs such as cost trend data and comparable asset sales. Fair value attributable to the intangible assets acquired is based on Level 3 computations using key inputs such as the Company's internally-prepared financial projections. Fair values assigned to acquired working capital are based on carrying amounts reported by the acquiree at the date of acquisition, which approximate their fair values.

2017 Transactions

Acquisition of NSH

On August 31, 2017, the Company completed its acquisition of NSH through the NSH Merger, pursuant to the NSH Merger Agreement (as defined in Note 1. "Organization") for total cash consideration of $711.7 million, net of cash acquired, including $19.6 million funded to an escrow account. The NSH Merger added to the Company's portfolio 22 owned or operated surgical facilities, including 7 ASCs and 15 surgical hospitals, as well as complementary ancillary services. The proceeds from the Preferred Private Placement (as defined in Note 1. "Organization"), the 2025 Unsecured Notes and the 2017 Senior Secured Credit Facilities (in each case, as defined in Note 4. "Long-Term Debt") were used to fund the acquisition.

Fees associated with the acquisition of NSH, which includes fees incurred related to the Company's preferred equity issuances and debt financings, was approximately $82.6 million during the two and eight months ended August 31, 2017 (Predecessor). Approximately $45.5 million was capitalized as deferred financing costs and discount, $18.3 million was capitalized as deferred equity issuance costs, $2.4 million was expensed as merger transaction and integration costs, and $16.4 million was recorded as loss on debt refinancing costs. All capitalized costs were subsequently written off as a result of the application of pushdown accounting, further discussed below.

The total consideration related to the acquisition of NSH was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The aggregate amounts preliminarily recognized as of the acquisition date for each major class of assets and liabilities are as follows (in thousands):

17

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

Cash consideration	$	762,850
Fair value of non-controlling interests	325,965
Aggregate fair value of acquisition	1,088,815
Net assets acquired:
Cash and cash equivalents	51,159
Accounts receivable	76,101
Inventories	14,986
Prepaid expenses and other current assets	18,007
Property and equipment	174,374
Intangible assets	27,741
Goodwill	845,185
Investments in and advances to affiliates	29,737
Long-term deferred tax assets	28,182
Acquisition escrow deposit	19,600
Other long-term assets	5,309
Accounts payable	(29,652		)
Accrued payroll and benefits	(27,313		)
Other current liabilities	(18,355		)
Current maturities of long-term debt	(16,416		)
Long-term debt, less current maturities	(42,770		)
Acquisition escrow liability	(19,600		)
Other long-term liabilities	(47,460		)
Total fair value of net assets acquired	1,088,815

The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the intangible assets recognized.

The preliminary estimated fair value assigned to goodwill is primarily attributable to synergies expected to arise as a result of the NSH Merger by enhancing the growth profile and diversity of the Company across the healthcare continuum. The entire amount of goodwill acquired in connection with the NSH Merger was allocated to the Company's surgical facility services operating segment. The total amount of the goodwill related to the NSH Merger that will be deductible for tax purposes is $153.5 million.

The amounts of revenues and earnings of NSH for the one month ended September 30, 2017 (Successor) was $34.0 million and $3.4 million, respectively, and are included in revenues and net loss attributable to Surgery Partners, Inc., respectively, in the condensed consolidated statement of operations.

18

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

The following pro forma combined summary of operations of the Company gives effect to using historical information of the operations of NSH as if the acquisition transaction had occurred as of January 1, 2016 (in thousands):

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Net revenues	$	132,258		$	267,013		$	415,764		$	1,122,326		$	1,235,472
Net (loss) income	(763		)	13,331			28,304			63,269			82,275
Less: Net income attributable to non-controlling interests	(6,492		)	(13,184		)	(25,207		)	(65,122		)	(78,356		)
Net (loss) income attributable to Surgery Partners, Inc.	$	(7,255	)	$	147		$	3,097		$	(1,853	)	$	3,919

These pro forma amounts exclude transaction related costs of $3.0 million and the gain on amendment to the TRA of $1.1 million for the one month ended September 30, 2017 (Successor), transaction related costs of $11.3 million, loss on debt refinancing of $18.2 million and the gain on amendment to the TRA of $15.3 million for the two months ended August 31, 2017 (Predecessor), transaction related costs of $5.7 million, loss on debt refinancing of $18.2 million and the gain on amendment to the TRA of $15.3 million for the eight months ended August 31, 2017 (Predecessor). The prior year pro forma amounts exclude the loss on debt refinancing of $3.6 million and $11.9 million for the three and nine months ended September 30, 2016 (Predecessor), respectively.

Change of Control - Pushdown Accounting

On August 31, 2017, H.I.G. sold the Purchased Shares (as defined in Note 1. "Organization") beneficially owned by H.I.G. to Bain at a purchase price per share of $19.00 for an aggregate purchase price of $502.7 million in cash pursuant to the Common Stock Purchase Agreement (as defined in Note 1. "Organization"). As of August 31, 2017, prior to giving effect to the Preferred Private Placement (as defined in Note 1. "Organization"), the Purchased Shares represented approximately 54.2% of the Company's outstanding Common Stock. As a result of the Private Sale and the Preferred Private Placement, Bain holds Series A Preferred Stock and Common Stock that collectively represented approximately 65.7% of the voting power of all classes of capital stock of the Company as of August 31, 2017, and H.I.G. and its affiliated investment funds no longer own any capital stock of the Company.

Fees associated with the change of control include fees incurred related to the Preferred Private Placement. Refer to Note 6. "Redeemable Preferred Stock", for the amount and accounting treatment of these costs.

In connection with the change of control, the Company elected to apply “pushdown” accounting by applying the guidance in Accounting Standards Codification Topic ("ASC") 805, Business Combinations. In accordance with ASC 805, all identifiable assets and liabilities of the Company were measured at and adjusted to fair value as of August 31, 2017, and similarly goodwill was recognized based on the terms of the transaction and the fair value of the new basis of the net assets of the Company.

19

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

The aggregate amounts preliminarily recognized in connection with the application of pushdown accounting for each major class of assets and liabilities as of August 31, 2017 are as follows (in thousands):

Equity attributable to Surgery Partners, Inc.	720,606
Redeemable preferred stock	310,000
Fair value of non-controlling interests	955,481
Aggregate fair value	1,986,087
Net assets:
Cash and cash equivalents	214,206
Accounts receivable	257,373
Inventories	44,310
Prepaid expenses and other current assets	54,248
Acquisition escrow deposit	4,570
Property and equipment	386,086
Intangible assets	56,750
Goodwill	3,269,225
Investments in and advances to affiliates	64,243
Restricted invested assets	315
Long-term deferred tax asset	208,935
Long-term acquisition escrow deposit	19,600
Other long-term assets	19,427
Accounts payable	(64,921	)
Accrued payroll and benefits	(52,995	)
Acquisition escrow liability	(4,570	)
Other current liabilities	(83,317	)
Current maturities of long-term debt	(49,942	)
Long-term debt, less current maturities	(2,142,375	)
Long-term tax receivable agreement liability	(78,498	)
Long-term acquisition escrow liability	(19,600	)
Other long-term liabilities	(116,983	)
Total fair value of net assets	1,986,087

The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the intangible assets recognized.

Goodwill recognized in connection with the application of pushdown accounting was allocated to each reportable segment as follows: $3.084 billion to surgical facilities services, $152.1 million to ancillary services and $32.8 million to optical services. The total amount of the goodwill related to the application of pushdown accounting that will be deductible for tax purposes is $360.5 million.

Other 2017 Acquisitions

During the eight months ended August 31, 2017 (Predecessor), the Company completed acquisitions in existing markets of three physician practices for a combined cash purchase price of $14.2 million. In connection with these acquisitions the Company preliminarily recognized net assets of $1.1 million and goodwill of $13.1 million. The acquisitions were funded through cash from operations and proceeds from the 2014 Revolver Loan (as defined in Note 4. "Long-Term Debt").

During the one month ended September 30, 2017 (Successor), the Company completed acquisitions in existing markets of one physician practice and the assets of an endoscopy practice for a combined cash purchase price of $1.2 million. In connection with these acquisitions the Company preliminarily recognized net assets of $101,000 and goodwill of $1.2 million. The acquisitions were funded through cash from operations.

20

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

The results of operations of the physician practices acquired are included in the Company’s results of operations beginning on the date of acquisition. The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

4. Long-Term Debt

A summary of long-term debt follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
2014 Revolver Loan	$	—	$	85,000
2014 First Lien Credit Agreement	—		932,000
2017 Senior Secured Credit Facilities:
Revolver	—		—
Term Loan	1,283,626		—
Senior Unsecured Notes due 2021	409,821		400,000
Senior Unsecured Notes due 2025	370,000		—
Subordinated Notes	—		1,000
Notes payable and secured loans	113,547		42,521
Capital lease obligations	16,340		13,996
Less: unamortized debt issuance costs and discount	—		(32,274		)
Total debt	2,193,334		1,442,243
Less: Current maturities	48,472		27,822
Total long-term debt	$	2,144,862	$	1,414,421

2014 Revolver Loan & 2014 First Lien Credit Agreement

On August 31, 2017 (Predecessor), the Company prepaid in full the outstanding principal of the 2014 Revolver Loan, a revolving credit facility entered into on November 3, 2014, and the 2014 First Lien Credit Agreement, a senior secured obligation of Surgery Center Holdings, Inc. entered into on November 3, 2014, with the proceeds from the 2017 Senior Secured Credit Facilities (as defined below). The total prepayment amount was $1.030 billion, which included $1.027 billion of outstanding principal and $3.0 million of accrued and unpaid interest, other fees and expenses. In connection with the prepayment, the Company recorded a loss on debt refinancing of $18.2 million for each of the two and eight month periods ending August 31, 2017 (Predecessor). The loss includes the partial write-off of unamortized debt issuance costs and discount related to the 2014 Revolver Loan and 2014 First Lien Credit Agreement and a portion of costs incurred with the 2017 Senior Secured Credit Facilities.

2014 Second Lien Credit Agreement

On March 31, 2016, the Company prepaid in full the outstanding principal of the 2014 Second Lien Credit Agreement, plus accrued and unpaid interest, with the proceeds of the issuance of the 2021 Unsecured Notes, defined below. In connection with the prepayment, the Company recorded a loss on debt refinancing of $8.3 million, for the nine months ended September 30, 2016 (Predecessor).

2017 Senior Secured Credit Facilities

On August 31, 2017 (Predecessor), SP Holdco I, Inc. and Surgery Center Holdings, Inc., each a wholly-owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”) providing for a $1.290 billion senior secured term loan (the “Term Loan”) and a $75.0 million revolving credit facility (the “Revolver” and, together with the Term Loan, the “2017 Senior Secured Credit Facilities”).

The Term Loan was fully drawn on August 31, 2017 (Predecessor) and the proceeds thereof were used to finance the consideration paid in the NSH Merger, to repay amounts outstanding under the Company’s then-existing 2014 First Lien Credit Agreement and 2014 Revolver Loan and amounts outstanding under the existing senior secured credit facilities of NSH, and to pay fees and expenses in connection with the foregoing and transactions related to the Transaction Agreements. The Revolver may be utilized for working capital, capital expenditures and general corporate purposes. Subject to certain conditions and requirements set forth in the Credit Agreement, the Company may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver. As of September 30, 2017 (Successor), the Company's availability on the Revolver was $71.9 million (including outstanding letters of credit of $3.1 million).

The Term Loan will mature on August 31, 2024 (or, if at least 50.0% of the 2021 Unsecured Notes (as defined below) shall have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020). The Revolver will mature on August 31, 2022 (or, if at least 50.0% of

21

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

the 2021 Notes have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020).

Interest on the 2017 Senior Secured Credit Facilities shall bear interest at a rate per annum equal to (x) LIBOR plus a margin ranging from 3.00% to 3.25% per annum, depending on the Company's first lien net leverage ratio or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (solely with respect to the Term Loan, the alternate base rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00% to 2.25% per annum. In addition, the Company is required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver.

The Term Loan amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount of the Term Loan (such amortization payments will commence on or around the last business day of the fiscal quarter ending December 31, 2017). The Term Loan is subject to mandatory prepayments based on excess cash flow for the applicable fiscal year that will depend on the first lien net leverage ratio as of the last day of the applicable fiscal year, as well as upon the occurrence of certain other events, as described in the Credit Agreement. There were no excess cash flow payments required as of September 30, 2017 (Successor).

With respect to the Revolver, the Company is required to comply with a maximum consolidated total net leverage ratio of 9.50:1.00, which covenant will be tested quarterly on a trailing four quarter basis only if, as of the last day of the applicable fiscal quarter the Revolver is drawn in an aggregate amount greater than 35% of the total commitments under the Revolver. Such financial maintenance covenant is subject to an equity cure. The Credit Agreement includes customary negative covenants restricting or limiting the ability of the Company and its restricted subsidiaries, to, among other things, sell assets, alter its business, engage in mergers, acquisitions and other business combinations, declare dividends or redeem or repurchase equity interests, incur additional indebtedness or guarantees, make loans and investments, incur liens, enter into transactions with affiliates, prepay certain junior debt, and modify or waive certain material agreements and organizational documents, in each case, subject to customary and other agreed upon exceptions. The Credit Agreement also contains customary affirmative covenants and events of default. As of September 30, 2017 (Successor), the Company was in compliance with the covenants contained in the Credit Agreement.

The 2017 Senior Secured Credit Facilities are guaranteed, on a joint and several basis, by SP Holdco I, Inc. and each of Surgery Center Holdings, Inc.'s current and future wholly-owned domestic restricted subsidiaries (subject to certain exceptions) (the “Subsidiary Guarantors”) and are secured by a first priority security interest in substantially all of Surgery Center Holdings, Inc.'s, SP Holdco I, Inc.'s and the Subsidiary Guarantors’ assets (subject to certain exceptions).

In connection with the Term Loan and Revolver, the Company recorded debt issuance costs and discount of $18.8 million and $9.4 million, respectively, in the Predecessor period, which were eliminated with the application of pushdown accounting.

Senior Unsecured Notes due 2021

Effective March 31, 2016 (Predecessor), Surgery Center Holdings, Inc., issued $400.0 million in gross proceeds of senior unsecured notes due April 15, 2021 (the "2021 Unsecured Notes"). The 2021 Unsecured Notes bear interest at the rate of 8.875% per year, payable semi-annually on April 15 and October 15 of each year. The 2021 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly owned restricted subsidiaries that guarantees the 2017 Senior Secured Credit Facilities (subject to certain exceptions).

The Company may redeem up to 35% of the aggregate principal amount of the 2021 Unsecured Notes, at any time before April 15, 2018, with the net cash proceeds of certain equity offerings at a redemption price equal to 108.875% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2021 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of any such qualified equity offering.

The Company may redeem the 2021 Unsecured Notes, in whole or in part, at any time prior to April 15, 2018 at a price equal to 100.000% of the principal amount to be redeemed plus an applicable make-whole premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2021 Unsecured Notes, in whole or in part, at any time on or after April 15, 2018, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to the date of redemption:

April 15, 2018 to April 14, 2019	106.656	%
April 15, 2019 to April 14, 2020	104.438	%
April 15, 2020 and thereafter	100.000	%

If Surgery Center Holdings, Inc., experiences a change in control under certain circumstances, it must offer to purchase the notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase. The change of control as discussed in Note 1. "Organization", did not trigger repurchase.

The 2021 Unsecured Notes contain customary affirmative and negative covenants, which among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

22

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

In connection with the offering of the 2021 Unsecured Notes, the Company recorded debt issuance costs of $8.4 million in the Predecessor period, which were eliminated with the application of pushdown accounting.

Senior Unsecured Notes due 2025

Effective June 30, 2017 (Predecessor), SP Finco, LLC, a wholly owned subsidiary of Surgery Center Holdings, Inc., issued $370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"), which gross proceeds were deposited in an escrow account (the “Escrow Account”) established at Wilmington Trust, National Association (in such capacity, the “Escrow Agent”) in the name of the trustee under the indenture governing the 2025 Unsecured Notes (the “2025 Unsecured Notes Indenture”) on behalf of the holders of the 2025 Unsecured Notes. The 2025 Unsecured Notes bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 2018.

In connection with the closing of the NSH Merger and the release of the proceeds from the Escrow Account, both of which occurred on August 31, 2017 (Predecessor), SP Finco, LLC merged with and into Surgery Center Holdings, Inc., with Surgery Center Holdings, Inc. surviving such merger and assuming, by operation of law, the rights and obligations of SP Finco, LLC under the 2025 Unsecured Notes and the indenture governing such notes. As of such time, the 2025 Unsecured Notes became guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.’s domestic wholly owned restricted subsidiaries that guarantees Surgery Center Holdings, Inc.’s senior secured credit facilities (subject to certain exceptions).

The Company may redeem up to 40% of the aggregate principal amount of the 2025 Unsecured Notes at any time prior to July 1, 2020, with the net cash proceeds of certain equity issuances at a redemption price equal to 106.750% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2025 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of the applicable equity offering.

The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time prior to July 1, 2020, at a price equal to 100.000% of the principal amount to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time on or after July 1, 2020, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to, but excluding, the date of redemption:

July 1, 2020 to June 30, 2021	103.375	%
July 1, 2021 to June 30, 2022	101.688	%
July 1, 2022 and thereafter	100.000	%

If Surgery Center Holdings, Inc. experiences a change in control under certain circumstances, it must offer to purchase the 2025 Unsecured Notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase.

The 2025 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

In connection with the offering of the 2025 Unsecured Notes, the Company recorded debt issuance costs of $17.3 million in the Predecessor period, which were eliminated with the application of pushdown accounting.

Subordinated Notes

On August 3, 2017 the Company redeemed in whole a subordinated debt facility of $1.0 million with a maturity date of August 4, 2017 and an interest rate of 17.00% per annum, at a price equal 100% of the $1.0 million principal amount redeemed, plus accrued and unpaid interest.

Notes Payable and Secured Loans

Certain of the Company’s subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made. The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. At September 30, 2017 (Successor), the Company was in compliance with its covenants contained in the credit agreements. The Company and its subsidiaries had notes payable to financial institutions of $113.5 million and $42.5 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively. The Company and its subsidiaries also provide a corporate guarantee of certain indebtedness of the Company’s subsidiaries.

Capital Lease Obligations

The Company is liable to various vendors for several equipment leases classified as capital leases. The carrying value of the leased assets was $19.2 million and $15.4 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

23

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

5. Redeemable Preferred Stock

On August 31, 2017, the Company issued 310,000 shares of Series A Preferred Stock to Bain at a purchase price of $1,000 per share for an aggregate purchase price of $310.0 million. The net proceeds from the Preferred Private Placement (as defined in Note 1. "Organization") were used to finance a portion of the NSH Merger.

The accrued value of the Series A Preferred Stock is convertible into shares of Common Stock at a price per share of Common Stock equal to $19.00, subject to certain adjustments as provided in the Certificate of Designations, Preferences, Rights and Limitations of the 10.00% Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc. (the “Series A Certificate of Designation”), at any time at the option of the holder. In addition, the Company may require the conversion of all, but not less than all, of the Series A Preferred Stock pursuant to the terms and conditions of the Series A Certificate of Designation, after the second anniversary of the date of issuance, if the volume weighted average closing price of the Common Stock for any twenty out of thirty consecutive trading days prior to such date, equals or exceeds $42.00 per share.

The Company cannot redeem the Series A Preferred Stock prior to the fifth anniversary of its issuance and thereafter, may redeem all, but not less than all, of the Series A Preferred Stock for cash pursuant to and subject to the terms and conditions of the Series A Certificate of Designation. The holders of Series A Preferred Stock may cause the Company to redeem the Series A Preferred Stock upon the occurrence of certain change of control transactions of the Company or the Common Stock ceasing to be listed or quoted on a trading market. The Company adjusts the carrying amount of the Series A Preferred Stock to equal the redemption value at the end of each reporting period as if it were also the redemption date. Changes in the redemption value are recognized immediately as they occur.

The Series A Preferred Stock ranks senior to the Common Stock and any other capital stock of the Company with respect to dividends, redemption and any other rights upon the liquidation, dissolution or winding up of the Company, and the holders thereof are entitled to vote with the holders of Common Stock, together as a single class, on all matters submitted to a vote of the Company’s stockholders. In addition to participating in any dividends that may be declared with respect to the Common Stock on an as-converted basis, each share of Series A Preferred Stock accrues dividends daily at a dividend rate of 10.00%, compounding quarterly, and in any given quarter, subject to certain conditions, the Board of Directors of the Company may declare a cash dividend in an amount up to 50% of the amount of the dividend that has accrued and accumulated during such quarter through the end of such quarter, and the amount of any quarterly dividend paid in cash shall not compound on the applicable date and shall not be included in the accrued value of the Series A Preferred Stock. In the event of the Company’s liquidation, dissolution or winding-up (whether voluntary of involuntary), holders of Series A Preferred Stock will be entitled to receive out of the assets of the Company available for distribution to shareholders, after satisfaction of any liabilities and obligations to creditors of the Company, with respect to each Series A Preferred Share, an amount equal to the greater of (i) $1,000.00 per share, plus dividends compounded to date, plus dividends accrued but not yet compounded and (ii) the amount that a holder of one share of Common Stock would receive, assuming the Series A Preferred Stock had converted into shares of Common Stock.

In connection with the issuance of Series A Preferred Stock in the Preferred Private Placement, the Company incurred issuance costs of $18.3 million in the Predecessor period, which were eliminated with the application of pushdown accounting.

A summary of activity related to the redeemable preferred stock for the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

Successor
Balance at September 1, 2017	$	310,000
Dividends accrued	2,633
Cash dividends declared	(1,316		)
Mark to redemption adjustment	15,566
Balance at September 30, 2017	$	326,882

6. Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with ASC 260, Earnings Per Share, based on the weighted-average number of shares outstanding in each period and dilutive stock options, unvested shares and warrants, to the extent such securities exist and have a dilutive effect on earnings per share. Beginning in the Successor period, in connection with the issuance of the Series A Preferred Stock, the Company began computing basic and diluted earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation method that determines earnings per share for common shares and participating securities according to their participation rights in dividends and undistributed earnings. Refer to Note 5. "Redeemable Preferred Stock", for further disclosure of the terms and conditions, including the participation rights, of the Series A Preferred Stock.

24

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

A reconciliation of the numerator and denominator of basic and diluted earnings per share for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands except share and per share amounts):

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Numerator:
Net loss attributable to Surgery Partners, Inc.	$	(9,140	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)
Less: amounts allocated to participating securities (1)	2,633			—			—			—			—
Less: mark to redemption adjustment	15,566			—			—			—			—
Net loss attributable to common stockholders	$	(27,339	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)
Denominator:
Weighted average shares outstanding- basic	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706
Effect of dilutive securities (2)	—			—			—			—			—
Weighted average shares outstanding- diluted	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706
Loss per share:
Basic	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Diluted (2)	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Dilutive securities outstanding not included in the computation of (loss) earnings per share as their effect is antidilutive:
Stock options	—			—			586			—			345
Restricted shares	112,529			34,506			369,545			105,944			337,915
Convertible preferred stock	—			N/A			N/A			N/A			N/A

⁽¹⁾Amounts allocated to participating securities includes dividends accrued during the Successor period for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses. There were no participating securities during the Predecessor periods.

⁽²⁾The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in each period.

7. Commitments and Contingencies

Professional, General and Workers' Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would have a material adverse effect on the Company's business, financial position, results of operations or liquidity.

25

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

Laws and Regulations

Laws and regulations governing the Company's business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how the Company's surgical facilities conduct their operations, from licensing requirements to how and whether the Company's facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. It is the Company's current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company's business, financial position, results of operations or liquidity. In addition, on October 23, 2017, the Company received a civil investigative demand (“CID”) from the federal government under the False Claims Act (“FCA”) for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by the Company’s physicians and submitted to laboratories owned and operated by the Company. The Company intends to respond to the CID and cooperate with the U.S. Attorney’s Office in connection with the FCA investigation.

Acquired Facilities

The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.

The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcare providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.

Potential Physician Investor Liability

A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.

Contingent Consideration

Pursuant to a purchase agreement dated December 24, 2009 (“the Purchase Agreement”), the Company acquired controlling interests in 36 business entities in various Florida locations which operate freestanding ASCs and provided anesthesia and pain management services (“the 2009 Acquisition”). The Purchase Agreement provided for maximum potential contingent consideration of up to $10.0 million based on operating results subsequent to the acquisition for the period from January 1, 2010 to December 31, 2010. Pursuant to the Purchase Agreement, the contingent consideration is payable as principal under a Subordinated Promissory Note, the form of which was delivered concurrent with the Purchase Agreement. The balance remains outstanding due to ongoing litigation as a result of a civil claim. The Company has made indemnification claims against the seller exceeding the amount of the contingent consideration liability, which the Company has a contractual right of offset against. Based on a court order in December 2016, the Company removed the contingent consideration liability on its consolidated balance sheets at December 31, 2016 (Predecessor). On April 20, 2017, a settlement was reached between the two parties resulting in the Company receiving $3.9 million of which $2.7 million was paid from the escrow funds set up at the time of purchase and $1.2 million was paid by the seller. During the second quarter (Predecessor) the Company recorded a gain on litigation settlement of $3.8 million for the settlement amount, net of legal costs.

In connection with an acquisition during the three months ended June 30, 2016, pursuant to the applicable purchase agreement, the Company must pay consideration to the prior owners of the applicable facility should the requirements for continuing employment agreed to in the purchase agreement be met. As of September 30, 2017 (Successor), the Company estimates it may have to pay $15.7 million in future contingent acquisition compensation expense over the remaining performance periods. The contingent acquisition compensation expense is recognized as a component of general and administrative expense in the condensed consolidated statements of operations and was $1.2 million and $5.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively and $605,000 for the one month ended

26

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

September 30, 2017 (Successor). For the prior year, contingent acquisition compensation expense was $1.5 million and $3.1 million for the three and nine months ended September 30 2016, respectively.

8. Segment Reporting

A public company is required to report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or "CODM," in deciding how to allocate resources and in assessing performance.

The Company operates in three major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities, the operation of optical services and the operation of ancillary services, which includes physician practices, a diagnostic laboratory and a specialty pharmacy. "All other" primarily consists of the Company's corporate general and administrative functions.

Adjusted EBITDA is the primary profit/loss metric reviewed by the CODM in making key business decisions and on allocation of resources. The segment disclosures below provide a reconciliation from Adjusted EBITDA to income before income taxes, its most directly comparable GAAP financial measure, in the reported condensed consolidated financial information.

The following tables present financial information for each reportable segment (in thousands):

	Successor		Predecessor				Predecessor
	September 1 to September 30,		July 1 to August 31,		Three Months Ended September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016		2017		2016
Revenues:
Surgical facility services	$	125,595	$	167,765	$	256,795	$	688,725	$	766,248
Ancillary services	5,775		4,409		22,684		52,261		62,967
Optical services	888		1,905		3,203		7,629		10,222
Total revenues	$	132,258	$	174,079	$	282,682	$	748,615	$	839,437

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Adjusted EBITDA:
Surgical facility services	$	20,947		$	27,726		$	53,347		$	125,912		$	153,318
Ancillary services	(1,265		)	(10,737		)	2,573			(6,526		)	9,141
Optical services	193			555			1,276			2,214			3,004
All other	(5,033		)	(9,142		)	(12,448		)	(36,036		)	(36,258		)
Total Adjusted EBITDA (1)	14,842			8,402			44,748			85,564			129,205
Net income attributable to non-controlling interests	6,492			8,813			16,672			42,087			54,392
Depreciation and amortization	(3,330		)	(7,599		)	(9,713		)	(30,124		)	(28,984		)
Interest expense, net	(15,883		)	(18,147		)	(26,475		)	(68,929		)	(74,863		)
Non-cash stock compensation expense	(1,683		)	(1,628		)	(691		)	(3,697		)	(1,326		)
Contingent acquisition compensation expense	(605		)	(1,210		)	(1,530		)	(5,057		)	(3,060		)
Merger transaction, integration and practice acquisition costs (2)	(3,457		)	(2,949		)	(2,471		)	(7,677		)	(8,579		)
Gain on litigation settlement	—			—			—			3,794			—
Gain on acquisition escrow release	—			1,000			—			1,000			—
Loss on disposal or impairment of long-lived assets, net	(333		)	(114		)	(572		)	(1,715		)	(1,697		)
Gain on amendment to tax receivable agreement	1,098			15,294			—			15,294			—
Tax receivable agreement expense	—			—			(3,733		)	—			(3,733		)
Loss on debt refinancing	—			(18,211		)	(3,595		)	(18,211		)	(11,876		)
(Loss) income before income taxes	$	(2,859	)	$	(16,349	)	$	12,640		$	12,329		$	49,479

⁽¹⁾ The above table reconciles Adjusted EBITDA to income before income taxes as reflected in the unaudited condensed consolidated statements of operations.

27

SURGERY PARTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2017

(Unaudited)

When the Company uses the term “Adjusted EBITDA,” it is referring to income before income taxes minus (a) net income attributable to non-controlling interests plus (b) depreciation and amortization, (c) interest expense, net, (d) non-cash stock compensation expense, (e) contingent acquisition compensation expense, (f) merger transaction, integration and practice acquisition costs, minus (g) gain on litigation settlement, (h) gain on acquisition escrow release, plus (i) loss on disposal or impairment of long-lived assets, net, minus (j) gain on amendment to tax receivable agreement, plus (k) tax receivable agreement expense and (l) loss on debt refinancing. The Company uses Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by the Company’s management to assess operating performance, make business decisions and allocate resources. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that the Company consolidates for financial reporting purposes. The Company believes that it is helpful to investors to present Adjusted EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors the Company's portion of Adjusted EBITDA generated by its surgical facilities and other operations.

Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating the Company's financial performance. The Company believes such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. The Company's calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

⁽²⁾ This amount includes merger transaction and integration costs of $3.0 million for the one month ended September 30, 2017(Successor), $2.3 million and $5.6 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $1.9 million and $6.4 million for the three and nine months ended September 30, 2016, respectively.

This amount includes practice acquisition costs of $474,000 for the one month ended September 30, 2017(Successor), $606,000 and $2.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $607,000 and $2.2 million for the three and nine months ended September 30, 2016, respectively.

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Assets:
Surgical facility services	$	3,969,584	$	1,914,842
Ancillary services	183,288		184,002
Optical services	43,451		22,478
Total	4,196,323		2,121,322
All other	405,531		183,636
Total assets	$	4,601,854	$	2,304,958

	Successor		Predecessor
	September 1 to September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016
Supplemental Information:
Cash purchases of property and equipment, net:
Surgical facility services	$	1,613	$	14,582	$	21,151
Ancillary services	2		1,875		3,450
Optical services	23		73		323
Total	$	1,638	$	16,530	$	24,924
All other	202		2,243		3,453
Total cash purchases of property and equipment, net	$	1,840	$	18,773	$	28,377

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report and included in our Annual Report on Form 10-K for the year ended December 31, 2016. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.

Unless otherwise indicated or the context otherwise requires, references herein to the “Company”, “Surgery Partners”, “we”, “us” and “our” refer: (i) immediately prior to the Reorganization, to Surgery Center Holdings, LLC and its consolidated subsidiaries, including Surgery

28

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Center Holdings, Inc., (ii) immediately following the Reorganization but immediately prior to the consummation of the NSH Merger, to Surgery Partners, Inc. and its consolidated subsidiaries, including Surgery Center Holdings, LLC and Surgery Center Holdings, Inc., and, (iii) immediately following the consummation of the NSH Merger, to Surgery Partners, Inc. and its consolidated subsidiaries, including Surgery Center Holdings, LLC, Surgery Center Holdings, Inc. and NSH.

Unless the context implies otherwise, the term “affiliates” means direct and indirect subsidiaries of Surgery Partners, Inc., and partnerships and joint ventures in which such subsidiaries are partners. The terms “facilities” or “hospitals” refer to entities owned and operated by affiliates of Surgery Partners, Inc. and the term “employees” refers to employees of affiliates of Surgery Partners, Inc.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements, which are based on our current expectations, estimates and assumptions about future events. All statements other than statements of current or historical fact contained in this report are forward-looking statements. These statements include, but are not limited to, statements regarding our future financial position, business strategy, budgets, effective tax rate, projected costs and plans and objectives of management for future operations, as well as our expectations regarding the benefits of the NSH Merger, including the projected synergies thereof, the performance of our business and other non-historical statements. The words “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “plan,” “will,” and similar expressions are generally intended to identify forward-looking statements. These statements involve risks, uncertainties and other factors that may cause actual results to differ from the expectations expressed in the statements. Many of these factors are beyond our ability to control or predict. These factors include, without limitation:(i) reductions in payments from government healthcare programs and managed care organizations; (ii) inability to contract with private third-party payors; (iii) changes in our payor mix or surgical case mix; (iv) failure to maintain relationships with our physicians; (v) payor controls designed to reduce the number of surgical procedures; (vi) inability to integrate operations of acquired surgical facilities, attract new physician partners, or acquire additional surgical facilities; (vii) shortages or quality control issues with surgery-related products, equipment and medical supplies; (viii) competition for physicians, nurses, strategic relationships, acquisitions and managed care contracts; (ix) inability to enforce non-compete restrictions against our physicians; (x) material liabilities incurred as a result of acquiring surgical facilities; (xi) litigation or medical malpractice claims; (xii) changes in the regulatory, economic and other conditions of the states where our surgical facilities are located; (xiii) substantial payments we expect to be required to make under the TRA; and (xiv) other risks and uncertainties described in this report, and set forth under the heading “Risk Factors” in our Quarterly Report on Form 10-Q for the period ended June 30, 2017, filed with the Securities and Exchange Commission on August 9, 2017 and discussed from time to time in our reports filed with the SEC.

In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When you consider these forward-looking statements, you should keep in mind these risk factors and other cautionary statements in this report.

These forward-looking statements speak only as of the date made. Other than as required by law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Executive Overview

As of November 9, 2017, we owned and operated a national network of surgical facilities, physician practices and a suite of ancillary services in 32 states. Our surgical facilities, which include 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. Our surgical hospitals provide services, such as diagnostic imaging, laboratory, obstetrics, oncology, pharmacy, physical therapy and wound care. Our portfolio of outpatient surgical facilities is complemented by our suite of ancillary services, which support our physicians in providing high quality and cost-efficient patient care. These ancillary services are comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services. As a result, we believe we are well positioned to benefit from rising consumerism and payors’ and patients’ focus on the delivery of high quality care and superior clinical outcomes in the lowest cost and care setting.

As of November 9, 2017, we owned or operated, primarily in partnership with physicians, a portfolio of 124 surgical facilities comprised of 104 ASCs and twenty surgical hospitals across 32 states. We owned a majority interest in 85 of the surgical facilities and consolidated 109 of these facilities for financial reporting purposes. In addition to surgical facilities, we owned or operated a network of 60 physician practices as of November 9, 2017. For the nine months ended September 30, 2017, approximately 332,000 surgical procedures were performed in our surgical facilities, generating approximately $814.3 million in revenue.

On August 31, 2017, we completed the acquisition of NSH Holdco, Inc. (“NSH”). Pursuant to the terms of the Agreement and Plan of Merger, dated as of May 9, 2017, by and among us, SP Merger Sub, Inc., a wholly owned subsidiary of the Company, NSH, and IPC / NSH, L.P. (solely in its capacity as sellers’ representative), as amended by that certain Letter Amendment, dated as of July 7, 2017 (as amended, the “NSH Merger Agreement”), SP Merger Sub, Inc. merged with and into NSH with NSH continuing as the surviving corporation and a wholly owned subsidiary of the Company (the “NSH Merger”). Also on August 31, 2017, (i) we completed the sale and issuance of 310,000 shares of the Company's preferred stock, par value $0.01 per share, designated as 10.00% Series A Convertible Perpetual Participating Preferred Stock (the “Series A Preferred Stock”) to BCPE Seminole Holdings LP (“Bain”), an affiliate of Bain Capital Private Equity, at a purchase price of $1,000 per share in cash (the “Preferred Private Placement”) pursuant to the Securities Purchase Agreement, dated as of May 9, 2017, by and between the Company and Bain (the “Preferred Stock Purchase Agreement”), and (ii) Bain completed its purchase of 26,455,651 shares (the “Purchased Shares”) of the Company's common stock, par value $0.01 per share, (the “Common Stock”) from H.I.G. Surgery Centers,

29

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

LLC (“H.I.G.”), at a purchase price of $19.00 per share in cash (the “Private Sale”) pursuant to the Stock Purchase Agreement, dated as of May 9, 2017, by and among the Company, Bain, H.I.G., and H.I.G. Bayside Debt & LBO Fund II L.P. (for the purposes stated therein)(the “Common Stock Purchase Agreement” and together with the NSH Merger Agreement, the Preferred Stock Purchase Agreement and the other agreements and documents executed in connection therewith, the “Transaction Agreements”). As a result of the Preferred Private Placement and the Private Sale, Bain became our controlling stockholder, holding Series A Preferred Stock and Common Stock that collectively represent approximately 65.7% of the voting power of all classes of capital stock of the Company as of August 31, 2017, and H.I.G. and its affiliated investment funds no longer own any capital stock of the Company.

As noted in the notes to the consolidated financial statements included previously in this report, in connection with the change of control effected by the Private Sale, we elected to apply “pushdown” accounting. For the purposes of management's discussion and analysis of financial condition and results of operations we have combined the Predecessor and Successor periods (each as defined in Note 1. "Organization" of our condensed consolidated financial statements), where applicable, as presented within the condensed consolidated financial statements and the accompanying notes.

We continue to focus on improving our same-facility performance, selectively acquiring established facilities and developing new facilities. During the nine months ended September 30, 2017, we completed acquisitions of four physician practices in existing markets and the assets of an endoscopy practice, for an aggregate investment of $15.4 million.

Revenues

Our revenues consist of patient service revenues and other service revenues. Patient service revenues consist of revenue from our surgical facility services and ancillary services segments. Specifically, patient service revenues include fees for surgical or diagnostic procedures performed at surgical facilities that we consolidate for financial reporting purposes, as well as for patient visits to our physician practices, anesthesia services, pharmacy services and diagnostic screens ordered by our physicians. Other service revenues consist of product sales from our optical laboratories, as well as the discounts and handling charges billed to the members of our optical products purchasing organization. Other service revenues also include management and administrative service fees derived from our non-consolidated facilities that we account for under the equity method, management of surgical facilities and physician practices in which we do not own an interest and management services we provide to physician practices for which we are not required to provide capital or additional assets.

The following table summarizes our revenues by service type as a percentage of total revenues for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Patient service revenues:
Surgical facilities revenues	95.5	%	90.4	%	91.4	%	90.6	%
Ancillary services revenues	2.7	%	8.0	%	7.0	%	7.5	%
	98.2	%	98.4	%	98.4	%	98.1	%
Other service revenues:
Optical services revenues	1.1	%	1.1	%	1.0	%	1.2	%
Other	0.7	%	0.5	%	0.6	%	0.7	%
	1.8	%	1.6	%	1.6	%	1.9	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%

During the third quarter of 2017, we experienced lower than expected revenue and incurred certain expenses related to Hurricanes Harvey and Irma, primarily driven by electrical outages at, and temporary closures of, certain of our facilities in affected areas. While all affected facilities are currently open and our operations have returned to normal, we anticipate residual impact from the hurricanes in the fourth quarter 2017. We expect the total impact from the hurricanes during the second half of 2017 to be approximately a $7.0 million to $9.0 million decrease in expected revenue.

Additionally, in the third quarter of 2017, we incurred a non-recurring adjustment to revenue of $15.6 million that was attributable to an increase in reserves for certain accounts receivables. This increase in reserves resulted from certain known events and actions during the third quarter of 2017 related to select payors primarily in our ancillary services segment. Upon consideration of such additional information, related receivables were determined to have a low likelihood of collection. The majority of this adjustment relates to receivables with balances from the first quarter of 2016 and prior. We believe we have accounted for all necessary reserve adjustments at this time.

On a normalized basis, net revenues for the three and nine months ended September 30, 2017 were $329.9 million and $904.4 million.

30

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

The following table reconciles normalized revenues to revenues, the most directly comparable GAAP financial measure:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Condensed Consolidated Statements of Operations Data:
Revenues	$	306,337	$	282,682	$	880,873	$	839,437
Hurricane estimated impact	8,000		—		8,000		—
Reserve adjustment	15,572		—		15,572		—
Normalized Revenues	$	329,909	$	282,682	$	904,445	$	839,437

Payor Mix

The following table sets forth by type of payor the percentage of our patient service revenues generated at the surgical facilities which we consolidate for financial reporting purposes in the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Private insurance payors	50.8	%	50.6	%	50.0	%	50.9	%
Government payors	39.9	%	40.2	%	41.0	%	40.2	%
Self-pay payors	2.7	%	1.9	%	2.3	%	1.7	%
Other payors (1)	6.6	%	7.3	%	6.7	%	7.2	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

(1) Other is comprised of anesthesia service agreements, auto liability, letters of protection and other payor types.

