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

All right. Great. Good morning, everyone. I'm Craig Hettenbach, I cover the provider and health tech space for Morgan Stanley. Very pleased to have with us Ardent Health, CEO, Marty Bonick; and CFO, Alfred Lumsdaine. So I thought we'd just kick it off with start with a brief overview of the company, if that's okay.

Yes. Great to be here this morning, Craig. Ardent Health is a leading provider of health care services. We operate in 8 midsized markets across the United States, in 6 different states. And we've got 30 hospitals and over 280 facilities, coupled with our joint venture model in which we partner with academics and nonprofits. So that's been the footprint of the company, and we're very focused on continuing to grow not only in our hospitals and in our core markets, but outside the 4 walls of the hospital into the outpatient environment and continue to expand in the territories that we're in as well as look for new opportunities for M&A.

Great. How do you think about just maybe comparing and contrasting kind of how Ardent fits relative to some of the public for-profit comps as well as nonprofit.

Yes. So the 8 markets that we operate in are midsized urban markets. And so still sizable cities but not necessarily the major metros. And so we go really deep inside of those markets. We're staying core in hospitals, clinics, ambulatory settings, and maybe unlike some of our peers, we have not differentiated outside of the core markets. And so all of the facilities that we own are inside of those markets. and we are staying in the pure-play acute care side and the ancillary outpatient services.

Great. And how do you think about just some of the demographic and employer trends in your markets like how it's shaping the growth profile for the company?

Our markets are very strong, again, growing about 3x faster than the U.S. average. And so that's really been a built and tailwind. And I know that there's a little bit of a discussion in terms of what the durability of volumes look like. Pre-COVID, our markets were growing, and we've got strong positions in those markets. We're #1 or 2 in the majority of the markets we operate in. And we were seeing positive organic growth trends pre-COVID. For the last couple of years, we've returned back to normal seasonal patterns and shifts -- patterns and trends and we've seen really robust growth. Right now, 5 years later, the population is a little bit older, a little bit sicker, but we've also really deployed our strategies over the last 5 years. and continue to do that as we go outside the 4 walls of the hospital. So we expect that demand to be very stable, very durable. And in the first half of the year, our admissions were up 6.6%, and we're continuing to expect to see similar momentum as we go in the back half of the year.

It does feel like we're kind of settling back into kind of a normal post-COVID. In terms of that comment just now in terms of the back half of the year, anything you're watching from a utilization perspective?

I think it just goes back again to the strength of our markets. The trends that we saw in the first half of the year, we've put a lot of work into our transfer centers and our operational efficiencies that allowed us to take in more patients and capitalize on the key growth in our markets, coupled with the pull-through from some of the outpatient areas that we've grown into our urgent cares. For example, as we bring them on to Epic, we get a lot more visibility in terms of what happens, not only how many patients are coming in and what happens when they leave our facilities. Last year, we purchased 6 urgent cares in East Texas, and about 45% of those patients that came into our facilities were new to us, never been seen in our system before. And what we've learned is those patients after they come into an urgent care, about 20% of them need follow-up services within 30 days after it. So we're able to schedule them into our specialty clinics or diagnostics or in some cases, there's admissions that come out of those. And so we've got a lot better visibility in terms of what's happening after we make those purchases and we bring them on to our core operating system with Epic.

That's great. Could we touch maybe even just high level, just how you think about the long-term kind of growth algorithm of the company and potential for margin expansion.

Sure. I'll start off or you can chime in here as well. Our top line algorithm for revenue growth has been predicated 2.5%, 3% volume growth, which is very consistent with what we've seen historically and doing slightly better this year, obviously, post COVID, on the volume side and then about a similar growth profile on the rate side. The government payers is generally a little bit lighter and the commercial payers is a little bit heavier, but that sort of mid-single-digit top line growth algorithm is where we've been focused.

Yes. And from a bottom line conversion standpoint, we think we can grow our EBITDA faster than the top line growth, primarily focused on what we have labeled our impact programs, which are average for margin expansion, Ardent has gone through a period really since Marty's arrival where we focused on creating scale, moving from a really a holding company to an operating company, consolidating essentially 5 disparate systems and back offices into one. We still have opportunities to create additional efficiencies and optimization of that platform that we're focused on. We've said -- we have historically said over the next 3 to 4 years, seeing a margin expansion of 100 to 200 basis points of these initiatives, we've actually -- this year, we brought in a new Chief Operating Officer, somebody who's worked in the retail health care space at scale and are focused on really accelerating the effect or the impact of these programs in order to see that realization really by the end of 2026 or 2027, I should say.

