Ardent Health, Inc. (ARDT) Earnings Call Transcript & Summary

Thank you so much for joining us for Bank of America Health Care Conference. My name is Joanna Gajuk. I cover health care facilities and managed care, Bank of America. And today, my pleasure to start this day with Ardent Health Partners, one of the largest health systems in the U.S. And today with us is Martin Bonick, CEO; and also Dave Styblo with IR. And I guess we're going to go right into Q&A, right?

Sounds good. Good to be here with everybody.

So I guess one of the key topics for hospitals, I guess, always, but recently too, is volumes, pretty good number actually in Q1. It was higher end of your full year guidance, right? And there was some calendar headwind, even there was flu. So maybe you can talk about that. But obviously, curious to know, you think this is sustainable? Or should we expect you come in for the year towards the higher end? How should we think about the Q1 implications for the rest of the year?

Yes. So we've been talking about volumes for forever, like you said. It's important as a barometer of how things are performing. And it's a little bit of a lag indicator in terms of the total market that we serve who end up in a hospital. But all through last year, we were saying that volumes were strong and durable, and we're back to the new normal post pandemic. We saw good growth in our markets, primarily because we're in, again, 8 midsized urban markets. They're growing about 3x faster than the U.S. average. And we've got good market share and good positions in those markets. So we're seeing that volume pull through. We saw it last year. We saw it continue into this year and even accelerate now our strategies around service line development, service line rationalization, our transfer centers all play a role in that. But again, I think it goes to the fact that we're beyond this "pent-up demand" that the payers seem to be talking about, and we feel very good about the volumes we're seeing in the markets, the positions we have and our ability to continue to accelerate that.

And I guess, inside your volumes, right, outpatient and not yours, but also other hospitals, outpatient were somewhat weaker, maybe a little bit. So is there something to call out? Obviously, there's the calendar impact that impacts the outpatient more than inpatient. But is there something that's going on? So maybe you can talk about the inpatient versus outpatient trends out there typically?

We certainly -- last year, we embarked upon a service line rationalization strategy, which was focused on how do we take some of those lower acuity surgeries out of the hospital of ours and allow us to backfill with inpatient surgical growth. So we certainly saw that happen. On the outpatient side, I don't think we're seeing anything different than the others in our peer group across the industry. You've got the reset of deductibles, you had the calendar headwind, as you mentioned, and maybe just a general slowdown with the economic uncertainty, people may be making decisions, but we haven't seen a big systemic issue around that. But ours is also slightly offset by some of that outpatient rationalization of surgeries. It's a big reason why we're so focused on growing into the outpatient environment. If we have the facilities, the ASCs to be able to shift those cases out of the hospital-based environment into an outpatient environment, we would have probably seen even stronger growth and that's why we're focusing on expanding the ASCs and our urgent cares and other outpatient services in our core markets.

Right. And I guess to that point, maybe you can expand on the strategy, right? And how much -- because I guess you're guiding to long-term volume growth of 2% to 3%, right? So how much of that is coming from outpatient to your point, you kind of have a lower base. So as you continue to add, how much of that 2% to 3% you assume is going to come from outpatient growth?

It's certainly a factor. I mean we haven't quantified exactly how much of that 2% to 3% growth is generally speaking to the core growth of our markets. The position we have in there, we think that the outpatient side will complement that. I'd like to talk about our total addressable market as the number of population that live in our markets. So there's about 5.6 million people that live in our 8 markets. Last year, we saw 1.23 million unique people in our markets. We only saw about 157,000 admissions though. So the other 1.x million we're seeing in our outpatient clinics, our facilities and the clinics are the front door to the health system. And so we partner with physicians. We go very deep into the primary care, the specialty care and the pull-through into the facilities ultimately comes from having those relationships with those patients. And so we see this all complements each other. And as we build the outpatient facility access points that gives us more opportunity to capture more of that population that will ultimately need that facility-based care.