Surgical Case Mix

We primarily operate multi-specialty surgical facilities where physicians perform a variety of procedures in various specialties, including GI, general surgery, ophthalmology, orthopedics and pain management, among others. We believe this diversification helps to protect us from adverse pricing and utilization trends in any individual procedure type and results in greater consistency in our case volume.

The following table sets forth the percentage of cases in each specialty performed at the surgical facilities which we consolidate for financial reporting purposes for the periods indicated:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Gastrointestinal	22.8	%	22.3	%	23.2	%	21.9	%
General surgery	2.8	%	2.4	%	2.5	%	2.4	%
Ophthalmology	28.8	%	29.8	%	28.5	%	29.8	%
Orthopedic and pain management	33.9	%	31.6	%	33.5	%	31.6	%
Other	11.7	%	13.9	%	12.3	%	14.3	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

31

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Case Growth

Same-facility Information

Same-facility revenues include revenues from our consolidated and non-consolidated surgical facilities (excluding facilities acquired in new markets or divested during the current and prior period) along with the revenues from our ancillary services comprised of a diagnostic laboratory, multi-specialty physician practices, urgent care facilities, anesthesia services, optical services and specialty pharmacy services that complement our surgical facilities in our existing markets. The below table reflects the pro forma effect of the NSH acquisition for a full period in both the three and nine months ended September 30, 2017 and 2016.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Cases (2)	$	138,798		$	139,247	$	410,331		$	405,051
Case growth	(0.3		)%	N/A		1.3		%	N/A
Revenue per case (2)	$	3,245		$	3,143	$	3,263		$	3,128
Revenue per case growth	3.3		%	N/A		4.3		%	N/A
Number of facilities	112			N/A		110			N/A

⁽²⁾ The table above includes normalization impact of the hurricanes and the non-recurring adjustment to revenue on the same-facility information of $23.6 million in revenues and 2,828 cases for both the three and nine months ended September 30, 2017.

Segment Information

A public company is required to report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or “CODM,” in deciding how to allocate resources and in assessing performance. Aggregation of similar operating segments into a single reportable operating segment is permitted if the businesses have similar economic characteristics and meet the criteria established by GAAP.

Our business is comprised of the following three reportable segments:

Surgical Facility Services Segment: Our surgical facility services segment consists of the operation of ASCs and surgical hospitals, and includes our anesthesia services. Our surgical facilities primarily provide non-emergency surgical procedures across many specialties, including, among others, GI, general surgery, ophthalmology, orthopedics and pain management.

Ancillary Services Segment: Our ancillary services segment consists of a diagnostic laboratory, a specialty pharmacy and multi-specialty physician practices. These physician practices include our owned and operated physician practices pursuant to long-term management service agreements.

Optical Services Segment: Our optical services segment consists of an optical laboratory and an optical products group purchasing organization. Our optical laboratory manufactures eyewear, while our optical products purchasing organization negotiates volume buying discounts with optical product manufacturers.

Our financial information by reportable segment is prepared on an internal management reporting basis that the chief operating decision maker uses to allocate resources and assess the performance of the operating segments. Our operating segments have been defined based on the separate financial information that is regularly produced and reviewed by our CODM, which is our Chief Executive Officer.

Adjusted EBITDA is the primary profit/loss metric reviewed by the CODM in making key business decisions and on allocation of resources. We have provided a reconciliation from Adjusted EBITDA back to income before income taxes in the reported condensed consolidated financial information.

32

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

The following tables present financial information for each reportable segment (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Revenues:
Surgical facility services	$	293,360	$	256,795	$	814,320	$	766,248
Ancillary services	10,184		22,684		58,036		62,967
Optical services	2,793		3,203		8,517		10,222
Total revenues	$	306,337	$	282,682	$	880,873	$	839,437

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Adjusted EBITDA:
Surgical facility services	$	48,673		$	53,347		$	146,859		$	153,318
Ancillary services	(12,002		)	2,573			(7,791		)	9,141
Optical services	748			1,276			2,407			3,004
All other	(14,175		)	(12,448		)	(41,069		)	(36,258		)
Total adjusted EBITDA (1)	23,244			44,748			100,406			129,205
Net income attributable to non-controlling interests	15,305			16,672			48,579			54,392
Depreciation and amortization	(10,929		)	(9,713		)	(33,454		)	(28,984		)
Interest expense, net	(34,030		)	(26,475		)	(84,812		)	(74,863		)
Non-cash stock compensation expense	(3,311		)	(691		)	(5,380		)	(1,326		)
Contingent acquisition compensation expense	(1,815		)	(1,530		)	(5,662		)	(3,060		)
Merger transaction, integration and practice acquisition costs (2)	(6,406		)	(2,471		)	(11,134		)	(8,579		)
Gain on litigation settlement	—			—			3,794			—
Gain on acquisition escrow release	1,000			—			1,000			—
Loss on disposal or impairment of long-lived assets, net	(447		)	(572		)	(2,048		)	(1,697		)
Gain on amendment to tax receivable agreement	16,392			—			16,392			—
Tax receivable agreement expense	—			(3,733		)	—			(3,733		)
Loss on debt refinancing	(18,211		)	(3,595		)	(18,211		)	(11,876		)
(Loss) income before income taxes	$	(19,208	)	$	12,640		$	9,470		$	49,479

⁽¹⁾ The above table reconciles Adjusted EBITDA to income before income taxes as reflected in the unaudited condensed consolidated statements of operations.

When we use the term “Adjusted EBITDA,” it is referring to income before income taxes minus (a) net income attributable to non-controlling interests plus (b) depreciation and amortization, (c) interest expense, net, (d) non-cash stock compensation expense, (e) contingent acquisition compensation expense, (f) merger transaction, integration and practice acquisition costs, minus (g) gain on litigation settlement, (h) gain on acquisition escrow release, plus (i) loss on disposal or impairment of long-lived assets, net, minus (j) gain on amendment to tax receivable agreement, plus (k) tax receivable agreement expense and (l) loss on debt refinancing. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by management to assess operating performance, make business decisions and allocate resources. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. We believe that it is helpful to investors to present Adjusted EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of Adjusted EBITDA generated by its surgical facilities and other operations.

Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

⁽²⁾ This amount includes merger transaction and integration costs of $5.3 million and $1.9 million for the three months ended September 30, 2017 and 2016, respectively, and practice acquisition costs of $1.1 million and $607,000 for the three months ended September 30, 2017 and 2016, respectively.

This amount includes merger transaction and integration costs of $8.6 million and $6.4 million for the nine months ended September 30, 2017 and 2016, respectively, and practice acquisition costs of $2.6 million and $2.2 million for the nine months ended September 30, 2017 and 2016, respectively.

33

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

	September 30, 2017	December 31, 2016
Assets:
Surgical facility services	3,969,584	1,914,842
Ancillary services	183,288	184,002
Optical services	43,451	22,478
Total	4,196,323	2,121,322
All other	405,531	183,636
Total assets	4,601,854	2,304,958

	Nine Months Ended September 30,
	2017		2016
Supplemental Information:
Cash purchases of property and equipment, net:
Surgical facility services	$	16,196	$	21,151
Ancillary services	1,877		3,450
Optical services	96		323
Total	$	18,169	$	24,924
All other	$	2,444	$	3,453
Total cash purchases of property and equipment, net	$	20,613	$	28,377

Critical Accounting Policies

Our significant accounting policies and practices are described in Note 2 of our condensed consolidated financial statements included previously in this report. In preparing our condensed consolidated financial statements in conformity with Generally Accepted Accounting Principles ("GAAP"), our management must 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 revenue and expenses during the reporting period. Certain accounting estimates are particularly sensitive because of their complexity and the possibility that future events affecting them may differ materially from our current judgments and estimates. Our actual results could differ from those estimates. We believe that the following critical accounting policies are important to the portrayal of our financial condition and results of operations and require our management’s subjective or complex judgment because of the sensitivity of the methods, assumptions and estimates used. This listing of critical accounting policies is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP, with no need for management’s judgment regarding accounting policy.

Consolidation and Control

Our condensed consolidated financial statements include the accounts of our Company, wholly-owned or controlled subsidiaries and variable interest entities in which we are the primary beneficiary. Our controlled subsidiaries consist of wholly-owned subsidiaries and other subsidiaries that we control through our ownership of a majority voting interest or other rights granted to us by contract to function as the sole general partner or managing member of the surgical facility. The rights of limited partners or minority members at our controlled subsidiaries are generally limited to those that protect their ownership interests, including the right to approve the issuance of new ownership interests, and those that protect their financial interests, including the right to approve the acquisition or divestiture of significant assets or the incurrence of debt that either physician limited partners or minority members are required to guarantee on a pro-rata basis based upon their respective ownership, or that exceeds 20.0% of the fair market value of the related surgical facility’s assets. All significant intercompany balances and transactions, including management fees from consolidated surgical facilities, are eliminated in consolidation.

As of September 30, 2017 we held less than a majority economic interest in five surgical facilities, three anesthesia practices and three physician practices over which we exercise controlling influence. Controlling influence includes financial interests, duties, rights and responsibilities for the day-to-day management of the entity. We also consider the relevant sections of the Accounting Standard Codification ("ASC") 810, Consolidation, to determine if we have the power to direct the activities and are the primary beneficiary of (and therefore should consolidate) any entity whose operations we do not control with voting rights. As we were the primary beneficiary, we consolidated the above 11 entities at September 30, 2017.

Revenue Recognition

Our patient service revenues are derived from surgical procedures performed at our ASCs, patient visits to physician practices, anesthesia services provided to patients, pharmacy services and diagnostic screens ordered by our physicians. The fees for such services are billed either

34

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

to the patient or a third-party payor, including Medicare and Medicaid. We recognize patient service revenues, net of contractual allowances, which we estimate based on the historical trend of our cash collections and contractual write-offs.

Our optical products purchasing organization negotiates volume buying discounts with optical product manufacturers. The buying discounts and any handling charges billed to the members of the purchasing organization represent the revenues recognized for financial reporting purposes. Revenue is recognized as orders are shipped to members. Product sale revenues from our optical laboratories and marketing products and services businesses, net of an allowance for returns and discounts, is recognized when the product is shipped or service is provided to the customer. We base our estimates for sales returns and discounts on historical experience and have not experienced significant fluctuations between estimated and actual return activity and discounts given.

Other service revenues consist of management and administrative service fees derived from non-consolidated surgical facilities that we account for under the equity method, management of surgical facilities in which we do not own an interest and management services we provide to physician networks for which we are not required to provide capital or additional assets. The fees we derive from these management arrangements are based on a predetermined percentage of the revenues of each surgical facility and physician network. We recognize other service revenues in the period in which services are rendered.

Allowance for Contractual Adjustments and Doubtful Accounts

Our patient service revenues and other receivables from third-party payors are recorded net of estimated contractual adjustments and allowances from third-party payors, which we estimate based on the historical trend of our surgical facilities’ cash collections and contractual write-offs, accounts receivable agings, established fee schedules, relationships with payors and procedure statistics. While changes in estimated reimbursement from third-party payors remain a possibility, we expect that any such changes would be minimal and, therefore, would not have a material effect on our financial condition or results of operations.

We estimate our allowances for doubtful accounts using similar information and analysis. While we believe that our allowances for contractual adjustments and doubtful accounts are adequate, if the actual write-offs are significantly different from our estimates, it could have a material adverse effect on our financial condition and results of operations. Because in most cases we have the ability to verify a patient’s insurance coverage before services are rendered, and because we have entered into contracts with third-party payors which account for a majority of our total revenues, the out-of-period contractual adjustments have been minimal. Our net accounts receivable reflected allowances for doubtful accounts of $2.0 million and $29.9 million at September 30, 2017 and December 31, 2016, respectively. The decrease is due to the application of pushdown accounting.

Our collection policies and procedures are based on the type of payor, size of claim and estimated collection percentage for each patient account. The operating systems used to manage our patient accounts provide for an aging schedule in 30-day increments, by payor, physician and patient. We analyze accounts receivable at each of our surgical facilities to ensure the proper collection and aged category. The operating systems generate reports that assist in the collection efforts by prioritizing patient accounts. Collection efforts include direct contact with insurance carriers or patients, written correspondence and the use of legal or collection agency assistance, as required. Our days sales outstanding were 63 days for the nine months endedSeptember 30, 2017 and 70 days for the year endedDecember 31, 2016.

At a consolidated level, we review the standard aging schedule, by facility, to determine the appropriate provision for doubtful accounts by monitoring changes in our consolidated accounts receivable by aged schedule, days sales outstanding and bad debt expense as a percentage of revenues. At a consolidated level, we do not review a consolidated aging by payor. Regional and local employees review each surgical facility’s aged accounts receivable by payor schedule. These employees have a closer relationship with the payors and have a more thorough understanding of the collection process for that particular surgical facility. Furthermore, this review is supported by an analysis of the actual revenues, contractual adjustments and cash collections received. If our internal collection efforts are unsuccessful, we further review patient accounts with balances of $25 or more. We then classify the accounts based on any external collection efforts we deem appropriate. An account is written-off only after we have pursued collection with legal or collection agency assistance or otherwise deemed an account to be uncollectible. Typically, accounts will be outstanding a minimum of 120 days before being written-off.

We recognize that final reimbursement of outstanding accounts receivable is subject to final approval by each third-party payor. However, because we have contracts with our third-party payors and we verify the insurance coverage of the patient before services are rendered, the amounts that are pending approval from third-party payors are minimal. Amounts are classified outside of self-pay if we have an agreement with the third-party payor or we have verified a patient’s coverage prior to services rendered. It is our policy to collect co-payments and deductibles prior to providing services. It is also our policy to verify a patient’s insurance 72 hours prior to the patient’s procedure. Because our services are primarily non-emergency, our surgical facilities have the ability to control these procedures. Our patient service revenues from self-pay payors as a percentage of total revenues were approximately 2.1% and 1.6% for the nine months endedSeptember 30, 2017 and 2016, respectively.

Income Taxes and Tax Receivable Agreement

We use the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If a net operating loss ("NOL") carryforward exists, we make a determination as to whether that NOL carryforward will be utilized in the future. A valuation allowance will be established for certain NOL carryforwards and other deferred tax assets where their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets is based upon estimates and assumptions related to our ability to generate sufficient future taxable income in certain

35

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

tax jurisdictions. If these estimates and related assumptions change in the future, we will be required to adjust our deferred tax valuation allowances.

As of September 30, 2017, we maintained a valuation allowance against certain state NOLs and capital losses for which we believe it is more likely than not that they will not be realized. On a quarterly basis, we continue to monitor results. If our expectations for future operating results on a consolidated basis or at the state jurisdiction level vary from actual results due to changes in healthcare regulations, general economic conditions, or other factors, we may need to adjust the valuation allowance, for all or a portion of our deferred tax assets. Our income tax expense in future periods will be reduced or increased to the extent of offsetting decreases or increases, respectively, in our valuation allowance in the period when the change in circumstances occurs. These changes could have a significant impact on our future earnings.

For the nine months endedSeptember 30, 2017, we recorded income tax expense at a rate of approximately (193.2)% of income before income taxes.  As a percentage of net income after income attributable to non-controlling interests, we expect the tax rate for the year to be between 41% and 42%. Based upon the application of interim accounting guidance, however, the tax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the relative net income from period to period. 

Section 382 (“Section 382”) of the Internal Revenue Code of 1986, as amended (the “Code”) imposes an annual limit on the ability of a corporation that undergoes an “ownership change” to use its NOLs to reduce its tax liability. An “ownership change” is generally defined as any change in ownership of more than 50.0% of a corporation’s “stock” by its “5-percent shareholders” (as defined in Section 382) over a rolling three-year period based upon each of those shareholder’s lowest percentage of stock owned during such period. As a result of the Symbion acquisition, approximately $179 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million, and, as a result of the NovaMed acquisition, approximately $17 million in NOL carryforwards are subject to an annual Section 382 base limitation of $4.9 million. As a result of the NSH acquisition, approximately $20.5 million in NOL carryforwards are subject to an annual Section 382 base limitation of $2.8 million. The sale of H.I.G.’s shares to Bain in connection with the Private Sale resulted in an ownership change as defined in Section 382. As a result, approximately $449.7 million in NOL carryforwards are subject to an annual Section 382 base limitation of $14.2 million. At this time, we do not believe this limitation, when combined with amounts allowable due to net unrecognized built in gains, will affect our ability to use any NOLs before they expire. However, no such assurances can be provided. If our ability to utilize our NOLs to offset taxable income generated in the future is subject to this limitation, it could have an adverse effect on our business, prospects, results of operations and financial condition.

On May 9, 2017, we entered into an agreement with H.I.G. (in its capacity as the stockholders representative) to amend that certain Income Tax Receivable Agreement, dated September 30, 2015 (as amended, the “TRA”), by and between the Company, H.I.G. (in its capacity as the stockholders representative) and the other parties referred to therein, which amendment became effective on August 31, 2017. The TRA was initially entered into in connection with the Reorganization undertaken to facilitate our initial public offering. Pursuant to the amendment to the TRA, we agreed to make payments to H.I.G. in its capacity as the stockholders representative pursuant to a fixed payment schedule. The amounts payable under the TRA are calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent. The amounts payable under the TRA are related to our projected realized tax savings over the next five years and are not dependent on our actual tax savings. Amounts payable pursuant to the TRA will be adjusted downward in the event that the maximum corporate federal income tax rate is reduced. To the extent that we are unable to make payments under the TRA and such inability is a result of the terms of credit agreements and other debt documents that are materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of such credit agreements and other debt documents cause us to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.

As a result of the amendment to the TRA, we were required to value the liability under the TRA by discounting the fixed payment schedule using our incremental borrowing rate. During the three and nine months ended September 30, 2017, we recognized a reduction in the carrying value of the TRA liability of $43.9 million, with $15.3 million of the reduction recorded to a gain on amendment of TRA and $28.6 million recorded as a reduction to the goodwill recorded in connection with the application of pushdown accounting related to the change of control (discussed in Note 1. "Organization" of our condensed consolidated financial statements included previously in this report).

Assuming our effective tax rate is 38% throughout the term of the TRA, we estimate that the total amounts payable under the TRA will be approximately $120.5 million. Prior to the effectiveness of the amendment to the TRA, the amounts payable under the TRA varied depending upon a number of factors, including the amount, character and timing of our taxable income. We estimated the total amounts payable would be approximately $123.4 million, if the tax benefits of related deferred tax assets were ultimately realized. The amounts payable were recognized during 2015 in conjunction with the release of our valuation allowance recorded against the deferred tax assets.

On September 8, 2017, in connection with the resignation of our former Chief Executive Officer, Michael Doyle, Mr. Doyle entered into a TRA Waiver and Assignment Agreement (the “CEO TRA Assignment Agreement”) with the Company, pursuant to which we accepted the assignment of 50% of Mr. Doyle’s (and his affiliates’) interest in future payments to which such parties were entitled pursuant to the TRA, in exchange for an upfront payment of approximately $5.1 million, in the aggregate, as set forth in the CEO TRA Assignment Agreement. On September 15, 2017 (Successor), certain of our employees entered into TRA Waiver and Assignment Agreements with the Company (collectively, the “Employee TRA Assignment Agreements” and together with the CEO TRA Assignment Agreement, the “TRA Assignment Agreements”), pursuant to which we made upfront payments of approximately $4.8 million in the aggregate, in exchange for the assignment of 100% of each such employee’s interest in future payments to which such employee was entitled pursuant to the TRA. During the period from September 1, 2017 to September 30, 2017, we recognized an aggregate gain of $1.1 million as a result of the TRA Assignment Agreements.

36

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Long-Lived Assets, Goodwill and Intangible Assets

We evaluate the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist in accordance with ASC 350, Intangibles- Goodwill and Other. We perform an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. We test our goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise. 

Off-Balance Sheet Arrangements

From time to time, we guarantee our pro-rata share of the third-party debts and other obligations of many of the non-consolidated partnerships and limited liability companies in which we own an interest. In most instances of these guarantees, the physicians and/or physician groups have also guaranteed their pro-rata share of the indebtedness to secure the financing. At September 30, 2017, we did not guarantee any debt of our non-consolidated surgical facilities.

Equity-Based Compensation

Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. The fair value of future stock options awarded will be based on the quoted market price of our common stock upon grant, as well as assumptions including expected stock price volatility, risk-free interest rate, expected dividends, and expected term.

Our policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. Our equity-based compensation expense can vary in the future depending on many factors, including levels of forfeitures and whether performance targets are met and whether a liquidity event occurs. In connection with the Reorganization, our board of directors and stockholders adopted the Surgery Partners, Inc. 2015 Omnibus Incentive Plan from which our future equity-based awards will be granted.

37

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Results of Operations

The following tables summarize certain results from the statements of operations for the three and nine months ended September 30, 2017 and 2016. The tables also show the percentage relationship to revenues for the periods indicated (dollars in thousands):

	Three Months Ended September 30,
	2017					2016
	Amount			% of Revenues		Amount			% of Revenues
Revenues	$	306,337		100.0	%	$	282,682		100.0	%
Operating expenses:
Cost of revenues	246,696			80.5	%	201,394			71.2	%
General and administrative expenses (1)	20,378			6.7	%	14,985			5.3	%
Depreciation and amortization	10,929			3.6	%	9,713			3.4	%
Provision for doubtful accounts	8,524			2.8	%	8,514			3.0	%
Income from equity investments	(1,608		)	(0.5	)%	(1,167		)	(0.4	)%
Loss on disposal or impairment of long-lived assets, net	447			0.1	%	572			0.2	%
Merger transaction and integration costs	5,326			1.7	%	1,864			0.7	%
Loss on debt refinancing	18,211			5.9	%	3,595			1.3	%
Gain on acquisition escrow release	(1,000		)	(0.3	)%	—			—	%
Electronic health records incentive income	4			—	%	364			0.1	%
Total operating expenses	307,907			100.5	%	239,834			84.8	%
Operating (loss) income	(1,570		)	(0.5	)%	42,848			15.2	%
Gain on amendment to tax receivable agreement	16,392			5.4	%	—			—	%
Tax receivable agreement expense	—			—	%	(3,733		)	(1.3	)%
Interest expense, net	(34,030		)	(11.1	)%	(26,475		)	(9.4	)%
(Loss) income before income taxes	(19,208		)	(6.3	)%	12,640			4.5	%
Income tax benefit	(20,929		)	(6.8	)%	(1,694		)	(0.6	)%
Net income	1,721			0.6	%	14,334			5.1	%
Less: Net income attributable to non-controlling interests	(15,305		)	(5.0	)%	(16,672		)	(5.9	)%
Net loss attributable to Surgery Partners, Inc.	$	(13,584	)	(4.4	)%	$	(2,338	)	(0.8	)%

⁽¹⁾ Includes contingent acquisition compensation expense of $1.8 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively.

38

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

	Nine Months Ended September 30,
	2017					2016
	Amount			% of Revenues		Amount			% of Revenues
Revenues	$	880,873		100.0	%	$	839,437		100.0	%
Operating expenses:
Cost of revenues	675,096			76.6	%	606,949			72.3	%
General and administrative expenses (1)	54,574			6.2	%	42,205			5.0	%
Depreciation and amortization	33,454			3.8	%	28,984			3.5	%
Provision for doubtful accounts	19,987			2.3	%	15,931			1.9	%
Income from equity investments	(3,860		)	(0.4	)%	(3,007		)	(0.4	)%
Loss on disposal or impairment of long-lived assets, net	2,048			0.2	%	1,697			0.2	%
Merger transaction and integration costs	8,567			1.0	%	6,361			0.8	%
Loss on debt refinancing	18,211			2.1	%	11,876			1.4	%
Gain on litigation settlement	(3,794		)	(0.4	)%	—			—	%
Gain on acquisition escrow release	(1,000		)	(0.1	)%	—			—	%
Electronic health records incentive (income) expense	(298		)	—	%	269			—	%
Other (income) expense	(2		)	—	%	97			—	%
Total operating expenses	802,983			91.2	%	711,362			84.7	%
Operating income	77,890			8.8	%	128,075			15.3	%
Gain on amendment to tax receivable agreement	16,392			1.9	%	—			—	%
Tax receivable agreement expense	—			—	%	(3,733		)	(0.4	)%
Interest expense, net	(84,812		)	(9.6	)%	(74,863		)	(8.9	)%
Income before income taxes	9,470			1.1	%	49,479			5.9	%
Income tax (benefit) expense	(18,300		)	(2.1	)%	2,496			0.3	%
Net income	27,770			3.2	%	46,983			5.6	%
Less: Net income attributable to non-controlling interests	(48,579		)	(5.5	)%	(54,392		)	(6.5	)%
Net loss attributable to Surgery Partners, Inc.	$	(20,809	)	(2.4	)%	$	(7,409	)	(0.9	)%

⁽¹⁾ Includes contingent acquisition compensation expense of $5.7 million and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively.

Three Months Ended September 30,2017 Compared to Three Months Ended September 30,2016

Overview. During the three months ended September 30, 2017, our revenues were $306.3 million compared to $282.7 million for the three months ended September 30, 2016. Revenue growth for the period was primarily attributable to the acquisition of NSH (closed on August 31, 2017) which added 22 surgical facilities to our portfolio. We incurred a net loss attributable to Surgery Partners, Inc. of $13.6 million for the 2017 period, compared to $2.3 million for the 2016 period. During the 2017 period we experienced lower than expected revenue and incurred certain expenses related to Hurricanes Harvey and Irma, primarily driven by electrical outages at, and temporary closures of, certain of our facilities in affected areas resulting in an estimated loss of approximately 2,828 cases. We estimate the total impact from the hurricanes during the second half of 2017 to be a decrease of approximately $7.0 million to $9.0 million in expected revenue, with a majority of the impact being recognized in the third quarter. Additionally, in the 2017 period, subsequent to the Preferred Private Placement, we, as part of a review of operations undertaken to create a solid foundation to support our long-term growth objectives, incurred a non-recurring expense of $15.6 million associated with an increase in reserves for certain accounts receivables. This increase in reserves resulted from certain known events and actions during the third quarter of 2017 related to select payors primarily in our ancillary services segment. Upon consideration of such additional information, related receivables were determined to have a low likelihood of collection. The majority of this adjustment related to receivables with balances from the first quarter of 2016 and prior. We believe we have accounted for all necessary reserve adjustments at this time. Excluding these items from the 2017 period, we achieved revenue growth of 16.7%.

39

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Revenues. Revenues for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 were as follows (dollars in thousands):

	Three Months Ended September 30,
	2017		2016		Dollar Variance			Percent Variance
Patient service revenues	$	300,763	$	278,195	$	22,568		8.1	%
Optical service revenues	2,794		3,203		(409		)	(12.8	)%
Other service revenues	2,780		1,284		1,496			116.5	%
Total revenues	$	306,337	$	282,682	$	23,655		8.4	%

Patient service revenues increased 8.1% to $300.8 million for the three months ended September 30, 2017 compared to $278.2 million for the three months ended September 30, 2016. The increase in patient service revenues was primarily attributable to the acquisition of NSH.

Cost of Revenues. Cost of revenues increased to $246.7 million for the three months ended September 30, 2017 compared to $201.4 million for the three months ended September 30, 2016. The increase was primarily attributable to the integration of acquisitions completed after September 30, 2016 (including the acquisition of NSH) and an increase in higher acuity case mix. As a percentage of revenues, cost of revenues were 80.5% for the 2017 period and 71.2% for the 2016 period.

General and Administrative Expenses. General and administrative expenses were $20.4 million for the three months ended September 30, 2017 compared to $15.0 million for the three months ended September 30, 2016. The increase was primarily due to an increase in stock compensation expense, costs incurred related to the planned relocation of the corporate office in Nashville, TN and the integration of NSH during the period. As a percentage of revenues, general and administrative expenses were 6.7% for the 2017 period compared to 5.3% for the 2016 period.

Depreciation and Amortization. Depreciation and amortization increased to $10.9 million for the three months ended September 30, 2017 compared to $9.7 million for the three months ended September 30, 2016. As a percentage of revenues, depreciation and amortization expenses were 3.6% for the 2017 period and 3.4% for the 2016 period. The increase was attributable to the addition of 22 surgical facilities in connection with the acquisition of NSH.

Provision for Doubtful Accounts. The provision for doubtful accounts was $8.5 million for each of the three months ended September 30, 2017 and September 30, 2016. As a percentage of revenues, the provision for doubtful accounts was 2.8% for the 2017 period and 3.0% for the 2016 period. The increase was attributable to the addition of 22 surgical facilities in connection with the acquisition of NSH.

Income from Equity Investments. The income from equity investments was $1.6 million for the three months ended September 30, 2017 and $1.2 million for the three months ended September 30, 2016. The increase was attributable to the addition of 4 minority owned surgical facilities (equity method investments) in connection with the acquisition of NSH.

Loss on Disposal or Impairment of Long-Lived Assets, Net. The net loss on disposal of long-lived assets was $447,000 for the three months ended September 30, 2017 compared to $572,000 for the three months ended September 30, 2016.

Merger Transaction and Integration Costs. We incurred $5.3 million of merger transaction and integration costs related to the integration of our acquisitions for the three months ended September 30, 2017 compared to $1.9 million for the three months ended September 30, 2016. The increase is primarily related to the costs incurred in connection with the acquisition of NSH.

Loss on Debt Refinancing. The loss on debt refinancing was $18.2 million for the three months ended September 30, 2017 compared to $3.6 million for the three months ended September 30, 2016. The increase was due to the prepayment in whole of the outstanding principal of the 2014 Revolver Loan and the 2014 First Lien Credit Agreement, with the proceeds from the 2017 Senior Secured Credit Facilities.

Operating (Loss) Income. Our operating income margin for the three months ended September 30, 2017 was (0.5)% compared to 15.2% during the three months ended September 30, 2016. During the three months ended September 30, 2017, we recorded a loss on debt refinancing of $18.2 million, merger transaction and integration costs related to acquisitions of $5.3 million, contingent acquisition compensation expense of $1.8 million and a loss on disposal of long-lived assets of $447,000. Further, the 2017 period included the impact of hurricanes Irma and Harvey and the impact associated with an increase in reserves for certain accounts receivables, the combination of these items resulted in a one time reduction to operating income of $23.2 million. Excluding the impact of these items, our operating income margin was 15.5% for the three months ended September 30, 2017.

During the three months ended September 30, 2016, we recorded $1.9 million of merger transaction and integration costs related to acquisitions, loss on debt refinancing of $3.6 million, contingent acquisition compensation expense of $1.5 million and a loss on disposal of long-lived assets of $0.6 million. Excluding the impact of these items, our operating income margin was 17.8% for the three months ended September 30, 2016.

40

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

The decline was primarily related to an unfavorable payor mix shift on our higher acuity cases resulting in higher supply costs with lower reimbursement rates.

Tax Receivable Agreement Gain. During the three months ended September 30, 2017, we recognized a tax receivable agreement gain of $16.4 million. We recognized this gain as a result of the amendment of the TRA and the TRA Assignment Agreements.

Tax Receivable Agreement Expense. We incurred tax receivable agreement expense of $3.7 million for the three months ended September 30, 2016. The 2016 expense was recorded to update the initial estimated liability for the filed tax returns and final 2015 tax losses that are included in the amounts payable under the TRA.

Interest Expense, Net. Interest expense, net, was $34.0 million for the three months ended September 30, 2017 compared to $26.5 million for the three months ended September 30, 2016. As a percentage of revenues, interest expense, net was 11.1% for the 2017 period compared to 9.4% for the 2016 period. The increase relates to our refinancing of our Senior Secured Credit Agreement and the issuance of our 2025 Senior Unsecured Notes, further discussed in Note 4. "Long-Term Debt" of our condensed consolidated financial statements included previously in this report.

Income Tax Benefit.  The income tax benefit was $20.9 million for the three months ended September 30, 2017 compared to $1.7 million for the three months ended September 30, 2016. The effective tax rate was 109.0% for the three months ended September 30, 2017 compared to (13.4)% for the three months ended September 30, 2016. As a percentage of net income after income attributable to non-controlling interests, we expect the tax rate for the year to be between 41% and 42%. Based upon the application of interim accounting guidance, however, the tax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the relative net income from period to period.

Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests was $15.3 million for the three months ended September 30, 2017 compared to $16.7 million for the three months ended September 30, 2016. As a percentage of revenues, net income attributable to non-controlling interests was 5.0% in the 2017 period and 5.9% for the 2016 period.

Nine Months Ended September 30,2017 Compared to Nine Months Ended September 30, 2016

Overview. During the nine months ended September 30, 2017, our revenues were $880.9 million compared to $839.4 million for the nine months ended September 30, 2016. Revenue growth for the period is primarily attributable to the acquisition of NSH (closed on August 31, 2017) which added 22 surgical facilities to our portfolio. We incurred a net loss attributable to Surgery Partners, Inc. for the 2017 period of $20.8 million, compared to $7.4 million for the 2016 period. During the 2017 period we experienced lower than expected revenue and incurred certain expenses related to Hurricanes Harvey and Irma, primarily driven by electrical outages at, and temporary closures of, certain of our facilities in affected areas resulting in an estimated loss of approximately 2,828 cases. We estimate the total impact from the hurricanes during the second half of 2017 to be a decrease of approximately $7.0 million to $9.0 million in expected revenue, with a majority of the impact being recognized in the third quarter. Additionally, in the 2017 period, subsequent to the Preferred Private Placement, we, as part of a review of operations undertaken to create a solid foundation to support our long-term growth objectives, incurred a non-recurring expense of $15.6 million associated with an increase in reserves for certain accounts receivables. This increase in reserves resulted from certain known events and actions during the third quarter of 2017 related to select payors primarily in our ancillary services segment. Upon consideration of such additional information, related receivables were determined to have a low likelihood of collection. The majority of this adjustment related to receivables with balances from the first quarter of 2016 and prior. We believe we have accounted for all necessary reserve adjustments at this time. Excluding these items from the 2017 period, we achieved revenue growth of 7.7%.

Revenues. Revenues for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 were as follows (dollars in thousands):

	Nine Months Ended September 30,
	2017		2016		Dollar Variance			Percent Variance
Patient service revenues	$	866,244	$	822,966	$	43,278		5.3	%
Optical service revenues	8,518		10,222		(1,704		)	(16.7	)%
Other service revenues	6,111		6,249		(138		)	(2.2	)%
Total revenues	$	880,873	$	839,437	$	41,436		4.9	%

Patient service revenues increased 5.3% to $866.2 million for the nine months ended September 30, 2017 compared to $823.0 million for the nine months ended September 30, 2016. The increase in patient service revenues was primarily attributable to the acquisition of NSH.

Cost of Revenues. Cost of revenues were $675.1 million for the nine months ended September 30, 2017 compared to $606.9 million for the nine months ended September 30, 2016. The increase was primarily attributable to the integration of acquisitions completed after September

41

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

30, 2016 (including NSH) and an increase in higher acuity case mix. As a percentage of revenues, cost of revenues were 76.6% for the 2017 period and 72.3% for the 2016 period.

General and Administrative Expenses. General and administrative expenses were $54.6 million for the nine months ended September 30, 2017 compared to $42.2 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in stock compensation expense, costs incurred related to the planned relocation of the corporate office in Nashville, TN and the integration of NSH during the period. As a percentage of revenues, general and administrative expenses were 6.2% for the 2017 period compared to 5.0% for the 2016 period.

Depreciation and Amortization. Depreciation and amortization increased to $33.5 million for the nine months ended September 30, 2017 compared to $29.0 million for the nine months ended September 30, 2016. As a percentage of revenues, depreciation and amortization expenses were 3.8% for the 2017 period and 3.5% for the 2016 period. The increase was attributable to the addition of 22 surgical facilities in connection with the acquisition of NSH.

Provision for Doubtful Accounts. The provision for doubtful accounts increased to $20.0 million for the nine months ended September 30, 2017 compared to $15.9 million for the nine months ended September 30, 2016. As a percentage of revenues, the provision for doubtful accounts was 2.3% for the 2017 period and 1.9% for the 2016 period. The increase was attributable to the addition of 22 surgical facilities in connection with the acquisition of NSH.

Income from Equity Investments. The income from equity investments was $3.9 million for the nine months ended September 30, 2017 compared to $3.0 million for the nine months ended September 30, 2016. The increase was attributable to the addition of 4 minority owned surgical facilities (equity method investments) in connection with the acquisition of NSH.

Loss on Disposal or Impairment of Long-Lived Assets, Net. The net loss on disposal of long-lived assets was $2.0 million for the nine months ended September 30, 2017 compared to $1.7 million for the nine months ended September 30, 2016.

Merger Transaction and Integration Costs. We incurred $8.6 million of merger transaction and integration costs for the nine months ended September 30, 2017 compared to $6.4 million for the nine months ended September 30, 2016. The increase was primarily related to the costs incurred in connection with the acquisition of NSH.

Loss on Debt Refinancing. We incurred a loss on debt refinancing of $18.2 million for the nine months ended September 30, 2017 compared to $11.9 million for the three months ended September 30, 2016. The increase was due to prepayment in full of the outstanding principal of the 2014 Revolver Loan and the 2014 First Lien Credit Agreement, with the proceeds from the 2017 Senior Secured Credit Facilities during the nine months ended September 30, 2017.

Operating Income. Our operating income margin for the nine months ended September 30, 2017 was 8.8% compared to 15.3% during the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we recorded a loss on debt refinancing of $18.2 million, merger transaction and integration costs related to acquisitions of $8.6 million, contingent acquisition compensation expense of $5.7 million and a loss on disposal of long-lived assets of $2.0 million. Further, the 2017 period included the impact of hurricanes Irma and Harvey and the impact associated with an increase in reserves for certain accounts receivables, the combination of these items resulted in a one time reduction to operating income of $23.2 million. Excluding the impact of these items, our operating income margin was 15.4% for the nine months ended September 30, 2017.

During the nine months ended September 30, 2016, we recorded a loss on debt refinancing of $11.9 million, $6.4 million of merger transaction and integration costs related to acquisitions, contingent acquisition compensation expense of $3.1 million and a loss on disposal of long-lived assets of $1.7 million. Excluding the impact of these items, our operating income margin was 18% for the nine months ended September 30, 2016.

The decline primarily relates to an unfavorable payor mix shift on our higher acuity cases resulting in higher supply costs with lower reimbursement rates.

Interest Expense, Net. Interest expense, net, was $84.8 million for the nine months ended September 30, 2017 compared to $74.9 million for the nine months ended September 30, 2016. As a percentage of revenues, interest expense, net was 9.6% for the 2017 period compared to 8.9% for the 2016 period.

Tax Receivable Agreement Gain. During the nine months ended September 30, 2017, we recognized a tax receivable agreement gain of $16.4 million. We recognized this gain as a result of the amendment of the TRA and the TRA Assignment Agreements.

Tax Receivable Agreement Expense. We incurred tax receivable agreement expense of $3.7 million for the nine months ended September 30, 2016. The 2016 expense was recorded to update the initial estimated liability for the filed tax returns and final 2015 tax losses that are included in the amounts payable under the TRA.

Income Tax (Benefit) Expense.  The income tax benefit was $18.3 million for the nine months ended September 30, 2017 compared to expense of $2.5 million for the nine months ended September 30, 2016. The effective tax rate was (193.2)% for the nine months ended September 30, 2017 compared to 5.0% for the nine months ended September 30, 2016. As a percentage of net income after income attributable to non-controlling interests, we expect the tax rate for the year to be between 41% and 42%. Based upon the application of interim accounting

42

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

guidance, however, the tax rate as a percentage of net income after income attributable to non-controlling interests will vary based upon the relative net income from period to period.

Net Income Attributable to Non-Controlling Interests. Net income attributable to non-controlling interests decreased to $48.6 million for the nine months ended September 30, 2017 compared to $54.4 million for the nine months ended September 30, 2016. As a percentage of revenues, net income attributable to non-controlling interests was 5.5% for the 2017 period and 6.5% for the 2016 period.

Liquidity and Capital Resources

Operating Activities

The primary source of our operating cash flow is the collection of accounts receivable from federal and state agencies (under the Medicare and Medicaid programs), managed care health plans, commercial insurance companies and individuals. During the nine months endedSeptember 30, 2017, our cash flow provided by operating activities was $66.5 million compared to $92.9 million in the nine months endedSeptember 30, 2016. The decrease period over period is primarily related to interest payments of $17.8 million on our 2021 Unsecured Notes and $10.0 million of tax receivable payments that were not incurred in the prior period. At September 30, 2017, we had working capital of $298.6 million compared to $175.2 million at December 31, 2016.

