Ardent Health, Inc. ($ARDT)

Good afternoon, everyone. Good morning, everyone. My name is Sam Becker. I'm with Goldman Sachs Research and I have the honor to [indiscernible] conference with Ardent Health CFO, Alfred Lumsdaine and Senior VP of IR, Dave Styblo. Thank you both for joining us. Our pleasure.

Thanks for having us.

So I guess to start, I know there's a lot going on with your recent CEO transition. But before we get into that, could you just remind us a little bit of the Ardent story and then your overall growth strategy stands today?

Sure. Ardent Health, we've been around a long time, 30 years, but the company went public 2 years ago and is still controlled public company. But off of that IPO plan 3 part of our strategy, focused, I'd say, first and foremost, on expanding margins. We believe we continue to have an opportunity through creating incremental scale the company was built off of acquisition but has moved transformed from being more of a holding company to more of an operating company where we've consolidated a lot of the back-office operations and oversight into a single operating unit. Over the last several years, we still have the opportunity to optimize that platform and we call a lot of our initiatives to expand margins. Our moniker is our impact programs. Second, we have transformed the company from being a hospital-centric focus to focusing on our markets, growing our ambulatory and outpatient footprint inside of our markets, investing in our markets to be sure that we are truly a system meeting the consumer demand where in the setting that the consumer wants to be seen and often in lower cost settings than the 4 walls of the hospital. And then lastly, the company would like to enter new markets through inorganic M&A. Again, went public 2 years ago with the belief that we would be entering new markets and doing inorganic M&A, the backdrop of the transaction market has not facilitated the types of transactions we are looking for. We want to be in markets that look a lot like our markets, where you have stronger-than-average population and economic growth dynamics at play. And while those have been out there, we're going to be very disciplined around what we pursue. The worst thing we could do is a bad acquisition. And so we've seen attractive markets at valuations that were unattractive. And we've seen attractive valuations in markets that we don't think are good long-term investments for Ardent. So haven't found that sweet spot yet, but continues to be core to our long-term growth strategy. But we have such a good opportunity in those first 2 buckets we're, again, going to stay very disciplined on new market M&A. And just overview of who Ardent is. We're 30 hospitals. We're in 8 markets across 6 states. -- predominantly in the South Southwest.

Awesome. That sounds great. So let's move on to the CEO transition a little bit -- could you just opine more on the Board's decision to transition now?

Sure. Happy to provide an overview of what Dave and I have talked to the Board about the Board, their perspective on this was that it's a very proactive move and couldn't be further from our reactive move. They weren't looking at this in any way reactive to anything. They were -- board appropriately has been extremely complementary of Marty in terms of the work that Marty did to build the organization from being a hospital-centric tubing a health system and executing on the strategy of transforming the company from that holding company perspective to an operating company, and the Board would say, Marty was absolutely the right CEO for that business transformation and executed it extremely well. And as we look at the go-forward challenges and headwinds, let's say, in the industry, there's the expectation that we've gone through a period of time, where there's been a ton of coverage expansion, the exchange growth. We've had growth in state supplemental programs with the big beautiful bill certainly has 1 element and other dynamics and headwinds at play, the expectation is there will be more of a premium on that underlying operational execution. Dave was brought in to enhance our operations, strengthen our core operating platform, stand up and enhance our impact programs. And as, again, as the Board looks at the next 5 years, they think that dynamic of operational execution will be different. They think Dave is extremely well positioned given his background, not only inside of health systems, but also across scaled retail health platform. Dave's got experience with running Target's pharmacy business with running Walmart Health business and the level of operational rigor standardization is at a dimension, I'd say, higher than what even the health system world is typically accustomed to. So bringing that operational focus and rigor and accelerating enhancing our margin profile takes primacy as we look forward.

Great. Great. And I was also curious, why do you think the Board looked internally at instead of doing maybe a larger nationwide search?

Well, I think it's -- yes, no, good question, and I think it's -- I'll say at a personal level, the easiest answer, and that is, Dave has proven himself inside of the organization over the past 15 months and executed at a level that has accelerated and enhanced our operational position. And in terms of really demonstrating that this was a proactive move and not a reactive move. I think that's probably no further evidence than the fact that it was an internal promotion.