So do you have a target in terms of average outpatient locations by hospitals that you're trying to get to? And I guess what these are, it sounds like ASCs, urgent care, but is there any preference? Or are you trying to kind of fill all the verticals essentially in?

Yes. No, we don't have a target per se. We certainly look at the number of clinics that we have, but that's not -- it's not a perfect ratio. We've got primary, secondary and tertiary level hospitals. And each of those different market locations can support a different level of growth. So it's not as simple as setting a target. But we do know that increasing the urgent care access points is key and that's one of the first things that we said we're going to do, and we're doing that. That's the front door into the system. A lot of people that don't have a primary care physicians are going to use that urgent care is that immediate, I need help, and I want it now, and I don't want to wait to get an appointment. But once we pull them in, we put them on our Epic EHR platform, we can see, Joanna, you don't have a primary care, we can recommend one that's in your neighborhood, that's taking new patients, and we can get you a schedule in there for the follow-up you need or if you need that specialty appointment. We're going to schedule in that urgent care before you leave so that you're not having to wait or go to Dr. Google to try to find that next level of care. And then we can pull you through that ecosystem. And then your -- once you're inside of that, then we can make sure that you're getting the services, the preventative screenings that you need and what have you in building that relationship that's going to help to take you through that journey.

And I guess before - oh, sorry, David.

I was going to say to put some data around that. I talked about this before, but we acquired 6 urgent care facilities in East Texas. And when we look back at the data at the beginning of 2024 throughout and see that 45% of the folks who came to that facility were new to the Ardent system. That's one proof point. But then in addition to that, 15% of those 45 then had a follow-up care within 30 days. So that just creates the whole longitudinal care program that we're trying to instill throughout the organization. So it creates a bigger funnel and allows us to have some downstream benefits ultimately to the hospital, ultimately to the inpatient where that's some of our highest ROI.

So that's the first step. ASCs obviously are generally a higher-margin business, usually a better payer mix and complement the inpatient services that we provide for the patients that need that. You've got more and more procedures each year that are being able to be performed in an outpatient setting. And so it's an area where Ardent has historically been a little bit under-indexed and we see that white space to grow in our markets. And then imaging centers, freestanding ERs, again, every market is unique in terms of its saturation, what it can hold, what it can support, but we see all of those as great avenues for us to continue to build out the network.

And I guess, before we move to the next topic, because very topical yesterday was around some acceleration in utilization. So any comments that you might have, what you're seeing, say, in April versus March or Q1?

We're not talking about April volumes right now, but we're just very pleased about the growth that we saw in Q1. I think we were among the top in the peer group in terms of the inpatient growth that we saw. And we are very bullish in terms of the positions we're in our markets, the growth of our markets and seeing that trend continue.

Right. And moving on very interesting part of Ardent story is the joint venture model, which is very unique for the hospital, publicly traded hospital companies. So maybe you can walk us through kind of the benefits to Ardent and also to the partners from having that joint venture model.