Investing Activities

Net cash used in investing activities during the nine months endedSeptember 30, 2017 was $747.6 million, which included $20.6 million related to purchases of property and equipment. We acquired NSH for a purchase price of $711.4 million, net of cash acquired. Additionally, we purchased four physician practices and the assets of an endoscopy practice for an aggregate purchase price of $15.4 million.

Net cash used in investing activities during the nine months endedSeptember 30, 2016 was $154.4 million, which included $28.4 million related to purchases of property and equipment, including $4.9 million related to the relocation of our hospital in Great Falls, Montana. Additionally, we paid $126.0 million in cash for acquisitions (net of cash acquired), of which $96.4 million, excluding $16.6 million of contingent acquisition consideration, related to the purchase of three surgical facilities, one of which was merged with an existing facility, six physician practices, a lab and a pharmacy. The remaining amount included an additional payment of $16.6 million to fund the final escrow payment related to the acquisition of Symbion Holding Corporation.

Financing Activities

Net cash used in financing activities during the nine months endedSeptember 30, 2017 was $811.1 million. During this period, we made distributions to non-controlling interest holders of $56.8 million and paid cash related to ownership transactions with consolidated affiliates of $1.5 million. Further, we made repayments on our long-term debt of $1.2 billion offset by borrowings of $1.8 billion. Our repayments and borrowings include a $132.5 million draw down and subsequent repayment of $217.5 million on our Revolver during the period. In addition, we paid debt issuance costs of $58.6 million and received proceeds on the issuance of preferred stock of $291.7 million, net of issuance costs.

Net cash provided by financing activities during the nine months endedSeptember 30, 2016 was $58.8 million. During this period, we made distributions to non-controlling interest holders of $49.4 million and received cash related to ownership transactions with consolidated affiliates of $1.1 million. Further, we made repayments on our long-term debt of $454.0 million offset by borrowings of $580.9 million. Our repayments and borrowings include a $91.5 million draw down and subsequent repayment of $184.8 million on our Revolver during the period. In addition, we paid debt issuance costs and the original issue discount of $14.3 million and a prepayment penalty on the payoff of the 2014 Second Lien of $4.9 million.

43

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Long-Term Debt

A summary of long-term debt follows (in thousands):

	September 30, 2017		December 31, 2016
2014 Revolver Loan	$	—	$	85,000
2014 First Lien Credit Agreement	—		932,000
2017 Senior Secured Credit Facilities:
Revolver	—		—
Term Loan	1,283,626		—
Senior Unsecured Notes due 2021	409,821		400,000
Senior Unsecured Notes due 2025	370,000		—
Subordinated Notes	—		1,000
Notes payable and secured loans	113,547		42,521
Capital lease obligations	16,340		13,996
Less: unamortized debt issuance costs and discount	—		(32,274		)
Total debt	2,193,334		1,442,243
Less: Current maturities	48,472		27,822
Total long-term debt	$	2,144,862	$	1,414,421

2014 Revolver Loan & 2014 First Lien Credit Agreement

On August 31, 2017, we prepaid in full the outstanding principal of the 2014 Revolver Loan, a revolving credit facility entered into on November 3, 2014, and the 2014 First Lien Credit Agreement, a senior secured obligation of Surgery Center Holdings, Inc. entered into on November 3, 2014, with the proceeds from the 2017 Senior Secured Credit Facilities. The total prepayment amount was $1.030 billion, which included $1.027 billion of outstanding principal and $3.0 million of accrued and unpaid interest, other fees and expenses. In connection with the prepayment, we recorded a loss on debt refinancing of $18.2 million, for each of the three and nine months ending September 30, 2016. The loss includes the partial write-off of unamortized debt issuance costs and discount related to the 2014 Revolver Loan and 2014 First Lien Credit Agreement and a portion of costs incurred with the 2017 Senior Secured Credit Facilities.

2014 Second Lien Credit Agreement

On March 31, 2016, we prepaid in full the outstanding principal of the 2014 Second Lien Credit Agreement, plus accrued and unpaid interest, with the proceeds of the issuance of the 2021 Unsecured Notes, defined below. In connection with the prepayment, we recorded a loss on debt refinancing of $8.3 million, for the nine months ended September 30, 2016.

2017 Senior Secured Credit Facilities

On August 31, 2017, SP Holdco I, Inc. and Surgery Center Holdings, Inc., each a wholly-owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”), providing for a $1.290 billion senior secured term loan (the “Term Loan”) and a $75.0 million revolving credit facility (the “Revolver” and, together with the Term Loan, the “2017 Senior Secured Credit Facilities”).

The Term Loan was fully drawn on August 31, 2017 and the proceeds thereof were used to finance the consideration paid in the NSH Merger, to repay amounts outstanding under our then-existing 2014 First Lien Credit Agreement and 2014 Revolver Loan and amounts outstanding under the existing senior secured credit facilities of NSH and to pay fees and expenses in connection with the foregoing and transactions related to the Transaction Agreements. The Revolver may be utilized for working capital, capital expenditures and general corporate purposes. Subject to certain conditions and requirements set forth in the Credit Agreement, we may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver. As of September 30, 2017, our availability on the Revolver was $71.9 million (including outstanding letters of credit of $3.1 million).

The Term Loan will mature on August 31, 2024 (or, if at least 50.0% of the 2021 Unsecured Notes (as defined below) shall have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020). The Revolver will mature on August 31, 2022 (or, if at least 50.0% of the 2021 Notes have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020).

Interest on the 2017 Senior Secured Credit Facilities shall bear interest at a rate per annum equal to (x) LIBOR plus a margin ranging from 3.00% to 3.25% per annum, depending on our first lien net leverage ratio or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (solely with

44

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

respect to the Term Loan, the alternate base rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00% to 2.25% per annum. In addition, we are required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver.

The Term Loan amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount of the Term Loan (such amortization payments will commence on or around the last business day of the fiscal quarter ending December 31, 2017). The Term Loan is subject to mandatory prepayments based on excess cash flow for the applicable fiscal year that will depend on the first lien net leverage ratio as of the last day of the applicable fiscal year, as well as upon the occurrence of certain other events, as described in the Credit Agreement. There were no excess cash flow payments required as of September 30, 2017.

With respect to the Revolver, we are required to comply with a maximum consolidated total net leverage ratio of 9.50:1.00, which covenant will be tested quarterly on a trailing four quarter basis only if, as of the last day of the applicable fiscal quarter the Revolver is drawn in an aggregate amount greater than 35% of the total commitments under the Revolver. Such financial maintenance covenant is subject to an equity cure. The Credit Agreement includes customary negative covenants restricting or limiting our ability and the ability of our restricted subsidiaries, to, among other things, sell assets, alter our business, engage in mergers, acquisitions and other business combinations, declare dividends or redeem or repurchase equity interests, incur additional indebtedness or guarantees, make loans and investments, incur liens, enter into transactions with affiliates, prepay certain junior debt, and modify or waive certain material agreements and organizational documents, in each case, subject to customary and other agreed upon exceptions. The Credit Agreement also contains customary affirmative covenants and events of default. As of September 30, 2017, we were in compliance with the covenants contained in the Credit Agreement.

The 2017 Senior Secured Credit Facilities are guaranteed, on a joint and several basis, by SP Holdco I, Inc. and each of Surgery Center Holdings, Inc.'s current and future wholly-owned domestic restricted subsidiaries (subject to certain exceptions) (the “Subsidiary Guarantors”) and are secured by a first priority security interest in substantially all of Surgery Center Holdings, Inc.'s, SP Holdco I, Inc.'s and the Subsidiary Guarantors’ assets (subject to certain exceptions).

In connection with the Term Loan and Revolver, we incurred debt issuance costs and discount of $18.8 million and $9.4 million, respectively, which were eliminated with the application of pushdown accounting.

Senior Unsecured Notes due 2021

Effective March 31, 2016, Surgery Center Holdings, Inc., issued $400.0 million in gross proceeds of senior unsecured notes due April 15, 2021 (the "2021 Unsecured Notes"). The 2021 Unsecured Notes bear interest at the rate of 8.875% per year, payable semi-annually on April 15 and October 15 of each year. The 2021 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly owned restricted subsidiaries that guarantees the 2017 Senior Secured Credit Facilities (subject to certain exceptions).

We may redeem up to 35% of the aggregate principal amount of the 2021 Unsecured Notes, at any time before April 15, 2018, with the net cash proceeds of certain equity offerings at a redemption price equal to 108.875% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2021 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of any such qualified equity offering.

We may redeem the 2021 Unsecured Notes, in whole or in part, at any time prior to April 15, 2018 at a price equal to 100.000% of the principal amount to be redeemed plus an applicable make-whole premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. We may redeem the 2021 Unsecured Notes, in whole or in part, at any time on or after April 15, 2018, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to the date of redemption:

April 15, 2018 to April 14, 2019	106.656	%
April 15, 2019 to April 14, 2020	104.438	%
April 15, 2020 and thereafter	100.000	%

If Surgery Center Holdings, Inc., experiences a change in control under certain circumstances, we must offer to purchase the 2021 Unsecured Notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase. The change of control as discussed in Note 1. "Organization", did not trigger repurchase.

The 2021 Unsecured Notes contain customary affirmative and negative covenants, which among other things, limit our ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

In connection with the offering of the 2021 Unsecured Notes, we incurred debt issuance costs of $8.4 million, which were eliminated with the application of pushdown accounting.

Senior Unsecured Notes due 2025

Effective June 30, 2017, SP Finco, LLC, a wholly owned subsidiary of Surgery Center Holdings, Inc., issued $370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"), which gross proceeds were deposited in an escrow account (the “Escrow Account”) established at Wilmington Trust, National Association (in such capacity, the “Escrow Agent”) in the name of the

45

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

trustee under the indenture governing the 2025 Unsecured Notes (the “2025 Unsecured Notes Indenture”) on behalf of the holders of the 2025 Unsecured Notes. The 2025 Unsecured Notes bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 2018.

In connection with the closing of the NSH Merger and the release of the proceeds from the Escrow Account, both of which occurred on August 31, 2017, SP Finco, LLC merged with and into Surgery Center Holdings, Inc., with Surgery Center Holdings, Inc. surviving such merger and assuming, by operation of law, the rights and obligations of SP Finco, LLC under the 2025 Unsecured Notes and the indenture governing such notes. As of such time, the 2025 Unsecured Notes became guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.’s domestic wholly owned restricted subsidiaries that guarantees Surgery Center Holdings, Inc.’s senior secured credit facilities (subject to certain exceptions).

We may redeem up to 40% of the aggregate principal amount of the 2025 Unsecured Notes at any time prior to July 1, 2020, with the net cash proceeds of certain equity issuances at a redemption price equal to 106.750% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2025 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of the applicable equity offering.

We may redeem the 2025 Unsecured Notes, in whole or in part, at any time prior to July 1, 2020, at a price equal to 100.000% of the principal amount to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. We may redeem the 2025 Unsecured Notes, in whole or in part, at any time on or after July 1, 2020, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to, but excluding, the date of redemption:

July 1, 2020 to June 30, 2021	103.375	%
July 1, 2021 to June 30, 2022	101.688	%
July 1, 2022 and thereafter	100.000	%

If Surgery Center Holdings, Inc., experiences a change in control under certain circumstances, we must offer to purchase the 2025 Unsecured Notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase.

The 2025 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit our ability to incur additional debt, pay dividends, create or assume liens, effect transactions with our affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

In connection with the offering of the 2025 Unsecured Notes, we incurred debt issuance costs of $17.3 million, which were eliminated with the application of pushdown accounting.

Subordinated Notes

On August 3, 2017, we redeemed in whole a subordinated debt facility of $1.0 million with a maturity date of August 4, 2017 and an interest rate of 17.00% per annum, at a price equal 100% of the $1.0 million principal amount redeemed, plus accrued and unpaid interest.

Notes Payable and Secured Loans

Certain of our subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made. The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. At September 30, 2017, we were in compliance with the covenants contained in the credit agreement. We and our subsidiaries had notes payable to financial institutions of $113.5 million and $42.5 million as of September 30, 2017 and December 31, 2016, respectively. We and our subsidiaries also provide a corporate guarantee of certain indebtedness of our subsidiaries.

Capital Lease Obligations

We are liable to various vendors for several equipment leases. The carrying value of the leased assets was $19.2 million and $15.4 million as of September 30, 2017 and December 31, 2016, respectively.

Summary

Based on our current level of operations, we believe cash flow from operations and available cash, together with available borrowings under the Revolver, will be adequate to meet our short-term (12 months or less) and longer-term (less than five years) liquidity needs.

EBITDA, Adjusted EBITDA and Credit Agreement EBITDA

When we use the term “EBITDA,” we are referring to income before income taxes minus (a) net income attributable to non-controlling interests plus (c) interest expense, net, and (d) depreciation and amortization. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that we consolidate for financial reporting purposes. Our operating strategy is to apply a market-based approach in structuring our partnerships with individual market dynamics driving

46

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

the structure. We believe that it is helpful to investors to present EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors our portion of EBITDA generated by our surgical facilities and other operations.

When we use the term "Adjusted EBITDA", we are referring to EBITDA, as defined above, adjusted for (a) merger transaction, integration and practice acquisition costs, (b) non-cash stock compensation expense, (c) loss on debt refinancing, (d) contingent acquisition compensation expense, (e) gain on litigation settlement, (f) loss on disposal or impairment of long-lived assets, net, (g) gain on amendment to tax receivable agreement, (h) tax receivable agreement expense and (i) gain on acquisition escrow release. We use Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by our management to assess operating performance, make business decisions and allocate resources.

EBITDA and Adjusted EBITDA are not measurements of financial performance under GAAP. They should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating our financial performance. We believe such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. Our calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

When we use the term “Credit Agreement EBITDA,” we are referring to Adjusted EBITDA, as defined above, further adjusted for (a) acquisitions, (b) non-cash expenses and (c) de novo start-up losses. These adjustments do not relate to our historical financial performance and instead relate to estimates compiled by our management and calculated in conformance with the definition of “Consolidated EBITDA” used in the credit agreements governing our credit facilities. We use Credit Agreement EBITDA as a measure of liquidity and to determine our compliance under certain covenants pursuant to our credit facilities. We have included it because we believe that it provides investors with additional information about our ability to incur and service debt and make capital expenditures.

Credit Agreement EBITDA is not a measurement of liquidity under GAAP, and should not be considered in isolation or as a substitute for any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Credit Agreement EBITDA are significant components in understanding and evaluating our liquidity. Our calculation of Credit Agreement EBITDA may not be comparable to similarly titled measures reported by other companies.

47

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

The following table reconciles EBITDA , Adjusted EBITDA and Normalized Adjusted EBITDA to income before income taxes, the most directly comparable GAAP financial measure (in thousands and unaudited):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
Condensed Consolidated Statements of Operations Data:
(Loss) income before income taxes	$	(19,208	)	$	12,640	$	9,470		$	49,479
(Minus):
Net income attributable to non-controlling interests	15,305			16,672		48,579			54,392
Plus:
Interest expense, net	34,030			26,475		84,812			74,863
Depreciation and amortization	10,929			9,713		33,454			28,984
EBITDA	10,446			32,156		79,157			98,934
Plus:
Non-cash stock compensation expense	3,311			691		5,380			1,326
Contingent acquisition compensation expense	1,815			1,530		5,662			3,060
Merger transaction, integration and practice acquisition costs	6,406			2,471		11,134			8,579
Gain on litigation settlement	—			—		(3,794		)	—
Gain on acquisition escrow release	(1,000		)	—		(1,000		)	—
Loss on disposal or impairment of long-lived assets, net	447			572		2,048			1,697
Gain on amendment to tax receivable agreement	(16,392		)	—		(16,392		)	—
Tax receivable agreement expense	—			3,733		—			3,733
Loss on debt refinancing	18,211			3,595		18,211			11,876
Adjusted EBITDA	$	23,244		$	44,748	$	100,406		$	129,205
Hurricane estimated impact	5,000					5,000
Reserve adjustment	14,868					14,868
Normalized Adjusted EBITDA	$	43,112		$	44,748	$	120,274		$	129,205

48

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

The following table reconciles Credit Agreement EBITDA to cash flows from operating activities, the most directly comparable GAAP financial measure (in thousands and unaudited):

	Twelve Months Ended September 30, 2017
Cash flows from operating activities	$	98,872
Adjustments to reconcile cash flows from operating activities to income before income taxes:
Depreciation and amortization	(44,021		)
Amortization of debt issuance costs and discounts	(6,892		)
Amortization of unfavorable lease liability	352
Equity-based compensation	(6,075		)
Loss on disposal or impairment of long-lived assets, net	(2,706		)
Loss on debt refinancing	(18,211		)
Gain on amendment to tax receivable agreement	16,392
Gain on legal settlement	14,101
Deferred income taxes	14,189
Interest on contingent consideration obligation	(1,124		)
Provision for doubtful accounts	(28,268		)
Income from equity investments, net of distributions received	422
Changes in operating assets and liabilities, net of acquisitions and divestitures	28,839
Income tax expense	(13,701		)
Income before income taxes	52,169
(Minus):
Net income attributable to non-controlling interests	69,817
Plus:
Interest expense, net	110,520
Depreciation and amortization	44,021
EBITDA	136,893
Plus:
Merger transaction, integration and practice acquisition costs	14,170
Gain on amendment to tax receivable agreement	(16,392		)
Non-cash stock compensation expense	6,191
Loss on debt refinancing	18,211
Contingent acquisition compensation expense	7,694
Gain on litigation settlement	(17,895		)
Gain on acquisition escrow release	(1,000		)
Loss on disposal of investments and long-lived assets, net	2,706
Adjusted EBITDA	150,578
Plus:
Acquisitions (1)	119,583
Hurricane estimated impact	5,000
Reserve impact	14,868
Non-cash expenses	1,596
De novo start-up losses (2)	136
Credit Agreement EBITDA	$	291,761

⁽¹⁾ Represents impact of acquired anesthesia entities, physician practices and surgical facilities as if each acquisition had occurred on October 1, 2016 including cost savings from reductions in corporate overhead, supply chain rationalization, enhanced physician engagement, improved payor contracting and revenue synergies associated with the NSH acquisition. Further, this includes revenue synergies from other business initiatives as defined in the Credit Agreement.

⁽²⁾ Relates to the losses associated with de novo in-market physician practices opened during the last twelve months.

49

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Inflation

Inflation and changing prices have not significantly affected our operating results or the markets in which we operate.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure about the nature, amount, timing and uncertainty of revenue. The provisions of the New Revenue Standard are effective for annual periods beginning after December 15, 2017, including interim periods within those years by applying either the full retrospective method or the modified retrospective approach upon adoption. We will adopt this ASU on January 1, 2018. We currently plan to adopt using the modified retrospective method, including providing all requisite disclosures under such method.

In preparation for the adoption of the New Revenue Standard, we continue to evaluate and refine our estimates of the anticipated impacts the New Revenue Standard will have on our revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures and control framework. Specifically, we continue to evaluate our accounting policies and internal controls under the New Revenue Standard, as well as analyzing all of the potential effects of the New Revenue Standard, particularly with respect to non-patient service revenue sources. Upon further evaluation, we anticipate that the majority of our provision for doubtful accounts will continue to be recognized as an operating expense rather than as a direct reduction to revenues, given our practice of assessing a patient’s ability to pay prior to or on the date of providing healthcare services.

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. We believe the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases.

In March 2016, the FASB issued ASU 2016-07, “Investments- Equity Method and Joint Ventures,” which allows investments that now meet equity method treatment and were previously accounted for under a different method to apply the equity method prospectively from the date the investment qualifies for equity method treatment. ASU 2016-07 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. We adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on our consolidated financial position, results of operations, cash flows and financial disclosures.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies the classification of certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. We are currently evaluating the impact this new guidance may have on the consolidated cash flows.

In October 2016, the FASB issued ASU 2016-17, “Interests Held through Related Parties That Are under Common Control,” which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a VIE through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. ASU 2016-17 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. We adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on our consolidated financial position, results of operations, cash flows and financial disclosures.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” which will require the reconciliation of restricted cash in the statement of cash flows. ASU 2016-18 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on our consolidated cash flows.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations – Clarifying the Definition of a Business,” which narrows the definition of a business when evaluating whether transactions should be accounted for as asset acquisitions or business combinations. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on our condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods

50

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

within those years. Early adoption is permitted for annual and interim periods after January 1, 2017. We early adopted this ASU on January 1, 2017. The adoption of ASU 2017-04 only impacts our financial statements in situations where an impairment of a reporting unit’s assets is determined.

Sources of Revenue and Recent Regulatory Developments

General

The healthcare industry is highly regulated, and we cannot provide any assurance that the regulatory environment in which we operate will not significantly change in the future or that we will be able to successfully address any such changes.

Every state imposes licensing requirements on individual physicians and healthcare facilities. In addition, federal and state laws regulate HMOs and other managed care organizations. Many states require regulatory approval, including licensure and accreditation, and in some cases, certificates of need, before establishing certain types of healthcare facilities, including surgical hospitals and ASCs, offering certain services, including the services we offer, or making expenditures in excess of certain amounts for healthcare equipment, facilities or programs. Our ability to operate profitably will depend in part upon our surgical facilities obtaining and maintaining all necessary licenses, accreditation, certificates of need and other approvals and operating in compliance with applicable healthcare regulations. Failure to do so could have a material adverse effect on our business.

Our surgical facilities are subject to federal, state and local laws dealing with issues such as occupational safety, employment, medical leave, insurance regulations, civil rights, discrimination, building codes and medical waste and other environmental issues. Federal, state and local governments are expanding the regulatory requirements on businesses like ours. The imposition of these regulatory requirements may have the effect of increasing operating costs and reducing the profitability of our operations.

We believe that hospital, outpatient surgery, physician, laboratory and other diagnostic and healthcare services will continue to be subject to intense regulation at the federal and state levels. We are unable to predict what additional government regulations, if any, affecting our business may be enacted in the future or how existing or future laws and regulations might be interpreted. If we, or any of our surgical facilities, fail to comply with applicable laws, it might have a material adverse effect on our business.

Certificates of Need and Licensure

Capital expenditures for the construction of new healthcare facilities, the addition of beds or new healthcare services or the acquisition of existing healthcare facilities may be reviewable by state regulators under statutory schemes that are sometimes referred to as certificate of need laws. States with certificate of need laws place limits on the construction and acquisition of healthcare facilities and the expansion of existing facilities and services. In these states, approvals, generally known as certificates of need, are required for capital expenditures exceeding certain preset monetary thresholds for the development, acquisition and/or expansion of certain facilities or services, including surgical facilities. We have a concentration of surgical facilities in certificate of need states as we believe the regulations present a competitive advantage to existing operators.

Our healthcare facilities also are subject to state licensing requirements for medical providers. Our ASCs have licenses to operate in the states in which they operate and must meet all applicable requirements for ASCs. In addition, even though our surgical facilities that are licensed as hospitals primarily provide surgical services, they must meet all applicable requirements for general hospital licensure. To assure continued compliance with these regulations, governmental and other authorities periodically inspect our surgical facilities. The failure to comply with these regulations could result in the suspension or revocation of a facility’s license. In addition, based on the specific operations of our surgical facilities, some of these facilities maintain a pharmacy license, a controlled substance registration, a clinical laboratory certification waiver, and environmental protection permits for biohazards and/or radioactive materials, as required by applicable law.

Healthcare Reform

The Affordable Care Act has been subject to a number of challenges to its constitutionality. On June 28, 2012, the United States Supreme Court upheld challenges to the constitutionality of the “individual mandate” provision, which generally requires all individuals to purchase healthcare insurance or pay a penalty, but struck down as unconstitutional the provision that would have allowed the federal government to revoke all federal Medicaid funding to any state that did not expand its Medicaid program. As a result, many states have refused to extend Medicaid eligibility to more individuals as envisioned by the law.

On June 25, 2015, the United States Supreme Court upheld the legality of premium subsidies made available by the federal government to individuals residing in the 36 states that have federally-run health insurance exchanges. The subsidies are provided to low-income individuals to assist with the cost of purchasing health insurance through federally-run health insurance exchanges. Other legal challenges to the Affordable Care Act are pending.

Additionally, at least one court has ruled that the President lacks authority to continue to make certain payments to insurers to offset the cost of reductions in out-of-pocket expenses (deductibles and coinsurance) that insurers are required to provide to certain enrollees whose incomes are below certain specified levels. Although that decision has been stayed, the Trump administration has announced that the federal government will not continue to make such payments absent explicit Congressional authority. It is uncertain whether Congress will enact legislation granting such authority, and it is therefore uncertain whether these payments will be reinstated in the future.

Initiatives to repeal the Affordable Care Act, in whole or in part, to delay elements of implementation or funding, and to offer amendments or supplements to modify its provisions have been persistent and have increased as a result of the 2016 election. The ultimate outcomes of

51

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

legislative attempts to repeal or amend the Affordable Care Act and legal challenges to the Affordable Care Act are unknown. As of September 30, 2017, there have been numerous pieces of legislation introduced in Congress for the repeal and replacement of the Affordable Care Act. Much of the introduced legislation calls for substantial reduction in federal spending over the next ten years primarily related to the termination of federal funding for the expanded eligibility for Medicaid coverage. Such legislation may have significant impact on the reimbursement for healthcare services generally, and may cause more individuals to become uninsured, rendering them unable to afford healthcare services offered by the Company. Accordingly, there can be no assurance that the adoption of any future federal or state healthcare reform legislation will not have a negative financial impact on the Company.

Moreover, other legislative changes have also been proposed and adopted since the Affordable Care Act was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments, will remain in effect through 2025 unless additional Congressional action is taken. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. These and other similar new laws may result in additional reductions in Medicare and other health care funding, which could have a material adverse effect on our financial operations.

Medicare and Medicaid Private Contractor Audits

The Centers for Medicare and Medicaid Services (“CMS") has implemented a number of programs that use private contractors that contract with CMS to identify overpayments and underpayments and other potential sources of billing fraud. These contractors, known as Recovery Audit Contractors (“RACs”) and Zone Program Integrity Contractors (“ZPICs”) conduct both post-payment and pre-payment review of claims submitted by Medicare providers. In addition, CMS employs Medicaid Integrity Contractors (“MICs”) to perform post-payment audits of Medicaid claims and identify overpayments. Our facilities and providers continue to receive letters from auditors such as RACs and ZPICs requesting repayment of alleged overpayments for services and incur expenses associated with responding to and appealing these determinations, as well as the costs of repaying any overpayments. Moreover, in recent years, the increase in Medicare payment appeals has created a backlog such that resolving appeals often takes multiple years.

For instance, we received the results of a MIC audit that resulted in an overpayment obligation. HMS Federal Solutions, a MIC, completed the audit of one of our surgical hospitals for the period July 1, 2009 through May 31, 2012 and determined an overpayment obligation in the amount of approximately $4.6 million based on its extrapolation of a statistical sampling of claims, as well as a civil monetary penalty in the amount of $162,000, for a total amount owed to Idaho’s Department of Health and Welfare, Medicaid Program Integrity Unit of approximately $4.7 million for failure to comply with Medicaid rules by billing for (i) non-covered services, (ii) services provided by non-eligible providers, (iii) services not provided and (iv) unauthorized services. We appealed the audit, which was settled during the quarter ending June 30, 2017 for $1.3 million.

Although all other repayments requested to date as a result of RAC, MIC and ZPIC audits have not been material to our Company, we are unable to quantify the aggregate financial impact of these audits on our facilities given the pending appeals and uncertainty about the extent of future audits.

Quality Improvement

The Medicare program presently requires hospitals and ASCs to report performance data on a variety of quality metrics. Facilities that fail to report are penalized with reduced Medicare payments. Additionally, payments to hospitals are adjusted based on the hospital’s performance on these quality measures. A substantial portion of hospital payment is at risk depending on its individual performance relative to benchmarks and other hospitals’ performance. There is a substantial risk that our Medicare payments could be reduced if our hospitals fail to perform adequately on these measures. Additionally, there is a risk that Medicare payments could be reduced if our facilities-hospitals and ASCs-fail to adequate report data as required by CMS. ASC payments are not yet adjusted based on performance against quality measures, but there is a substantial risk that Congress may soon link ASC Medicare payments to actual performance, in addition to reporting.

If the public performance data becomes a primary factor in determining where patients choose to receive care, and if competing hospitals and ASCs have better results than our facilities on those measures, we would expect that our patient volumes could decline.

Medicare and Medicaid Participation

The majority of our revenue is expected to continue to be received from third-party payors, including federal and state programs, such as Medicare and Medicaid, and commercial payors. To participate in the Medicare program and receive Medicare payment, our surgical facilities must comply with regulations promulgated by the Department of Health and Human Services (“HHS”). Among other things, these regulations, known as “conditions for coverage” or “conditions of participation,” impose numerous requirements on our facilities, their equipment, their personnel and their standards of medical care, as well as compliance with all applicable state and local laws and regulations. On April 26, 2007, CMS issued a policy memorandum that reaffirmed its prior interpretation of its conditions of participation that all hospitals (other than critical access hospitals) participating in the Medicare program are required to provide basic emergency care interventions regardless of whether or not the hospital maintains an emergency department. Our five facilities licensed as hospitals are required to meet this requirement to maintain their participating provider status in the Medicare program. As of September 30, 2017, two of our hospitals, which do not have an emergency room, maintain a protocol for the transfer of patients requiring emergency treatment, which protocol may be interpreted as

52

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

inconsistent with the 2007 CMS policy memorandum. Our surgical facilities must also satisfy the conditions of participation to be eligible to participate in the various state Medicaid programs. The requirements for certification under Medicare and Medicaid are subject to change and, in order to remain qualified for these programs, we may have to make changes from time to time in our facilities, equipment, personnel or services. Although we intend to continue to participate in these reimbursement programs, we cannot assure you that our surgical facilities will continue to qualify for participation.

The Affordable Care Act and its implementing regulations require a hospital to provide written disclosure of physician ownership interests to the hospital’s patients and on the hospital’s website and in any advertising, along with annual reports to the government detailing such interests. Additionally, hospitals that do not have 24/7 physician coverage are required to inform patients of this fact and receive signed acknowledgment from the patients of the disclosure. A hospital’s provider agreement may be terminated if it fails to provide the required notices. In 2010, CMS issued a “self-referral disclosure protocol” for hospitals and other providers that wish to self-disclose potential violations of the Stark Law to CMS and to attempt to resolve those potential violations and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute. The disclosure requirements set forth in the Affordable Care Act and the self-referral disclosure protocol reflect a move towards increasing government scrutiny of the financial relationships between hospitals and referring physicians and increasing disclosure of potential violations of the Stark Law to the government by hospitals and other healthcare providers. We intend for all of our facilities to meet their disclosure obligations.

Survey and Accreditation

Hospitals and healthcare facilities are subject to periodic inspection by federal, state and local authorities to determine their compliance with applicable regulations and requirements necessary for licensing, certification and accreditation. All of our hospitals and surgical facilities currently are licensed under appropriate state laws and are qualified to participate in the Medicare and Medicaid programs. Renewal and continuation of certain of these licenses, certifications and accreditations are based on inspections or other reviews generally conducted in the normal course of business of health facilities. Loss of, or limitations imposed on, licenses or accreditations could reduce a facility’s utilization or revenue, or its ability to operate all or a portion of its facilities.

Utilization Review

Federal law contains numerous provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients meet professionally recognized standards and are medically necessary and that claims for reimbursement are properly filed. These provisions include a requirement that a sampling of admissions of Medicare and Medicaid patients must be reviewed by quality improvement organizations, which review the appropriateness of Medicare and Medicaid patient admissions and discharges, the quality of care provided, the validity of MS-DRG classifications and the appropriateness of cases of extraordinary length of stay or cost. Quality improvement organizations may deny payment for services provided or assess fines and also have the authority to recommend to HHS that a provider which is in substantial noncompliance with the standards of the quality improvement organization be excluded from participation in the Medicare program. Utilization review is also a requirement of most non-governmental managed care organizations.

Federal Anti-Kickback Statute and Medicare Fraud and Abuse Laws

The Social Security Act includes provisions addressing false statements, illegal remuneration and other instances of fraud and abuse in federal health care programs. These provisions include the statute commonly known as the federal Anti-Kickback statute (the “Anti-Kickback Statute”). The Anti-Kickback Statute prohibits providers and others from, among other things, soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for either making a referral for, or ordering or arranging for, or recommending the order of, any item or service covered by a federal healthcare program, including, but not limited to, the Medicare and Medicaid programs. Violations of the Anti-Kickback Statute are criminal offenses punishable by imprisonment and fines of up to $25,000 for each violation. Civil violations are punishable by fines of up to $50,000 for each violation, as well as damages of up to three times the total amount of remuneration received from the government for healthcare claims.

Because physician-investors in our surgical facilities are in a position to generate referrals to the facilities, the distribution of available cash to those investors could come under scrutiny under the Anti-Kickback Statute. Some courts have held that the Anti-Kickback Statute is violated if one purpose (as opposed to a primary or the sole purpose) of a payment to a provider is to induce referrals. Further, Section 6402(f)(2) of the Affordable Care Act amends the Anti-Kickback Statute by adding a provision to clarify that a person need not have actual knowledge of such section or specific intent to commit a violation of the Anti-Kickback Statute. Because none of these cases involved a joint venture such as those owning and operating our surgical facilities, it is not clear how a court would apply these holdings to our activities. It is clear, however, that a physician’s investment income from a surgical facility may not vary with the number of his or her referrals to the surgical facility, and we believe that we comply with this prohibition.

Under regulations issued by the Office of the Inspector General of the U.S. Department of Health and Human Services (the “OIG"), certain categories of activities are deemed not to violate the Anti-Kickback Statute (commonly referred to as the safe harbors). According to the preamble to these safe harbor regulations, the failure of a particular business arrangement to comply with the regulations does not determine whether the arrangement violates the Anti-Kickback Statute. The safe harbor regulations do not make conduct illegal, but instead outline standards that, if complied with, protect conduct that might otherwise be deemed in violation of the Anti-Kickback Statute. Failure to meet a safe harbor does not indicate that the arrangement violates the Anti-Kickback Statute, although it may be subject to additional scrutiny.

We believe the ownership and operations of our surgery centers and hospitals do not fit wholly within any of the safe harbors, but we attempt to structure our ASCs to fit as closely as possible within the safe harbor designed to protect distributions to physician-investors in ASCs who directly refer patients to the ASC and personally perform the procedures at the center as an extension of their practice (the “ASC

53

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Safe Harbor”). The ASC Safe Harbor protects four categories of investors, including ASCs owned by (1) general surgeons, (2) single-specialty physicians, (3) multi-specialty physicians and (4) hospital/physician joint ventures, provided that certain requirements are satisfied. These requirements include the following:

• The ASC must be an ASC certified to participate in the Medicare program, and its operating and recovery room space must be dedicated exclusively to the ASC and not a part of a hospital (although such space may be leased from a hospital if such lease meets the requirements of the safe harbor for space rental).

• Each investor must be either (a) a physician who derived at least one-third of his or her medical practice income for the previous fiscal year or 12-month period from performing procedures on the list of Medicare-covered procedures for ASCs, (b) a hospital, or (c) a person or entity not in a position to make or influence referrals to the center, nor to provide items or services to the ASC, nor employed by the ASC or any investor.

• Unless all physician-investors are members of a single specialty, each physician-investor must perform at least one-third of his or her procedures at the ASC each year. This requirement is in addition to the requirement that the physician-investor has derived at least one-third of his or her medical practice income for the past year from performing procedures.

• Physician-investors must have fully informed their referred patients of the physician’s investment.

• The terms on which an investment interest is offered to an investor are not related to the previous or expected volume of referrals, services furnished or the amount of business otherwise generated from that investor to the entity.

• Neither the ASC nor any other investor nor any person acting on their behalf may loan funds to or guarantee a loan for an investor if the investor uses any part of such loan to obtain the investment interest.

• The amount of payment to an investor in return for the investment interest is directly proportional to the amount of the capital investment (including the fair market value of any pre-operational services rendered) of that investor.

• All physician-investors, any hospital-investor and the center agree to treat patients receiving benefits or assistance under a federal healthcare program in a non-discriminatory manner.

• All ancillary services performed at the ASC for beneficiaries of federal healthcare programs must be directly and integrally related to primary procedures performed at the ASC and may not be billed separately.

• No hospital-investor may include on its cost report or any claim for payment from a federal healthcare program any costs associated with the ASC.

• The ASC may not use equipment owned by or services provided by a hospital-investor unless such equipment is leased in accordance with a lease that complies with the Anti-Kickback Statute equipment rental safe harbor and such services are provided in accordance with a contract that complies with the Anti-Kickback Statute personal services and management contract safe harbor.

• No hospital-investor may be in a position to make or influence referrals directly or indirectly to any other investor or the ASC.

We believe that the ownership and operations of our surgical centers will not satisfy this ASC Safe Harbor for investment interests in ASCs because, among other things, we or one of our subsidiaries will generally be an investor in and provide management services to each ASC. We cannot assure you that the OIG would view our activities favorably even though we strive to achieve compliance with the remaining elements of this safe harbor.

In addition, although we expect each physician-investor to utilize the ASC as an extension of his or her practice and ask each physician-investor to certify this practice, we cannot assure you that all physician-investors will derive at least one-third of their medical practice income from performing Medicare-covered ASC procedures, perform one-third of their procedures at the ASC or inform their referred patients of their investment interests. Interests in our ASC joint ventures are purchased at what we believe to be fair market value. Investors who purchase at a later time generally pay more for a given percentage interest than founding investors. The result is that while all investors are paid distributions in accordance with their ownership interests, for ASCs where there are later purchases, we cannot meet the safe harbor requirement that return on investment is directly proportional to the amount of capital investment. The OIG has on several occasions reviewed investments relating to ASCs, and in Advisory Opinion No. 07-05, raised concerns that (a) purchases of interests from physicians might yield gains on investment rather than capital infusion to the ASCs, (b) such purchases could be meant to reward or influence the selling physicians’ referrals to the ASC or the hospital, and (c) such returns might not be directly proportional to the amount of capital invested. Nonetheless, we believe our fair market value purchase requirements and distribution policies comply with the Anti-Kickback Statute.

In OIG Advisory Opinion No. 09-09 (July 29, 2009), the OIG concluded that an arrangement involving an ASC joint venture between a hospital and physicians involving the combination of their two ASCs into a single, larger ASC presented minimal risk of fraud or abuse, despite the fact that it did not fit within any applicable Anti-Kickback safe harbors. Additionally, the OIG stated that fair market value should be determined based only on the tangible assets of each ASC since the physician investors are referral sources for the ASC. The OIG stated that a cash flow-based valuation of the business contributed by the physician investors potentially would include the value of the physician investors’ referrals over the time that their ASC was in existence prior to the merger with the hospital’s ASC. The OIG went on to note that a valuation involving intangible assets would not necessarily result in a violation of the Anti-Kickback Statute, but would require a review of all the facts and circumstances. It is not clear whether the OIG is concerned about using a cash flow-based valuation in most healthcare transactions involving referral sources, or just transactions, similar to this one, where the parties’ contributions would be valued differently for contributing

54

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

the same assets if only one party’s contribution is valued as a going concern based on cash flow. Also, the OIG appears to be focused on historical cash flow rather than a projected, discounted cash flow, which is a commonly used valuation methodology. What is clear is that for the first time, the OIG addressed valuation methodologies, which could lead to increased scrutiny of all transactions involving physicians.

Our hospital investments do not fit wholly within the safe harbor for investments in small entities because more than 40.0% of the investment interests are held by investors who are either in a position to refer to the hospital or who provide services to the hospital and more than 40.0% of the hospital’s gross revenue last year were derived from referrals generated by investors. However, we believe we comply with the remaining elements of the safe harbor.

In addition to the physician ownership in our surgical facilities, other financial relationships of ours with potential referral sources could potentially be scrutinized under the Anti-Kickback Statute. We have entered into management agreements to manage the majority of our surgical facilities. Most of these agreements call for our subsidiary to be paid a percentage-based management fee. Although there is a safe harbor for personal services and management contracts (the “Personal Services and Management Safe Harbor”), the Personal Services and Management Safe Harbor requires, among other things, that the amount of the aggregate compensation paid to the manager over the term of the agreement be set in advance. Because our management fees are generally based on a percentage of revenue, our management agreements do not typically meet this requirement. We do, however, believe that our management arrangements satisfy the other requirements of the Personal Services and Management Safe Harbor for personal services and management contracts. The OIG has taken the position in several advisory opinions that percentage-based management agreements are not protected by a safe harbor, and consequently, may violate the Anti-Kickback Statute. We have implemented formal compliance programs designed to safeguard against overbilling and believe that our management agreements comply with the requirements of the Anti-Kickback Statute. However, we cannot assure you that the OIG would find our compliance programs to be adequate or that our management agreements would be found to comply with the Anti-Kickback Statute.