Great. Maybe just staying on a minute for the impact program. Are there any particular initiatives that you're seeing really take hold today? And then how do you think of that kind of as it evolves through 2027, what are some key either milestones or initiatives?

We've seen good uptake on our supply chain initiatives this year. If you look at supplies as a percent of net, obviously seeing improvement there, but we know that there's more opportunities to go after as we continue to standardize operational and clinical protocols across our 8 different markets. On top of that, as we look to technology and AI we really expect to see improvement off of the initiatives that we've started. We've got a virtual nursing, a virtual attending program, our patient wearables, our focus on ambient listening that's helping provide a dictation or a transcription of their record sort of autonomously. All of those things, we expect to provide longer-term clinical benefit as we look at those impact initiatives. The early results have been promising by the $13 reduction in patient day on our virtual nursing program, which is not only good from a financial perspective, but good from a quality and satisfaction perspective, it's helping us to reduce our dependence on contract labor as we focused on recruitment and retention efforts with our bedside nursing initiatives, and it's reducing that contract labor component.

Great. I want to come back to just David Caspers in terms of really just bringing someone from outside the organization. Any new perspectives or things that kind of he's been helping for in terms of driving some of these programs?

Yes. Dave has been a great addition to our team. He's got traditional health care system experience, but he's also got that retail health experience with Target, Walmart, as Alfred said, and he's operated at a level of scale that's far bigger than really any health system in the country. And so his perspective in terms of the art of the possible has been really invigorating our teams in terms of thinking about how we can operate the business leaner and with greater standardization across the company. He's brought a sense of energy, a sense of direction and focus that's been very helpful just to guiding our operational teams take us to the next level. So we're excited about what he's brought and how he's going to help us to convert that impact program into margin.

That's great. I did want to touch on just thoughts around kind of your largest shareholder in kind of -- on a kind of a near-term basis as you think about kind of stock liquidity on a longer-term basis kind of their thought process?

Yes. So equity group investments is the largest shareholder, controlling shareholder today. They've been very constructive. They've been with us since 2015 when Ardent was purchased from Welsh, Carson and have been just a great partner in terms of helping these companies grow and scale. The company, from a revenue perspective has tripled over the last decade, and we expect them to continue to be long-term constructive shareholders, we're obviously past the lockup period, and they've not sold any shares in the open market. We expect when they do that, that will be something that they'll do in structured secondaries or block trades, whichever is appropriate, but doing things that are going to be constructive for all shareholders because we expect they'll be long term. And at the same time, we realize that the lack of liquidity or float is something that's been a concern for some investors. And so as they do sell down in a structured way, that will help the liquidity issue on the other side.

Makes sense. All right. Maybe we can segue to some of the policy things happening at the moment. And I thought it was helpful on the earnings call, you guys gave some context on the kind of One Big Beautiful Bill in terms of potential impacts and kind of frame the worst case. How do you go about that in terms of looking at what's going on with potential funding cuts and provider taxes.

We really did look at what we articulated on the call as kind of the worst-case scenario. There are no offsets. We didn't factor in any of the rural fund potential proceeds when we quantified it. We wanted to put out what is just if we quantify the impact today from the Big Beautiful Bill, what would be the impact, which was over the next decade, reaching the $150 million to $175 million impact. Now we do -- we would expect that there would be offsets. There are programs that are available today that we would expect states to apply for to offset some of the impact of the loss of funding. And we also would expect obviously, that a number of our hospitals would qualify for the rural fund. I can't quantify what that looks like today. There's still -- the rules haven't been set by the -- at the state level or through CMS. So -- but we would expect that those offsets would be not insignificant.