Yes. No, it is, I think, unique to us, and there's some structural things that we've invested in over the years that I think put us in a great position to capitalize on that strategy. The first is that we've invested in Epic. And most of the academic health systems across the nation, the large academics have invested in Epic and having that continuity of communication and care across different settings is important and most of the academics are looking at that as they contemplate a partnership. And so that's something that we definitely have built into our system that is an attractor. But for us, if we go into a new market, we bring our operating expertise, the systems and structures we put in place to be able to operate facilities in a very efficient way. And health care is challenging physician recruitment, patient loyalty, brand recognition, all of those things are important. And so the academic system partnerships that we focused on, and we believe can complement each other in a very strong ways. For us, it brings that X factor in. And I'll talk about University of Texas. Our relationship there is very strong. If you look at when that acquisition was first cemented together, the entire system was losing money, and it was losing market share. Now we look back 5 years later, and we've improved the services. We've improved the physicians collectively. We turned that into a positive margin and it's still a growing margin story for us. But from the distributions that our partners get, our academic partners get, they're investing in their teaching programs and they're building a new medical school on our campus that will train future doctors in our hospitals and become future medical staff. And so there's just this flywheel effect that can happen. I would say, if you live in Texas, everybody loves UT unless you're an AG. And so we've painted that town orange. We've changed the trajectory of what that looks like. And we brought services that didn't exist. Last year, we hope opened up an ECMO program, which is sort of advanced cardiac life-saving care. There was no ECMO program in all of East Texas before this partnership. We brought that to them. And this is really -- we saw this really proliferate during COVID but that advanced end-stage lifesaving care is not something that's easy. You've got to have a specialist, specially trained physicians, nurses, and what have you and our ability to recruit because of the university partnership and that academic prestige and halo that goes with it has allowed us to bring in the subspecialists in that East Texas region that probably otherwise wouldn't have come. So that's an example. But we've grown our teaching program in that market significantly in terms of the residents and fellows that we're training in that market. So there's just a lot of opportunity for us when we think about this as a 1 plus 1 equals 3 scenario.

And part of the joint venture structure, is also your -- I guess, you employing and affiliating with a lot of physicians. So can you talk about this a little bit more, like what's the role of the physicians and why that's important to you?

So as we look at these midsize markets, the physician patient relationship is key, and it goes back to how do we grow the top of the funnel in terms of the patient population that we're trying to do. That physician is going to recommend and refer facility-based care to patients when they need it. And so you don't want to wait until a patient is having an emergency, calls 911 and gets the ambulance and hope that you're going to get your fair share of them coming. We want them to come in and say, I'm a UT patient. I got a UT doctor and I want to go to a UT hospital. We don't brand Ardent in our markets. We brand the local partnership there. But having the physicians is key. Again, we saw over 1.2 million patients, but only 157,000 were admitted last year. So those other patients are patients that may, at some point, need that higher level of care. And so by building those physician relationships, we're building those connections for longer-term longitudinal relationships that Dave was talking about.

And I guess switching gears a little bit, a lot of is happening in DC. So curious to hear your opinion about the latest, the House, I guess, version of the reconciliation bill and kind of what you're thinking about what was included and not included and kind of how do you think it's going to get finalized?

Yes. So I mean, obviously, it's a proposal, and it's just that. But I would say that we felt very comfortable. We've been very confident ultimately in the durability of the directed payment programs and some of the other legislation that's being talked about. So we felt confirmed in our conviction that at least the initial proposal was not going to be taking away from our existing programs. And that they're being talked about being grandfathered in, which was -- which we think is a strong positive indication of what we had been messaging and expecting to happen. And it still has to get passed by the Senate. And I think that they've got an even tougher road. So if the first markup or the first draft proposal, is something that I think is very manageable, something that is sustainable for us and doesn't push us backwards. That's good. The other things that have been taken -- seemingly taken off the table, FMAP changes and provider tax caps or what have you, those things are all inside of our current guide. So we feel pretty good at where the process is today. It's a long way to go before it's finalized. But I think fearing the worst of what people were talking about seeing the first mark up and say, okay, this is something that is incremental change, but not monumental change at the end of the day, and we feel good about the first read and knowing that it probably gets better from here.

Right. And talking about DPPs right? And I guess we're still waiting for the approval of one of the states, right? It's expected to bring a good chunk of EBITDA this year, right? So any other there? And kind of how are you thinking about why there is a delay? Is sort of pipeline that like they're going through all the...