Certain of our ASCs have entered into arrangements for professional services, including arrangements for anesthesia services. In a Special Advisory Bulletin issued in April 2003, the OIG focused on “questionable” contractual arrangements where a health care provider in one line of business (the “Owner”) expands into a related health care business by contracting with an existing provider of a related item or service (the “Manager/Supplier”) to provide the new item or service to the Owner’s existing patient population, including federal health care program patients (so called “suspect Contractual Joint Ventures”). The Manager/Supplier not only manages the new line of business, but may also supply it with inventory, employees, space, billing, and other services. In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager/Supplier-otherwise a potential competitor-receiving in return the profits of the business as remuneration for its referrals. Through an Advisory Opinion, the OIG extended this suspect contractual joint venture analysis to arrangements between anesthesiologists and physician owners of ASCs. In Advisory Opinion 12-06, the OIG concluded that certain proposed arrangements between anesthesia groups and physician-owned ASCs could result in prohibited remuneration under the federal Anti-Kickback Statute. We believe our arrangements for anesthesia services are distinguishable from those described in Advisory Opinion 12-06 (May 25, 2012) and are in compliance with the requirements of the federal Anti-Kickback Statute. However, we cannot assure you that regulatory authorities would agree with that position.

We also may guarantee a surgical facility’s third-party debt financing and certain lease obligations as part of our obligations under a management agreement. Physician investors are generally not required to enter into similar guarantees. The OIG might take the position that the failure of the physician investors to enter into similar guarantees represents a special benefit to the physician investors given to induce patient referrals and that such failure constitutes a violation of the Anti-Kickback Statute. We believe that the management fees (and in some cases guarantee fees) are adequate compensation to us for the credit risk associated with the guarantees and that the failure of the physician investors to enter into similar guarantees does not create a material risk of violating the Anti-Kickback Statute. However, the OIG has not issued any guidance in this regard.

The OIG is authorized to issue advisory opinions regarding the interpretation and applicability of the Anti-Kickback Statute, including whether an activity constitutes grounds for the imposition of civil or criminal sanctions. We have not, however, sought such an opinion regarding any of our arrangements. If it were determined that our activities, or those of our surgical facilities or hospitals, violate the Anti-Kickback Statute, we, our subsidiaries, our officers, our directors and each surgical facility and hospital investor could be subject, individually, to substantial monetary liability, prison sentences and/or exclusion from participation in any healthcare program funded in whole or in part by the U.S. government, including Medicare, Medicaid, TRICARE or state healthcare programs.

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 have also 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.

Federal Physician Self-Referral Law

Congress has enacted the federal physician self-referral law, or Stark Law, that prohibits certain self-referrals for healthcare services. As currently enacted, the Stark Law prohibits a practitioner, including a physician, dentist or podiatrist, from referring patients to an entity with which the practitioner or a member of his or her immediate family has a “financial relationship” for the provision of certain “designated health services” that are paid for in whole or in part by Medicare or Medicaid unless an exception applies. The term “financial relationship” is broadly defined and includes most types of ownership and compensation relationships. The Stark Law also prohibits the entity from seeking payment from Medicare or Medicaid for services that are rendered through a prohibited referral. If an entity is paid for services provided through a prohibited referral, it may be required to refund the payments. Violations of the Stark Law may also result in the imposition of damages equal

55

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

to three times the amount improperly claimed and civil monetary penalties of up to $15,000 per prohibited claim and $100,000 per prohibited circumvention scheme and exclusion from participation in the Medicare and Medicaid programs. For the purposes of the Stark Law, the term “designated health services” is defined to include:

• clinical laboratory services;

• physical therapy services;

• occupational therapy services;

• radiology services, including magnetic resonance imaging, computerized axial tomography scan and ultrasound 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.

The list of designated health services does not, however, include surgical services that are provided in an ASC. Furthermore, in final Stark Law regulations published by HHS on January 4, 2001, the term “designated health services” was specifically defined to not include services that are reimbursed by Medicare as part of a composite rate, such as services that are provided in an ASC. However, if designated health services are provided by an ASC and separately billed, referrals to the ASC by a physician-investor would be prohibited by the Stark Law. Because our facilities that are licensed as ASCs do not have independent laboratories and do not provide designated health services apart from surgical services, we do not believe referrals to these facilities by physician-investors are prohibited. If legislation or regulations are implemented that prohibit physicians from referring patients to surgical facilities in which the physician has a beneficial interest, our business and financial results would be materially adversely affected.

Five of our facilities are licensed as hospitals as of September 30, 2017. The Stark Law currently includes the Whole Hospital Exception, which applies to physician ownership of a hospital, provided such ownership is in the whole hospital and the physician is authorized to perform services at the hospital. We believe that physician investments in our facilities licensed as hospitals meet this requirement. However, changes to the Whole Hospital Exception have been the subject of recent regulatory action and legislation. Changes in the Affordable Care Act include:

• a prohibition on hospitals from having any physician ownership unless the hospital already had physician ownership and a Medicare provider agreement in effect as of December 31, 2010;

• a limitation on the percentage of total physician ownership or investment interests in the hospital or entity whose assets include the hospital to the percentage of physician ownership or investment as of March 23, 2010;

• a prohibition from expanding the number of beds, operating rooms, and procedure rooms for which it is licensed after March 23, 2010, unless the hospital obtains an exception from the Secretary;

• a requirement that return on investment be proportionate to the investment by each investor;

• restrictions on preferential treatment of physician versus non-physician investors;

• a requirement for written disclosures of physician ownership interests to the hospital’s patients and on the hospital’s website and in any advertising, along with annual reports to the government detailing such interests;

• a prohibition on the hospital or other investors from providing financing to physician investors;

• a requirement that any hospital that does not have 24/7 physician coverage inform patients of this fact and receive signed acknowledgments from the patients of the disclosure; and

• a prohibition on “grandfathered” status for any physician owned hospital that converted from an ASC to a hospital on or after March 23, 2010.

The Affordable Care Act also requires that each hospital with physician ownership submit an annual report of ownership and/or investment interest. Our hospitals have submitted their first reports. CMS has delayed the collection of the second report and publication of the first annual report. We cannot predict whether other proposed amendments to the Whole Hospital Exception will be included in any future legislation, including a repeal of the Affordable Care Act, or if Congress will adopt any similar provisions that would prohibit or otherwise restrict physicians from holding ownership interests in hospitals. Any such changes could have an adverse effect on our financial condition and results of operations.

In addition to the physician ownership in our surgical facilities, we have other financial relationships with potential referral sources that potentially could be scrutinized under the Stark Law. We have entered into personal service agreements, such as medical director agreements, with physicians at our hospitals. We believe that our agreements with referral sources satisfy the requirements of the personal service arrangements exception to the Stark Law and have implemented formal compliance programs designed to ensure continued compliance.

56

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

However, we cannot assure you that the OIG or CMS would find our compliance programs to be adequate or that our agreements with referral sources would be found to comply with the Stark Law.

False and Other Improper Claims

The U.S. government is authorized to impose criminal, civil and administrative penalties on any person or entity that files a false claim for payment from the Medicare or Medicaid programs or other federal and state healthcare programs. Claims filed with private insurers can also lead to criminal and civil penalties, including, but not limited to, penalties relating to violations of federal mail and wire fraud statutes, as well as penalties under the anti-fraud provisions of HIPAA. While the criminal statutes are generally reserved for instances of fraudulent intent, the U.S. government is applying its criminal, civil and administrative penalty statutes in an ever-expanding range of circumstances. For example, the U.S. government has taken the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant merely should have known the services were unnecessary, even if the government cannot demonstrate actual knowledge. The U.S. government has also taken the position that claiming payment for low-quality services is a violation of these statutes if the claimant should have known that the care being provided was substandard.

Over the past several years, the U.S. government has investigated an increasing number of healthcare providers for potential violations of the federal False Claims Act. The federal False Claims Act prohibits a person from knowingly presenting, or causing to be presented, a false or fraudulent claim to the U.S. government. The statute defines “knowingly” to include not only actual knowledge of a claim’s falsity, but also reckless disregard for or intentional ignorance of the truth or falsity of a claim. The Fraud Enforcement and Recovery Act of 2009 further expanded the scope of the False Claims Act by, among other things, creating liability for knowingly and improperly avoiding or decreasing an obligation to pay money to the federal government. The Affordable Care Act also created federal False Claims Act liability for the knowing failure to report and return an overpayment within 60 days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later. This requirement has led to an increasing use of the self-disclosure protocols that have been implemented by CMS, the OIG and other governmental agencies by the healthcare industry. The Affordable Care Act also provided that claims submitted in connection with patient referrals that result from violations of the Anti-Kickback Statute constitute false claims for the purposes of the federal False Claims Act, and some courts have held that a violation of the Stark Law can result in False Claims Act liability as well. Because our surgical facilities perform hundreds of similar procedures a year for which they are paid by Medicare and other government health care programs, and there is a relatively long statute of limitations, a billing error or cost reporting error could result in significant civil or criminal penalties.

Under the qui tam, or whistleblower, provisions of the False Claims Act, private parties may bring actions on behalf of the U.S. government. These private parties, often referred to as relators, are entitled to share in any amounts recovered by the government through trial or settlement. Both whistleblower lawsuits and direct enforcement activity by the government have increased significantly in recent years and have increased the risk that a healthcare company, like us, will have to defend a false claims action, pay fines or be excluded from the Medicare and Medicaid programs and other federal and state healthcare programs as a result of an investigation resulting from a whistleblower case. Although we believe that our operations materially comply with both federal and state laws, they may nevertheless be the subject of a whistleblower lawsuit or may otherwise be challenged or scrutinized by governmental authorities. Providers found liable for False Claims Act violations are subject to damages of up to three times the actual damage sustained by the government plus mandatory civil monetary penalties between $5,500 and $11,000 for each separate false claim. A determination that we have violated these laws could have a material adverse effect on us.

Other Fraud and Abuse Laws

The Medicare Patient and Program Protection Act of 1987, as amended by the Health Insurance Portability and Accountability Act of 1996, (“HIPAA”), and the Balanced Budget Act of 1997, impose civil monetary penalties and exclusion from state and federal healthcare programs on providers who commit violations of fraud and abuse laws. HIPAA authorizes the Secretary of the Department of Health & Human Services (“Secretary”), and in some cases requires the Secretary, to exclude individuals and entities that the Secretary determines have “committed an act” in violation of applicable fraud and abuse laws or improperly filed claims in violation of such laws from participating in any federal healthcare program. HIPAA also expanded the Secretary’s authority to exclude a person involved in fraudulent activity from participating in a program providing health benefits, whether directly or indirectly, in whole or in part, by the U.S. government. Additionally, under HIPAA, individuals who hold a direct or indirect ownership or controlling interest in an entity that is found to violate these laws may also be excluded from Medicare and Medicaid and other federal and state healthcare programs if the individual knew or should have known, or acted with deliberate ignorance or reckless disregard of, the truth or falsity of the information of the activity leading to the conviction or exclusion of the entity, or where the individual is an officer or managing employee of such entity. This standard does not require that specific intent to defraud be proven by OIG. Under HIPAA it is also a crime to defraud any commercial healthcare benefit program.

Federal and State Privacy and Security Requirements

We are subject to HIPAA, including The HITECH Act, which was enacted as part of The American Recovery and Reinvestment Act of 2009. The HITECH Act strengthened the requirements and significantly increased the penalties for violations of the HIPAA privacy and security regulations. On January 25, 2013, HHS issued the HIPAA Omnibus Rule, which became effective on March 26, 2013. Prior to the HIPAA Omnibus Rule, the HITECH Act required us to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured protected health information that poses significant risk of financial, reputational or other harm to a patient. The HIPAA Omnibus Rule eliminated this harm threshold standard and instead we are now required to notify patients of any unauthorized access, acquisition, or disclosure of their unsecured protected health information in all situations except those in which we can demonstrate that there is a low probability that the protected health information has been compromised. We now have the burden of demonstrating through a risk assessment that a breach of

57

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

protected health information has not occurred. This new more objective standard may lead to an increased number of occurrences that require breach notifications. In addition, the HIPAA Omnibus Rule also modified the following aspects of the HIPAA privacy and security regulations:

• makes our facilities’ business associates directly liable for compliance with certain of HIPAA’s requirements;

• makes our facilities liable for violations by their business associates if HHS determines an agency relationship exists between the facility and the business associate under federal agency law;

• adds limitations on the use and disclosure of health information for marketing and fund-raising purposes, and prohibits the sale of protected health information without individual authorization;

• expands our patients’ rights to receive electronic copies of their health information and to restrict disclosures to a health plan concerning treatment for which our patient has paid out of pocket in full;

• requires modifications to, and redistribution of, our facilities’ notice of privacy practices;

• requires modifications to existing agreements with business associates;

• adopts the additional HITECH Act provisions not previously adopted addressing enforcement of noncompliance with HIPAA due to willful neglect;

• incorporates the increased and tiered civil money penalty structure provided by the HITECH Act; and

• revises the HIPAA privacy rule to increase privacy protections for genetic information as required by the Genetic Information Nondiscrimination Act of 2008.

The HIPAA privacy standards apply to individually identifiable information held or disclosed by a covered entity in any form, whether communicated electronically, on paper or orally. These standards impose extensive administrative requirements on us. These standards require our compliance with rules governing the use and disclosure of this health information. They create rights for patients in their health information, such as the right to amend their health information, and they require us to impose these rules, by contract, on any business associate to whom we disclose such information in order to perform functions on our behalf.

The HIPAA security standards require us to establish and maintain reasonable and appropriate administrative, technical and physical safeguards to ensure the integrity, confidentiality and the availability of electronic protected health and related financial information. Although the security standards do not reference or advocate a specific technology, and covered healthcare providers, plans and clearinghouses have the flexibility to choose their own technical solutions, the security standards have required us to implement significant new systems, business procedures and training programs.

Violations of the HIPAA privacy and security regulations may result in civil and criminal penalties. The HITECH Act strengthened the requirements of the HIPAA privacy and security regulations and significantly increased the penalties for violations by introducing a tiered penalty system, with penalties of up to $50,000 per violation with a maximum civil penalty of $1.5 million in a calendar year for violations of the same requirement. However, a single breach incident can result in violations of multiple requirements, resulting in possible penalties well in excess of $1.5 million. Under the HITECH Act, HHS is required to conduct periodic compliance audits of covered entities and their business associates. The HITECH Act and the HIPAA Omnibus Rule also extend the application of certain provisions of the security and privacy regulations to business associates and subjects business associates to civil and criminal penalties for violation of the regulations.

The HITECH Act authorizes State Attorneys General to bring civil actions seeking either an injunction or damages in response to violations of HIPAA privacy and security regulations or the new data breach law that affects the privacy of their state residents. We expect vigorous enforcement of the HITECH Act’s requirements by HHS and State Attorneys General. Additionally, HHS conducted a pilot audit program that concluded December 2012 in the first phase of HHS’ implementation of the HITECH Act’s requirements of periodic audits of covered entities and business associates to ensure their compliance with the HIPAA privacy and security regulations. HHS has allocated increased funding towards HIPAA enforcement activity and such enforcement activity has seen a marked increase over recent years. We cannot predict whether our surgical facilities will be able to comply with the final rules and the financial impact to our surgical facilities in implementing the requirements under the final rules when they take effect, or whether our hospitals will be selected for an audit, or the results of such an audit.

Our facilities also remain subject to any state laws that relate to privacy or the reporting of data breaches that are more restrictive than the regulations issued under HIPAA and the requirements of the HITECH Act. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving certain personal information, such as social security numbers, dates of birth and credit card information.

Adoption of Electronic Health Records

The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. Beginning in 2011 and extending through 2016, eligible hospitals may receive incentive payments based upon successfully demonstrating meaningful use of its certified EHR technology. Beginning in 2015, those hospitals that do not successfully demonstrate meaningful use of EHR technology are subject to reduced payments from Medicare. EHR meaningful use objectives and measures that hospitals and physicians must meet in order to qualify for incentive payments will be implemented in three stages. Stage 1 has been in effect since 2011 and Stage 2 took effect for hospitals beginning in fiscal year 2014. On October 16, 2015, CMS published a final rule that consolidated Stage 1 and Stage 2 into a “Modified Stage 2” effective as of 2015 and set out requirements for Stage 3, which is set to take full effect in 2018. In connection with the acquisition of

58

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

Symbion, we acquired six surgical facilities that are licensed as hospitals, five of which we own as of September 30, 2017. These hospitals began the implementation of EHR initiatives in 2012. We strive to comply with the EHR meaningful use requirements of the HITECH Act so as to qualify for incentive payments. Continued implementation of EHR and compliance with the HITECH Act will result in significant costs. We recorded income of $3,000 and $305,000 which was recognized during the three and nine months ended September 30, 2017, respectively. We incurred negligible costs for hardware, software and implementation expenses during the same three month period. We do not currently know the extent of additional costs that will be associated with implementation of additional systems or the amount of future incentives that we will receive.

HIPAA Administrative Simplification Requirements

The HIPAA transaction regulations were issued to encourage electronic commerce in the healthcare industry. These regulations include standards that healthcare providers must follow when electronically transmitting certain healthcare transactions, such as healthcare claims.

Emergency Medical Treatment and Active Labor Act

Our hospitals are subject to the Emergency Medical Treatment and Active Labor Act (“EMTALA”). This federal law requires any hospital that participates in the Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospital’s emergency department for treatment and, if the patient is suffering from an emergency medical condition, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions or transfer exists regardless of a patient’s ability to pay for treatment. Off-campus facilities such as surgery centers that lack emergency departments or otherwise do not treat emergency medical conditions generally are not subject to EMTALA. They must, however, have policies in place that explain how the location should proceed in an emergency situation, such as transferring the patient to the closest hospital with an emergency department. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient’s ability to pay, including civil monetary penalties and exclusion from participation in the government health care programs. In addition, an injured patient, the patient’s family or a medical facility that suffers a financial loss as a direct result of another hospital’s violation of the law can bring a civil suit against that other hospital. CMS has actively enforced EMTALA and has indicated that it will continue to do so in the future. Although we believe that our hospitals comply with EMTALA, we cannot predict whether CMS will implement new requirements in the future and, if so, whether our hospitals will comply with any new requirements.

State Regulation

Many of the states in which our surgical facilities operate have adopted statutes and/or regulations that prohibit the payment of kickbacks or any type of remuneration in exchange for patient referrals and that prohibit healthcare providers from, in certain circumstances, referring a patient to a healthcare facility in which the provider has an ownership or investment interest. While these statutes generally mirror the federal Anti-Kickback Statute and Stark Law, they vary widely in their scope and application. Some are specifically limited to healthcare services that are paid for in whole or in part by the Medicaid program; others apply to all healthcare services regardless of payor; and others apply only to state-defined designated services, which may differ from the designated health services under the Stark Law. In addition, many states have adopted statutes that mirror the False Claims Act and that prohibit the filing of a false or fraudulent claim with a state governmental agency. We intend to comply with all applicable state healthcare laws, rules and regulations. However, these laws, rules and regulations have typically been the subject of limited judicial and regulatory interpretation. As a result, we cannot assure you that our surgical facilities will not be investigated or scrutinized by the governmental authorities empowered to do so or, if challenged, that their activities would be found to be lawful. A determination of non-compliance with the applicable state healthcare laws, rules, and regulations could subject our surgical facilities to civil and criminal penalties and could have a material adverse effect on our operations.

We are also subject to various state insurance statutes and regulations that prohibit us from submitting inaccurate, incorrect or misleading claims. Many state insurance laws and regulations are broadly worded and could be implicated, for example, if our surgical facilities were to adjust an out-of-network co-payment or other patient responsibility amounts without fully disclosing the adjustment on the claim submitted to the payor. While some of our surgical facilities adjust the out-of-network costs of patient co-payment and deductible amounts to reflect in-network co-payment costs when providing services to patients whose health insurance is covered by a payor with which the surgical facilities are not contracted, our policy is to fully disclose adjustments in the claims submitted to the payors. We believe that our surgical facilities are in compliance with all applicable state insurance laws and regulations regarding the submission of claims. We cannot assure you, however, that none of our surgical facilities’ insurance claims will ever be challenged. If we were found to be in violation of a state’s insurance laws or regulations, we could be forced to discontinue the violative practice, which could have an adverse effect on our financial position and results of operations, and we could be subject to fines and criminal penalties.

Fee Splitting; Corporate Practice of Medicine

The laws of many states prohibit physicians from splitting fees with non-physicians (i.e., sharing in a percentage of professional fees), prohibit non-physician entities (such as us) from practicing medicine and exercising control over or employing physicians and prohibit referrals to facilities in which physicians have a financial interest. The existence, interpretation and enforcement of these laws vary significantly from state to state. In light of these restrictions, in certain states we facilitate the provision of physician services by maintaining long-term management services agreements through our subsidiaries with affiliated professional contractors, which employ or contract with physicians and other healthcare professionals to provide physician professional services. Under these arrangements, our subsidiaries perform only non-medical administrative services, do not represent that they offer medical services and do not exercise influence or control over the practice of medicine by the physicians employed by the affiliated professional contractors. Although we believe that the fees we receive from affiliated professional

59

SURGERY PARTNERS, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SEPTEMBER 30, 2017

contractors have been structured in a manner that is compliant with applicable fee-splitting laws, it is possible that a government regulator could interpret such fee arrangements to be in violation of certain fee-splitting laws. Future interpretations of, or changes in, these laws might require structural and organizational modifications of our existing relationships, and we cannot assure you that we would be able to appropriately modify such relationships. In addition, statutes in some states could restrict our expansion into those states.

Clinical Laboratory Regulation

Our clinical laboratories are subject to federal oversight under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) which extends federal oversight to virtually all clinical laboratories by requiring that they be certified by the federal government or by a federally-approved accreditation agency. CLIA requires that all clinical laboratories meet quality assurance, quality control and personnel standards. Laboratories also must undergo proficiency testing and are subject to inspections. Standards for testing under CLIA are based on the complexity of the tests performed by the laboratory, with tests classified as “high complexity,” “moderate complexity,” or “waived.” Laboratories performing high complexity testing are required to meet more stringent requirements than moderate complexity laboratories. Laboratories performing only waived tests, which are tests determined by the Food and Drug Administration to have a low potential for error and requiring little oversight, may apply for a certificate of waiver exempting them from most of the requirements of CLIA. Our operations also subject to state and local laboratory regulation. CLIA provides that a state may adopt laboratory regulations different from or more stringent than those under federal law, and a number of states have implemented their own laboratory regulatory requirements. State laws may require that laboratory personnel meet certain qualifications, specify certain quality controls, or require maintenance of certain records. We believe that we are in material compliance with all applicable laboratory requirements, but no assurances can be given that our laboratories will pass all future licensure or certification inspections.

Regulatory Compliance Program

It is our policy to conduct our business with integrity and in compliance with the law. We have in place and continue to enhance a company-wide compliance program that focuses on all areas of regulatory compliance including billing, reimbursement, cost reporting practices and contractual arrangements with referral sources.

This regulatory compliance program is intended to help ensure that high standards of conduct are maintained in the operation of our business and that policies and procedures are implemented so that employees act in full compliance with all applicable laws, regulations and company policies. Under the regulatory compliance program, every employee and certain contractors involved in patient care, and coding and billing, receive initial and periodic legal compliance and ethics training. In addition, we regularly monitor our ongoing compliance efforts and develop and implement policies and procedures designed to foster compliance with the law. The program also includes a mechanism for employees to report, without fear of retaliation, any suspected legal or ethical violations to their supervisors, designated compliance officers in our facilities, our compliance hotline or directly to our corporate compliance office. We believe our compliance program is consistent with standard industry practices. However, we cannot provide any assurances that our compliance program will detect all violations of law or protect against qui tam suits or government enforcement actions.

60

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk primarily from exposure to changes in interest rates based on our financing, investing and cash management activities. We utilize a balanced mix of maturities along with both fixed rate and variable rate debt to manage our exposures to changes in interest rates, and do not hold or issue any derivative financial instruments for this purpose. 

Our variable rate debt instruments are primarily indexed to the prime rate or LIBOR. Interest rate changes would result in gains or losses in the market value of our fixed rate debt portfolio due to differences in market interest rates and the rates at the inception of the debt agreements. At September 30, 2017, we had outstanding principal amount of debt of $1.30 billion in variable rate instruments. Assuming a hypothetical 100 basis points increase in LIBOR on our debt as of September 30, 2017, our quarterly interest expense would increase by approximately $3.2 million. Although there can be no assurances that interest rates will not change significantly, we do not expect changes in interest rates to have a material effect on our net earnings or cash flows in 2017 based on our indebtedness at September 30, 2017.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on, and as of the time of such evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as a result of the material weakness identified by management as initially disclosed under “Item 9A-Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Such material weakness pertains to lack of documentation evidencing certain controls involving revenue, accounts receivable and related allowances. Notwithstanding the identified material weakness, as of the date of this filing, management, including the Chief Executive Officer and Chief Financial Officer, believes that the unaudited consolidated financial statements contained in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the fiscal years presented in conformity with GAAP. Management is actively engaged in the implementation of a remediation plan to address the lack of documentation issue. The plan includes the implementation of enhanced documentation policies and procedures, along with the allocation of resources dedicated to training and monitoring these policies and procedures.

As a result of these efforts, as of the date of this filing management believes we have made progress toward remediating the underlying causes of the material weakness. Although we believe our remediation efforts will be effective in remediating the material weakness, there can be no assurance as to when the remediation plan will be fully implemented, or that the plan, as currently designed, will adequately remediate the material weakness. The material weakness will not be considered fully addressed until the enhanced policies and procedures over documentation evidencing certain controls involving revenue, accounts receivable and related allowances have been in operation for a sufficient period of time for our management to conclude that the material weakness has been fully remediated. We will continue to work on implementing and testing the enhanced documentation policies and procedures in order to make this final determination.

Other than our progress in our remediation efforts outlined above, there have been no changes during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including the Chief Executive Officer and the Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well-designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, with the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of controls. For these reasons, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

61

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are, from time to time, subject to claims and suits arising in the ordinary course of business, including claims for damages for personal injuries, breach of management contracts and employment related claims. In certain of these actions, plaintiffs request payment for damages, including punitive damages, that may not be covered by insurance. In the opinion of management, we are not currently a party to any such proceedings that would have a material adverse effect on our business, financial condition or results of operations. In addition, on October 23, 2017, we received a civil investigative demand (“CID”) from the federal government under the False Claims Act (“FCA”) for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by our physicians and submitted to laboratories owned and operated by us. We intend to respond to the CID and cooperate with the U.S. Attorney’s Office in connection with the FCA investigation.

Item 1A. Risk Factors

There have been no material changes with respect to the risk factors discussed in the Quarterly Report on Form 10-Q for the period ended June 30, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

As previously reported in our Current Report on Form 8-K filed September 1, 2017, we issued 310,000 shares of Series A Preferred Stock to Bain at a purchase price of $1,000.00 per share for an aggregate purchase price of $310,000,000.00 on August 31, 2017. The net proceeds from the Preferred Private Placement were used to finance a portion of the NSH Merger. The issuance of the Series A Preferred Stock to Bain was made in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) and Rule 506 promulgated thereunder. The issuance of Common Stock that may be issued upon the conversion of the Series A Preferred Stock will be issued in reliance upon an exemption from the registration requirements of the Securities Act pursuant to Section 4(a)(2) promulgated thereunder.

For further discussion of the Preferred Private Placement and the Series A Preferred Stock, see Note 1. “Organization” and Note 5, “Redeemable Preferred Stock” of our condensed consolidated financial statements included previously in this report and the disclosures set forth in Item 3.02 and Item 3.03 of our Current Report on Form 8-K filed September 1, 2017, which are incorporated by reference herein.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

As previously reported in our Current Report on Form 8-K filed November 3, 2017, the Amended and Restated Certificate of Incorporation of the Company (as amended, the “Third Amended and Restated Charter”), which reallocates certain rights with respect to the determination of the size and composition of the Board, became effective upon its filing with the Secretary of State of the State of Delaware on October 30, 2017.

62

Item 6. Exhibits

No.	Description
2.1	Agreement and Plan of Merger by and among Surgery Partners, Inc., SP Merger Sub, Inc., NSH Holdco, Inc. and IPC / NSH, L.P., dated as of May 9, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 11, 2017).*
2.2	Letter Amendment to Merger Agreement, by and among Surgery Partners, Inc., SP Merger Sub, Inc., NSH Holdco, Inc. and IPC / NSH, L.P., dated as of July 7, 2017 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 11, 2017).*
3.1	Amended and Restated Certificate of Incorporation of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed September 1, 2017).
3.2	Amended and Restated Bylaws of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).
3.3	Certificate of Designations, Preferences, Rights and Limitations of the 10.00% Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed September 1, 2017).
3.4	Amended and Restated Certificate of Incorporation of Surgery Partners, Inc., dated October 30, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 3, 2017).
4.1	First Supplemental Indenture, by and among Surgery Center Holdings, Inc., Wilmington Trust, National Association, as Trustee, and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).
4.2	Fourth Supplemental Indenture, by and among Surgery Center Holdings, Inc., Wilmington Trust, National Association, as Trustee, and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed September 1, 2017).
10.1	Amended and Restated Registration Rights Agreement by and among Surgery Partners, Inc., certain stockholders of Surgery Partners, Inc. and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 1, 2017).
10.2	Credit Agreement, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).*
10.3	Employment Agreement, by and between Surgery Partners, Inc. and Cliff Adlerz, dated September 7, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.4	Termination and Release Agreement, by and among Surgery Partners, Inc., Surgery Partners, LLC and Michael T. Doyle, dated September 7, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.5	Consulting Services Agreement, by and between Surgery Partners, Inc. and Michael T. Doyle, dated September 7, 2017 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.6	TRA Waiver and Assignment Agreement, by and among Surgery Partners, Inc., Michael T. Doyle, the Makayla Doyle 2012 Irrevocable Trust under agreement dated July 20, 2012, the Michael Doyle 2012 Irrevocable Trust under agreement dated July 20, 2012 and the Mason Doyle 2012 Irrevocable Trust under agreement dated July 20, 2012, dated September 8, 2017 (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.7	Form of Leveraged Performance Unit Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed September 8, 2017).
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

63

101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Schedules and/or Exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule to the SEC upon request.

64

EXHIBIT INDEX

No.	Description
2.1	Agreement and Plan of Merger by and among Surgery Partners, Inc., SP Merger Sub, Inc., NSH Holdco, Inc. and IPC / NSH, L.P., dated as of May 9, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 11, 2017).*
2.2	Letter Amendment to Merger Agreement, by and among Surgery Partners, Inc., SP Merger Sub, Inc., NSH Holdco, Inc. and IPC / NSH, L.P., dated as of July 7, 2017 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 11, 2017).*
3.1	Amended and Restated Certificate of Incorporation of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed September 1, 2017).
3.2	Amended and Restated Bylaws of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).
3.3	Certificate of Designations, Preferences, Rights and Limitations of the 10.00% Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc., dated August 31, 2017 (incorporated herein by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed September 1, 2017).
3.4	Amended and Restated Certificate of Incorporation of Surgery Partners, Inc., dated October 30, 2017 (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 3, 2017).
4.1	First Supplemental Indenture, by and among Surgery Center Holdings, Inc., Wilmington Trust, National Association, as Trustee, and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).
4.2	Fourth Supplemental Indenture, by and among Surgery Center Holdings, Inc., Wilmington Trust, National Association, as Trustee, and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed September 1, 2017).
10.1	Amended and Restated Registration Rights Agreement by and among Surgery Partners, Inc., certain stockholders of Surgery Partners, Inc. and certain other parties thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 1, 2017).
10.2	Credit Agreement, by and among SP Holdco I, Inc., Surgery Center Holdings, Inc., Jefferies Finance LLC and the other guarantors and lenders party thereto, dated August 31, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 1, 2017).*
10.3	Employment Agreement, by and between Surgery Partners, Inc. and Cliff Adlerz, dated September 7, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.4	Termination and Release Agreement, by and among Surgery Partners, Inc., Surgery Partners, LLC and Michael T. Doyle, dated September 7, 2017 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.5	Consulting Services Agreement, by and between Surgery Partners, Inc. and Michael T. Doyle, dated September 7, 2017 (incorporated herein by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.6	TRA Waiver and Assignment Agreement, by and among Surgery Partners, Inc., Michael T. Doyle, the Makayla Doyle 2012 Irrevocable Trust under agreement dated July 20, 2012, the Michael Doyle 2012 Irrevocable Trust under agreement dated July 20, 2012 and the Mason Doyle 2012 Irrevocable Trust under agreement dated July 20, 2012, dated September 8, 2017 (incorporated herein by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed September 8, 2017).
10.7	Form of Leveraged Performance Unit Award Agreement (incorporated herein by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed September 8, 2017).
31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

65

101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Schedules and/or Exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish a supplemental copy of any omitted schedule to the SEC upon request.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SURGERY PARTNERS, INC.
By:	/s/ Teresa F. Sparks Teresa F. Sparks Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Date: November 9, 2017

66

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO RULE 13a-14(a) AND RULE 15d- 14(a) OF THE SECURITIES AND EXCHANGE ACT, AS AMENDED AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Clifford G. Adlerz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Surgery Partners, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

By: /s/ Clifford G. Adlerz Clifford G. Adlerz Chief Executive Officer (Principal Executive Officer)

Date: November 9, 2017

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) AND RULE 15d- 14(a) OF THE SECURITIES AND EXCHANGE ACT, AS AMENDED AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Teresa F. Sparks, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Surgery Partners, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

By: /s/ Teresa F. Sparks Teresa F. Sparks Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Date: November 9, 2017

EX-32.1

Exhibit 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Surgery Partners, Inc. (the “Company”) for the period ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Clifford G. Adlerz, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

By: /s/ Clifford G. Adlerz Clifford G. Adlerz Chief Executive Officer (Principal Executive Officer)

Date: November 9, 2017

EX-32.2

Exhibit 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report on Form 10-Q of Surgery Partners, Inc. (the “Company”) for the period ended September 30, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Teresa F. Sparks, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

By: /s/ Teresa F. Sparks Teresa F. Sparks Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Date: November 9, 2017

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2017	Nov. 09, 2017
Document and Entity Information [Abstract]
Entity Registrant Name	Surgery Partners, Inc.
Entity Central Index Key	0001638833
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Document Type	10-Q
Document Period End Date	Sep. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Amendment Flag	false
Entity Common Stock, Shares Outstanding		48,769,296

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Current assets:
Cash and cash equivalents	$ 199,701
Accounts receivable, less allowance for doubtful accounts of $2,045 and $29,872, respectively	271,140
Inventories	44,523
Prepaid expenses and other current assets	53,724
Acquisition escrow deposit	4,571
Total current assets	573,659
Property and equipment, net	388,697
Intangible assets, net	56,507
Goodwill	3,270,309
Investments in and advances to affiliates	64,427
Restricted invested assets	315
Long-term deferred tax assets	209,207
Long-term acquisition escrow deposit	19,600
Other long-term assets	19,133
Total assets	4,601,854
Current liabilities:
Accounts payable	73,251
Accrued payroll and benefits	42,439
Acquisition escrow liability	4,571
Other current liabilities	106,279
Current maturities of long-term debt	48,472
Total current liabilities	275,012
Long-term debt, less current maturities	2,144,862
Long-term tax receivable agreement liability	68,148
Long-term acquisition escrow liability	19,600
Other long-term liabilities	116,799
Non-controlling interests—redeemable	271,416
Redeemable preferred stock - Series A, 310,000 shares authorized, issued and outstanding, redemption value of $326,882 at September 30, 2017; no shares were authorized issued or outstanding at December 31, 2016.	326,882
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares issued or outstanding	0
Common stock, $0.01 par value, 300,000,000 shares authorized, 48,769,296 shares issued and outstanding at September 30, 2017; 48,488,616 shares issued and outstanding at December 31, 2016	488
Additional paid-in capital	704,054
Retained deficit	(9,140)
Total Surgery Partners, Inc. stockholders' equity	695,402
Non-controlling interests—non-redeemable	683,733
Total stockholders' equity	1,379,135
Total liabilities and stockholders' equity	4,601,854
Predecessor
Current assets:
Cash and cash equivalents		$ 69,699
Accounts receivable, less allowance for doubtful accounts of $2,045 and $29,872, respectively		220,594
Inventories		28,777
Prepaid expenses and other current assets		32,014
Acquisition escrow deposit		10,871
Total current assets		361,955
Property and equipment, net		204,253
Intangible assets, net		48,023
Goodwill		1,555,204
Investments in and advances to affiliates		34,980
Restricted invested assets		315
Long-term deferred tax assets		83,793
Long-term acquisition escrow deposit		0
Other long-term assets		16,435
Total assets		2,304,958
Current liabilities:
Accounts payable		49,766
Accrued payroll and benefits		29,273
Acquisition escrow liability		10,871
Other current liabilities		68,993
Current maturities of long-term debt		27,822
Total current liabilities		186,725
Long-term debt, less current maturities		1,414,421
Long-term tax receivable agreement liability		122,351
Long-term acquisition escrow liability		0
Other long-term liabilities		76,266
Non-controlling interests—redeemable		180,521
Stockholders' equity:
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares issued or outstanding		0
Common stock, $0.01 par value, 300,000,000 shares authorized, 48,769,296 shares issued and outstanding at September 30, 2017; 48,488,616 shares issued and outstanding at December 31, 2016		485
Additional paid-in capital		320,543
Retained deficit		(311,351)
Total Surgery Partners, Inc. stockholders' equity		9,677
Non-controlling interests—non-redeemable		314,997
Total stockholders' equity		324,674
Total liabilities and stockholders' equity		2,304,958
Redeemable Preferred Stock
Current liabilities:
Redeemable preferred stock - Series A, 310,000 shares authorized, issued and outstanding, redemption value of $326,882 at September 30, 2017; no shares were authorized issued or outstanding at December 31, 2016.	$ 326,882
Redeemable Preferred Stock | Predecessor
Current liabilities:
Redeemable preferred stock - Series A, 310,000 shares authorized, issued and outstanding, redemption value of $326,882 at September 30, 2017; no shares were authorized issued or outstanding at December 31, 2016.		$ 0

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Allowance for doubtful accounts	$ 3,690
Redeemable preferred stock, redemption value	$ 326,882
Preferred stock, par value (in USD per share)	$ 0.01
Preferred stock, shares authorized (shares)	20,000,000
Preferred stock, shares issued (shares)	0
Preferred stock, shares outstanding (shares)	0
Common stock, par value (in USD per share)	$ 0.01
Common stock, shares authorized (shares)	300,000,000
Common stock, shares issued (shares)	48,769,296
Common stock, shares outstanding (shares)	48,769,296
Predecessor
Allowance for doubtful accounts		$ 29,872
Preferred stock, par value (in USD per share)		$ 0.01
Preferred stock, shares authorized (shares)		20,000,000
Preferred stock, shares issued (shares)		0
Preferred stock, shares outstanding (shares)		0
Common stock, par value (in USD per share)		$ 0.01
Common stock, shares authorized (shares)		300,000,000
Common stock, shares issued (shares)		48,488,616
Common stock, shares outstanding (shares)		48,488,616
Redeemable Preferred Stock
Redeemable preferred stock, shares authorized (shares)	310,000
Redeemable preferred stock, shares issued (shares)	310,000
Redeemable preferred stock, shares outstanding (shares)	310,000
Redeemable Preferred Stock | Predecessor
Redeemable preferred stock, shares authorized (shares)		0
Redeemable preferred stock, shares issued (shares)		0
Redeemable preferred stock, shares outstanding (shares)		0

XML

Condensed Consolidated Statements of Operations - USD ($) $ in Thousands		1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
		Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Revenues		$ 132,258
Operating expenses:
Salaries and benefits		41,784
Supplies		35,028
Professional and medical fees		11,254
Lease expense		6,858
Other operating expenses		8,000
Cost of revenues		102,924
General and administrative expenses	[1]	7,777
Depreciation and amortization		3,330
Provision for doubtful accounts		3,690
Income from equity investments		(712)
Loss on disposal or impairment of long-lived assets, net		333
Merger transaction and integration costs		2,983		$ 1,900	$ 5,600	$ 6,400
Loss on debt refinancing		0
Gain on litigation settlement		0
Gain on acquisition escrow release		0
Electronic health records incentive expense (income)		7
Other (income) expense		0
Total operating expenses		120,332
Operating income (loss)		11,926
Gain on amendment to tax receivable agreement		1,098
Tax receivable agreement expense		0
Interest expense, net		(15,883)
(Loss) income before income taxes		(2,859)
Income tax (benefit) expense		(211)
Net (loss) income		(2,648)
Less: Net income attributable to non-controlling interests		(6,492)
Net loss attributable to Surgery Partners, Inc.		$ (9,140)
Net loss per share attributable to common stockholders
Basic (in USD per share)	[2]	$ (0.57)
Diluted (in USD per share)	[2],[3]	$ (0.57)
Weighted average common shares outstanding
Basic (shares)		48,314,746
Diluted (shares)	[3]	48,314,746
Contingent acquisition expense		$ 605
Predecessor
Revenues			$ 174,079	282,682	748,615	839,437
Operating expenses:
Salaries and benefits			61,240	85,724	241,149	266,401
Supplies			48,078	65,907	193,322	196,484
Professional and medical fees			14,229	20,856	57,931	60,813
Lease expense			9,203	13,204	36,503	38,712
Other operating expenses			11,022	15,703	43,267	44,539
Cost of revenues			143,772	201,394	572,172	606,949
General and administrative expenses	[1]		12,601	14,985	46,797	42,205
Depreciation and amortization			7,599	9,713	30,124	28,984
Provision for doubtful accounts			4,834	8,514	16,297	15,931
Income from equity investments			(896)	(1,167)	(3,148)	(3,007)
Loss on disposal or impairment of long-lived assets, net			114	572	1,715	1,697
Merger transaction and integration costs			2,343	1,864	5,584	6,361
Loss on debt refinancing			18,211	3,595	18,211	11,876
Gain on litigation settlement			0	0	(3,794)	0
Gain on acquisition escrow release			(1,000)	0	(1,000)	0
Electronic health records incentive expense (income)			(3)	364	(305)	269
Other (income) expense			0	0	(2)	97
Total operating expenses			187,575	239,834	682,651	711,362
Operating income (loss)			(13,496)	42,848	65,964	128,075
Gain on amendment to tax receivable agreement			15,294	0	15,294	0
Tax receivable agreement expense			0	(3,733)	0	(3,733)
Interest expense, net			(18,147)	(26,475)	(68,929)	(74,863)
(Loss) income before income taxes			(16,349)	12,640	12,329	49,479
Income tax (benefit) expense			(20,718)	(1,694)	(18,089)	2,496
Net (loss) income			4,369	14,334	30,418	46,983
Less: Net income attributable to non-controlling interests			(8,813)	(16,672)	(42,087)	(54,392)
Net loss attributable to Surgery Partners, Inc.			$ (4,444)	$ (2,338)	$ (11,669)	$ (7,409)
Net loss per share attributable to common stockholders
Basic (in USD per share)	[2]		$ (0.09)	$ (0.05)	$ (0.24)	$ (0.15)
Diluted (in USD per share)	[2],[3]		$ (0.09)	$ (0.05)	$ (0.24)	$ (0.15)
Weighted average common shares outstanding
Basic (shares)			48,146,611	48,019,652	48,121,404	48,018,706
Diluted (shares)	[3]		48,146,611	48,019,652	48,121,404	48,018,706
Contingent acquisition expense			$ 1,210	$ 1,530	$ 5,057	$ 3,060

[1] Includes contingent acquisition compensation expense of $605,000 for the one month ended September 30, 2017 (Successor), $1.2 million and $5.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $1.5 million and $3.1 million for the three and nine months ended September 30, 2016, respectively.