And as we look at the rural funds as an example, that will go into place next year. And so while each state is going to have to deal with, how do divvy those funds up, just looking at our footprint, we've got a mix of primary, secondary and tertiary level hospitals. We think that perhaps 1/3 of our hospitals could be hospitals that would likely qualify for those funds as they're -- as they finish the rulings on that. And then CMS is going to divvy up about 50% of that. And what we've heard from CMS in talking with their ranking officials is that they're going to be focusing on helping hospitals to provide innovation technology that's going to drive improved outcomes for Medicare and Medicaid beneficiaries and things like patient wearables has been publicly talked about by CMS. Our BioButton program that we have would qualify today for the criteria that's been outlined for CMS in that regard. And so we think that we're well positioned for those funds as an example. And we do know that our states are having conversations in talking with ranking members of CMS. They said that the Medicaid program was always meant to be a federal and state partnership. And I think that the One Big Beautiful Bill has talked about trying to move more of that responsibilities back towards the states. And so as Alfred said, the $150 to $175 million, we consider kind of a worst case and that's without any other programs that he talked about in. We expect that the states are going to have, to have some contribution of dollars going back into their Medicaid programs at a state level. So we expect that number to come down.

Last thing I would say is 2 years is a long time before the big cuts really start in earnest. And it's difficult to expect that there wouldn't be some change between now and then. Obviously, I'd be loath to predict what that might be. But as we have seen many times over, when you have forward starting reductions, often those actually don't happen or continue to get deferred indefinitely.

For sure. And how do you think about just the state of rural health systems in particular? Like I feel like the public for-profit hospitals can weather this, if you will, and manage through the a lot of health systems operating with negative margins, any thoughts in terms of -- in understanding those things that can change here over time, too, but what it could mean for just consolidation, M&A across health systems longer term.

Yes, it's a great point. I mean, I've been saying this that the public companies are not a great comp for health care. If you look at the Kaufman Hall data, for example, they track on a monthly basis, hospital operating margins across the country. And still a great majority of the hospitals are in nonprofit systems and you've got about 1/3 of hospitals losing money. So you think about adding on to that impact, and it really becomes hard to sustain for a lot of systems. And so we do expect that, that's going to drive the M&A process. whether that's rural systems or midsize or large major metros, I think that it's not unique to rural health care. I think that this is going to broadly impact the health system across the country. particularly as the nonprofits have some other issues that are currently under debate as well with 340B programs and some pilots that are rolling out. So health care is going to be a challenge for those organizations if they've already been struggling. So we brought in a new Chief Development Officer this summer, Chris Schoeplein, and Chris came from the sell-side advisory services. He spent 17 years working with nonprofits. And so he's been a great addition to our team as well, since we went public last summer, our visibility in terms of that joint venture model that we provide has gotten more visibility and which is a good thing. Our phones were ringing from different systems wanting to talk and understand that model better. And now that Chris is here, we're really harvesting those conversations and taking advantage of looking for other midsized markets that we could potentially partner into with an academic or a nonprofit that could help us accelerate that joint venture model that we've historically grown and had great success with.

That's great. And maybe just more broadly, just a pulse on Washington. The sentiment around enhanced subsidies has improved in recent weeks. What are you may be hearing on the ground in terms of D.C. on the policy front?

Yes. We've obviously advanced the -- both the listening and the advocacy side of our government relations efforts this year, and consistent with what you've heard. We're hearing the same things. It turns out that Americans like coverage, and that's not a partisan issue. America is the most covered as it's been today as it's been in modern history between Medicare, Medicaid and the managed programs and then the health exchanges, we have sort of government health care for all who need it. I don't know that we'll see government health care universal anytime in my lifetime, but we certainly have the avenues to cover Americans. And so that's a good thing. The enhanced premium tax credits particularly as you see some of these Medicaid cuts coming, if we don't have an answer to that, that, that just leaves a bigger hole in that middle lower income bucket for patients to struggle to access insurance. As we talk to legislators, I think that there's a growing recognition and appreciation that these programs are popular, that they're necessary, and what we're hearing is growing sentiment that something will be done there now, whether that's just an extension of the programs for a year or 2 or whether there's some type of change to that. I've always thought that the Republicans will come out with a way in which they can accomplish a similar goal to the enhanced premium tax credits, but do it in a Republican friendly way that they can claim some type of credit of how they have made it better. But I don't think that you can say you've made it better if you're taking access from care away from people. And I think that that's what they're hearing as they go back in their districts and town halls. And so there's been a growing rise from at least the folks that we're talking to in our GR channels that are suggesting that there's a growing appetite and appreciation and the need for doing something around tax credits.