Rules of government at work, I think, is the answer. If you look at the approval cycle, every state has to have their DPP program approved every year. And once the state has been approved, there's not been a case where it's not been reapproved. There can be challenges or questions along the way, but they ultimately are every one of these across the 44-plus states that have now have these programs goes through this every year, and some have been going at it for years. New Mexico was approved in late '24 for the second half of '24. And immediately, they put in the application for 2025, essentially the same application. So there's no reason to believe that wouldn't be approved. We know that there have been correspondence going back and forth between CMS and the state and it was all kind of technical procedural issues. So we don't see any red flags in terms of that and just working through its system. We feel very confident that ultimately, these programs get approved. And with the Energy and Commerce markup or the proposal, it's gives us even more confidence that these things are going to happen. The timing is a little bit suspect, but we've seen a number of state program starting to come out of CMS, which is an encouraging sign. Tennessee was the most recent state, and that was a new approval that hadn't been there before. And that application was in before the New Mexico one. So we're expecting to see New Mexico get approved and the other states to follow.

Hopefully to just work their pipes.

Every state has to do it every year. So it's just New Mexico is next in line, hopefully.

And just thinking about broadly when it comes to this reconciliation bill discussions, and DPPs and such. Is there something to be said about state somehow delayed payments or something else is happening because they're waiting also on these different decisions? Or you haven't really seen anything like that obviously?

Well so for New Mexico, I mean until it's approved, they're not going to -- we're not going to do the tax, not going to pay the tax until the program is approved. So cash flow timing should match up from that perspective.

Yes. But in terms of other programs that have been already approved, right? Is there any delays in like getting paid from states because they just -- there's uncertainty out there, what's going to happen...

Each state has a different payment program, but we've not seen any delays in payments. Some are quarterly, some are semiannual.

Right. And I guess moving on outside of the DPP programs, right, this year, it's helping margins, right? You also talk about what, 100 to 200 basis points of the margin improvement over a long period of time through other company-specific actions. So maybe you can bring us up to speed, what's been done and what else is there left that's going to drive that margin improvement at the core?

Yes. So in preparation before we went public last summer, we've really focused on turning Ardent from what had been largely a holding company into a more robust operating company, when we had all the services and functions, but we didn't necessarily have everything flowing through similar funnels in each of our different markets. And so we did a lot of that heavy lifting before we went public and sort of the cover of COVID. And now we feel like we've got a very scalable and robust system. And that being said, we're much more centralized, we're standardized, but we still have room for optimization. And so there's pockets of opportunity in the labor side, there's certainly opportunities on the supply chain side that we're going to continue to go after, continued performance in revenue cycle. And then you add on the outpatient growth. And those margins and those outpatient centers are generally better than the core margin. And so over time as we continue to build those, they're smaller chunks of EBITDA and smaller chunks of revenue, but the margin profile is better. And so as we build upon those things and stack them, we expect to see that have an impact as well. So all of those categories build upon each other.

And talking about costs, right, maybe we can also touch base on what the labor situation is. So it sounds like everyone's pretty much seeing stable, but is there anything you would call out there in terms of use of contract labor, what the rates are and the utilization of that? And I guess nurses and also physicians because I guess that's maybe one area of, I guess, labor that's growing faster in terms of the professional fees. So maybe you can touch on all these different pieces.

Yes. So we've largely seen the workforce stabilized and sort of getting again back to sort of normalized inflation trends. We typically budget somewhere around a 3% plus or minus sort of cost of living adjustment into our staffing models and budgeting plans. And we saw that sort of normalize last year. We're seeing that -- expect that to continue into this year. So not expecting anything to change dramatically. What we have seen is a reduction from our peak and COVID of contract labor growing and slowly ratcheting back down, again, we were down about 60 basis points this first quarter over last quarter last year. We're a 3.8% contract labor as a percent of salaries, wages and benefits. We were in the lower 3s pre-pandemic. So we're getting closer to that number. But based upon the strong growth of services in our markets, we've opted to keep some of that contract labor in. Now the reason we've still been able to titrate that down is the focus on our people, our focus on our culture. We've seen our retention rate of nurses go up and a turnover level come down. And that sort of giveaway, takeaway with the nurses, the turnover is incrementally helping us to reduce that contract labor down. So we saw some large step functions down from '23 to '24. We expect to see some modest improvement in '25 as we continue to focus on that turnover and recruitment and retention activity with the nurses. On the physician side, we did see the -- again, '23 was a very challenging year for the industry, '24 moderated a bit from the peak of '23. We do expect it to moderate again a little bit this year, but still be north of inflation, and we've talked about that in previous earnings calls and first quarter was a little bit better than expectations, but we know that there's still some headwinds. And so it's still -- we still feel like we're in line with the guide that we've given for the year, knowing some out -- later in the year negotiations that we're doing. But the impact of the surprise billing has trickled down through the industry, through the different specialties, and we hope that we're in the latter innings of this. And it's still a little bit north of the inflationary environment that we've been seeing historically.