[2] Includes the impact of amounts allocated to participating securities. See Note 6. "Earnings Per Share" for the calculation of net loss per share attributable to common stockholders.

[3] The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in those periods.

XML

Condensed Consolidated Statements of Comprehensive Income (Loss) - USD ($) $ in Thousands	1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Net (loss) income	$ (2,648)
Other comprehensive income	0
Comprehensive (loss) income	(2,648)
Less: Comprehensive income attributable to non-controlling interests	(6,492)
Comprehensive loss attributable to Surgery Partners, Inc.	$ (9,140)
Predecessor
Net (loss) income		$ 4,369	$ 14,334	$ 30,418	$ 46,983
Other comprehensive income		0	0	0	0
Comprehensive (loss) income		4,369	14,334	30,418	46,983
Less: Comprehensive income attributable to non-controlling interests		(8,813)	(16,672)	(42,087)	(54,392)
Comprehensive loss attributable to Surgery Partners, Inc.		$ (4,444)	$ (2,338)	$ (11,669)	$ (7,409)

XML

Condensed Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Total	Common Stock	Additional Paid-in Capital	Retained Deficit	Non-Controlling Interests— Non-Redeemable
Beginning Balance, stockholders' equity (shares) (Predecessor) at Dec. 31, 2016	48,488,616	48,488,616
Beginning Balance, stockholders' equity (Predecessor) at Dec. 31, 2016	$ 324,674	$ 485	$ 320,543	$ (311,351)	$ 314,997
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income | Predecessor	20,803			(11,669)	32,472
Issuance of restricted stock, net of forfeitures (shares) | Predecessor		355,607
Issuance of restricted and unrestricted shares | Predecessor	0	$ 3	(3)
Equity-based compensation | Predecessor	3,697		3,697
Cancellation of restricted shares (in shares) | Predecessor		(33,908)
Cancellation of restricted shares | Predecessor	(790)		(790)
Acquisition of NSH | Predecessor	172,645				172,645
Acquisition and disposal of shares of non-controlling interests, net | Predecessor	(2,146)		3,483		(5,629)
Distributions to non-controlling interests—non-redeemable holders | Predecessor	(38,875)				(38,875)
Ending Balance, stockholders' equity (shares) (Predecessor) at Aug. 31, 2017		48,810,315
Ending Balance, stockholders' equity (shares) at Aug. 31, 2017		48,810,315
Ending Balance, stockholders' equity (Predecessor) at Aug. 31, 2017	480,008	$ 488	326,930	(323,020)	475,610
Ending Balance, stockholders' equity at Aug. 31, 2017	1,405,086	$ 488	720,118	0	684,480
Increase (Decrease) in Stockholders' Equity [Roll Forward]
Net (loss) income	(3,702)			(9,140)	5,438
Equity-based compensation	1,683		1,683
Cancellation of restricted shares (in shares)		(41,019)
Preferred dividends	(2,633)		(2,633)
Mark to redemption adjustment	(15,566)		(15,566)
Acquisition and disposal of shares of non-controlling interests, net	(19)		452		(471)
Distributions to non-controlling interests—non-redeemable holders	$ (5,714)				(5,714)
Ending Balance, stockholders' equity (shares) at Sep. 30, 2017	48,769,296	48,769,296
Ending Balance, stockholders' equity at Sep. 30, 2017	$ 1,379,135	$ 488	$ 704,054	$ (9,140)	$ 683,733

XML

Condensed Consolidated Statements of Cash Flows - USD ($) $ in Thousands	1 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016
Cash flows from operating activities:
Net (loss) income	$ (2,648)
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	3,330
Amortization of debt issuance costs, discounts and premium	(103)
Amortization of unfavorable lease liability	(27)
Equity-based compensation	1,683
Loss on disposal or impairment of long-lived assets, net	333
Loss on debt refinancing	0
Gain on amendment to tax receivable agreement	(1,098)
Tax receivable agreement expense	0
Deferred income taxes	(465)
Provision for doubtful accounts	3,690
(Income) loss from equity investments, net of distributions received	(203)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable	(2,795)
Other operating assets and liabilities	(2,919)
Net cash (used in) provided by operating activities	(1,222)
Cash flows from investing activities:
Purchases of property and equipment, net	(1,840)
Payments for acquisitions, net of cash acquired	(1,163)
Proceeds from divestitures	0
Net cash used in investing activities	(3,003)
Cash flows from financing activities:
Principal payments on long-term debt	(3,609)
Borrowings of long-term debt	0
Payments of debt issuance costs	(4)
Penalty on prepayment of debt	0
Proceeds from preferred stock issuance	0
Payments of stock issuance costs	0
Distributions to non-controlling interest holders	(6,444)
Receipts (payments) related to ownership transactions with non-controlling interest holders	30
Financing lease obligation	(253)
Other financing activities	0
Net cash (used in) provided by financing activities	(10,280)
Net (decrease) increase in cash and cash equivalents	(14,505)
Cash and cash equivalents at beginning of period	214,206
Cash and cash equivalents at end of period	199,701	$ 214,206
Predecessor
Cash flows from operating activities:
Net (loss) income		30,418	$ 46,983
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		30,124	28,984
Amortization of debt issuance costs, discounts and premium		5,091	5,295
Amortization of unfavorable lease liability		(217)	(323)
Equity-based compensation		3,697	1,326
Loss on disposal or impairment of long-lived assets, net		1,715	1,697
Loss on debt refinancing		18,211	11,876
Gain on amendment to tax receivable agreement		(15,294)	0
Tax receivable agreement expense		0	3,733
Deferred income taxes		(18,703)	1,903
Provision for doubtful accounts		16,297	15,931
(Income) loss from equity investments, net of distributions received		489	(138)
Changes in operating assets and liabilities, net of acquisitions and divestitures:
Accounts receivable		8,837	(38,480)
Other operating assets and liabilities		(12,947)	14,076
Net cash (used in) provided by operating activities		67,718	92,863
Cash flows from investing activities:
Purchases of property and equipment, net		(18,773)	(28,377)
Payments for acquisitions, net of cash acquired		(725,853)	(126,018)
Proceeds from divestitures		70	0
Net cash used in investing activities		(744,556)	(154,395)
Cash flows from financing activities:
Principal payments on long-term debt		(1,164,237)	(453,957)
Borrowings of long-term debt		1,805,966	580,945
Payments of debt issuance costs		(58,591)	(14,296)
Penalty on prepayment of debt		0	(4,900)
Proceeds from preferred stock issuance		310,000	0
Payments of stock issuance costs		(18,347)	0
Distributions to non-controlling interest holders		(50,343)	(49,443)
Receipts (payments) related to ownership transactions with non-controlling interest holders		(1,518)	1,105
Financing lease obligation		(796)	(646)
Other financing activities		(789)
Net cash (used in) provided by financing activities		821,345	58,808
Net (decrease) increase in cash and cash equivalents		144,507	(2,724)
Cash and cash equivalents at beginning of period	$ 214,206	69,699	57,933
Cash and cash equivalents at end of period		$ 214,206	$ 55,209

XML

Organization

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Organization

Organization

Surgery Partners, Inc., a Delaware corporation (together with its subsidiaries, the “Company”), was formed on April 2, 2015, as a holding company for the purpose of facilitating an initial public offering (the “IPO”) of shares of common stock. Prior to September 30, 2015, the Company conducted business through Surgery Center Holdings, Inc. and its subsidiaries. Surgery Center Holdings, LLC was and is the sole indirect owner of the equity interests of Surgery Center Holdings, Inc. and has no other material assets.

On September 30, 2015, Surgery Partners, Inc. became the direct parent and sole member of Surgery Center Holdings, LLC (the "Reorganization"). In the Reorganization, all of the equity interests held by the pre-IPO owners of Surgery Center Holdings, LLC were contributed to Surgery Partners, Inc. in exchange for 33,871,990 shares of common stock of Surgery Partners, Inc. and certain rights to additional payments under a tax receivable agreement. After giving effect to the Reorganization, Surgery Partners, Inc. is a holding company, and its sole material asset is an equity interest in Surgery Center Holdings, LLC. On October 1, 2015, the Company completed its IPO of 14,285,000 shares of common stock at an offering price of $19.00 per share.

On August 31, 2017, the Company completed its acquisition of NSH Holdco, Inc. (“NSH”). Pursuant to the terms of the Agreement and Plan of Merger, dated as of May 9, 2017, by and among the Company, SP Merger Sub, Inc., a wholly owned subsidiary of the Company, NSH, and IPC / NSH, L.P. (solely in its capacity as sellers’ representative), as amended by that certain Letter Amendment, dated as of July 7, 2017 (as amended, the “NSH Merger Agreement”), SP Merger Sub, Inc. merged with and into NSH with NSH continuing as the surviving corporation and a wholly owned subsidiary of Surgery Center Holdings, Inc. (the “NSH Merger”). Also on August 31, 2017, (i) the Company completed the sale and issuance of 310,000 shares of the Company's preferred stock, par value $0.01 per share, designated as 10.00% Series A Convertible Perpetual Participating Preferred Stock (the “Series A Preferred Stock”) to BCPE Seminole Holdings LP (“Bain”), an affiliate of Bain Capital Private Equity, at a purchase price of $1,000 per share in cash (the “Preferred Private Placement”) pursuant to the Securities Purchase Agreement, dated as of May 9, 2017, by and between the Company and Bain (the “Preferred Stock Purchase Agreement”), and (ii) Bain completed its purchase of 26,455,651 shares (the “Purchased Shares”) of the Company's common stock, par value $0.01 per share (the “Common Stock”) from H.I.G. Surgery Centers, LLC (“H.I.G.”) at a purchase price of $19.00 per share in cash (the “Private Sale”) pursuant to the Stock Purchase Agreement, dated as of May 9, 2017, by and among the Company, Bain, H.I.G. and H.I.G. Bayside Debt & LBO Fund II L.P. (for the purposes stated therein) (the “Common Stock Purchase Agreement” and together with the NSH Merger Agreement, the Preferred Stock Purchase Agreement and the other agreements and documents executed in connection therewith, including the TRA (as defined in Note 2. “Significant Accounting Policies - Income Taxes and Tax Receivable Agreement”), the “Transaction Agreements”). As of August 31, 2017, the Purchased Shares represented approximately 54.2% of the Company’s outstanding Common Stock. As a result of the Preferred Private Placement and the Private Sale, Bain became the controlling stockholder of the Company, holding Series A Preferred Stock and Common Stock that collectively represent approximately 65.7% of the voting power of all classes of capital stock of the Company as of August 31, 2017, and H.I.G. and its affiliated investment funds no longer own any capital stock of the Company.

In connection with the change of control effected by the Preferred Private Placement and the Private Sale, the Company elected to apply “pushdown” accounting by applying the guidance in Accounting Standards Codification Topic ("ASC") 805, Business Combinations, including the recognition of the Company’s assets and liabilities at fair value as of August 31, 2017, and similarly recognizing goodwill calculated based on the terms of the transaction and the fair value of the new basis of net assets of the Company. 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."

As of September 30, 2017 (Successor), the Company owned and operated a national network of surgical facilities and ancillary services in 32 states.  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 Company's surgical hospitals 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, optical services and specialty pharmacy services.

As of September 30, 2017 (Successor), the Company owned or operated a portfolio of 124 surgical facilities, comprised of 104 ASCs and 20 surgical hospitals. The Company owns 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 85 of the surgical facilities and consolidated 109 of these facilities for financial reporting purposes. In addition, the Company owned or operated a network of 60 physician practices.

XML

Significant Accounting Policies

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Significant Accounting Policies

Significant Accounting Policies

Principles of Consolidation

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.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. 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 condensed consolidated balance sheet at December 31, 2016 (Predecessor) has been derived from the audited financial statements as of that date. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 (Predecessor). 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 accompanying notes. Actual results could differ from those estimates.

Non-Controlling Interests

The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.

Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the condensed consolidated financial statements within the equity section but separate from the Company's equity. However, in instances in which certain redemption features that are not solely within the control of the Company are present, classification of non-controlling interests outside of permanent equity is required. Consolidated net income attributable to the Company and to the non-controlling interests are identified and presented on the condensed consolidated statements of operations; changes in ownership interests in which the Company retains a controlling interest are accounted for as equity transactions assuming the Company continues to consolidate related entities. Certain transactions with non-controlling interests are classified within financing activities in the condensed consolidated statements of cash flows.

The condensed consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control.

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):

Predecessor
Balance at December 31, 2016	$	180,521
Net income attributable to non-controlling interests—redeemable	9,615
Acquisition and disposal of shares of non-controlling interests, net—redeemable	(3,323		)
Distributions to non-controlling interest—redeemable holders	(11,468		)
Acquisition of NSH	153,320
Balance at August 31, 2017	$	328,665
Successor
Balance at September 1, 2017	$	271,001
Net income attributable to non-controlling interests—redeemable	1,054
Acquisition and disposal of shares of non-controlling interests, net—redeemable	91
Distributions to non-controlling interest—redeemable holders	(730		)
Balance at September 30, 2017	$	271,416

Variable Interest Entities

The condensed consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary under the provisions of ASC 810, Consolidation. As of September 30, 2017 (Successor), the variable interest entities include five surgical facilities, three anesthesia practices and three physician practices. At December 31, 2016 (Predecessor), the variable interest entities included five surgical facilities, three anesthesia practices and two physician practices. The change is due to a physician practice acquired during the three months ended June 30, 2017 (Predecessor). The Company has the power to direct the activities that most significantly impact a variable interest entity's economic performance. Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur. As of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), the condensed consolidated balance sheets of the Company included total assets of $90.1 million and $99.5 million, respectively, and total liabilities of $8.0 million and $10.7 million, respectively, related to the Company's variable interest entities.

Equity Method Investments

The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities. These investments are accounted for using the equity method of accounting. The total amount of these investments included in investments in and advances to affiliates in the condensed consolidated balance sheets was $64.4 million and $35.0 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

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. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.

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				Predecessor
	September 30, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
2014 Revolver Loan	$	—	$	—	$	85,000	$	85,000
2014 First Lien Credit Agreement, net of debt issuance costs and discount	$	—	$	—	$	911,784	$	917,528
2017 Senior Secured Credit Facilities:
Revolver	$	—	$	—	$	—	$	—
Term Loan	$	1,283,626	$	1,267,581	$	—	$	—
Senior Unsecured Notes due 2021 (1)	$	409,821	$	429,288	$	387,942	$	412,189
Senior Unsecured Notes due 2025	$	370,000	$	346,413	$	—	$	—

⁽¹⁾ The carrying amount in the Predecessor period is net of unamortized debt issuance costs and discount, which were eliminated with the application of pushdown accounting.

The fair values of the 2014 First Lien Credit Agreement, Term Loan, 2021 Unsecured Notes and the 2025 Unsecured Notes (in each case, as defined in Note 4. "Long-Term Debt") were based on a Level 2 computation using quoted prices for identical liabilities in inactive markets at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), as applicable. The carrying amounts related to the Company's other long-term debt obligations, including the 2014 Revolver Loan and the Revolver (in each case, as defined in Note 4. "Long-Term Debt"), approximate their fair values.

The Company maintains a supplemental executive retirement savings plan (the "SERP") for certain executive officers. 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 September 30, 2017 (Successor) and December 31, 2016 (Predecessor), the fair value of the assets in the SERP were $1.8 million and $1.7 million, respectively, and were included in other long-term assets in the condensed consolidated balance sheets. The Company had a liability related to the SERP of $1.8 million and $1.7 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, which was included in other long-term liabilities in the condensed consolidated balance sheets.

Revenues

The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances, which the Company estimates based on the historical trend of its cash collections and contractual write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics.

A summary of revenues by service type as a percentage of total revenues follows:

	Successor		Predecessor				Predecessor
	September 1 to September 30,		July 1 to August 31,		Three Months Ended September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016		2017		2016
Patient service revenues:
Surgical facilities revenues	94.0	%	95.5	%	90.4	%	91.4	%	90.6	%
Ancillary services revenues	4.2	%	2.7	%	8.0	%	7.0	%	7.5	%
	98.2	%	98.2	%	98.4	%	98.4	%	98.1	%
Other service revenues:
Optical services revenues	0.7	%	1.1	%	1.1	%	1.0	%	1.2	%
Other	1.1	%	0.7	%	0.5	%	0.6	%	0.7	%
	1.8	%	1.8	%	1.6	%	1.6	%	1.9	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Patient service revenues. 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 on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid. Changes in estimated contractual adjustments and discounts are recorded in the period of change. 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 $630,000, $1.1 million, respectively. 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).

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
	September 1 to September 30,				July 1 to August 31,				Three Months Ended September 30,
	2017				2017				2016
	Amount		%		Amount		%		Amount		%
Patient service revenues:
Private insurance	$	72,930	56.2	%	$	80,166	46.9	%	$	140,637	50.6	%
Government	46,162		35.5	%	73,734		43.1	%	111,929		40.2	%
Self-pay	3,861		3.0	%	4,119		2.4	%	5,389		1.9	%
Other (1)	6,883		5.3	%	12,909		7.6	%	20,240		7.3	%
Total patient service revenues	$	129,836	100.0	%	$	170,928	100.0	%	$	278,195	100.0	%
Other service revenues:
Optical service revenues	$	888			$	1,905			$	3,203
Other revenues	1,534				1,246				1,284
Total net revenues	$	132,258			$	174,079			$	282,682

	Successor				Predecessor
	September 1 to September 30,				January 1 to August 31,				Nine Months Ended September 30,
	2017				2017				2016
	Amount		%		Amount		%		Amount		%
Patient service revenues:
Private insurance	$	72,930	56.2	%	$	360,092	48.9	%	$	418,798	50.9	%
Government	46,162		35.5	%	308,993		42.0	%	331,041		40.2	%
Self-pay	3,861		3.0	%	15,949		2.2	%	13,814		1.7	%
Other (1)	6,883		5.3	%	51,374		6.9	%	59,313		7.2	%
Total patient service revenues	$	129,836	100.0	%	$	736,408	100.0	%	$	822,966	100.0	%
Other service revenues:
Optical service revenues	$	888			$	7,629			$	10,222
Other revenues	1,534				4,578				6,249
Total net revenues	$	132,258			$	748,615			$	839,437

(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. Revenue is recognized as 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. Revenue is recognized when 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. 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 services are rendered.

Subsequent to the Preferred Private Placement, the Company, as part of a review of operations undertaken to create a solid foundation to support the Company's long-term growth objectives, incurred a non-recurring adjustment to revenue of $15.6 million, which was attributable to an increase in reserves for certain accounts receivable during the two months ended August 31, 2017 (Predecessor). The increase in reserves resulted from certain known events and actions during the two months ended August 31, 2017 (Predecessor) related to select payors primarily in the Company’s ancillary services segment. Upon consideration of such additional information, related receivables were determined to have a low likelihood of collection. The majority of this adjustment related to receivables with balances from the first quarter of 2016 and prior. The Company believes it has accounted for all necessary reserve adjustments at this time.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.

Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts

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. As of September 30, 2017 (Successor), the Company had a net third-party Medicaid settlements liability of $1.4 million compared to a net third-party Medicaid settlements receivable of $454,000 at December 31, 2016 (Predecessor).

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 72 hours 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 $8.4 million and $7.0 million at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

Inventories

Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.

Prepaid Expenses and Other Current Assets

A summary of prepaid expenses and other current assets follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Prepaid expenses	$	18,418	$	11,158
Receivables - optical product purchasing organization	8,369		7,042
Insurance recoveries	2,837		2,476
Tax refund receivable	8,618		—
Other current assets	15,482		11,338
Total	$	53,724	$	32,014

Property and Equipment

Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized.

A summary of property and equipment follows (in thousands):

	Successor			Predecessor
	September 30, 2017			December 31, 2016
Land	$	20,880		$	8,082
Buildings and improvements	181,237			118,172
Furniture and equipment	14,242			14,670
Computer and software	21,708			29,902
Medical equipment	140,198			117,418
Construction in progress	13,161			2,396
Property and equipment, at cost	391,426			290,640
Less: Accumulated depreciation	(2,729		)	(86,387		)
Property and equipment, net	$	388,697		$	204,253

The Company also leases certain facilities and equipment under capital leases. Assets held under capital leases are stated at the present value of minimum lease payments at the inception of the related lease. Such assets are depreciated on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.The carrying values of assets under capital lease were $19.2 million and $15.4 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, net of accumulated depreciation of $0.7 million and $11.6 million, respectively.

Intangible Assets

The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management agreements and customer relationships. Physician income guarantees are amortized into salaries and benefits costs in the condensed consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the service lives of the agreements, typically ranging from two to five years for non-compete agreements and 15 years for the management rights agreements. Customer relationships are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years.

A summary of the activity related to intangible assets for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Predecessor
Balance at December 31, 2016	$	813		$	21,290		$	16,457		$	3,780	$	3,704		$	1,979		$	48,023
Additions	445			26,900			92			745		—			130			28,312
Recruitment expense	(380		)	—			—			—		—			—			(380		)
Amortization	—			(1,154		)	(3,715		)	—		(733		)	(438		)	(6,040		)
Balance at August 31, 2017	$	878		$	47,036		$	12,834		$	4,525	$	2,971		$	1,671		$	69,915
	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Successor
Balance at September 1, 2017	$	878		$	41,600		$	8,024		$	5,078	$	—		$	1,170		$	56,750
Additions	—			—			41			25		—			—			66
Recruitment expense	(38		)	—			—			—		—			—			(38		)
Amortization	—			(138		)	(84		)	—		—			(49		)	(271		)
Balance at September 30, 2017	$	840		$	41,462		$	7,981		$	5,103	$	—		$	1,121		$	56,507

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 activity related to goodwill for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

Predecessor
Balance at December 31, 2016	$	1,555,204
Acquisitions	858,323
Divestitures	(175		)
Purchase price adjustments	1,220
Balance at August 31, 2017	$	2,414,572
Successor
Balance at September 1, 2017	$	3,269,225
Acquisitions	1,214
Divestitures	—
Purchase price adjustments	(130		)
Balance at September 30, 2017	$	3,270,309

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist in accordance with Accounting Standards Codification (ASC) 350, Intangibles- Goodwill and Other. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise. 

Restricted Invested Assets

Restricted invested assets of $315,000 as of both September 30, 2017 (Successor) and December 31, 2016 (Predecessor) were related to a requirement under the operating lease agreement at the Company's Chesterfield, Missouri facility. In accordance with the provisions of the lease agreement, 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.

Other Long-Term Assets

A summary of other long-term assets follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Notes receivable	$	2,853	$	716
Deposits	2,794		4,196
Assets of SERP	1,804		1,725
Debt issuance costs	—		1,488
Insurance recoverable	6,835		6,835
Other	4,847		1,475
Total	$	19,133	$	16,435

Other Current Liabilities

A summary of other current liabilities follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Interest payable	$	23,777	$	19,206
Current taxes payable	6,731		2,622
Insurance liabilities	10,287		6,625
Amounts due to patients and payors	15,087		12,221
Tax receivable agreement liability	837		999
Contingent acquisition compensation liability	7,866		4,589
Contingent proceeds payable	8,618		—
Other accrued expenses	33,076		22,731
Total	$	106,279	$	68,993

Other Long-Term Liabilities

A summary of other long-term liabilities follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Facility lease obligations	$	90,052	$	52,653
Medical malpractice liability	13,453		10,453
Liability of SERP	1,804		1,725
Unfavorable lease liability	7,893		1,671
Other long-term liabilities	3,597		9,764
Total	$	116,799	$	76,266

At four of the Company's surgical facilities, the Company has facility lease obligations payable to the lessor of each facility. Payments are allocated to principal adjustments of the lease obligations and interest expense. The current portions of the lease obligations were $1.5 million and $1.3 million at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively, and were included in other current liabilities in the condensed consolidated balance sheets. The long-term portions of the lease obligations, included in the table above, were $90.1 million and $52.7 million at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively. The increase is due to facility lease obligations assumed with the NSH Merger.

Operating Leases

The Company leases office space and equipment for its surgical facilities, including surgical facilities under development. The lease agreements generally require the lessee, or the Company, to pay all maintenance, property taxes, utilities and insurance costs. The Company accounts for operating lease obligations and sublease income on a straight-line basis. Contingent obligations of the Company, as defined by each lease agreement, are recognized when specific contractual measures have been met, typically the result of an increase in the Consumer Price Index. Lease obligations paid in advance are recorded as prepaid rent and included in prepaid expenses and other current assets on the condensed consolidated balance sheets. The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is recorded as deferred rent and included in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets.

Equity-Based Compensation

Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. The Company applies the Black-Scholes-Merton method of valuation in determining share-based compensation expense for option awards. 

The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. In connection with the Reorganization, the Company’s board of directors and stockholders adopted the Surgery Partners, Inc. 2015 Omnibus Incentive Plan from which the Company’s future equity-based awards will be granted.

Professional, General and Workers' Compensation Insurance

The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis.

The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the condensed consolidated balance sheets. Total professional, general and workers' compensation claim liabilities as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor) are $16.6 million and $13.8 million, respectively. The balance includes expected insurance recoveries of $9.1 million and $9.3 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

Income Taxes and Tax Receivable Agreement

The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If a net operating loss carryforward exists, the Company makes a determination as to whether that net operating loss ("NOL") carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.

The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners.

The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2014 or state income tax examinations for years prior to 2012.

On May 9, 2017, the Company and H.I.G., in its capacity as the stockholders representative, entered into an agreement to amend that certain Income Tax Receivable Agreement, dated September 30, 2015 (as amended, the “TRA”), by and between the Company, H.I.G. (in its capacity as the stockholders representative) and the other parties referred to therein, which amendment became effective on August 31, 2017. The TRA was initially entered into in connection with the reorganization undertaken to facilitate the Company’s initial public offering. Pursuant to the amendment to the TRA, the Company agreed to make payments to H.I.G. in its capacity as the stockholders representative pursuant to a fixed payment schedule. The amounts payable under the TRA are calculated as the product of (i) an annual base amount and (ii) the maximum corporate federal income tax rate for the applicable year plus three percent. The amounts payable under the TRA are related to the Company’s projected realized tax savings over the next six years and are not dependent on the Company’s actual tax savings over such period. The calculation of amounts payable pursuant to the TRA is thus dependent on the maximum corporate federal income tax rate. To the extent that the Company is unable to make payments under the TRA and such inability is a result of the terms of credit agreements and other debt documents that are materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 500 basis points until paid. If the terms of such credit agreements and other debt documents cause the Company to be unable to make payments under the TRA and such terms are not materially more restrictive than those existing as of September 30, 2015, such payments will be deferred and will accrue interest at a rate of LIBOR plus 300 basis points until paid.

As a result of the amendment to the TRA, the Company was required to value the liability under the TRA by discounting the fixed payment schedule using the Company’s incremental borrowing rate. During the two and eight month periods ended August 31, 2017 (Predecessor), the Company recognized a reduction in the carrying value of the liability under the TRA of $43.9 million, with $15.3 million of the reduction recorded to a gain on amendment of TRA and $28.6 million recorded as a reduction to the goodwill recorded in connection with the application of pushdown accounting related to the change of control (discussed in Note 1. "Organization").

Assuming the Company’s effective tax rate is 38% throughout the term of the TRA, the Company estimates that the total amounts payable under the TRA will be approximately $120.5 million. Prior to the effectiveness of the amendment to the TRA, the amounts payable under the TRA varied depending upon a number of factors, including the amount, character and timing of the taxable income of Surgery Partners, Inc. The Company estimated the total amounts payable would be approximately $123.4 million, if the tax benefits of related deferred tax assets were ultimately realized. The amounts payable were recognized during 2015 in conjunction with the release of the Company's valuation allowance recorded against the deferred tax assets.

On September 8, 2017 (Successor), in connection with the resignation of the Company's former Chief Executive Officer, Michael Doyle, Mr. Doyle entered into a TRA Waiver and Assignment Agreement (the “CEO TRA Assignment Agreement”) with the Company, pursuant to which the Company accepted the assignment of 50% of Mr. Doyle’s (and his affiliates’) interest in future payments to which such parties were entitled pursuant to the TRA, in exchange for an upfront payment of approximately $5.1 million, in the aggregate, as set forth in the CEO TRA Assignment Agreement. On September 15, 2017 (Successor), certain of the Company’s employees entered into TRA Waiver and Assignment Agreements with the Company (collectively, the “Employee TRA Assignment Agreements” and together with the CEO TRA Assignment Agreement, the “TRA Assignment Agreements”), pursuant to which the Company made upfront payments of approximately $4.8 million in the aggregate, in exchange for the assignment of 100% of each such employee’s interest in future payments to which such employee was entitled pursuant to the TRA. During the period from September 1 to September 30, 2017 (Successor), the Company recognized an aggregate gain of $1.1 million as a result of the TRA Assignment Agreements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure about the nature, amount, timing and uncertainty of revenue. The provisions of the New Revenue Standard are effective for annual periods beginning after December 15, 2017, including interim periods within those years by applying either the full retrospective method or the modified retrospective approach upon adoption. The Company will adopt this ASU on January 1, 2018. The Company currently plans to adopt using the modified retrospective method, including providing all requisite disclosures under such method.

In preparation for the adoption of the New Revenue Standard, the Company continues to evaluate and refine its estimates of the anticipated impacts the New Revenue Standard will have on its revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures and control framework. Specifically, the Company is continuing to evaluate its accounting policies and internal controls under the New Revenue Standard, as well as analyzing all of the potential effects of the New Revenue Standard, particularly with respect to non-patient service revenue sources. Upon further evaluation, the Company anticipates that the majority of its 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.

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 Company believes the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases.

In March 2016, the FASB issued ASU 2016-07, “Investments- Equity Method and Joint Ventures,” which allows investments that now meet equity method treatment that were previously accounted for under a different method to apply the equity method prospectively from the date the investment qualifies for equity method treatment. ASU 2016-07 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial position, results of operations, cash flows and financial disclosures.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies the classification of certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact this new guidance may have on the condensed consolidated cash flows.

In October 2016, the FASB issued ASU 2016-17, “Interests Held through Related Parties That Are under Common Control,” which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a VIE through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. ASU 2016-17 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial position, results of operations, cash flows and financial disclosures.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” which will require the reconciliation of restricted cash in the statement of cash flows. ASU 2016-18 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company's condensed consolidated cash flows.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations – Clarifying the Definition of a Business,” which narrows the definition of a business when evaluating whether transactions should be accounted for as asset acquisitions or business combinations. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for annual and interim periods after January 1, 2017. The Company early adopted this ASU on January 1, 2017. The adoption of ASU 2017-04 only impacts the Company's financial statements in situations where an impairment of a reporting unit’s assets is determined.

XML

Acquisitions and Developments

9 Months Ended

Sep. 30, 2017

Business Combinations [Abstract]

Acquisitions and Developments

Acquisitions and Developments

The Company accounts for its business combinations in accordance with the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer can be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control. The assets acquired, liabilities assumed and any non-controlling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. Any goodwill recognized is determined as the excess of the fair value of the consideration conveyed plus the fair value of any non-controlling interests in the acquisition over the fair value of the net assets acquired. Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.

Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and professional liabilities. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. Fair value attributable to non-controlling interests is based on a Level 3 computation using significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of non-controlling interests, primarily from acquisitions of surgical facilities. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. Fair value attributable to the property and equipment acquired is based on Level 3 computations using key inputs such as cost trend data and comparable asset sales. Fair value attributable to the intangible assets acquired is based on Level 3 computations using key inputs such as the Company's internally-prepared financial projections. Fair values assigned to acquired working capital are based on carrying amounts reported by the acquiree at the date of acquisition, which approximate their fair values.

2017 Transactions

Acquisition of NSH

On August 31, 2017, the Company completed its acquisition of NSH through the NSH Merger, pursuant to the NSH Merger Agreement (as defined in Note 1. "Organization") for total cash consideration of $711.7 million, net of cash acquired, including $19.6 million funded to an escrow account. The NSH Merger added to the Company's portfolio 22 owned or operated surgical facilities, including 7 ASCs and 15 surgical hospitals, as well as complementary ancillary services. The proceeds from the Preferred Private Placement (as defined in Note 1. "Organization"), the 2025 Unsecured Notes and the 2017 Senior Secured Credit Facilities (in each case, as defined in Note 4. "Long-Term Debt") were used to fund the acquisition.

Fees associated with the acquisition of NSH, which includes fees incurred related to the Company's preferred equity issuances and debt financings, was approximately $82.6 million during the two and eight months ended August 31, 2017 (Predecessor). Approximately $45.5 million was capitalized as deferred financing costs and discount, $18.3 million was capitalized as deferred equity issuance costs, $2.4 million was expensed as merger transaction and integration costs, and $16.4 million was recorded as loss on debt refinancing costs. All capitalized costs were subsequently written off as a result of the application of pushdown accounting, further discussed below.

The total consideration related to the acquisition of NSH was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The aggregate amounts preliminarily recognized as of the acquisition date for each major class of assets and liabilities are as follows (in thousands):

Cash consideration	$	762,850
Fair value of non-controlling interests	325,965
Aggregate fair value of acquisition	1,088,815
Net assets acquired:
Cash and cash equivalents	51,159
Accounts receivable	76,101
Inventories	14,986
Prepaid expenses and other current assets	18,007
Property and equipment	174,374
Intangible assets	27,741
Goodwill	845,185
Investments in and advances to affiliates	29,737
Long-term deferred tax assets	28,182
Acquisition escrow deposit	19,600
Other long-term assets	5,309
Accounts payable	(29,652		)
Accrued payroll and benefits	(27,313		)
Other current liabilities	(18,355		)
Current maturities of long-term debt	(16,416		)
Long-term debt, less current maturities	(42,770		)
Acquisition escrow liability	(19,600		)
Other long-term liabilities	(47,460		)
Total fair value of net assets acquired	1,088,815

The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the intangible assets recognized.

The preliminary estimated fair value assigned to goodwill is primarily attributable to synergies expected to arise as a result of the NSH Merger by enhancing the growth profile and diversity of the Company across the healthcare continuum. The entire amount of goodwill acquired in connection with the NSH Merger was allocated to the Company's surgical facility services operating segment. The total amount of the goodwill related to the NSH Merger that will be deductible for tax purposes is $153.5 million.

The amounts of revenues and earnings of NSH for the one month ended September 30, 2017 (Successor) was $34.0 million and $3.4 million, respectively, and are included in revenues and net loss attributable to Surgery Partners, Inc., respectively, in the condensed consolidated statement of operations.

The following pro forma combined summary of operations of the Company gives effect to using historical information of the operations of NSH as if the acquisition transaction had occurred as of January 1, 2016 (in thousands):

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Net revenues	$	132,258		$	267,013		$	415,764		$	1,122,326		$	1,235,472
Net (loss) income	(763		)	13,331			28,304			63,269			82,275
Less: Net income attributable to non-controlling interests	(6,492		)	(13,184		)	(25,207		)	(65,122		)	(78,356		)
Net (loss) income attributable to Surgery Partners, Inc.	$	(7,255	)	$	147		$	3,097		$	(1,853	)	$	3,919

These pro forma amounts exclude transaction related costs of $3.0 million and the gain on amendment to the TRA of $1.1 million for the one month ended September 30, 2017 (Successor), transaction related costs of $11.3 million, loss on debt refinancing of $18.2 million and the gain on amendment to the TRA of $15.3 million for the two months ended August 31, 2017 (Predecessor), transaction related costs of $5.7 million, loss on debt refinancing of $18.2 million and the gain on amendment to the TRA of $15.3 million for the eight months ended August 31, 2017 (Predecessor). The prior year pro forma amounts exclude the loss on debt refinancing of $3.6 million and $11.9 million for the three and nine months ended September 30, 2016 (Predecessor), respectively.

Change of Control - Pushdown Accounting

On August 31, 2017, H.I.G. sold the Purchased Shares (as defined in Note 1. "Organization") beneficially owned by H.I.G. to Bain at a purchase price per share of $19.00 for an aggregate purchase price of $502.7 million in cash pursuant to the Common Stock Purchase Agreement (as defined in Note 1. "Organization"). As of August 31, 2017, prior to giving effect to the Preferred Private Placement (as defined in Note 1. "Organization"), the Purchased Shares represented approximately 54.2% of the Company's outstanding Common Stock. As a result of the Private Sale and the Preferred Private Placement, Bain holds Series A Preferred Stock and Common Stock that collectively represented approximately 65.7% of the voting power of all classes of capital stock of the Company as of August 31, 2017, and H.I.G. and its affiliated investment funds no longer own any capital stock of the Company.

Fees associated with the change of control include fees incurred related to the Preferred Private Placement. Refer to Note 6. "Redeemable Preferred Stock", for the amount and accounting treatment of these costs.

In connection with the change of control, the Company elected to apply “pushdown” accounting by applying the guidance in Accounting Standards Codification Topic ("ASC") 805, Business Combinations. In accordance with ASC 805, all identifiable assets and liabilities of the Company were measured at and adjusted to fair value as of August 31, 2017, and similarly goodwill was recognized based on the terms of the transaction and the fair value of the new basis of the net assets of the Company.