What I would add about the exchanges, however, is that for us, we're a little bit under-indexed relative to our peers from a volume standpoint. For us, the exchanges represent about 7% of revenue or about 6% of admissions and the economics, the underlying economics of exchange volume while it gets categorized into the commercial bucket, are actually very different from traditional commercial. The economics are much closer to Medicare than they are to traditional commercial. So we've tried to make it clear. The underlying profitability of these volumes are actually not nearly as strong as traditional commercial.

Yes. I think you mentioned on the call recently around that, too, in terms of how you're approaching.

Right. Yes. And in fact, we're even on some of the very -- where we're getting plans that are having a significant amount of denials. We're actually looking at terminating some of those plans.

Got it. Maybe just shifting gears to supplemental payments. I think Texas was recently approved. And how are you feeling about kind of those programs? And I know for some time, the big question has just been durability of these programs, anything changing in your view?

On the durability side, no. I mean, we were saying that even going into the legislative season, these programs started under the first administration of Trump and obviously have grown as you've got 44-plus states now that are covered by these programs, but you don't typically see these things go backwards. And so we've always had strong conviction around the durability. Our New Mexico program was approved as anticipated earlier this year. And we don't see any major changes happening particularly now that the OBBB has been passed and sort of set the future for these programs in terms of what they're going to look like in terms of harmonizing the output. So we see them very, very durable on Texas. Alfred, do you want to talk about it?

Yes. Texas, the plan actually had a couple of different provisions that were new. However, for us, we expect our economics to be very consistent with historical, some of the distribution of funds moved increased funding for some of the children's hospitals and a little bit on the urban side, but we think our economics will largely be the same.

I want to shift back to just technology. You mentioned kind of AI before a big focus for the market. Maybe we start -- I guess, on 2 fronts, you have kind of Epic in terms of how you're utilizing that across the health system. And then also, you have partners like Ensemble. So there might be some direct things you're doing in AI, but there might also be some indirect in terms of some of your partners and really what that means for the business?

Yes, it's a great call out. We're fortunate to have chosen some really great partners that are leading in this area, Epic is -- the KLAS, K-L-A-S leading electronic health record, but it's really much more than that. It's our clinical operating system for the company. So everything from the bedside care that we deliver at the hospitals or the clinics to our transfer centers to the revenue cycle to consumer outreach platforms that they have CRM modules that they have built in, Epic is really leading in terms of spreading out their services, but their most recent annual user group meeting, they showcase some of the things that they're already doing in flight and some of the things on the build and AI is central to all of that. And so I've said this before publicly, and I think it only becomes more true that historically, our EHRs have been something that our clinicians are working for the technology. Now the technology is going to start working for our clinicians, and we can really see that already and we're benefiting by that as a system. Similarly Ensemble, our partner with revenue cycle. They work inside of Epic, and so they derisk their revenue cycle operations because they're not lifting and shipping that data and then pumping it back into the -- they're working in native system, but they also are spending tens of millions of dollars on capital infusion into AI. They recently made an acquisition of a company that's going to help accelerate that, and we're seeing the benefits of that, everything from the pre-auth process to the denial adjudication process and just making sure we've got clean claims going out the door, more accurate and better coding, all of those things are helpful and continuing to deal in this challenged payer landscape that we work in. And so we're fortunate to have both of those partners as drivers of technology and then helping us to improve the business. And then as you said, we talked about some of the things we're doing clinically at the bed side and on the business side that we're going to be continuing to advance as we work our impact programs over the coming years. We just really see a big opportunity for making our labor pool stronger, more effective and reducing dependence upon contract labor.

Got it. Maybe we can just touch on that since you mentioned it, I think labor has been pretty stable. Any thoughts there in terms of just the labor backdrop more broadly than just on a longer-term basis, whether it's efficiencies with AI and how that can help?