And these professional fees, right, I think they're probably like 7% of revenues, right? So it became like a material, I guess, cost on your P&L, so does it also create pressure on margins structurally that now you might never really get to whatever target was because this is such a bigger piece and sounds like, to your point, like it's -- there's no way it's going to come down, right? It maybe decelerates the growth, right? But like...

Yes. I think on the salary side, yes, if you give a nurse a raise, you're not going to see that dollar come back given dollar raise, you're not going to see that come back because the price of gas or eggs or milk comes down. On the physician side, it is multifactorial. So we're really focusing on the managed care negotiations, we're still seeing above average -- above inflationary rate negotiations with the managed care plans. Principally, they're driving a lot of this increase in the physician subsidy cost. I mean this is a squeezing of the balloon and it's -- we're pushing back and making sure that we're getting rates that help to offset those provider-based staffing headwinds. And so we don't think that this is any permanent impairment to margins, it makes it more difficult, but it's also why we've got to continue to push the payers to pay for the balloon squeezing that they're doing, so to speak.

So is there something you can actually do. It sounds like you have some contract up for negotiation later in the year. So is this something where you kind of feel good that you might be able to kind of like, I don't know, you bring it down the fees, right, but maybe like the rate of growth?

Yes. Structurally, we've got some partnerships with some key staffing groups that are helping us to expand. So as we do see turnover in certain markets, having preferred provider relationships in each of the different specialties is something that we think that will help to offset those costs, and we can spread those across the footprint versus just dealing on a market-by-market basis. And so structurally, yes, we are working on other things to combat just the general trend that we've seen in those inflationary cost in. But as a part of that plan to help moderate these things and get them back into a normal inflationary increase environment.

And I guess part of the problem -- I mean, is the No Surprise Act, but also the Medicare rates vary for doctors not really growing, but rather are being cut. So what's your view of physician fee fix for this year. Obviously, it hasn't been included in the latest CR. But is there still hope that something might come later in the year and somehow help all these docs a little bit?

Yes. I mean from the conversations that we have with our trade associations and personal conversations in D.C., I think that the elected officials are very aware of the impact on physicians and I -- we've heard that there's still talks and hopes that they will sort of permanently fix this doc fix issue that they've been sort of having to just re-up every year. And it's one factor in the bigger plan that they're trying to address. But ultimately, as I think having sustainable rates for physicians to be able to support that is something that I think Congress is aware of, and it's complicated while they're trying to deal with all the other budget woes. But ultimately, I think that we see some relief on that end.

Because in this proposal from the House, there was something included there, not necessarily to fix this year, but I guess, more kind of looking forward -- I mean going forward, rate adjustments or the way it's calculated, right?

Yes. As we talk to people, I think Congress is tired of having to deal with this every year, and it's like, okay, we keep -- we keep re-upping this every year, why don't we just fix this. And so I do think that ultimately, that there's some relief coming.

And you mentioned on commercial as a lever, right, to try to offset some of the pressure on professional fees. So maybe just really speaking, you can talk about your contracting with commercial plans in terms of where the rate updates are right now, right? Are they still kind of like midsingle digits? Is there any pressure from the payers? Because obviously, they all complain about high trend and this and that. So does that create sort of put you at a disadvantage, so to speak,where they're going to like push harder on this...