The aggregate amounts preliminarily recognized in connection with the application of pushdown accounting for each major class of assets and liabilities as of August 31, 2017 are as follows (in thousands):

Equity attributable to Surgery Partners, Inc.	720,606
Redeemable preferred stock	310,000
Fair value of non-controlling interests	955,481
Aggregate fair value	1,986,087
Net assets:
Cash and cash equivalents	214,206
Accounts receivable	257,373
Inventories	44,310
Prepaid expenses and other current assets	54,248
Acquisition escrow deposit	4,570
Property and equipment	386,086
Intangible assets	56,750
Goodwill	3,269,225
Investments in and advances to affiliates	64,243
Restricted invested assets	315
Long-term deferred tax asset	208,935
Long-term acquisition escrow deposit	19,600
Other long-term assets	19,427
Accounts payable	(64,921	)
Accrued payroll and benefits	(52,995	)
Acquisition escrow liability	(4,570	)
Other current liabilities	(83,317	)
Current maturities of long-term debt	(49,942	)
Long-term debt, less current maturities	(2,142,375	)
Long-term tax receivable agreement liability	(78,498	)
Long-term acquisition escrow liability	(19,600	)
Other long-term liabilities	(116,983	)
Total fair value of net assets	1,986,087

The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

A majority of the deferred income taxes recognized as a component of the Company's purchase price allocation is a result of the difference between the book and tax basis of the intangible assets recognized.

Goodwill recognized in connection with the application of pushdown accounting was allocated to each reportable segment as follows: $3.084 billion to surgical facilities services, $152.1 million to ancillary services and $32.8 million to optical services. The total amount of the goodwill related to the application of pushdown accounting that will be deductible for tax purposes is $360.5 million.

Other 2017 Acquisitions

During the eight months ended August 31, 2017 (Predecessor), the Company completed acquisitions in existing markets of three physician practices for a combined cash purchase price of $14.2 million. In connection with these acquisitions the Company preliminarily recognized net assets of $1.1 million and goodwill of $13.1 million. The acquisitions were funded through cash from operations and proceeds from the 2014 Revolver Loan (as defined in Note 4. "Long-Term Debt").

During the one month ended September 30, 2017 (Successor), the Company completed acquisitions in existing markets of one physician practice and the assets of an endoscopy practice for a combined cash purchase price of $1.2 million. In connection with these acquisitions the Company preliminarily recognized net assets of $101,000 and goodwill of $1.2 million. The acquisitions were funded through cash from operations.

The results of operations of the physician practices acquired are included in the Company’s results of operations beginning on the date of acquisition. The fair values assigned to certain assets and liabilities assumed by the Company have been estimated on a preliminary basis and are subject to change as new facts and circumstances emerge that were present at the date of acquisition.

XML

Long-Term Debt

9 Months Ended

Sep. 30, 2017

Debt Disclosure [Abstract]

Long-Term Debt

Long-Term Debt

A summary of long-term debt follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
2014 Revolver Loan	$	—	$	85,000
2014 First Lien Credit Agreement	—		932,000
2017 Senior Secured Credit Facilities:
Revolver	—		—
Term Loan	1,283,626		—
Senior Unsecured Notes due 2021	409,821		400,000
Senior Unsecured Notes due 2025	370,000		—
Subordinated Notes	—		1,000
Notes payable and secured loans	113,547		42,521
Capital lease obligations	16,340		13,996
Less: unamortized debt issuance costs and discount	—		(32,274		)
Total debt	2,193,334		1,442,243
Less: Current maturities	48,472		27,822
Total long-term debt	$	2,144,862	$	1,414,421

2014 Revolver Loan & 2014 First Lien Credit Agreement

On August 31, 2017 (Predecessor), the Company prepaid in full the outstanding principal of the 2014 Revolver Loan, a revolving credit facility entered into on November 3, 2014, and the 2014 First Lien Credit Agreement, a senior secured obligation of Surgery Center Holdings, Inc. entered into on November 3, 2014, with the proceeds from the 2017 Senior Secured Credit Facilities (as defined below). The total prepayment amount was $1.030 billion, which included $1.027 billion of outstanding principal and $3.0 million of accrued and unpaid interest, other fees and expenses. In connection with the prepayment, the Company recorded a loss on debt refinancing of $18.2 million for each of the two and eight month periods ending August 31, 2017 (Predecessor). The loss includes the partial write-off of unamortized debt issuance costs and discount related to the 2014 Revolver Loan and 2014 First Lien Credit Agreement and a portion of costs incurred with the 2017 Senior Secured Credit Facilities.

2014 Second Lien Credit Agreement

On March 31, 2016, the Company prepaid in full the outstanding principal of the 2014 Second Lien Credit Agreement, plus accrued and unpaid interest, with the proceeds of the issuance of the 2021 Unsecured Notes, defined below. In connection with the prepayment, the Company recorded a loss on debt refinancing of $8.3 million, for the nine months ended September 30, 2016 (Predecessor).

2017 Senior Secured Credit Facilities

On August 31, 2017 (Predecessor), SP Holdco I, Inc. and Surgery Center Holdings, Inc., each a wholly-owned subsidiary of the Company, entered into a credit agreement (the “Credit Agreement”) providing for a $1.290 billion senior secured term loan (the “Term Loan”) and a $75.0 million revolving credit facility (the “Revolver” and, together with the Term Loan, the “2017 Senior Secured Credit Facilities”).

The Term Loan was fully drawn on August 31, 2017 (Predecessor) and the proceeds thereof were used to finance the consideration paid in the NSH Merger, to repay amounts outstanding under the Company’s then-existing 2014 First Lien Credit Agreement and 2014 Revolver Loan and amounts outstanding under the existing senior secured credit facilities of NSH, and to pay fees and expenses in connection with the foregoing and transactions related to the Transaction Agreements. The Revolver may be utilized for working capital, capital expenditures and general corporate purposes. Subject to certain conditions and requirements set forth in the Credit Agreement, the Company may request one or more additional incremental term loan facilities or one or more increases in the commitments under the Revolver. As of September 30, 2017 (Successor), the Company's availability on the Revolver was $71.9 million (including outstanding letters of credit of $3.1 million).

The Term Loan will mature on August 31, 2024 (or, if at least 50.0% of the 2021 Unsecured Notes (as defined below) shall have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020). The Revolver will mature on August 31, 2022 (or, if at least 50.0% of the 2021 Notes have not either been repaid or refinanced with permitted indebtedness having a maturity date not earlier than six months after the maturity date of the Term Loan by no later than October 15, 2020, then October 15, 2020).

Interest on the 2017 Senior Secured Credit Facilities shall bear interest at a rate per annum equal to (x) LIBOR plus a margin ranging from 3.00% to 3.25% per annum, depending on the Company's first lien net leverage ratio or (y) an alternate base rate (which will be the highest of (i) the prime rate, (ii) 0.5% per annum above the federal funds effective rate and (iii) one-month LIBOR plus 1.00% per annum (solely with respect to the Term Loan, the alternate base rate shall not be less than 2.00% per annum)) plus a margin ranging from 2.00% to 2.25% per annum. In addition, the Company is required to pay a commitment fee of 0.50% per annum in respect of unused commitments under the Revolver.

The Term Loan amortizes in equal quarterly installments of 0.25% of the aggregate original principal amount of the Term Loan (such amortization payments will commence on or around the last business day of the fiscal quarter ending December 31, 2017). The Term Loan is subject to mandatory prepayments based on excess cash flow for the applicable fiscal year that will depend on the first lien net leverage ratio as of the last day of the applicable fiscal year, as well as upon the occurrence of certain other events, as described in the Credit Agreement. There were no excess cash flow payments required as of September 30, 2017 (Successor).

With respect to the Revolver, the Company is required to comply with a maximum consolidated total net leverage ratio of 9.50:1.00, which covenant will be tested quarterly on a trailing four quarter basis only if, as of the last day of the applicable fiscal quarter the Revolver is drawn in an aggregate amount greater than 35% of the total commitments under the Revolver. Such financial maintenance covenant is subject to an equity cure. The Credit Agreement includes customary negative covenants restricting or limiting the ability of the Company and its restricted subsidiaries, to, among other things, sell assets, alter its business, engage in mergers, acquisitions and other business combinations, declare dividends or redeem or repurchase equity interests, incur additional indebtedness or guarantees, make loans and investments, incur liens, enter into transactions with affiliates, prepay certain junior debt, and modify or waive certain material agreements and organizational documents, in each case, subject to customary and other agreed upon exceptions. The Credit Agreement also contains customary affirmative covenants and events of default. As of September 30, 2017 (Successor), the Company was in compliance with the covenants contained in the Credit Agreement.

The 2017 Senior Secured Credit Facilities are guaranteed, on a joint and several basis, by SP Holdco I, Inc. and each of Surgery Center Holdings, Inc.'s current and future wholly-owned domestic restricted subsidiaries (subject to certain exceptions) (the “Subsidiary Guarantors”) and are secured by a first priority security interest in substantially all of Surgery Center Holdings, Inc.'s, SP Holdco I, Inc.'s and the Subsidiary Guarantors’ assets (subject to certain exceptions).

In connection with the Term Loan and Revolver, the Company recorded debt issuance costs and discount of $18.8 million and $9.4 million, respectively, in the Predecessor period, which were eliminated with the application of pushdown accounting.

Senior Unsecured Notes due 2021

Effective March 31, 2016 (Predecessor), Surgery Center Holdings, Inc., issued $400.0 million in gross proceeds of senior unsecured notes due April 15, 2021 (the "2021 Unsecured Notes"). The 2021 Unsecured Notes bear interest at the rate of 8.875% per year, payable semi-annually on April 15 and October 15 of each year. The 2021 Unsecured Notes are a senior unsecured obligation of Surgery Center Holdings, Inc. and are guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.'s existing and future domestic wholly owned restricted subsidiaries that guarantees the 2017 Senior Secured Credit Facilities (subject to certain exceptions).

The Company may redeem up to 35% of the aggregate principal amount of the 2021 Unsecured Notes, at any time before April 15, 2018, with the net cash proceeds of certain equity offerings at a redemption price equal to 108.875% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2021 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of any such qualified equity offering.

The Company may redeem the 2021 Unsecured Notes, in whole or in part, at any time prior to April 15, 2018 at a price equal to 100.000% of the principal amount to be redeemed plus an applicable make-whole premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2021 Unsecured Notes, in whole or in part, at any time on or after April 15, 2018, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to the date of redemption:

April 15, 2018 to April 14, 2019	106.656	%
April 15, 2019 to April 14, 2020	104.438	%
April 15, 2020 and thereafter	100.000	%

If Surgery Center Holdings, Inc., experiences a change in control under certain circumstances, it must offer to purchase the notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase. The change of control as discussed in Note 1. "Organization", did not trigger repurchase.

The 2021 Unsecured Notes contain customary affirmative and negative covenants, which among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

In connection with the offering of the 2021 Unsecured Notes, the Company recorded debt issuance costs of $8.4 million in the Predecessor period, which were eliminated with the application of pushdown accounting.

Senior Unsecured Notes due 2025

Effective June 30, 2017 (Predecessor), SP Finco, LLC, a wholly owned subsidiary of Surgery Center Holdings, Inc., issued $370.0 million in gross proceeds of senior unsecured notes due July 1, 2025 (the "2025 Unsecured Notes"), which gross proceeds were deposited in an escrow account (the “Escrow Account”) established at Wilmington Trust, National Association (in such capacity, the “Escrow Agent”) in the name of the trustee under the indenture governing the 2025 Unsecured Notes (the “2025 Unsecured Notes Indenture”) on behalf of the holders of the 2025 Unsecured Notes. The 2025 Unsecured Notes bear interest at the rate of 6.750% per year, payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 2018.

In connection with the closing of the NSH Merger and the release of the proceeds from the Escrow Account, both of which occurred on August 31, 2017 (Predecessor), SP Finco, LLC merged with and into Surgery Center Holdings, Inc., with Surgery Center Holdings, Inc. surviving such merger and assuming, by operation of law, the rights and obligations of SP Finco, LLC under the 2025 Unsecured Notes and the indenture governing such notes. As of such time, the 2025 Unsecured Notes became guaranteed on a senior unsecured basis by each of Surgery Center Holdings, Inc.’s domestic wholly owned restricted subsidiaries that guarantees Surgery Center Holdings, Inc.’s senior secured credit facilities (subject to certain exceptions).

The Company may redeem up to 40% of the aggregate principal amount of the 2025 Unsecured Notes at any time prior to July 1, 2020, with the net cash proceeds of certain equity issuances at a redemption price equal to 106.750% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the date of redemption, provided that at least 50% of the aggregate principal amount of the 2025 Unsecured Notes remain outstanding immediately after the occurrence of such redemption and such redemption occurs within 180 days of the date of the closing of the applicable equity offering.

The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time prior to July 1, 2020, at a price equal to 100.000% of the principal amount to be redeemed plus the applicable premium, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time on or after July 1, 2020, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to, but excluding, the date of redemption:

July 1, 2020 to June 30, 2021	103.375	%
July 1, 2021 to June 30, 2022	101.688	%
July 1, 2022 and thereafter	100.000	%

If Surgery Center Holdings, Inc. experiences a change in control under certain circumstances, it must offer to purchase the 2025 Unsecured Notes at a purchase price equal to 101.000% of the principal amount, plus accrued and unpaid interest to, but excluding, the date of repurchase.

The 2025 Unsecured Notes contain customary affirmative and negative covenants, which, among other things, limit the Company’s ability to incur additional debt, pay dividends, create or assume liens, effect transactions with its affiliates, guarantee payment of certain debt securities, sell assets, merge, consolidate, enter into acquisitions and effect sale and leaseback transactions.

In connection with the offering of the 2025 Unsecured Notes, the Company recorded debt issuance costs of $17.3 million in the Predecessor period, which were eliminated with the application of pushdown accounting.

Subordinated Notes

On August 3, 2017 the Company redeemed in whole a subordinated debt facility of $1.0 million with a maturity date of August 4, 2017 and an interest rate of 17.00% per annum, at a price equal 100% of the $1.0 million principal amount redeemed, plus accrued and unpaid interest.

Notes Payable and Secured Loans

Certain of the Company’s subsidiaries have outstanding bank indebtedness, which is collateralized by the real estate and equipment owned by the surgical facilities to which the loans were made. The various bank indebtedness agreements contain covenants to maintain certain financial ratios and also restrict encumbrance of assets, creation of indebtedness, investing activities and payment of distributions. At September 30, 2017 (Successor), the Company was in compliance with its covenants contained in the credit agreements. The Company and its subsidiaries had notes payable to financial institutions of $113.5 million and $42.5 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively. The Company and its subsidiaries also provide a corporate guarantee of certain indebtedness of the Company’s subsidiaries.

Capital Lease Obligations

The Company is liable to various vendors for several equipment leases classified as capital leases. The carrying value of the leased assets was $19.2 million and $15.4 million as of September 30, 2017 (Successor) and December 31, 2016 (Predecessor), respectively.

XML

Redeemable Preferred Stock

9 Months Ended

Sep. 30, 2017

Temporary Equity Disclosure [Abstract]

Redeemable Preferred Stock

Redeemable Preferred Stock

On August 31, 2017, the Company issued 310,000 shares of Series A Preferred Stock to Bain at a purchase price of $1,000 per share for an aggregate purchase price of $310.0 million. The net proceeds from the Preferred Private Placement (as defined in Note 1. "Organization") were used to finance a portion of the NSH Merger.

The accrued value of the Series A Preferred Stock is convertible into shares of Common Stock at a price per share of Common Stock equal to $19.00, subject to certain adjustments as provided in the Certificate of Designations, Preferences, Rights and Limitations of the 10.00% Series A Convertible Perpetual Participating Preferred Stock of Surgery Partners, Inc. (the “Series A Certificate of Designation”), at any time at the option of the holder. In addition, the Company may require the conversion of all, but not less than all, of the Series A Preferred Stock pursuant to the terms and conditions of the Series A Certificate of Designation, after the second anniversary of the date of issuance, if the volume weighted average closing price of the Common Stock for any twenty out of thirty consecutive trading days prior to such date, equals or exceeds $42.00 per share.

The Company cannot redeem the Series A Preferred Stock prior to the fifth anniversary of its issuance and thereafter, may redeem all, but not less than all, of the Series A Preferred Stock for cash pursuant to and subject to the terms and conditions of the Series A Certificate of Designation. The holders of Series A Preferred Stock may cause the Company to redeem the Series A Preferred Stock upon the occurrence of certain change of control transactions of the Company or the Common Stock ceasing to be listed or quoted on a trading market. The Company adjusts the carrying amount of the Series A Preferred Stock to equal the redemption value at the end of each reporting period as if it were also the redemption date. Changes in the redemption value are recognized immediately as they occur.

The Series A Preferred Stock ranks senior to the Common Stock and any other capital stock of the Company with respect to dividends, redemption and any other rights upon the liquidation, dissolution or winding up of the Company, and the holders thereof are entitled to vote with the holders of Common Stock, together as a single class, on all matters submitted to a vote of the Company’s stockholders. In addition to participating in any dividends that may be declared with respect to the Common Stock on an as-converted basis, each share of Series A Preferred Stock accrues dividends daily at a dividend rate of 10.00%, compounding quarterly, and in any given quarter, subject to certain conditions, the Board of Directors of the Company may declare a cash dividend in an amount up to 50% of the amount of the dividend that has accrued and accumulated during such quarter through the end of such quarter, and the amount of any quarterly dividend paid in cash shall not compound on the applicable date and shall not be included in the accrued value of the Series A Preferred Stock. In the event of the Company’s liquidation, dissolution or winding-up (whether voluntary of involuntary), holders of Series A Preferred Stock will be entitled to receive out of the assets of the Company available for distribution to shareholders, after satisfaction of any liabilities and obligations to creditors of the Company, with respect to each Series A Preferred Share, an amount equal to the greater of (i) $1,000.00 per share, plus dividends compounded to date, plus dividends accrued but not yet compounded and (ii) the amount that a holder of one share of Common Stock would receive, assuming the Series A Preferred Stock had converted into shares of Common Stock.

In connection with the issuance of Series A Preferred Stock in the Preferred Private Placement, the Company incurred issuance costs of $18.3 million in the Predecessor period, which were eliminated with the application of pushdown accounting.

A summary of activity related to the redeemable preferred stock for the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

Successor
Balance at September 1, 2017	$	310,000
Dividends accrued	2,633
Cash dividends declared	(1,316		)
Mark to redemption adjustment	15,566
Balance at September 30, 2017	$	326,882

XML

Earnings Per Share

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Earnings Per Share

Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with ASC 260, Earnings Per Share, based on the weighted-average number of shares outstanding in each period and dilutive stock options, unvested shares and warrants, to the extent such securities exist and have a dilutive effect on earnings per share. Beginning in the Successor period, in connection with the issuance of the Series A Preferred Stock, the Company began computing basic and diluted earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation method that determines earnings per share for common shares and participating securities according to their participation rights in dividends and undistributed earnings. Refer to Note 5. "Redeemable Preferred Stock", for further disclosure of the terms and conditions, including the participation rights, of the Series A Preferred Stock.

A reconciliation of the numerator and denominator of basic and diluted earnings per share for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands except share and per share amounts):

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Numerator:
Net loss attributable to Surgery Partners, Inc.	$	(9,140	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)
Less: amounts allocated to participating securities (1)	2,633			—			—			—			—
Less: mark to redemption adjustment	15,566			—			—			—			—
Net loss attributable to common stockholders	$	(27,339	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)
Denominator:
Weighted average shares outstanding- basic	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706
Effect of dilutive securities (2)	—			—			—			—			—
Weighted average shares outstanding- diluted	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706
Loss per share:
Basic	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Diluted (2)	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Dilutive securities outstanding not included in the computation of (loss) earnings per share as their effect is antidilutive:
Stock options	—			—			586			—			345
Restricted shares	112,529			34,506			369,545			105,944			337,915
Convertible preferred stock	—			N/A			N/A			N/A			N/A

⁽¹⁾Amounts allocated to participating securities includes dividends accrued during the Successor period for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses. There were no participating securities during the Predecessor periods.

⁽²⁾The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in each period.

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2017

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Professional, General and Workers' Compensation Liability Risks

The Company is subject to claims and legal actions in the ordinary course of business, including claims relating to patient treatment, employment practices and personal injuries. To cover these claims, the Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis. Plaintiffs in these matters may request punitive or other damages that may not be covered by insurance. The Company is not aware of any such proceedings that would have a material adverse effect on the Company's business, financial position, results of operations or liquidity.

Laws and Regulations

Laws and regulations governing the Company's business, including those relating to the Medicare and Medicaid programs, are complex and subject to interpretation. These laws and regulations govern every aspect of how the Company's surgical facilities conduct their operations, from licensing requirements to how and whether the Company's facilities may receive payments pursuant to the Medicare and Medicaid programs. Compliance with such laws and regulations can be subject to future government agency review and interpretation as well as legislative changes to such laws. Noncompliance with such laws and regulations may subject the Company to significant regulatory action including fines, penalties, and exclusion from the Medicare, Medicaid and other federal healthcare programs. From time to time, governmental regulatory agencies will conduct inquiries of the Company's practices, including, but not limited to, the Company's compliance with federal and state fraud and abuse laws, billing practices and relationships with physicians. It is the Company's current practice and future intent to cooperate fully with such inquiries. The Company is not aware of any such inquiry that would have a material adverse effect on the Company's business, financial position, results of operations or liquidity. In addition, on October 23, 2017, the Company received a civil investigative demand (“CID”) from the federal government under the False Claims Act (“FCA”) for documents and information dating back to January 1, 2010 relating to the medical necessity of certain drug tests conducted by the Company’s physicians and submitted to laboratories owned and operated by the Company. The Company intends to respond to the CID and cooperate with the U.S. Attorney’s Office in connection with the FCA investigation.

Acquired Facilities

The Company, through its wholly-owned subsidiaries or controlled partnerships and limited liability companies, has acquired and will continue to acquire surgical facilities with prior operating histories. Such facilities may have unknown or contingent liabilities, including liabilities for failure to comply with healthcare laws and regulations, such as billing and reimbursement, fraud and abuse and similar anti-referral laws. Although the Company attempts to assure that no such liabilities exist, obtain indemnification from prospective sellers covering such matters and institute policies designed to conform centers to its standards following completion of acquisitions, there can be no assurance that the Company will not become liable for past activities that may later be asserted to be improper by private plaintiffs or government agencies. There can be no assurance that any such matter will be covered by indemnification or, if covered, that the liability sustained will not exceed contractual limits or the financial capacity of the indemnifying party.

The Company cannot predict whether federal or state statutory or regulatory provisions will be enacted that would prohibit or otherwise regulate relationships which the Company has established or may establish with other healthcare providers or have materially adverse effects on its business or revenues arising from such future actions. Management believes, however, that it will be able to adjust the Company's operations so as to be in compliance with any statutory or regulatory provision as may be applicable.

Potential Physician Investor Liability

A majority of the physician investors in the partnerships and limited liability companies which operate the Company's surgical facilities carry general and professional liability insurance on a claims-made basis. Each partnership or limited liability company may, however, be liable for damages to persons or property arising from occurrences at the surgical facilities. Although the various physician investors and other surgeons generally are required to obtain general and professional liability insurance with tail coverage that extends beyond the period of any claims-made policies, such individuals may not be able to obtain coverage in amounts sufficient to cover all potential liability. Since most insurance policies contain exclusions, the physician investors will not be insured against all possible occurrences. In the event of an uninsured or underinsured loss, the value of an investment in the partnership interests or limited liability company membership units and the amount of distributions could be adversely affected.

Contingent Consideration

Pursuant to a purchase agreement dated December 24, 2009 (“the Purchase Agreement”), the Company acquired controlling interests in 36 business entities in various Florida locations which operate freestanding ASCs and provided anesthesia and pain management services (“the 2009 Acquisition”). The Purchase Agreement provided for maximum potential contingent consideration of up to $10.0 million based on operating results subsequent to the acquisition for the period from January 1, 2010 to December 31, 2010. Pursuant to the Purchase Agreement, the contingent consideration is payable as principal under a Subordinated Promissory Note, the form of which was delivered concurrent with the Purchase Agreement. The balance remains outstanding due to ongoing litigation as a result of a civil claim. The Company has made indemnification claims against the seller exceeding the amount of the contingent consideration liability, which the Company has a contractual right of offset against. Based on a court order in December 2016, the Company removed the contingent consideration liability on its consolidated balance sheets at December 31, 2016 (Predecessor). On April 20, 2017, a settlement was reached between the two parties resulting in the Company receiving $3.9 million of which $2.7 million was paid from the escrow funds set up at the time of purchase and $1.2 million was paid by the seller. During the second quarter (Predecessor) the Company recorded a gain on litigation settlement of $3.8 million for the settlement amount, net of legal costs.

In connection with an acquisition during the three months ended June 30, 2016, pursuant to the applicable purchase agreement, the Company must pay consideration to the prior owners of the applicable facility should the requirements for continuing employment agreed to in the purchase agreement be met. As of September 30, 2017 (Successor), the Company estimates it may have to pay $15.7 million in future contingent acquisition compensation expense over the remaining performance periods. The contingent acquisition compensation expense is recognized as a component of general and administrative expense in the condensed consolidated statements of operations and was $1.2 million and $5.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively and $605,000 for the one month ended September 30, 2017 (Successor). For the prior year, contingent acquisition compensation expense was $1.5 million and $3.1 million for the three and nine months ended September 30 2016, respectively.

XML

Segment Reporting

9 Months Ended

Sep. 30, 2017

Segment Reporting [Abstract]

Segment Reporting

Segment Reporting

A public company is required to report annual and interim financial and descriptive information about its reportable operating segments. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or "CODM," in deciding how to allocate resources and in assessing performance.

The Company operates in three major lines of business that are also the Company's reportable operating segments - the operation of surgical facilities, the operation of optical services and the operation of ancillary services, which includes physician practices, a diagnostic laboratory and a specialty pharmacy. "All other" primarily consists of the Company's corporate general and administrative functions.

Adjusted EBITDA is the primary profit/loss metric reviewed by the CODM in making key business decisions and on allocation of resources. The segment disclosures below provide a reconciliation from Adjusted EBITDA to income before income taxes, its most directly comparable GAAP financial measure, in the reported condensed consolidated financial information.

The following tables present financial information for each reportable segment (in thousands):

	Successor		Predecessor				Predecessor
	September 1 to September 30,		July 1 to August 31,		Three Months Ended September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016		2017		2016
Revenues:
Surgical facility services	$	125,595	$	167,765	$	256,795	$	688,725	$	766,248
Ancillary services	5,775		4,409		22,684		52,261		62,967
Optical services	888		1,905		3,203		7,629		10,222
Total revenues	$	132,258	$	174,079	$	282,682	$	748,615	$	839,437

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Adjusted EBITDA:
Surgical facility services	$	20,947		$	27,726		$	53,347		$	125,912		$	153,318
Ancillary services	(1,265		)	(10,737		)	2,573			(6,526		)	9,141
Optical services	193			555			1,276			2,214			3,004
All other	(5,033		)	(9,142		)	(12,448		)	(36,036		)	(36,258		)
Total Adjusted EBITDA (1)	14,842			8,402			44,748			85,564			129,205
Net income attributable to non-controlling interests	6,492			8,813			16,672			42,087			54,392
Depreciation and amortization	(3,330		)	(7,599		)	(9,713		)	(30,124		)	(28,984		)
Interest expense, net	(15,883		)	(18,147		)	(26,475		)	(68,929		)	(74,863		)
Non-cash stock compensation expense	(1,683		)	(1,628		)	(691		)	(3,697		)	(1,326		)
Contingent acquisition compensation expense	(605		)	(1,210		)	(1,530		)	(5,057		)	(3,060		)
Merger transaction, integration and practice acquisition costs (2)	(3,457		)	(2,949		)	(2,471		)	(7,677		)	(8,579		)
Gain on litigation settlement	—			—			—			3,794			—
Gain on acquisition escrow release	—			1,000			—			1,000			—
Loss on disposal or impairment of long-lived assets, net	(333		)	(114		)	(572		)	(1,715		)	(1,697		)
Gain on amendment to tax receivable agreement	1,098			15,294			—			15,294			—
Tax receivable agreement expense	—			—			(3,733		)	—			(3,733		)
Loss on debt refinancing	—			(18,211		)	(3,595		)	(18,211		)	(11,876		)
(Loss) income before income taxes	$	(2,859	)	$	(16,349	)	$	12,640		$	12,329		$	49,479

⁽¹⁾ The above table reconciles Adjusted EBITDA to income before income taxes as reflected in the unaudited condensed consolidated statements of operations.

When the Company uses the term “Adjusted EBITDA,” it is referring to income before income taxes minus (a) net income attributable to non-controlling interests plus (b) depreciation and amortization, (c) interest expense, net, (d) non-cash stock compensation expense, (e) contingent acquisition compensation expense, (f) merger transaction, integration and practice acquisition costs, minus (g) gain on litigation settlement, (h) gain on acquisition escrow release, plus (i) loss on disposal or impairment of long-lived assets, net, minus (j) gain on amendment to tax receivable agreement, plus (k) tax receivable agreement expense and (l) loss on debt refinancing. The Company uses Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by the Company’s management to assess operating performance, make business decisions and allocate resources. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that the Company consolidates for financial reporting purposes. The Company believes that it is helpful to investors to present Adjusted EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors the Company's portion of Adjusted EBITDA generated by its surgical facilities and other operations.

Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating the Company's financial performance. The Company believes such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. The Company's calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

⁽²⁾ This amount includes merger transaction and integration costs of $3.0 million for the one month ended September 30, 2017(Successor), $2.3 million and $5.6 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $1.9 million and $6.4 million for the three and nine months ended September 30, 2016, respectively.

This amount includes practice acquisition costs of $474,000 for the one month ended September 30, 2017(Successor), $606,000 and $2.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $607,000 and $2.2 million for the three and nine months ended September 30, 2016, respectively.

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Assets:
Surgical facility services	$	3,969,584	$	1,914,842
Ancillary services	183,288		184,002
Optical services	43,451		22,478
Total	4,196,323		2,121,322
All other	405,531		183,636
Total assets	$	4,601,854	$	2,304,958

	Successor		Predecessor
	September 1 to September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016
Supplemental Information:
Cash purchases of property and equipment, net:
Surgical facility services	$	1,613	$	14,582	$	21,151
Ancillary services	2		1,875		3,450
Optical services	23		73		323
Total	$	1,638	$	16,530	$	24,924
All other	202		2,243		3,453
Total cash purchases of property and equipment, net	$	1,840	$	18,773	$	28,377

XML

Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Principles of Consolidation

Principles of Consolidation

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.

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. 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 condensed consolidated balance sheet at December 31, 2016 (Predecessor) has been derived from the audited financial statements as of that date. The information contained in these condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended December 31, 2016 (Predecessor). 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 accompanying notes. Actual results could differ from those estimates.

Non-Controlling Interests

Non-Controlling Interests

The physician limited partners and physician minority members of the entities that the Company controls are responsible for the supervision and delivery of medical services. The governance rights of limited partners and minority members are restricted to those that protect their financial interests. Under certain partnership and operating agreements governing these partnerships and limited liability companies, the Company could be removed as the sole general partner or managing member for certain events such as material breach of the partnership or operating agreement, gross negligence or bankruptcy. These protective rights do not preclude consolidation of the respective partnerships and limited liability companies.

Ownership interests in consolidated subsidiaries held by parties other than the Company are identified and generally presented in the condensed consolidated financial statements within the equity section but separate from the Company's equity. However, in instances in which certain redemption features that are not solely within the control of the Company are present, classification of non-controlling interests outside of permanent equity is required. Consolidated net income attributable to the Company and to the non-controlling interests are identified and presented on the condensed consolidated statements of operations; changes in ownership interests in which the Company retains a controlling interest are accounted for as equity transactions assuming the Company continues to consolidate related entities. Certain transactions with non-controlling interests are classified within financing activities in the condensed consolidated statements of cash flows.

The condensed consolidated financial statements of the Company include all assets, liabilities, revenues and expenses of surgical facilities in which the Company has sufficient ownership and rights to allow the Company to consolidate the surgical facilities. Similar to its investments in non-consolidated affiliates, the Company regularly engages in the purchase and sale of ownership interests with respect to its consolidated subsidiaries that do not result in a change of control.

Non-Controlling Interests — Redeemable.

Variable Interest Entities

Variable Interest Entities

The condensed consolidated financial statements include the accounts of variable interest entities in which the Company is the primary beneficiary under the provisions of ASC 810, Consolidation. As of September 30, 2017 (Successor), the variable interest entities include five surgical facilities, three anesthesia practices and three physician practices. At December 31, 2016 (Predecessor), the variable interest entities included five surgical facilities, three anesthesia practices and two physician practices. The change is due to a physician practice acquired during the three months ended June 30, 2017 (Predecessor). The Company has the power to direct the activities that most significantly impact a variable interest entity's economic performance. Additionally, the Company would absorb the majority of the expected losses from any of these entities should such expected losses occur.

Equity Method Investments

Equity Method Investments

The Company has non-consolidating investments in surgical facilities and management companies that own or manage surgical facilities. These investments are accounted for using the equity method of accounting.

Use of Estimates

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. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All adjustments are of a normal, recurring nature. Actual results could differ from those estimates.

Fair Value of Financial Instruments

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.

The fair values of the 2014 First Lien Credit Agreement, Term Loan, 2021 Unsecured Notes and the 2025 Unsecured Notes (in each case, as defined in Note 4. "Long-Term Debt") were based on a Level 2 computation using quoted prices for identical liabilities in inactive markets at September 30, 2017 (Successor) and December 31, 2016 (Predecessor), as applicable. The carrying amounts related to the Company's other long-term debt obligations, including the 2014 Revolver Loan and the Revolver (in each case, as defined in Note 4. "Long-Term Debt"), approximate their fair values.

The Company maintains a supplemental executive retirement savings plan (the "SERP") for certain executive officers. 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.

Revenues

Revenues

The Company recognizes revenues in the period in which the services are performed. Patient service revenues and receivables from third-party payors are recorded net of estimated contractual adjustments and allowances, which the Company estimates based on the historical trend of its cash collections and contractual write-offs, accounts receivable agings, established fee schedules, contracts with payors and procedure statistics.

Patient service revenues. 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 on the date of service, net of estimated contractual adjustments and discounts from third-party payors, including Medicare and Medicaid. Changes in estimated contractual adjustments and discounts are recorded in the period of change.

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. Revenue is recognized as 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. Revenue is recognized when 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. 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 services are rendered.

Cash and Cash Equivalents

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.  The Company maintains its cash and cash equivalent balances at high credit quality financial institutions.

Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts

Accounts Receivable and Allowances for Contractual Adjustments and Doubtful Accounts

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. As of September 30, 2017 (Successor), the Company had a net third-party Medicaid settlements liability of $1.4 million compared to a net third-party Medicaid settlements receivable of $454,000 at December 31, 2016 (Predecessor).

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 72 hours 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.

Inventories

Inventories

Inventories, which consist primarily of medical and drug supplies, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.

Property and Equipment

Property and Equipment

Property and equipment are stated at cost or, if obtained through acquisition, at fair value determined on the date of acquisition. Depreciation is recognized using the straight-line method over the estimated useful lives of the assets, generally three to five years for computers and software and five to seven years for furniture and equipment. Leasehold improvements are depreciated on a straight-line basis over the shorter of the lease term or the estimated useful life of the assets. Routine maintenance and repairs are expensed as incurred, while expenditures that increase capacities or extend useful lives are capitalized.

The Company also leases certain facilities and equipment under capital leases. Assets held under capital leases are stated at the present value of minimum lease payments at the inception of the related lease. Such assets are depreciated on a straight-line basis over the lesser of the lease term or the remaining useful life of the leased asset.

Goodwill and Intangible Assets

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.

Intangible Assets

The Company has indefinite-lived intangible assets related to the certificates of need held in jurisdictions where certain of its surgical facilities are located. The Company also has finite-lived intangible assets related to physician guarantee agreements, non-compete agreements, management agreements and customer relationships. Physician income guarantees are amortized into salaries and benefits costs in the condensed consolidated statements of operations over the commitment period of the contract, generally three to four years. Non-compete agreements and management rights agreements are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the service lives of the agreements, typically ranging from two to five years for non-compete agreements and 15 years for the management rights agreements. Customer relationships are amortized into depreciation and amortization expense in the condensed consolidated statements of operations over the estimated lives of the relationships, ranging from three to ten years.

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

Impairment of Long-Lived Assets, Goodwill and Intangible Assets

The Company evaluates the carrying value of long-lived assets when impairment indicators are present or when circumstances indicate that impairment may exist in accordance with Accounting Standards Codification (ASC) 350, Intangibles- Goodwill and Other. The Company performs an impairment test by preparing an expected undiscounted cash flow projection. If the projection indicates that the recorded amount of the long-lived asset is not expected to be recovered, the carrying value is reduced to estimated fair value. The cash flow projection and fair value represents management’s best estimate, using appropriate and customary assumptions, projections and methodologies, at the date of evaluation. The Company tests its goodwill and intangible assets for impairment at least annually, or more frequently if certain indicators arise. 

Operating Leases

Operating Leases

The Company leases office space and equipment for its surgical facilities, including surgical facilities under development. The lease agreements generally require the lessee, or the Company, to pay all maintenance, property taxes, utilities and insurance costs. The Company accounts for operating lease obligations and sublease income on a straight-line basis. Contingent obligations of the Company, as defined by each lease agreement, are recognized when specific contractual measures have been met, typically the result of an increase in the Consumer Price Index. Lease obligations paid in advance are recorded as prepaid rent and included in prepaid expenses and other current assets on the condensed consolidated balance sheets. The difference between actual lease payments and straight-line lease expense over the initial lease term, excluding optional renewal periods, is recorded as deferred rent and included in other current liabilities and other long-term liabilities on the condensed consolidated balance sheets.

Equity-Based Compensation

Equity-Based Compensation

Transactions in which the Company receives employee and non-employee services in exchange for the Company’s equity instruments or liabilities that are based on the fair value of the Company’s equity securities or may be settled by the issuance of these securities are accounted for using a fair value method. The Company applies the Black-Scholes-Merton method of valuation in determining share-based compensation expense for option awards. 

The Company’s policy is to recognize compensation expense using the straight line method over the relevant vesting period for units that vest based on time. In connection with the Reorganization, the Company’s board of directors and stockholders adopted the Surgery Partners, Inc. 2015 Omnibus Incentive Plan from which the Company’s future equity-based awards will be granted.

Professional, General and Workers' Compensation Insurance

Professional, General and Workers' Compensation Insurance

The Company maintains general liability and professional liability insurance in excess of self-insured retentions through third party commercial insurance carriers in amounts that management believes is sufficient for the Company's operations, although, potentially, some claims may exceed the scope of coverage in effect. The professional and general insurance coverage is on a claims-made basis. Workers' compensation insurance is on an occurrence basis.

The Company expenses the costs under the self-insured retention exposure for general and professional liability and workers compensation claims which relate to (i) claims made during the policy period, which are offset by insurance recoveries and (ii) an estimate of claims incurred but not yet reported that are expected to be reported after the policy period expires. Reserves and provisions are based upon actuarially determined estimates. The reserves are estimated using individual case-basis valuations and actuarial analysis. Reserves for professional, general and workers' compensation claim liabilities are determined with no regard for expected insurance recoveries and are presented gross on the condensed consolidated balance sheets.

Income Taxes and Tax Receivable Agreement

Income Taxes and Tax Receivable Agreement

The Company uses the asset and liability method to account for income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If a net operating loss carryforward exists, the Company makes a determination as to whether that net operating loss ("NOL") carryforward will be utilized in the future. A valuation allowance is established for certain net operating loss carryforwards when their recoverability is deemed to be uncertain. The carrying value of the net deferred tax assets assumes that the Company will be able to generate sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions. If these estimates and related assumptions change in the future, the Company may be required to adjust its deferred tax valuation allowances.

The Company and certain of its subsidiaries file a consolidated federal income tax return. The partnerships, limited liability companies, and certain non-consolidated physician practice corporations also file separate income tax returns. The Company's allocable portion of each partnership's and limited liability company's income or loss is included in taxable income of the Company. The remaining income or loss of each partnership and limited liability company is allocated to the other owners.

The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2014 or state income tax examinations for years prior to 2012.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 will require significant management judgment in addition to changing the way many companies recognize revenue in their financial statements. Additionally, and among other provisions, the New Revenue Standard requires expanded quantitative and qualitative disclosures, including disclosure about the nature, amount, timing and uncertainty of revenue. The provisions of the New Revenue Standard are effective for annual periods beginning after December 15, 2017, including interim periods within those years by applying either the full retrospective method or the modified retrospective approach upon adoption. The Company will adopt this ASU on January 1, 2018. The Company currently plans to adopt using the modified retrospective method, including providing all requisite disclosures under such method.