Again, we're fortunate to be in growing markets, desirable markets where people want to work and the nursing shortage has always been something that's been persistent throughout my career, just how acute is it at any given moment. That being said, we've seen our turnover rates come down, our attrition rates come down back to pre-pandemic levels. And where we deploy technology, it's really being seen as a benefit to our nurses as well as our patients, we really focus on our culture and having organizations where people want to work. And we've been proud to be recognized by like Modern Healthcare list us 75 Best Places to Work across the country, 75 best hospitals. 9 of our hospitals this year won that award. So we've got over 10% of the award winners, almost 1/3 of our hospitals winning that award. It says a lot about the culture in our people aspects, but providing technology that's going to allow our caregivers again to work at the top of their license, and just make it easier to deliver care and safer, more effective for patients to receive care. We're seeing that with our virtual nursing program. And so the bedside task of being a nurse are very challenging. It's a very demanding job, and you've got multiple patients that want your attention at the same time. And so things like admitting orders and discharge notes and medication reconciliation, all of those things take time. Patient comes in with a bag of prescriptions and you've got to transcribe that, make sure it's entered in the system correctly, so that you're not -- you can give the appropriate medications for that care. All those things take time. Now with virtual nursing, we're able to bring in additional nurses into the room to help with those additional orders or discharge instructions, answer patient questions. And give the dedicated time that a patient needs and deserves while also letting that bedside nurse care for the other 5 patients that they might have at any given moment to take care of. So we're seeing the benefits of that. The patient wearables that we have are helping us with providing better care. These -- the BioButton is something about the size of your smartwatch that sits on your chest. And instead of having a blood pressure cuffs and a pulse ox machine and EKG reads and all these different things that we normally put patients up to, that little button will do that and monitor all of the key core vitals. So we're getting minute-by-minute vital sign capture in a med surg environment versus 4 to 6 data points a day. So the result of that is less unplanned admissions to the ICU and patients deteriorate because we can intervene quicker. And the other result is we're freeing up about $8 a day of care with that patient going home sooner. So it's opening up that bed for us to take that next patient coming from the transfer center to help boost our admissions, and we're seeing the benefits of those. Our virtual attending program where we're bringing specialists to the patient versus transferring the patient to the hospital. And so in our East Texas region where we've done our outlying hospitals have seen about 11% increase in their admissions because we're no longer dependent upon taking that patient and transferring them to a higher level of care. We're just bringing that nephrologist, that neurologist, that specialist to the patient where they need. So we're really encouraged by the early rollouts that we're seeing, and we'll be continuing to scale this as we go into next year across the company.

That's great. Can we touch on just the outpatient strategy, you gave interesting nugget before in terms of people coming into the system now, but just how it's been going in terms of some of the urgent care acquisitions today?

The urgent cares have been a good addition what we -- if you've been around the hospital industry, you've always heard that the emergency room is the front door to the hospital. Well, our clinics and our urgent cares are the front door to our health system. And as we look at the unique patients that we cared for last year, over 1.2 million unique individuals, only about 157,000 of them ended up being admitted into our hospitals. And so the other 1 million-plus people we're seeing in our outpatient environment, as I mentioned before, 45% of those patients that came into those East Texas centers were brand new to our system. That's an opportunity for us to then say, do you have a primary care that you can follow up with, you can schedule them? Do you have other comorbid conditions, can we get you into that specialist? Do you need a diagnostic test or exam and follow-up from that urgent care that couldn't be done on site. We're going to make sure we're scheduling into those procedures as those things are happening. So that's been a great way of just increasing the top of the funnel. And then once we have you in the system, there's actuarial data will suggest there's x hundred admissions per -- or x hundred admissions per 1,000 population on Medicare or commercial patients that are going to need hospital-based care or ASCs or other things. And so we started, as we said, with the urgent cares because that was the front door to get more patients into the system. Right now, we're continuing to build out that outpatient strategy, adding more urgent carriers, but also imaging centers. We've got 2 ambulatory surgery centers in construction, working on a joint venture on a micro hospital. And so we've got a number of different projects and plan just to continue to build out that base across our 8 markets that we operate in to make sure that we can provide a full continuum of services. Again, most people don't need inpatient care in the given course of a year, but everybody needs health care services. And so the more we can integrate you into that system, the more likely it is when you do need that facility-based care that you're going to choose us.

Got it. And if you look out the next kind of 3 or 4 years, how do you think about just the cadence of some of these investments, mix between kind of urgent care versus ASCs, imaging centers? How does it look like potentially?