So on the first part, we are still seeing sort of that, call it, mid-single-digit rate increases. And I think that's very justifiable given the -- not only the cost inflation environment we've seen, but also how they have ultimately pushed costs back into the health system through these physician subsidies and other slowdowns, whether it's denials or underpayments or slow paying. And so I think that the mid-single digits is something that we're still holding our ground on and seeing success. We're essentially all contracted for this year and about 2/3 for next year. So we feel good about how that's matriculating. And the negotiations are getting tougher. You're seeing more providers across the country go back to what I'd say, sort of pre-pandemic tactics. These are arm wrestling matches. The payers unless they're pushed are going to push back. And so we are having to get more aggressive with those negotiating postures and taking things further and closer to an up to termination. Whether that's notifying members in the market about potentially going out of network. So we are having to definitely ramp up as they intensify their pushback. We're having to do the same. But based upon the strength that we have in our markets, the positions as needed service providers in our areas, we're must-haves in our markets. We feel like we've got one, the right side on here, we're taking care of patients. We're taking care of their members and doing a good job of it, and they need us in their network as much as we need them.

And maybe just on the commercial rate topic or contract rather, I think you mentioned some increase in denials, right? So is it something that you expect to kind of accelerate? Do you think from here, maybe gets better? And is there something you can do contractually to kind of maybe go after this or sort of lower the level of these denials at some point?

Yes. So last year, as I would say, not corresponding, but coincidentally with the increase of admissions coming from the 2-midnight rule, we did see an increase in the denial activity. They were not necessarily one-for-one or linear with each other, but -- and then the second half saw a bit of a step up from there. I'd say that they're holding right now, but it is something that we're watching very closely. And the very, very vast majority of these are getting paid. It's turning in more into a slow pay versus not getting paid. And so our revenue cycle partners are, again, key in battling that, making sure we've got clean claims going off the door that we've got good documentation to support that. And ultimately, we're providing the care. This is -- it's really just sad state of the way the industry works and that we've provided care and then we have to justify getting paid for the care that we deliver, but our revenue cycle partners are really strong in terms of knowing what the payers need so we can get claims claimed. And so our denial rates are, I'd say, doing much better than the industry averages, and we're still seeing pressure on that front.

And maybe -- maybe we can talk about lastly, part of your long-term growth algorithm includes some acquisitions, I guess, not in your guidance, but outside of longer term. So maybe talk about kind of the targets or how you're looking at the market. And also because of all the things we just talked about, the professional fee policy. And are you seeing more interest from the nonprofits or academics sort of, hey, like we got to do something because the market is changing.

Yes. And certainly, I mean, it's a tale of 2 cities. You've got systems like ours that are doing well and you've got a lot of hospitals still struggling. So we definitely have seen our pipeline increase. We're bringing on a new Chief Development Officer just to be dedicated full time on mining through those opportunities, building the relationships. It takes time to do that. Particularly with our joint venture model approach to be able to go and have those targeted discussions with academics even before there's an acquisition target per se, so that when something arises that we're ready to capitalize on that opportunity. But we do think based upon the number of conversations and since we've gone public, the visibility of people understanding what we do and how we could potentially benefit, we've seen the number of inbound and outbound calls increase the pipeline building up, and we're very encouraged about either tuck-in growth on the acute care basis inside of our core markets or new markets growth opportunities still to come this year.

We have 15 seconds -- all right. So maybe cash flow, how we should think about cash flow for this year?

From a cash flow perspective, we haven't changed our guidance on that. As we work through balancing out sort of the slow pay of the payers, we're tightly managing our CapEx spend on the other side to manage that, but we expect that to continue as planned.

All right. Sounds good. Thank you so much. Thanks, everyone. Right on time.

Thank you.