In preparation for the adoption of the New Revenue Standard, the Company continues to evaluate and refine its estimates of the anticipated impacts the New Revenue Standard will have on its revenue recognition policies, procedures, financial position, results of operations, cash flows, financial disclosures and control framework. Specifically, the Company is continuing to evaluate its accounting policies and internal controls under the New Revenue Standard, as well as analyzing all of the potential effects of the New Revenue Standard, particularly with respect to non-patient service revenue sources. Upon further evaluation, the Company anticipates that the majority of its 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.

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 Company believes the primary effect of adopting the new standard will be to record right-of-use assets and obligations for current operating leases.

In March 2016, the FASB issued ASU 2016-07, “Investments- Equity Method and Joint Ventures,” which allows investments that now meet equity method treatment that were previously accounted for under a different method to apply the equity method prospectively from the date the investment qualifies for equity method treatment. ASU 2016-07 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial position, results of operations, cash flows and financial disclosures.

In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments,” which clarifies the classification of certain cash receipts and cash payments on the statement of cash flows. ASU 2016-15 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the impact this new guidance may have on the condensed consolidated cash flows.

In October 2016, the FASB issued ASU 2016-17, “Interests Held through Related Parties That Are under Common Control,” which modifies existing guidance with respect to how a decision maker that holds an indirect interest in a VIE through a common control party determines whether it is the primary beneficiary of the VIE as part of the analysis of whether the VIE would need to be consolidated. Under the ASU, a decision maker would need to consider only its proportionate indirect interest in the VIE held through a common control party. Previous guidance had required the decision maker to treat the common control party’s interest in the VIE as if the decision maker held the interest itself. As a result of the ASU, in certain cases, previous consolidation conclusions may change. ASU 2016-17 is effective prospectively for fiscal years beginning after December 15, 2016, including interim periods within those years. The Company adopted this ASU on January 1, 2017. The adoption of this ASU did not have a material impact on the Company's condensed consolidated financial position, results of operations, cash flows and financial disclosures.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows: Restricted Cash,” which will require the reconciliation of restricted cash in the statement of cash flows. ASU 2016-18 is effective retrospectively for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company's condensed consolidated cash flows.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations – Clarifying the Definition of a Business,” which narrows the definition of a business when evaluating whether transactions should be accounted for as asset acquisitions or business combinations. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The adoption of this ASU will not have a material impact on the Company's condensed consolidated financial position, results of operations and cash flows.

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those years. Early adoption is permitted for annual and interim periods after January 1, 2017. The Company early adopted this ASU on January 1, 2017. The adoption of ASU 2017-04 only impacts the Company's financial statements in situations where an impairment of a reporting unit’s assets is determined.

Business Combinations

The Company accounts for its business combinations in accordance with the fundamental requirements of the acquisition method of accounting and under the premise that an acquirer can be identified for each business combination. The acquirer is the entity that obtains control of one or more businesses in the business combination and the acquisition date is the date the acquirer achieves control. The assets acquired, liabilities assumed and any non-controlling interests in the acquired business at the acquisition date are recognized at their fair values as of that date, and the direct costs incurred in connection with the business combination are recorded and expensed separately from the business combination. Any goodwill recognized is determined as the excess of the fair value of the consideration conveyed plus the fair value of any non-controlling interests in the acquisition over the fair value of the net assets acquired. Acquisitions in which the Company is able to exert significant influence but does not have control are accounted for using the equity method.

Acquired assets and assumed liabilities typically include, but are not limited to, fixed assets, intangible assets and professional liabilities. The valuations are based on appraisal reports, discounted cash flow analyses, actuarial analyses or other appropriate valuation techniques to determine the fair value of the assets acquired or liabilities assumed. Fair value attributable to non-controlling interests is based on a Level 3 computation using significant inputs that are not observable in the market. Key inputs used to determine the fair value include financial multiples used in the purchase of non-controlling interests, primarily from acquisitions of surgical facilities. Such multiples, based on earnings, are used as a benchmark for the discount to be applied for the lack of control or marketability. Fair value attributable to the property and equipment acquired is based on Level 3 computations using key inputs such as cost trend data and comparable asset sales. Fair value attributable to the intangible assets acquired is based on Level 3 computations using key inputs such as the Company's internally-prepared financial projections. Fair values assigned to acquired working capital are based on carrying amounts reported by the acquiree at the date of acquisition, which approximate their fair values.

XML

Significant Accounting Policies (Tables)

9 Months Ended

Sep. 30, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Schedule of Rollforward of Non-Controlling Interests - Redeemable

A summary of activity related to the non-controlling interests—redeemable follows (in thousands):

Predecessor
Balance at December 31, 2016	$	180,521
Net income attributable to non-controlling interests—redeemable	9,615
Acquisition and disposal of shares of non-controlling interests, net—redeemable	(3,323		)
Distributions to non-controlling interest—redeemable holders	(11,468		)
Acquisition of NSH	153,320
Balance at August 31, 2017	$	328,665
Successor
Balance at September 1, 2017	$	271,001
Net income attributable to non-controlling interests—redeemable	1,054
Acquisition and disposal of shares of non-controlling interests, net—redeemable	91
Distributions to non-controlling interest—redeemable holders	(730		)
Balance at September 30, 2017	$	271,416

Schedule of Carrying Amounts and Fair Values of Debt

A summary of the carrying amounts and fair values of the Company's long-term debt follows (in thousands):

	Successor				Predecessor
	September 30, 2017				December 31, 2016
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
2014 Revolver Loan	$	—	$	—	$	85,000	$	85,000
2014 First Lien Credit Agreement, net of debt issuance costs and discount	$	—	$	—	$	911,784	$	917,528
2017 Senior Secured Credit Facilities:
Revolver	$	—	$	—	$	—	$	—
Term Loan	$	1,283,626	$	1,267,581	$	—	$	—
Senior Unsecured Notes due 2021 (1)	$	409,821	$	429,288	$	387,942	$	412,189
Senior Unsecured Notes due 2025	$	370,000	$	346,413	$	—	$	—

⁽¹⁾ The carrying amount in the Predecessor period is net of unamortized debt issuance costs and discount, which were eliminated with the application of pushdown accounting.

Schedule of Revenues by Service Type

A summary of revenues by service type as a percentage of total revenues follows:

	Successor		Predecessor				Predecessor
	September 1 to September 30,		July 1 to August 31,		Three Months Ended September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016		2017		2016
Patient service revenues:
Surgical facilities revenues	94.0	%	95.5	%	90.4	%	91.4	%	90.6	%
Ancillary services revenues	4.2	%	2.7	%	8.0	%	7.0	%	7.5	%
	98.2	%	98.2	%	98.4	%	98.4	%	98.1	%
Other service revenues:
Optical services revenues	0.7	%	1.1	%	1.1	%	1.0	%	1.2	%
Other	1.1	%	0.7	%	0.5	%	0.6	%	0.7	%
	1.8	%	1.8	%	1.6	%	1.6	%	1.9	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Schedule of Revenue Sources for Patient Service Revenues

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
	September 1 to September 30,				July 1 to August 31,				Three Months Ended September 30,
	2017				2017				2016
	Amount		%		Amount		%		Amount		%
Patient service revenues:
Private insurance	$	72,930	56.2	%	$	80,166	46.9	%	$	140,637	50.6	%
Government	46,162		35.5	%	73,734		43.1	%	111,929		40.2	%
Self-pay	3,861		3.0	%	4,119		2.4	%	5,389		1.9	%
Other (1)	6,883		5.3	%	12,909		7.6	%	20,240		7.3	%
Total patient service revenues	$	129,836	100.0	%	$	170,928	100.0	%	$	278,195	100.0	%
Other service revenues:
Optical service revenues	$	888			$	1,905			$	3,203
Other revenues	1,534				1,246				1,284
Total net revenues	$	132,258			$	174,079			$	282,682

	Successor				Predecessor
	September 1 to September 30,				January 1 to August 31,				Nine Months Ended September 30,
	2017				2017				2016
	Amount		%		Amount		%		Amount		%
Patient service revenues:
Private insurance	$	72,930	56.2	%	$	360,092	48.9	%	$	418,798	50.9	%
Government	46,162		35.5	%	308,993		42.0	%	331,041		40.2	%
Self-pay	3,861		3.0	%	15,949		2.2	%	13,814		1.7	%
Other (1)	6,883		5.3	%	51,374		6.9	%	59,313		7.2	%
Total patient service revenues	$	129,836	100.0	%	$	736,408	100.0	%	$	822,966	100.0	%
Other service revenues:
Optical service revenues	$	888			$	7,629			$	10,222
Other revenues	1,534				4,578				6,249
Total net revenues	$	132,258			$	748,615			$	839,437

(1) Other is comprised of anesthesia service agreements, auto liability, letters of protection and other payor types.

Schedule of Prepaid Expenses and Other Current Assets

A summary of prepaid expenses and other current assets follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Prepaid expenses	$	18,418	$	11,158
Receivables - optical product purchasing organization	8,369		7,042
Insurance recoveries	2,837		2,476
Tax refund receivable	8,618		—
Other current assets	15,482		11,338
Total	$	53,724	$	32,014

Schedule of Property and Equipment

A summary of property and equipment follows (in thousands):

	Successor			Predecessor
	September 30, 2017			December 31, 2016
Land	$	20,880		$	8,082
Buildings and improvements	181,237			118,172
Furniture and equipment	14,242			14,670
Computer and software	21,708			29,902
Medical equipment	140,198			117,418
Construction in progress	13,161			2,396
Property and equipment, at cost	391,426			290,640
Less: Accumulated depreciation	(2,729		)	(86,387		)
Property and equipment, net	$	388,697		$	204,253

Schedule of Finite-Lived Intangible Assets

A summary of the activity related to intangible assets for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Predecessor
Balance at December 31, 2016	$	813		$	21,290		$	16,457		$	3,780	$	3,704		$	1,979		$	48,023
Additions	445			26,900			92			745		—			130			28,312
Recruitment expense	(380		)	—			—			—		—			—			(380		)
Amortization	—			(1,154		)	(3,715		)	—		(733		)	(438		)	(6,040		)
Balance at August 31, 2017	$	878		$	47,036		$	12,834		$	4,525	$	2,971		$	1,671		$	69,915
	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Successor
Balance at September 1, 2017	$	878		$	41,600		$	8,024		$	5,078	$	—		$	1,170		$	56,750
Additions	—			—			41			25		—			—			66
Recruitment expense	(38		)	—			—			—		—			—			(38		)
Amortization	—			(138		)	(84		)	—		—			(49		)	(271		)
Balance at September 30, 2017	$	840		$	41,462		$	7,981		$	5,103	$	—		$	1,121		$	56,507

Schedule of Indefinite-Lived Intangible Assets

A summary of the activity related to intangible assets for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Predecessor
Balance at December 31, 2016	$	813		$	21,290		$	16,457		$	3,780	$	3,704		$	1,979		$	48,023
Additions	445			26,900			92			745		—			130			28,312
Recruitment expense	(380		)	—			—			—		—			—			(380		)
Amortization	—			(1,154		)	(3,715		)	—		(733		)	(438		)	(6,040		)
Balance at August 31, 2017	$	878		$	47,036		$	12,834		$	4,525	$	2,971		$	1,671		$	69,915
	Physician Income Guarantees			Management Rights			Non-Compete Agreements			Certificates of Need		Customer Relationships			Other			Total Intangible Assets
Successor
Balance at September 1, 2017	$	878		$	41,600		$	8,024		$	5,078	$	—		$	1,170		$	56,750
Additions	—			—			41			25		—			—			66
Recruitment expense	(38		)	—			—			—		—			—			(38		)
Amortization	—			(138		)	(84		)	—		—			(49		)	(271		)
Balance at September 30, 2017	$	840		$	41,462		$	7,981		$	5,103	$	—		$	1,121		$	56,507

Schedule of Rollforward of Goodwill

A summary of activity related to goodwill for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

Predecessor
Balance at December 31, 2016	$	1,555,204
Acquisitions	858,323
Divestitures	(175		)
Purchase price adjustments	1,220
Balance at August 31, 2017	$	2,414,572
Successor
Balance at September 1, 2017	$	3,269,225
Acquisitions	1,214
Divestitures	—
Purchase price adjustments	(130		)
Balance at September 30, 2017	$	3,270,309

Schedule of Other Long-Term Assets

A summary of other long-term assets follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Notes receivable	$	2,853	$	716
Deposits	2,794		4,196
Assets of SERP	1,804		1,725
Debt issuance costs	—		1,488
Insurance recoverable	6,835		6,835
Other	4,847		1,475
Total	$	19,133	$	16,435

Schedule of Other Current Liabilities

A summary of other current liabilities follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Interest payable	$	23,777	$	19,206
Current taxes payable	6,731		2,622
Insurance liabilities	10,287		6,625
Amounts due to patients and payors	15,087		12,221
Tax receivable agreement liability	837		999
Contingent acquisition compensation liability	7,866		4,589
Contingent proceeds payable	8,618		—
Other accrued expenses	33,076		22,731
Total	$	106,279	$	68,993

Schedule of Other Long-Term Liabilities

A summary of other long-term liabilities follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Facility lease obligations	$	90,052	$	52,653
Medical malpractice liability	13,453		10,453
Liability of SERP	1,804		1,725
Unfavorable lease liability	7,893		1,671
Other long-term liabilities	3,597		9,764
Total	$	116,799	$	76,266

XML

Acquisitions and Developments (Tables)

9 Months Ended

Sep. 30, 2017

Business Combinations [Abstract]

Schedule of Assets Acquired and Liabilities Assumed

The aggregate amounts preliminarily recognized in connection with the application of pushdown accounting for each major class of assets and liabilities as of August 31, 2017 are as follows (in thousands):

Equity attributable to Surgery Partners, Inc.	720,606
Redeemable preferred stock	310,000
Fair value of non-controlling interests	955,481
Aggregate fair value	1,986,087
Net assets:
Cash and cash equivalents	214,206
Accounts receivable	257,373
Inventories	44,310
Prepaid expenses and other current assets	54,248
Acquisition escrow deposit	4,570
Property and equipment	386,086
Intangible assets	56,750
Goodwill	3,269,225
Investments in and advances to affiliates	64,243
Restricted invested assets	315
Long-term deferred tax asset	208,935
Long-term acquisition escrow deposit	19,600
Other long-term assets	19,427
Accounts payable	(64,921	)
Accrued payroll and benefits	(52,995	)
Acquisition escrow liability	(4,570	)
Other current liabilities	(83,317	)
Current maturities of long-term debt	(49,942	)
Long-term debt, less current maturities	(2,142,375	)
Long-term tax receivable agreement liability	(78,498	)
Long-term acquisition escrow liability	(19,600	)
Other long-term liabilities	(116,983	)
Total fair value of net assets	1,986,087

The aggregate amounts preliminarily recognized as of the acquisition date for each major class of assets and liabilities are as follows (in thousands):

Cash consideration	$	762,850
Fair value of non-controlling interests	325,965
Aggregate fair value of acquisition	1,088,815
Net assets acquired:
Cash and cash equivalents	51,159
Accounts receivable	76,101
Inventories	14,986
Prepaid expenses and other current assets	18,007
Property and equipment	174,374
Intangible assets	27,741
Goodwill	845,185
Investments in and advances to affiliates	29,737
Long-term deferred tax assets	28,182
Acquisition escrow deposit	19,600
Other long-term assets	5,309
Accounts payable	(29,652		)
Accrued payroll and benefits	(27,313		)
Other current liabilities	(18,355		)
Current maturities of long-term debt	(16,416		)
Long-term debt, less current maturities	(42,770		)
Acquisition escrow liability	(19,600		)
Other long-term liabilities	(47,460		)
Total fair value of net assets acquired	1,088,815

Summary of Pro Forma Information

The following pro forma combined summary of operations of the Company gives effect to using historical information of the operations of NSH as if the acquisition transaction had occurred as of January 1, 2016 (in thousands):

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Net revenues	$	132,258		$	267,013		$	415,764		$	1,122,326		$	1,235,472
Net (loss) income	(763		)	13,331			28,304			63,269			82,275
Less: Net income attributable to non-controlling interests	(6,492		)	(13,184		)	(25,207		)	(65,122		)	(78,356		)
Net (loss) income attributable to Surgery Partners, Inc.	$	(7,255	)	$	147		$	3,097		$	(1,853	)	$	3,919

XML

Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2017

Debt Disclosure [Abstract]

Summary of long-term debt

A summary of long-term debt follows (in thousands):

	Successor		Predecessor
	September 30, 2017		December 31, 2016
2014 Revolver Loan	$	—	$	85,000
2014 First Lien Credit Agreement	—		932,000
2017 Senior Secured Credit Facilities:
Revolver	—		—
Term Loan	1,283,626		—
Senior Unsecured Notes due 2021	409,821		400,000
Senior Unsecured Notes due 2025	370,000		—
Subordinated Notes	—		1,000
Notes payable and secured loans	113,547		42,521
Capital lease obligations	16,340		13,996
Less: unamortized debt issuance costs and discount	—		(32,274		)
Total debt	2,193,334		1,442,243
Less: Current maturities	48,472		27,822
Total long-term debt	$	2,144,862	$	1,414,421

Debt redemption percentages

The Company may redeem the 2025 Unsecured Notes, in whole or in part, at any time on or after July 1, 2020, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to, but excluding, the date of redemption:

July 1, 2020 to June 30, 2021	103.375	%
July 1, 2021 to June 30, 2022	101.688	%
July 1, 2022 and thereafter	100.000	%

The Company may redeem the 2021 Unsecured Notes, in whole or in part, at any time on or after April 15, 2018, at the redemption prices set forth below (expressed as a percentage of the principal amount to be redeemed), plus accrued and unpaid interest, if any, to the date of redemption:

April 15, 2018 to April 14, 2019	106.656	%
April 15, 2019 to April 14, 2020	104.438	%
April 15, 2020 and thereafter	100.000	%

XML

Redeemable Preferred Stock (Tables)

9 Months Ended

Sep. 30, 2017

Temporary Equity Disclosure [Abstract]

Activity Related to Redeemable Preferred Stock

A summary of activity related to the redeemable preferred stock for the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands):

Successor
Balance at September 1, 2017	$	310,000
Dividends accrued	2,633
Cash dividends declared	(1,316		)
Mark to redemption adjustment	15,566
Balance at September 30, 2017	$	326,882

XML

Earnings Per Share (Tables)

9 Months Ended

Sep. 30, 2017

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted

reconciliation of the numerator and denominator of basic and diluted earnings per share for the period from January 1, 2017 to August 31, 2017 (Predecessor) and the period from September 1, 2017 to September 30, 2017 (Successor) follows (in thousands except share and per share amounts):

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Numerator:
Net loss attributable to Surgery Partners, Inc.	$	(9,140	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)
Less: amounts allocated to participating securities (1)	2,633			—			—			—			—
Less: mark to redemption adjustment	15,566			—			—			—			—
Net loss attributable to common stockholders	$	(27,339	)	$	(4,444	)	$	(2,338	)	$	(11,669	)	$	(7,409	)
Denominator:
Weighted average shares outstanding- basic	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706
Effect of dilutive securities (2)	—			—			—			—			—
Weighted average shares outstanding- diluted	48,314,746			48,146,611			48,019,652			48,121,404			48,018,706
Loss per share:
Basic	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Diluted (2)	$	(0.57	)	$	(0.09	)	$	(0.05	)	$	(0.24	)	$	(0.15	)
Dilutive securities outstanding not included in the computation of (loss) earnings per share as their effect is antidilutive:
Stock options	—			—			586			—			345
Restricted shares	112,529			34,506			369,545			105,944			337,915
Convertible preferred stock	—			N/A			N/A			N/A			N/A

⁽¹⁾Amounts allocated to participating securities includes dividends accrued during the Successor period for the Series A Preferred Stock. The Series A Preferred Stock does not participate in undistributed losses. There were no participating securities during the Predecessor periods.

⁽²⁾The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in each period.

XML

Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2017

Segment Reporting [Abstract]

Reconciliation of Revenue from Segments to Consolidated

The following tables present financial information for each reportable segment (in thousands):

	Successor		Predecessor				Predecessor
	September 1 to September 30,		July 1 to August 31,		Three Months Ended September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016		2017		2016
Revenues:
Surgical facility services	$	125,595	$	167,765	$	256,795	$	688,725	$	766,248
Ancillary services	5,775		4,409		22,684		52,261		62,967
Optical services	888		1,905		3,203		7,629		10,222
Total revenues	$	132,258	$	174,079	$	282,682	$	748,615	$	839,437

Schedule of Segment Operating Income

	Successor			Predecessor						Predecessor
	September 1 to September 30,			July 1 to August 31,			Three Months Ended September 30,			January 1 to August 31,			Nine Months Ended September 30,
	2017			2017			2016			2017			2016
Adjusted EBITDA:
Surgical facility services	$	20,947		$	27,726		$	53,347		$	125,912		$	153,318
Ancillary services	(1,265		)	(10,737		)	2,573			(6,526		)	9,141
Optical services	193			555			1,276			2,214			3,004
All other	(5,033		)	(9,142		)	(12,448		)	(36,036		)	(36,258		)
Total Adjusted EBITDA (1)	14,842			8,402			44,748			85,564			129,205
Net income attributable to non-controlling interests	6,492			8,813			16,672			42,087			54,392
Depreciation and amortization	(3,330		)	(7,599		)	(9,713		)	(30,124		)	(28,984		)
Interest expense, net	(15,883		)	(18,147		)	(26,475		)	(68,929		)	(74,863		)
Non-cash stock compensation expense	(1,683		)	(1,628		)	(691		)	(3,697		)	(1,326		)
Contingent acquisition compensation expense	(605		)	(1,210		)	(1,530		)	(5,057		)	(3,060		)
Merger transaction, integration and practice acquisition costs (2)	(3,457		)	(2,949		)	(2,471		)	(7,677		)	(8,579		)
Gain on litigation settlement	—			—			—			3,794			—
Gain on acquisition escrow release	—			1,000			—			1,000			—
Loss on disposal or impairment of long-lived assets, net	(333		)	(114		)	(572		)	(1,715		)	(1,697		)
Gain on amendment to tax receivable agreement	1,098			15,294			—			15,294			—
Tax receivable agreement expense	—			—			(3,733		)	—			(3,733		)
Loss on debt refinancing	—			(18,211		)	(3,595		)	(18,211		)	(11,876		)
(Loss) income before income taxes	$	(2,859	)	$	(16,349	)	$	12,640		$	12,329		$	49,479

⁽¹⁾ The above table reconciles Adjusted EBITDA to income before income taxes as reflected in the unaudited condensed consolidated statements of operations.

When the Company uses the term “Adjusted EBITDA,” it is referring to income before income taxes minus (a) net income attributable to non-controlling interests plus (b) depreciation and amortization, (c) interest expense, net, (d) non-cash stock compensation expense, (e) contingent acquisition compensation expense, (f) merger transaction, integration and practice acquisition costs, minus (g) gain on litigation settlement, (h) gain on acquisition escrow release, plus (i) loss on disposal or impairment of long-lived assets, net, minus (j) gain on amendment to tax receivable agreement, plus (k) tax receivable agreement expense and (l) loss on debt refinancing. The Company uses Adjusted EBITDA as a measure of financial performance. Adjusted EBITDA is a key measure used by the Company’s management to assess operating performance, make business decisions and allocate resources. Non-controlling interests represent the interests of third parties, such as physicians, and in some cases, healthcare systems that own an interest in surgical facilities that the Company consolidates for financial reporting purposes. The Company believes that it is helpful to investors to present Adjusted EBITDA as defined above because it excludes the portion of net income attributable to these third-party interests and clarifies for investors the Company's portion of Adjusted EBITDA generated by its surgical facilities and other operations.

Adjusted EBITDA is not a measurement of financial performance under GAAP, and should not be considered in isolation or as a substitute for net income, operating income or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from Adjusted EBITDA are significant components in understanding and evaluating the Company's financial performance. The Company believes such adjustments are appropriate, as the magnitude and frequency of such items can vary significantly and are not related to the assessment of normal operating performance. The Company's calculation of Adjusted EBITDA may not be comparable to similarly titled measures reported by other companies.

⁽²⁾ This amount includes merger transaction and integration costs of $3.0 million for the one month ended September 30, 2017(Successor), $2.3 million and $5.6 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $1.9 million and $6.4 million for the three and nine months ended September 30, 2016, respectively.

This amount includes practice acquisition costs of $474,000 for the one month ended September 30, 2017(Successor), $606,000 and $2.1 million for the two and eight months ended August 31, 2017 (Predecessor), respectively, and $607,000 and $2.2 million for the three and nine months ended September 30, 2016,

Reconciliation of Assets from Segment to Consolidated

	Successor		Predecessor
	September 30, 2017		December 31, 2016
Assets:
Surgical facility services	$	3,969,584	$	1,914,842
Ancillary services	183,288		184,002
Optical services	43,451		22,478
Total	4,196,323		2,121,322
All other	405,531		183,636
Total assets	$	4,601,854	$	2,304,958

Schedule of Other Segment Reporting Information

	Successor		Predecessor
	September 1 to September 30,		January 1 to August 31,		Nine Months Ended September 30,
	2017		2017		2016
Supplemental Information:
Cash purchases of property and equipment, net:
Surgical facility services	$	1,613	$	14,582	$	21,151
Ancillary services	2		1,875		3,450
Optical services	23		73		323
Total	$	1,638	$	16,530	$	24,924
All other	202		2,243		3,453
Total cash purchases of property and equipment, net	$	1,840	$	18,773	$	28,377

XML

Organization (Details)	Aug. 31, 2017 $ / shares shares	Oct. 01, 2015 $ / shares shares	Sep. 30, 2017 surgical_facility state $ / shares shares	May 09, 2017 $ / shares	Sep. 30, 2015 shares
Product Information [Line Items]
Common stock, shares issued (shares) | shares			48,769,296
Preferred stock, par value (in USD per share)			$ 0.01
Common stock, par value (in USD per share)			$ 0.01
Number of States in which entity operates | state			32
Number of surgical facilities owned | surgical_facility			124
Number of surgical facilities owned, majority interest | surgical_facility			85
Number of surgical facilities owned, consolidated | surgical_facility			109
Facilities, Ambulatory Surgery Centers
Product Information [Line Items]
Number of surgical facilities owned | surgical_facility			104
Facilities, Surgical Hospitals
Product Information [Line Items]
Number of surgical facilities owned | surgical_facility			20
Facilities, Physician Clinics
Product Information [Line Items]
Number of surgical facilities owned | surgical_facility			60
IPO
Product Information [Line Items]
Stock issued during period (shares) | shares		14,285,000
Share price (in USD per share)		$ 19.00
Surgery Center Holdings, LLC
Product Information [Line Items]
Common stock, shares issued (shares) | shares					33,871,990
BCPE Seminole Holdings LP | Majority Shareholder
Product Information [Line Items]
Stock expected to be sold by investor (in shares) | shares	26,455,651
Common stock, par value (in USD per share)	$ 0.01
Stock expected to be sold by investor, price per share (in USD per share)	$ 19.00
Voting interests acquired	65.70%
BCPE Seminole Holdings LP | Common Stock | Majority Shareholder
Product Information [Line Items]
Voting interests acquired	54.20%
BCPE Seminole Holdings LP | Preferred Class A | Preferred Stock
Product Information [Line Items]
Stock issued during period (shares) | shares	310,000
Preferred stock, par value (in USD per share)				$ 0.01
Preferred stock dividend rate	10.00%
Purchase price per share (in USD per share)	$ 1,000

XML

Significant Accounting Policies - Schedule of Non-Controlling Interests - Redeemable (Details) - USD ($) $ in Thousands	1 Months Ended	8 Months Ended
	Sep. 30, 2017	Aug. 31, 2017
Non-Controlling Interests - Redeemable [Roll Forward]
Beginning balance	$ 271,001
Net income attributable to non-controlling interests—redeemable	1,054
Acquisition and disposal of shares of non-controlling interests, net—redeemable	91
Distributions to non-controlling interest—redeemable holders	(730)
Ending balance	271,416	$ 271,001
Predecessor
Non-Controlling Interests - Redeemable [Roll Forward]
Beginning balance	$ 328,665	180,521
Net income attributable to non-controlling interests—redeemable		9,615
Acquisition and disposal of shares of non-controlling interests, net—redeemable		(3,323)
Distributions to non-controlling interest—redeemable holders		(11,468)
Acquisition of NSH		153,320
Ending balance		$ 328,665

XML

Significant Accounting Policies - Variable Interest Entities (Details) $ in Millions				3 Months Ended	12 Months Ended
	Sep. 30, 2017 USD ($) Anesthesia_Practice	Sep. 30, 2017 USD ($) surgical_facility	Sep. 30, 2017 USD ($) Practice	Jun. 30, 2017 Practice	Dec. 31, 2016 USD ($) Anesthesia_Practice	Dec. 31, 2016 USD ($) surgical_facility	Dec. 31, 2016 USD ($) Practice
Variable Interest Entity [Line Items]
Number of facilities included in VIE	3	5	3
Variable Interest Entity, Primary Beneficiary, Aggregated Disclosure
Variable Interest Entity [Line Items]
Total assets related to VIE	$ 90.1	$ 90.1	$ 90.1
Total liabilities related to VIE	$ 8.0	$ 8.0	$ 8.0
Predecessor
Variable Interest Entity [Line Items]
Number of facilities included in VIE					3	5	2
Number of physician practices acquired | Practice				1
Predecessor | Variable Interest Entity, Primary Beneficiary, Aggregated Disclosure
Variable Interest Entity [Line Items]
Total assets related to VIE					$ 99.5	$ 99.5	$ 99.5
Total liabilities related to VIE					$ 10.7	$ 10.7	$ 10.7

XML

Significant Accounting Policies - Equity Method Investments (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Schedule of Equity Method Investments [Line Items]
Investments in and advances to affiliates	$ 64,427
Predecessor
Schedule of Equity Method Investments [Line Items]
Investments in and advances to affiliates		$ 34,980

XML

Significant Accounting Policies - Schedule of Carrying Amount and Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
2017 Senior Secured Credit Facility - Term Loan | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	$ 1,283,626
2017 Senior Secured Credit Facility - Term Loan | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	1,267,581
Senior Unsecured Notes Due 2021 | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	409,821
Senior Unsecured Notes Due 2021 | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	409,821
Senior Unsecured Notes Due 2021 | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	429,288
Senior Unsecured Notes Due 2025 | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	370,000
Senior Unsecured Notes Due 2025 | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	370,000
Senior Unsecured Notes Due 2025 | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	346,413
Revolving Credit Facility | Line of Credit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	0
Revolving Credit Facility | 2014 Revolver Loan | Carrying Amount | Line of Credit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	0
Revolving Credit Facility | 2014 Revolver Loan | Fair Value | Line of Credit | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	0
Revolving Credit Facility | 2014 First Lien Credit Agreement | Carrying Amount | Line of Credit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	0
Revolving Credit Facility | 2014 First Lien Credit Agreement | Fair Value | Line of Credit | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	0
Revolving Credit Facility | 2017 Senior Secured Credit Facility - Revolver | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	0
Revolving Credit Facility | 2017 Senior Secured Credit Facility - Revolver | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt	$ 0
Predecessor | 2017 Senior Secured Credit Facility - Term Loan | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		$ 0
Predecessor | 2017 Senior Secured Credit Facility - Term Loan | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		0
Predecessor | Senior Unsecured Notes Due 2021 | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		400,000
Predecessor | Senior Unsecured Notes Due 2021 | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		387,942
Predecessor | Senior Unsecured Notes Due 2021 | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		412,189
Predecessor | Senior Unsecured Notes Due 2025 | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		0
Predecessor | Senior Unsecured Notes Due 2025 | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		0
Predecessor | Senior Unsecured Notes Due 2025 | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		0
Predecessor | Revolving Credit Facility | Line of Credit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		85,000
Predecessor | Revolving Credit Facility | 2014 Revolver Loan | Carrying Amount | Line of Credit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		85,000
Predecessor | Revolving Credit Facility | 2014 Revolver Loan | Fair Value | Line of Credit | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		85,000
Predecessor | Revolving Credit Facility | 2014 First Lien Credit Agreement | Carrying Amount | Line of Credit
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		911,784
Predecessor | Revolving Credit Facility | 2014 First Lien Credit Agreement | Fair Value | Line of Credit | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		917,528
Predecessor | Revolving Credit Facility | 2017 Senior Secured Credit Facility - Revolver | Carrying Amount | Senior Notes
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		0
Predecessor | Revolving Credit Facility | 2017 Senior Secured Credit Facility - Revolver | Fair Value | Senior Notes | Fair Value, Inputs, Level 2
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Long-term debt		$ 0

XML

Significant Accounting Policies - Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets of SERP	$ 1,804
Liability of SERP	1,804
Fair Value, Inputs, Level 1
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets of SERP	1,800
Liability of SERP	$ 1,800
Predecessor
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets of SERP		$ 1,725
Liability of SERP		1,725
Predecessor | Fair Value, Inputs, Level 1
Fair Value, Balance Sheet Grouping, Financial Statement Captions [Line Items]
Assets of SERP		1,700
Liability of SERP		$ 1,700

XML

Significant Accounting Policies - Schedule of Revenues by Service Type (Details) - USD ($)	1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Revenue from External Customer [Line Items]
Increase of revenue as result of changes in estimates to third-party settlements related to prior years	$ 0
Revenue Source | Revenue
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues	100.00%
Revenue Source | Revenue | Healthcare Organization, Patient Service
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues	98.20%
Revenue Source | Revenue | Surgical Facility Services
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues	94.00%
Revenue Source | Revenue | Ancillary Services
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues	4.20%
Revenue Source | Revenue | Healthcare Organization, Other Service
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues	1.80%
Revenue Source | Revenue | Optical Services
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues	0.70%
Revenue Source | Revenue | Other
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues	1.10%
Predecessor
Revenue from External Customer [Line Items]
Increase of revenue as result of changes in estimates to third-party settlements related to prior years		$ 630,000		$ 1,100,000
Predecessor | Revenue Source | Revenue
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues		100.00%	100.00%	100.00%	100.00%
Predecessor | Revenue Source | Revenue | Healthcare Organization, Patient Service
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues		98.20%	98.40%	98.40%	98.10%
Predecessor | Revenue Source | Revenue | Surgical Facility Services
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues		95.50%	90.40%	91.40%	90.60%
Predecessor | Revenue Source | Revenue | Ancillary Services
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues		2.70%	8.00%	7.00%	7.50%
Predecessor | Revenue Source | Revenue | Healthcare Organization, Other Service
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues		1.80%	1.60%	1.60%	1.90%
Predecessor | Revenue Source | Revenue | Optical Services
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues		1.10%	1.10%	1.00%	1.20%
Predecessor | Revenue Source | Revenue | Other
Revenue from External Customer [Line Items]
Service revenues as a percentage of total revenues		0.70%	0.50%	0.60%	0.70%

XML

Significant Accounting Policies - Schedule of Revenues by Sources (Details) - USD ($) $ in Thousands	1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Total net revenues	$ 132,258
Healthcare Organization, Patient Service
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues	$ 129,836
Healthcare Organization, Patient Service | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues	100.00%
Healthcare Organization, Patient Service | Private insurance
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues	$ 72,930
Healthcare Organization, Patient Service | Private insurance | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues	56.20%
Healthcare Organization, Patient Service | Government
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues	$ 46,162
Healthcare Organization, Patient Service | Government | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues	35.50%
Healthcare Organization, Patient Service | Self-pay
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues	$ 3,861
Healthcare Organization, Patient Service | Self-pay | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues	3.00%
Healthcare Organization, Patient Service | Other
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues	$ 6,883
Healthcare Organization, Patient Service | Other | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues	5.30%
Optical Services
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Other service revenues	$ 888
Other
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Other service revenues	$ 1,534
Predecessor
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Total net revenues		$ 174,079	$ 282,682	$ 748,615	$ 839,437
Increase in accounts receivable reserves		15,600
Predecessor | Healthcare Organization, Patient Service
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues		$ 170,928	$ 278,195	$ 736,408	$ 822,966
Predecessor | Healthcare Organization, Patient Service | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues		100.00%	100.00%	100.00%	100.00%
Predecessor | Healthcare Organization, Patient Service | Private insurance
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues		$ 80,166	$ 140,637	$ 360,092	$ 418,798
Predecessor | Healthcare Organization, Patient Service | Private insurance | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues		46.90%	50.60%	48.90%	50.90%
Predecessor | Healthcare Organization, Patient Service | Government
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues		$ 73,734	$ 111,929	$ 308,993	$ 331,041
Predecessor | Healthcare Organization, Patient Service | Government | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues		43.10%	40.20%	42.00%	40.20%
Predecessor | Healthcare Organization, Patient Service | Self-pay
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues		$ 4,119	$ 5,389	$ 15,949	$ 13,814
Predecessor | Healthcare Organization, Patient Service | Self-pay | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues		2.40%	1.90%	2.20%	1.70%
Predecessor | Healthcare Organization, Patient Service | Other
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Patient service revenues		$ 12,909	$ 20,240	$ 51,374	$ 59,313
Predecessor | Healthcare Organization, Patient Service | Other | Customer | Revenue
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Service revenues as a percentage of total revenues		7.60%	7.30%	6.90%	7.20%
Predecessor | Optical Services
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Other service revenues		$ 1,905	$ 3,203	$ 7,629	$ 10,222
Predecessor | Other
Health Care Organization, Receivable and Revenue Disclosures [Line Items]
Other service revenues		$ 1,246	$ 1,284	$ 4,578	$ 6,249

XML

Significant Accounting Policies - Accounts Receivable (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Accounts, Notes, Loans and Financing Receivable [Line Items]
Third-Party Medicaid settlement liability	$ 1,400
Optical products receivable	$ 8,369
Predecessor
Accounts, Notes, Loans and Financing Receivable [Line Items]
Third-Party Medicaid settlement receivable		$ 454
Optical products receivable		$ 7,042

XML

Significant Accounting Policies - Schedule of Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Schedule Of Prepaid Expenses And Other Current Assets [Line Items]
Prepaid expenses	$ 18,418
Receivables - optical product purchasing organization	8,369
Insurance recoveries	2,837
Tax refund receivable	8,618
Other current assets	15,482
Total	$ 53,724
Predecessor
Schedule Of Prepaid Expenses And Other Current Assets [Line Items]
Prepaid expenses		$ 11,158
Receivables - optical product purchasing organization		7,042
Insurance recoveries		2,476
Tax refund receivable		0
Other current assets		11,338
Total		$ 32,014

XML

Significant Accounting Policies - Property and Equipment (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2017	Dec. 31, 2016
Schedule of Property, Plant and Equipment
Property and equipment, gross	$ 391,426
Less: accumulated depreciation	(2,729)
Property and equipment, net	388,697
Carrying value of assets under capital lease	19,200
Accumulated depreciation of assets under capital lease	(700)
Land
Schedule of Property, Plant and Equipment
Property and equipment, gross	20,880
Buildings and improvements
Schedule of Property, Plant and Equipment
Property and equipment, gross	181,237
Furniture and equipment
Schedule of Property, Plant and Equipment
Property and equipment, gross	$ 14,242
Furniture and equipment | Minimum
Property, Plant and Equipment [Line Items]
Property, and equipment useful life	5 years
Furniture and equipment | Maximum
Property, Plant and Equipment [Line Items]
Property, and equipment useful life	7 years
Computer and software
Schedule of Property, Plant and Equipment
Property and equipment, gross	$ 21,708
Computer and software | Minimum
Property, Plant and Equipment [Line Items]
Property, and equipment useful life	3 years
Computer and software | Maximum
Property, Plant and Equipment [Line Items]
Property, and equipment useful life	5 years
Medical equipment
Schedule of Property, Plant and Equipment
Property and equipment, gross	$ 140,198
Construction in progress
Schedule of Property, Plant and Equipment
Property and equipment, gross	$ 13,161
Predecessor
Schedule of Property, Plant and Equipment
Property and equipment, gross		$ 290,640
Less: accumulated depreciation		(86,387)
Property and equipment, net		204,253
Carrying value of assets under capital lease		15,400
Accumulated depreciation of assets under capital lease		(11,600)
Predecessor | Land
Schedule of Property, Plant and Equipment
Property and equipment, gross		8,082
Predecessor | Buildings and improvements
Schedule of Property, Plant and Equipment
Property and equipment, gross		118,172
Predecessor | Furniture and equipment
Schedule of Property, Plant and Equipment
Property and equipment, gross		14,670
Predecessor | Computer and software
Schedule of Property, Plant and Equipment
Property and equipment, gross		29,902
Predecessor | Medical equipment
Schedule of Property, Plant and Equipment
Property and equipment, gross		117,418
Predecessor | Construction in progress
Schedule of Property, Plant and Equipment
Property and equipment, gross		$ 2,396