So we've really increased our market share at the urgent cares with the acquisitions that we did last year and earlier this year. And so we've gotten significant market share penetration now with those acquisitions, and they're still ramping up, but the early indication is all very positive and consistent with our expectations. As we continue on, I expect that those urgent cares, micro hospitals, imaging centers are going to be the next wave, and those will be phased in over the next several years. All of this has been part of our capital budget planning. We increased our capital about a percentage point with the majority of that additional capital contribution going to fund these ambulatory surgery -- ambulatory investments across the footprint. The urgent cares, we were fortunate to be able to find attractive purchase prices to enter into those markets and get speed to value through an acquisition for a lot of these others will be focusing principally on de novos. Again, the trading multiples for some of those business lines are far north of where the hospital industry is trading. And so it's a little bit of a build strategy on that end, but we think that we can do that more effectively. And we're going to be partnering with physicians on our ASCs. And so we want to make sure that we've got good partnerships. And that when we open those that we know that there's going to be demand and surgical volume growth as soon as we open those doors. And so -- it's a little bit of a build strategy over the next several years but contemplating our capital plan.

Great. A good segue. Just M&A more broadly, just how you think about the pipeline, how you think about kind of the JV model, which is kind of unique to you guys?

Yes. The joint venture model, again, has taken a lot of attraction. You've got academics that are struggling, not only with some of the contemplated cuts of the OBBB, but also NIH-cuts and things that have already started to happen. And so we see great opportunity for M&A. And we've said we've also -- we're also going to be very disciplined in pursuing that. So we are continuing to look for tuck-in opportunities as sort of that next phase of growth inside of our core regions, and we think that there's going to be some opportunities in our larger markets for that. And we know that there's opportunities for our next true market entry way. We had one that we had looked at last year shortly after the IPO. And it was a great story in terms of midsized markets. We have an academic partner who's interested, it could bring some of the needed services that were going to be needed to make that work. But upon diligence, found some things that were concerning and as a new public company, the last thing we want to do is something that's not going to be accretive to shareholders and something that we can make good for the company. So we ended up backing away from that. But it's only opened up other doors for us, and we're excited. That's why we brought Chris on to help fuel that. But we're very confident that the opportunities around M&A are going to be there, particularly with some of the legislative changes.

Got it. Now it's good to hear the discipline. Like you said, you want to make sure you do the right deal. I'm sure it has to be frustrating too, right, in terms of you feel like you're close to something.

I mean it's always, we want to make sure we can make an impact on the communities that we go into a positive impact. And it's something that M&A is not inexpensive. And we've told investors that whatever we do, we want to make sure we can see a path to delevering that transaction over the near term, of course, of the next, call it, next couple of years. And so that's something that we're going to be very focused on as we look through that. And now with the changes of the legislation, that will be part of our calculus in terms of which states might we go into based upon what some of the projected changes to the legislation might incur.

And I would just add, when we think about M&A, I mean, to Marty's point, we're going to continue to be very disciplined. We clearly plan to do M&A. It is key to our growth, one of the key pillars However, given our opportunities on the ambulatory side and given the opportunities to expand margins that we already talked about, we've got other levers for growth so we don't have to be super aggressive and we can be very disciplined on the M&A front.

Good point. Not like you're sitting still, you're still doing some things that are driving the business. Just going back to the JV model, particularly around NIH funding has been a very noisy backdrop. Any considerations there in terms of impact, positive or negatives there?

Not to us. We partner with academics, but most of our centers are still sort of tertiary level community hospitals. So we're not seeing impacts because we're not doing that primary research ourselves and more so through our partners. But I think as you look across the country, that certainly is having an impact. And the academic systems still have a desire to grow, but that's going to become more challenging for them from a balance sheet perspective on the one hand. And then many of them have not had that integrating or operating experience to go into new markets in their state outside of the core areas. So -- we think that our model is going to be attractive to them as an opportunity for them to still show positive growth, derisk that growth and be less capital dependent upon for their own personal balance sheet.

Great. All right. I think we're coming down on time here. So Marty, and Alfred, thank you so much for your time this morning.

Great to be here.

Our pleasure.

I appreciate it.