XML

Significant Accounting Policies - Schedule of Intangible Assets (Details) - USD ($) $ in Thousands	1 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2017
Intangible Assets [Roll Forward]
Beginning balance	$ 56,750
Additions	66
Recruitment expense	(38)
Amortization	(271)
Ending balance	56,507	$ 56,750	$ 56,507
Certificates of Need
Intangible Assets [Roll Forward]
Beginning balance	5,078
Additions	25
Ending balance	5,103	5,078	5,103
Physician Income Guarantees
Intangible Assets [Roll Forward]
Beginning balance	878
Additions	0
Recruitment expense	(38)
Ending balance	840	878	$ 840
Physician Income Guarantees | Minimum
Intangible Assets [Line Items]
Intangible asset useful life			3 years
Physician Income Guarantees | Maximum
Intangible Assets [Line Items]
Intangible asset useful life			4 years
Management Rights
Intangible Assets [Line Items]
Intangible asset useful life			15 years
Intangible Assets [Roll Forward]
Beginning balance	41,600
Additions	0
Amortization	(138)
Ending balance	41,462	41,600	$ 41,462
Non-Compete Agreements
Intangible Assets [Roll Forward]
Beginning balance	8,024
Additions	41
Amortization	(84)
Ending balance	7,981	8,024	$ 7,981
Non-Compete Agreements | Minimum
Intangible Assets [Line Items]
Intangible asset useful life			2 years
Non-Compete Agreements | Maximum
Intangible Assets [Line Items]
Intangible asset useful life			5 years
Customer Relationships
Intangible Assets [Roll Forward]
Beginning balance	0
Additions	0
Amortization	0
Ending balance	0	0	$ 0
Customer Relationships | Minimum
Intangible Assets [Line Items]
Intangible asset useful life			3 years
Customer Relationships | Maximum
Intangible Assets [Line Items]
Intangible asset useful life			10 years
Other
Intangible Assets [Roll Forward]
Beginning balance	1,170
Additions	0
Amortization	(49)
Ending balance	1,121	1,170	$ 1,121
Predecessor
Intangible Assets [Roll Forward]
Beginning balance	69,915	48,023	48,023
Additions		28,312
Recruitment expense		(380)
Amortization		(6,040)
Ending balance		69,915
Predecessor | Certificates of Need
Intangible Assets [Roll Forward]
Beginning balance	4,525	3,780	3,780
Additions		745
Ending balance		4,525
Predecessor | Physician Income Guarantees
Intangible Assets [Roll Forward]
Beginning balance	878	813	813
Additions		445
Recruitment expense		(380)
Ending balance		878
Predecessor | Management Rights
Intangible Assets [Roll Forward]
Beginning balance	47,036	21,290	21,290
Additions		26,900
Amortization		(1,154)
Ending balance		47,036
Predecessor | Non-Compete Agreements
Intangible Assets [Roll Forward]
Beginning balance	12,834	16,457	16,457
Additions		92
Amortization		(3,715)
Ending balance		12,834
Predecessor | Customer Relationships
Intangible Assets [Roll Forward]
Beginning balance	2,971	3,704	3,704
Amortization		(733)
Ending balance		2,971
Predecessor | Other
Intangible Assets [Roll Forward]
Beginning balance	$ 1,671	1,979	$ 1,979
Additions		130
Amortization		(438)
Ending balance		$ 1,671

XML

Significant Accounting Policies - Schedule of Rollforward of Goodwill (Details) - USD ($) $ in Thousands	1 Months Ended	8 Months Ended
	Sep. 30, 2017	Aug. 31, 2017
Goodwill [Roll Forward]
Goodwill, beginning of period	$ 3,269,225
Acquisitions	1,214
Divestitures	0
Purchase price adjustments	(130)
Goodwill, end of period	3,270,309	$ 3,269,225
Predecessor
Goodwill [Roll Forward]
Goodwill, beginning of period	$ 2,414,572	1,555,204
Acquisitions		858,323
Divestitures		(175)
Purchase price adjustments		1,220
Goodwill, end of period		$ 2,414,572

XML

Significant Accounting Policies - Restricted Invested Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted invested assets	$ 315
Chesterfield, Missouri facility
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted invested assets	$ 315
Predecessor
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted invested assets		$ 315
Predecessor | Chesterfield, Missouri facility
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted invested assets		$ 315

XML

Significant Accounting Policies - Schedule of Other Long-Term Assets (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Other Assets, Noncurrent [Line Items]
Notes receivable	$ 2,853
Deposits	2,794
Assets of SERP	1,804
Debt issuance costs	0
Insurance recoverable	6,835
Other	4,847
Total	$ 19,133
Predecessor
Other Assets, Noncurrent [Line Items]
Notes receivable		$ 716
Deposits		4,196
Assets of SERP		1,725
Debt issuance costs		1,488
Insurance recoverable		6,835
Other		1,475
Total		$ 16,435

XML

Significant Accounting Policies - Schedule of Other Current Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Other Liabilities, Current [Line Items]
Interest payable	$ 23,777
Current taxes payable	6,731
Insurance liabilities	10,287
Amounts due to patients and payors	15,087
Tax receivable agreement liability	837
Contingent acquisition compensation liability	7,866
Contingent proceeds payable	8,618
Other accrued expenses	33,076
Total	$ 106,279
Predecessor
Other Liabilities, Current [Line Items]
Interest payable		$ 19,206
Current taxes payable		2,622
Insurance liabilities		6,625
Amounts due to patients and payors		12,221
Tax receivable agreement liability		999
Contingent acquisition compensation liability		4,589
Contingent proceeds payable		0
Other accrued expenses		22,731
Total		$ 68,993

XML

Significant Accounting Policies - Schedule of Other Long-Term Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Capital Leased Assets [Line Items]
Facility lease obligations	$ 90,052
Medical malpractice liability	13,453
Liability of SERP	1,804
Unfavorable lease liability	7,893
Other long-term liabilities	3,597
Total	116,799
Capital lease obligations	16,340
Idaho Falls, Idaho, Surgical Hospital
Capital Leased Assets [Line Items]
Current portion of lease obligation	1,500
Capital lease obligations	$ 90,100
Predecessor
Capital Leased Assets [Line Items]
Facility lease obligations		$ 52,653
Medical malpractice liability		10,453
Liability of SERP		1,725
Unfavorable lease liability		1,671
Other long-term liabilities		9,764
Total		76,266
Capital lease obligations		13,996
Predecessor | Idaho Falls, Idaho, Surgical Hospital
Capital Leased Assets [Line Items]
Current portion of lease obligation		1,300
Capital lease obligations		$ 52,700

XML

Significant Accounting Policies - Professional, General and Workers' Compensation Insurance (Details) - USD ($) $ in Millions	Sep. 30, 2017	Dec. 31, 2016
Liability for Claims and Claims Adjustment Expense [Line Items]
Professional, general and workers' compensation insurance reserve	$ 16.6
Estimated insurance recoveries	$ 9.1
Predecessor
Liability for Claims and Claims Adjustment Expense [Line Items]
Professional, general and workers' compensation insurance reserve		$ 13.8
Estimated insurance recoveries		$ 9.3

XML

Significant Accounting Policies - Income Taxes and Tax Receivable Agreement (Details) - USD ($) $ in Millions		1 Months Ended	2 Months Ended	8 Months Ended	9 Months Ended
	Sep. 08, 2017	Sep. 30, 2017	Aug. 31, 2017	Aug. 31, 2017	Sep. 30, 2017	Dec. 31, 2015
Income Tax Contingency [Line Items]
Gain on amendment of TRA		$ 1.1
Effective tax rate					38.00%
Long-term tax receivable agreement liability		120.5			$ 120.5
Former Chief Executive Officer
Income Tax Contingency [Line Items]
Interest in future payments assigned	50.00%
Payments to related parties	$ 5.1
Employees
Income Tax Contingency [Line Items]
Payments to related parties		$ 4.8
Interest in future cash payments purchased		100.00%
Predecessor
Income Tax Contingency [Line Items]
Reduction in carrying value of TRA			$ 43.9	$ 43.9
Gain on amendment of TRA			15.3	15.3
Long-term tax receivable agreement liability						$ 123.4
Predecessor | Pushdown Accounting
Income Tax Contingency [Line Items]
Reduction to goodwill			$ 28.6	$ 28.6
Materially More Restrictive | LIBOR
Income Tax Contingency [Line Items]
Interest accrued on payment under Tax Receivable Agreement, basis spread on variable rate					5.00%
Not Materially More Restrictive | LIBOR
Income Tax Contingency [Line Items]
Interest accrued on payment under Tax Receivable Agreement, basis spread on variable rate					3.00%

XML

Acquisitions and Developments - Additional Information (Details) $ / shares in Units, $ in Thousands					1 Months Ended	2 Months Ended	3 Months Ended			8 Months Ended	9 Months Ended
	Aug. 31, 2017 USD ($) Anesthesia_Practice $ / shares	Aug. 31, 2017 USD ($) surgical_facility $ / shares	Aug. 31, 2017 USD ($) $ / shares	Aug. 31, 2017 USD ($) surgical_hospital $ / shares	Sep. 30, 2017 USD ($) Practice	Aug. 31, 2017 USD ($) $ / shares	Sep. 30, 2017 USD ($)	Jun. 30, 2017 Practice	Sep. 30, 2016 USD ($)	Aug. 31, 2017 USD ($) Practice $ / shares	Sep. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)
Business Acquisition [Line Items]
Payments for acquisitions, net of cash acquired					$ 1,163
Merger transaction and integration costs					2,983		$ 2,300		$ 1,900	$ 5,600	$ 6,400
Merger and integration costs					3,457					2,400
Loss on debt refinancing costs										16,400
Net loss attributable to Surgery Partners, Inc.					(9,140)
Gain on amendment of TRA					1,100
Loss on debt refinancing					0
Goodwill	$ 3,269,225	$ 3,269,225	$ 3,269,225	$ 3,269,225	3,270,309	$ 3,269,225	3,270,309			3,269,225
HIG | Bain Capital
Business Acquisition [Line Items]
Goodwill expected to be deductible for tax	$ 360,500	$ 360,500	$ 360,500	$ 360,500		$ 360,500				$ 360,500
Purchase price of acquisition (in USD per share) | $ / shares	$ 19.00	$ 19.00	$ 19.00	$ 19.00		$ 19.00				$ 19.00
Cash consideration			$ 502,700
Equity interest prior to acquisition	54.20%	54.20%	54.20%	54.20%		54.20%				54.20%
Equity interest subsequent to acquisition	65.70%	65.70%	65.70%	65.70%		65.70%				65.70%
Goodwill	$ 3,269,225	$ 3,269,225	$ 3,269,225	$ 3,269,225		$ 3,269,225				$ 3,269,225
Business acquisition total purchase price			1,986,087
HIG | Bain Capital | Surgical Facility Services
Business Acquisition [Line Items]
Goodwill	3,084,000	3,084,000	3,084,000	3,084,000		3,084,000				3,084,000
HIG | Bain Capital | Ancillary Services
Business Acquisition [Line Items]
Goodwill	152,100	152,100	152,100	152,100		152,100				152,100
HIG | Bain Capital | Optical Services
Business Acquisition [Line Items]
Goodwill	32,800	32,800	32,800	32,800		32,800				32,800
NSH
Business Acquisition [Line Items]
Revenues					34,000
Net loss attributable to Surgery Partners, Inc.					3,400
Transaction costs					3,000
Gain on amendment of TRA					$ 1,100
2017 Physician Practice Acquisitions
Business Acquisition [Line Items]
Number of businesses acquired | Practice					1
Endoscopy Practice Acquisitions, 2017
Business Acquisition [Line Items]
Number of businesses acquired | Practice					1
Physician And Endoscopy Practice Acquisitions, 2017
Business Acquisition [Line Items]
Goodwill					$ 1,200		1,200
Net assets acquired					101		101
Business acquisition total purchase price					1,200
Predecessor
Business Acquisition [Line Items]
Payments for acquisitions, net of cash acquired										725,853	126,018
Merger transaction and integration costs						2,343			1,864	5,584	6,361
Merger and integration costs						2,949			2,471	7,677	8,579
Net loss attributable to Surgery Partners, Inc.						(4,444)			(2,338)	(11,669)	(7,409)
Gain on amendment of TRA						15,300				15,300
Loss on debt refinancing						18,211			3,595	18,211	11,876
Goodwill	2,414,572	2,414,572	2,414,572	2,414,572		2,414,572				2,414,572		$ 1,555,204
Number of businesses acquired in existing market | Practice								1
Predecessor | NSH
Business Acquisition [Line Items]
Payments for acquisitions, net of cash acquired			711,700
Funded to escrow	$ 19,600	$ 19,600	19,600	$ 19,600		19,600				19,600
Number of businesses acquired	7	22		15
Merger transaction and integration costs						82,600				82,600
Deferred financing costs	$ 45,500	$ 45,500	45,500	$ 45,500		45,500				45,500
Deferred equity issuance costs	(18,300)	(18,300)	(18,300)	(18,300)		(18,300)				(18,300)
Merger and integration costs						2,400
Loss on debt refinancing costs						16,400
Goodwill expected to be deductible for tax					$ 153,500		$ 153,500
Transaction costs						11,300				5,700
Gain on amendment of TRA						15,300				15,300
Loss on debt refinancing						18,200			$ 3,600	18,200	$ 11,900
Cash consideration			762,850
Goodwill	845,185	845,185	845,185	845,185		845,185				845,185
Predecessor | 2017 Physician Practice Acquisitions
Business Acquisition [Line Items]
Cash consideration										14,200
Goodwill	13,100	13,100	13,100	13,100		13,100				$ 13,100
Number of businesses acquired in existing market | Practice										3
Net assets acquired	$ 1,100	$ 1,100	$ 1,100	$ 1,100		$ 1,100				$ 1,100

XML

Acquisitions and Developments - Assets Acquired and Liabilities Assumed (Details) - USD ($) $ in Thousands	Aug. 31, 2017	Sep. 30, 2017	Dec. 31, 2016
Net assets acquired:
Goodwill	$ 3,269,225	$ 3,270,309
Bain Capital | HIG
Business Acquisition [Line Items]
Cash consideration	502,700
Equity attributable to Surgery Partners, Inc.	720,606
Redeemable preferred stock	310,000
Fair value of non-controlling interests	955,481
Aggregate fair value	1,986,087
Net assets acquired:
Cash and cash equivalents	214,206
Accounts receivable	257,373
Inventories	44,310
Prepaid expenses and other current assets	54,248
Acquisition escrow deposit	4,570
Property and equipment	386,086
Intangible assets	56,750
Goodwill	3,269,225
Investments in and advances to affiliates	64,243
Restricted invested assets	315
Long-term deferred tax assets	208,935
Long-term acquisition escrow deposit	19,600
Other long-term assets	19,427
Accounts payable	(64,921)
Accrued payroll and benefits	(52,995)
Acquisition escrow liability	(4,570)
Other current liabilities	(83,317)
Current maturities of long-term debt	(49,942)
Long-term debt, less current maturities	(2,142,375)
Long-term tax receivable agreement liability	(78,498)
Long-term acquisition escrow liability	(19,600)
Other long-term liabilities	(116,983)
Total fair value of net assets acquired	1,986,087
Predecessor
Net assets acquired:
Goodwill	2,414,572		$ 1,555,204
Predecessor | NSH
Business Acquisition [Line Items]
Cash consideration	762,850
Fair value of non-controlling interests	325,965
Aggregate fair value of acquisition	1,088,815
Net assets acquired:
Cash and cash equivalents	51,159
Accounts receivable	76,101
Inventories	14,986
Prepaid expenses and other current assets	18,007
Property and equipment	174,374
Intangible assets	27,741
Goodwill	845,185
Investments in and advances to affiliates	29,737
Long-term deferred tax assets	28,182
Long-term acquisition escrow deposit	19,600
Other long-term assets	5,309
Accounts payable	(29,652)
Accrued payroll and benefits	(27,313)
Other current liabilities	(18,355)
Current maturities of long-term debt	(16,416)
Long-term debt, less current maturities	(42,770)
Long-term acquisition escrow liability	(19,600)
Other long-term liabilities	(47,460)
Total fair value of net assets acquired	$ 1,088,815

XML

Acquisitions and Developments - Proforma Information (Details) - NSH - USD ($) $ in Thousands	1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Business Acquisition [Line Items]
Net revenues	$ 132,258
Net (loss) income	(763)
Less: Net income attributable to non-controlling interests	(6,492)
Net (loss) income attributable to Surgery Partners, Inc.	$ (7,255)
Predecessor
Business Acquisition [Line Items]
Net revenues		$ 267,013	$ 415,764	$ 1,122,326	$ 1,235,472
Net (loss) income		13,331	28,304	63,269	82,275
Less: Net income attributable to non-controlling interests		(13,184)	(25,207)	(65,122)	(78,356)
Net (loss) income attributable to Surgery Partners, Inc.		$ 147	$ 3,097	$ (1,853)	$ 3,919

XML

Long-Term Debt - Summary of Long-Term Debt (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Aug. 31, 2017	Dec. 31, 2016
Debt Instrument [Line Items]
Capital lease obligations	$ 16,340
Less: unamortized debt issuance costs and discount	0
Debt and capital lease obligations	2,193,334
Less: Current maturities	48,472
Total long-term debt	2,144,862
Line of Credit | Revolving Credit Facility
Debt Instrument [Line Items]
Long-term debt	0
Line of Credit | 2014 First Lien Credit Agreement
Debt Instrument [Line Items]
Long-term debt	0
Secured Debt | 2017 Senior Secured Credit Facility - Term Loan
Debt Instrument [Line Items]
Long-term debt	1,283,626
Secured Debt | Revolving Credit Facility | 2017 Senior Secured Credit Facility - Revolver
Debt Instrument [Line Items]
Long-term debt	0
Senior Notes | Senior Unsecured Notes Due 2021
Debt Instrument [Line Items]
Long-term debt	409,821
Senior Notes | Senior Unsecured Notes Due 2025
Debt Instrument [Line Items]
Long-term debt	370,000
Subordinated Notes
Debt Instrument [Line Items]
Long-term debt	0
Notes payable and secured loans
Debt Instrument [Line Items]
Long-term debt	$ 113,547
Predecessor
Debt Instrument [Line Items]
Capital lease obligations			$ 13,996
Less: unamortized debt issuance costs and discount			(32,274)
Debt and capital lease obligations			1,442,243
Less: Current maturities			27,822
Total long-term debt			1,414,421
Predecessor | Line of Credit | Revolving Credit Facility
Debt Instrument [Line Items]
Long-term debt			85,000
Predecessor | Line of Credit | 2014 First Lien Credit Agreement
Debt Instrument [Line Items]
Long-term debt			932,000
Predecessor | Secured Debt | 2017 Senior Secured Credit Facility - Term Loan
Debt Instrument [Line Items]
Long-term debt			0
Less: unamortized debt issuance costs and discount		$ (18,800)
Predecessor | Secured Debt | Revolving Credit Facility | 2017 Senior Secured Credit Facility - Revolver
Debt Instrument [Line Items]
Long-term debt			0
Less: unamortized debt issuance costs and discount		$ (9,400)
Predecessor | Senior Notes | Senior Unsecured Notes Due 2021
Debt Instrument [Line Items]
Long-term debt			400,000
Predecessor | Senior Notes | Senior Unsecured Notes Due 2025
Debt Instrument [Line Items]
Long-term debt			0
Predecessor | Subordinated Notes
Debt Instrument [Line Items]
Long-term debt			1,000
Predecessor | Notes payable and secured loans
Debt Instrument [Line Items]
Long-term debt			$ 42,521

XML

Long-Term Debt - 2014 Revolver Loan & 2014 First Lien Credit Agreement (Details)		2 Months Ended	8 Months Ended
	Aug. 31, 2017 USD ($)	Aug. 31, 2017 USD ($)	Aug. 31, 2017 USD ($)
Debt Instrument [Line Items]
Loss on debt refinancing costs			$ 16,400,000
2014 Revolver and First Lien Credit Agreement Loans | Predecessor | Revolving Credit Facility | Line of Credit
Debt Instrument [Line Items]
Total prepayment amount	$ 1,030,000,000
Principal amount of debt redeemed	1,026,800,000.0	$ 1,026,800,000.0	1,026,800,000.0
Accrued and unpaid interest	$ 3,000,000
Loss on debt refinancing costs		$ 18,200,000	$ 18,200,000

XML

Long-Term Debt - 2014 Second Lien Credit Agreement (Details) - USD ($) $ in Thousands		1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
	Mar. 31, 2016	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Debt Instrument [Line Items]
Loss on debt refinancing		$ 0
Predecessor
Debt Instrument [Line Items]
Loss on debt refinancing			$ 18,211	$ 3,595	$ 18,211	$ 11,876
Predecessor | 2014 Second Lien Credit Agreement | Line of Credit
Debt Instrument [Line Items]
Loss on debt refinancing	$ 8,300

XML

Long-Term Debt - 2017 Senior Secured Credit Facilities (Details) - USD ($) $ in Thousands		9 Months Ended
	Aug. 31, 2017	Sep. 30, 2017	Dec. 31, 2016
Debt Instrument [Line Items]
Debt issuance costs and discount		$ 0
Predecessor
Debt Instrument [Line Items]
Debt issuance costs and discount			$ 32,274
Line of Credit | Revolving Credit Facility
Debt Instrument [Line Items]
Debt remaining borrowing capacity		71,900
Line of Credit | Letter of Credit
Debt Instrument [Line Items]
Debt remaining borrowing capacity		$ 3,100
2017 Senior Secured Credit Facility - Term Loan | Secured Debt
Debt Instrument [Line Items]
Debt repayment threshold	50.00%
Quarterly maturity installments		0.25%
2017 Senior Secured Credit Facility - Term Loan | Secured Debt | Predecessor
Debt Instrument [Line Items]
Debt, face amount	$ 1,290,000
Debt issuance costs and discount	$ 18,800
2017 Senior Secured Credit Facility - Revolver | Secured Debt | Revolving Credit Facility
Debt Instrument [Line Items]
Debt repayment threshold	50.00%
Unused commitment fee		0.50%
Net leverage ratio		9.50
Total commitment threshold		35.00%
2017 Senior Secured Credit Facility - Revolver | Secured Debt | Predecessor | Revolving Credit Facility
Debt Instrument [Line Items]
Debt, face amount	$ 75,000
Debt issuance costs and discount	$ 9,400
2017 Senior Secured Credit Facilities | Secured Debt | Federal Funds Effective Rate
Debt Instrument [Line Items]
Debt instrument, basis spread on variable rate		0.50%
2017 Senior Secured Credit Facilities | Secured Debt | One Month LIBOR
Debt Instrument [Line Items]
Debt instrument, basis spread on variable rate		1.00%
2017 Senior Secured Credit Facilities | Secured Debt | Base Rate
Debt Instrument [Line Items]
Debt instrument, basis spread on variable rate		2.00%
2017 Senior Secured Credit Facilities | Secured Debt | Minimum | LIBOR
Debt Instrument [Line Items]
Debt instrument, basis spread on variable rate		3.00%
2017 Senior Secured Credit Facilities | Secured Debt | Minimum | Base Rate
Debt Instrument [Line Items]
Debt instrument, margin in addition to base rate		2.00%
2017 Senior Secured Credit Facilities | Secured Debt | Maximum | LIBOR
Debt Instrument [Line Items]
Debt instrument, basis spread on variable rate		3.25%
2017 Senior Secured Credit Facilities | Secured Debt | Maximum | Base Rate
Debt Instrument [Line Items]
Debt instrument, margin in addition to base rate		2.25%

XML

Long-Term Debt - Senior Unsecured Notes Due 2021 (Details) - USD ($)	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Dec. 31, 2016	Mar. 31, 2016
Debt Instrument [Line Items]
Debt issuance costs	$ 0
Senior Notes | Senior Unsecured Notes Due 2021
Debt Instrument [Line Items]
Debt instrument, stated rate	8.875%
Senior Notes | Senior Unsecured Notes Due 2021 | Redemption Period One
Debt Instrument [Line Items]
Debt instrument, redeemable percentage of aggregate principal	35.00%
Redemption price, percentage of principal, proceeds from equity offerings	108.875%
Required remaining principal balance, after redemption	50.00%
Debt redemption, required period after closing of equity offering	180 days
Redemption price, percentage of principal	100.00%
Senior Notes | Senior Unsecured Notes Due 2021 | April 15, 2018 to April 14, 2019
Debt Instrument [Line Items]
Redemption price, percentage of principal	106.656%
Senior Notes | Senior Unsecured Notes Due 2021 | April 15, 2019 to April 14, 2020
Debt Instrument [Line Items]
Redemption price, percentage of principal	104.438%
Senior Notes | Senior Unsecured Notes Due 2021 | April 15, 2020 and thereafter
Debt Instrument [Line Items]
Redemption price, percentage of principal	100.00%
Senior Notes | Senior Unsecured Notes Due 2021 | Change in control
Debt Instrument [Line Items]
Redemption price, percentage of principal	101.00%
Predecessor
Debt Instrument [Line Items]
Debt issuance costs			$ 1,488,000
Predecessor | Senior Notes | Senior Unsecured Notes Due 2021
Debt Instrument [Line Items]
Debt, face amount				$ 400,000,000.0
Debt issuance costs		$ 8,400,000

XML

Long-Term Debt - Senior Unsecured Notes Due 2025 (Details) - USD ($)	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Jun. 30, 2017	Dec. 31, 2016
Debt Instrument [Line Items]
Debt issuance costs	$ 0
Senior Notes | Senior Unsecured Notes Due 2025
Debt Instrument [Line Items]
Debt instrument, stated rate	6.75%
Senior Notes | Senior Unsecured Notes Due 2025 | Redemption Period One
Debt Instrument [Line Items]
Debt instrument, redeemable percentage of aggregate principal	40.00%
Redemption price, percentage of principal, proceeds from equity offerings	106.75%
Required remaining principal balance, after redemption	50.00%
Debt redemption, required period after closing of equity offering	180 days
Redemption price, percentage of principal	100.00%
Senior Notes | Senior Unsecured Notes Due 2025 | July 1, 2020 to June 30, 2021
Debt Instrument [Line Items]
Redemption price, percentage of principal	103.375%
Senior Notes | Senior Unsecured Notes Due 2025 | July 1, 2021 to June 30, 2022
Debt Instrument [Line Items]
Redemption price, percentage of principal	101.688%
Senior Notes | Senior Unsecured Notes Due 2025 | July 1, 2022 and thereafter
Debt Instrument [Line Items]
Redemption price, percentage of principal	100.00%
Senior Notes | Senior Unsecured Notes Due 2025 | Change in control
Debt Instrument [Line Items]
Redemption price, percentage of principal	101.00%
Predecessor
Debt Instrument [Line Items]
Debt issuance costs				$ 1,488,000
Predecessor | Senior Notes | Senior Unsecured Notes Due 2025
Debt Instrument [Line Items]
Debt, face amount			$ 370,000,000.0
Debt issuance costs		$ 17,300,000

XML

Long-Term Debt - Additional (Details) - USD ($)	Aug. 03, 2017	Sep. 30, 2017	Dec. 31, 2016
Debt Instrument [Line Items]
Capital leased assets		$ 19,200,000
Subordinated Notes
Debt Instrument [Line Items]
Long-term debt, carrying value		0
Notes payable and secured loans
Debt Instrument [Line Items]
Long-term debt, carrying value		$ 113,547,000
Predecessor
Debt Instrument [Line Items]
Capital leased assets			$ 15,400,000
Predecessor | Subordinated Notes
Debt Instrument [Line Items]
Principal amount of debt redeemed	$ 1,000,000.0
Debt instrument, stated rate	17.00%
Redemption price, percentage of principal	100.00%
Long-term debt, carrying value			1,000,000
Predecessor | Notes payable and secured loans
Debt Instrument [Line Items]
Long-term debt, carrying value			$ 42,521,000

XML

Redeemable Preferred Stock (Details) $ / shares in Units, $ in Thousands		1 Months Ended	9 Months Ended
	Aug. 31, 2017 USD ($) $ / shares shares	Sep. 30, 2017 USD ($) $ / shares	Sep. 30, 2017 USD ($) trading_days $ / shares
Increase (Decrease) in Temporary Equity [Roll Forward]
September 1, 2017		$ 310,000
Dividends accrued		2,633
Cash dividends declared		(1,316)
Mark to redemption adjustment		15,566
September 30, 2017	$ 310,000	$ 326,882	$ 326,882
Series A Preferred Stock
Temporary Equity [Line Items]
Preferred stock dividend rate			10.00%
Trading days | trading_days			20
Consecutive trading days | trading_days			30
Threshold share price (in USD per share) | $ / shares			$ 42.00
Maximum cash dividend declarable			50.00%
Redemption price (in USD per share) | $ / shares		$ 1,000.00	$ 1,000.00
Series A Preferred Stock | Common Stock
Temporary Equity [Line Items]
Share price (in USD per share) | $ / shares		$ 19.00	$ 19.00
Predecessor | NSH
Temporary Equity [Line Items]
Deferred equity issuance costs	$ (18,300)
Majority Shareholder | Series A Preferred Stock
Temporary Equity [Line Items]
Stock issued during period (shares) | shares	310,000
Purchase price per share (in USD per share) | $ / shares	$ 1,000
Proceeds from issuance of preferred shares	$ 310,000

XML

Earnings Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands		1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
		Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Numerator:
Net loss attributable to Surgery Partners, Inc.		$ (9,140)
Less: amounts allocated to participating securities		2,633
Less: mark to redemption adjustment		15,566
Net loss attributable to common stockholders		$ (27,339)
Denominator:
Weighted average shares outstanding- basic (shares)		48,314,746
Effect of dilutive securities (shares)		0
Weighted average shares outstanding- diluted (shares)	[1]	48,314,746
Loss per share:
Basic (in USD per share)	[2]	$ (0.57)
Diluted (in USD per share)	[1],[2]	$ (0.57)
Stock options
Loss per share:
Antidilutive securities excluded from computation of (loss) earnings per share (shares)		0
Restricted shares
Loss per share:
Antidilutive securities excluded from computation of (loss) earnings per share (shares)		112,529
Convertible preferred stock
Loss per share:
Antidilutive securities excluded from computation of (loss) earnings per share (shares)		0
Predecessor
Numerator:
Net loss attributable to Surgery Partners, Inc.			$ (4,444)	$ (2,338)	$ (11,669)	$ (7,409)
Less: amounts allocated to participating securities			0	0	0	0
Less: mark to redemption adjustment			0	0	0	0
Net loss attributable to common stockholders			$ (4,444)	$ (2,338)	$ (11,669)	$ (7,409)
Denominator:
Weighted average shares outstanding- basic (shares)			48,146,611	48,019,652	48,121,404	48,018,706
Effect of dilutive securities (shares)			0	0	0	0
Weighted average shares outstanding- diluted (shares)	[1]		48,146,611	48,019,652	48,121,404	48,018,706
Loss per share:
Basic (in USD per share)	[2]		$ (0.09)	$ (0.05)	$ (0.24)	$ (0.15)
Diluted (in USD per share)	[1],[2]		$ (0.09)	$ (0.05)	$ (0.24)	$ (0.15)
Predecessor | Stock options
Loss per share:
Antidilutive securities excluded from computation of (loss) earnings per share (shares)			0	586	0	345
Predecessor | Restricted shares
Loss per share:
Antidilutive securities excluded from computation of (loss) earnings per share (shares)			34,506	369,545	105,944	337,915

[1] The impact of potentially dilutive securities for all periods presented was not considered because the effect would be anti-dilutive in those periods.

[2] Includes the impact of amounts allocated to participating securities. See Note 6. "Earnings Per Share" for the calculation of net loss per share attributable to common stockholders.

XML

Commitments and Contingencies (Details)			1 Months Ended	2 Months Ended	3 Months Ended		8 Months Ended	9 Months Ended
	Apr. 20, 2017 USD ($)	Dec. 24, 2009 USD ($) Entity	Sep. 30, 2017 USD ($)	Aug. 31, 2017 USD ($)	Jun. 30, 2017 USD ($)	Sep. 30, 2016 USD ($)	Aug. 31, 2017 USD ($)	Sep. 30, 2016 USD ($)
Guarantor Obligations [Line Items]
Total settlement amount			$ 0
Q2 Period Ended, 2016 Acquisition
Guarantor Obligations [Line Items]
Contingent consideration, liability			15,700,000
Q2 Period Ended, 2016 Acquisition | General and Administrative Expense
Guarantor Obligations [Line Items]
Contingent acquisition compensation expense			$ 605,000
Predecessor
Guarantor Obligations [Line Items]
Total settlement amount				$ 0		$ 0	$ 3,794,000	$ 0
Predecessor | Purchase Agreement
Guarantor Obligations [Line Items]
Number of business entities acquired | Entity		36
Maximum potential contingent consideration		$ 10,000,000.0
Total settlement amount	$ 3,900,000				$ 3,800,000
Amount of settlement paid from escrow	2,700,000
Amount of settlement paid by seller	$ 1,200,000
Predecessor | Q2 Period Ended, 2016 Acquisition | General and Administrative Expense
Guarantor Obligations [Line Items]
Contingent acquisition compensation expense				$ 1,200,000		$ 1,500,000	$ 5,100,000	$ 3,100,000

XML

Segment Reporting - Revenues by Reportable Segment (Details) $ in Thousands	1 Months Ended	2 Months Ended	3 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017 USD ($)	Aug. 31, 2017 USD ($)	Sep. 30, 2016 USD ($)	Aug. 31, 2017 USD ($)	Sep. 30, 2017 segment	Sep. 30, 2016 USD ($)
Segment Reporting Information [Line Items]
Number of operating segments | segment					3
Revenues	$ 132,258
Surgical Facility Services
Segment Reporting Information [Line Items]
Revenues	125,595
Ancillary Services
Segment Reporting Information [Line Items]
Revenues	5,775
Optical Services
Segment Reporting Information [Line Items]
Revenues	$ 888
Predecessor
Segment Reporting Information [Line Items]
Revenues		$ 174,079	$ 282,682	$ 748,615		$ 839,437
Predecessor | Surgical Facility Services
Segment Reporting Information [Line Items]
Revenues		167,765	256,795	688,725		766,248
Predecessor | Ancillary Services
Segment Reporting Information [Line Items]
Revenues		4,409	22,684	52,261		62,967
Predecessor | Optical Services
Segment Reporting Information [Line Items]
Revenues		$ 1,905	$ 3,203	$ 7,629		$ 10,222

XML

Segment Reporting - Segment Operating Income (Details) - USD ($) $ in Thousands	1 Months Ended	2 Months Ended	3 Months Ended		8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2017	Sep. 30, 2016	Aug. 31, 2017	Sep. 30, 2016
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA	$ 14,842
All other	(5,033)
Net income attributable to non-controlling interests	6,492
Depreciation and amortization	(3,330)
Interest expense, net	(15,883)
Non-cash stock compensation expense	(1,683)
Contingent acquisition compensation expense	(605)
Merger transaction, integration and practice acquisition costs	(3,457)				$ (2,400)
Gain on litigation settlement	0
Gain on acquisition escrow release	0
Loss on disposal or impairment of long-lived assets, net	(333)
Gain on amendment to tax receivable agreement	1,098
Tax receivable agreement expense	0
Loss on debt refinancing	0
(Loss) income before income taxes	(2,859)
Merger transaction and integration costs	2,983		$ 2,300	$ 1,900	5,600	$ 6,400
Practice acquisition costs	474	$ 606		607	2,100	2,200
Operating Segments | Surgical Facility Services
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA	20,947
Operating Segments | Ancillary Services
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA	(1,265)
Operating Segments | Optical Services
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA	$ 193
Predecessor
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA		8,402		44,748	85,564	129,205
All other		(9,142)		(12,448)	(36,036)	(36,258)
Net income attributable to non-controlling interests		8,813		16,672	42,087	54,392
Depreciation and amortization		(7,599)		(9,713)	(30,124)	(28,984)
Interest expense, net		(18,147)		(26,475)	(68,929)	(74,863)
Non-cash stock compensation expense		(1,628)		(691)	(3,697)	(1,326)
Contingent acquisition compensation expense		(1,210)		(1,530)	(5,057)	(3,060)
Merger transaction, integration and practice acquisition costs		(2,949)		(2,471)	(7,677)	(8,579)
Gain on litigation settlement		0		0	3,794	0
Gain on acquisition escrow release		1,000		0	1,000	0
Loss on disposal or impairment of long-lived assets, net		(114)		(572)	(1,715)	(1,697)
Gain on amendment to tax receivable agreement		15,294		0	15,294	0
Tax receivable agreement expense		0		(3,733)	0	(3,733)
Loss on debt refinancing		(18,211)		(3,595)	(18,211)	(11,876)
(Loss) income before income taxes		(16,349)		12,640	12,329	49,479
Merger transaction and integration costs		2,343		1,864	5,584	6,361
Predecessor | Operating Segments | Surgical Facility Services
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA		27,726		53,347	125,912	153,318
Predecessor | Operating Segments | Ancillary Services
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA		(10,737)		2,573	(6,526)	9,141
Predecessor | Operating Segments | Optical Services
Segment Reporting Information [Line Items]
Total segment adjusted EBITDA		$ 555		$ 1,276	$ 2,214	$ 3,004

XML

Segment Reporting - Assets by Operating Segment (Details) - USD ($) $ in Thousands	Sep. 30, 2017	Dec. 31, 2016
Segment Reporting Information [Line Items]
Assets	$ 4,601,854
Predecessor
Segment Reporting Information [Line Items]
Assets		$ 2,304,958
Operating Segments
Segment Reporting Information [Line Items]
Assets	4,196,323
Operating Segments | Surgical Facility Services
Segment Reporting Information [Line Items]
Assets	3,969,584
Operating Segments | Ancillary Services
Segment Reporting Information [Line Items]
Assets	183,288
Operating Segments | Optical Services
Segment Reporting Information [Line Items]
Assets	43,451
Operating Segments | Predecessor
Segment Reporting Information [Line Items]
Assets		2,121,322
Operating Segments | Predecessor | Surgical Facility Services
Segment Reporting Information [Line Items]
Assets		1,914,842
Operating Segments | Predecessor | Ancillary Services
Segment Reporting Information [Line Items]
Assets		184,002
Operating Segments | Predecessor | Optical Services
Segment Reporting Information [Line Items]
Assets		22,478
Corporate, Non-Segment
Segment Reporting Information [Line Items]
Assets	$ 405,531
Corporate, Non-Segment | Predecessor
Segment Reporting Information [Line Items]
Assets		$ 183,636

XML

Segment Reporting - Cash Purchases of Property and Equipment (Details) - USD ($) $ in Thousands	1 Months Ended	8 Months Ended	9 Months Ended
	Sep. 30, 2017	Aug. 31, 2017	Sep. 30, 2016
Segment Reporting Information [Line Items]
Purchases of property and equipment, net	$ 1,840
Operating Segments
Segment Reporting Information [Line Items]
Purchases of property and equipment, net	1,638
Operating Segments | Surgical Facility Services
Segment Reporting Information [Line Items]
Purchases of property and equipment, net	1,613
Operating Segments | Ancillary Services
Segment Reporting Information [Line Items]
Purchases of property and equipment, net	2
Operating Segments | Optical Services
Segment Reporting Information [Line Items]
Purchases of property and equipment, net	23
Corporate, Non-Segment
Segment Reporting Information [Line Items]
Purchases of property and equipment, net	$ 202
Predecessor
Segment Reporting Information [Line Items]
Purchases of property and equipment, net		$ 18,773	$ 28,377
Predecessor | Operating Segments
Segment Reporting Information [Line Items]
Purchases of property and equipment, net		16,530	24,924
Predecessor | Operating Segments | Surgical Facility Services
Segment Reporting Information [Line Items]
Purchases of property and equipment, net		14,582	21,151
Predecessor | Operating Segments | Ancillary Services
Segment Reporting Information [Line Items]
Purchases of property and equipment, net		1,875	3,450
Predecessor | Operating Segments | Optical Services
Segment Reporting Information [Line Items]
Purchases of property and equipment, net		73	323
Predecessor | Corporate, Non-Segment
Segment Reporting Information [Line Items]
Purchases of property and equipment, net		$ 2,243	$ 3,453