Great. And I know you talked a little bit about Dave's experience. Are there any strengths that you'd like to highlight for him and working so closely with that...

Sure. Absolutely. Yes, I have really had the pleasure working with Dave for 15 months. I tell people who I met and ask about Dave, he is an extraordinary leader from the standpoint of creating. He is 1 of the most authentic, consistent and accountable driven leaders that I've worked with in my career. And I think, yes, if I were to highlight 3 strengths, it would be just those things. And I think those are the dimensions that really make his operational rigor and acumen come to the forefront.

Tim, as you think about evals, he has been the catalyst behind our impact program savings and initiative. And so again, he's been here for 15 months plus. And so when we initially introduced that program, we had targeted [ $45 million ] of savings for fiscal year 2026. And since then, he's continued to drive find and harvest additional savings. And on our last earnings call, we raised that up to additional $15 million up to $55 million. So again, just to give the mark a little flavor of just his discipline and execution, ability to find things and continue to deliver, that's an additional proof point just as the investment community introduced to Dave.

Great. And transitioning a little bit to volumes. Last week, when you made the announcement, you also mentioned you observed volume softness across our portfolio during the second quarter. And you also gave some industry-wide commentary as well. And I just wanted to see if you could elaborate a little bit more on that, what you've seen across the portfolio and some of those industry trends.

Absolutely. And obviously, that commentary got picked up very, very broadly. And what we were, I guess, first and foremost, doing was reaffirming our guidance for the with this trend. Again, it goes to the fact that the CEO change was a proactive, not a reactive move and we are very comfortable and confident with our guidance as we go forward for the rest of the year. But with that reaffirmation, what we didn't want to do is not give color on kind of the shape of that. And we -- the industry data that we work with shows volume softness, particularly most acutely on the surgical side, more acute on inpatient than outpatient, which we attribute to kind of the normal ongoing shift of procedures out of inpatient setting to outpatient settings. But yes, we just thought we'd be remiss not to give a shape of what we're seeing and the fact with our reaffirmation of guidance that we're continuing to work on the cost structure of the organization back to Dave prior comments about Dave Casper, and continuing to expand and accelerate our impact program such that we have the cost structure of the enterprise build for the overall volume environment. That's what the message we were trying to send. And so with the volume observations, we're largely, where we work with as 1 example, we're triangulating a number of different sources, but a decent amount of our data comes through our relationship with Ensemble. Ensemble is the 10x the size of Ardent so the 6 states and 8 markets that we're in. And that data suggests again very broad softening across, I would say, all geographies, not the same across all geographies, but across all geographies, as well as broad softness across payer type and service line. And so that helps provide we think some of the underlying rationale as to the dynamics that underlie the softness, which we think. Certainly, overall, I'd say, macroeconomic concerns, inflationary pressures, et cetera, would certainly be 1 thesis when you see the breadth of the volume softness.

Great. And then I guess within that data that you've been seeing, sort of what's the -- you may have just mentioned to the sense that what's the scale and size of that sample?

Yes. Again, I would say our biggest sample set today is off of data that we work with Ensemble. So again, I would suggest, call it, 10x the size of our...

Great. And then you mentioned the impact program, but with the reiteration of guidance last week, what really gives you confidence to achieve that guide despite the soft?

Yes. I would point back to the impact programs. Now again, I don't want to get ahead of ourselves in talking specifically quantifying where we are relative to the pull-through of our impact programs. We, again, as Dave mentioned, size stood at $55 million for this year at the midpoint. I would expect that number will increase given the dynamics we're talking about that we're working to enhance and expand the throughput of that through the year as a consequence of the overall demand environment that we're working against. And I would point to a couple of different things. We -- obviously, it's easy to think about these types of programs on the cost side. And clearly, we are working on our overall organizational structure, keeping it lean for the underlying volume demand, particularly at I'd call the middle management layers and working on having a scaled and nimble organization structured for the demand levels today and going forward. Working on supply chain improvements, what can we do around pricing, unit pricing what can we do around physician preference items and obsolescence, so a number of broad supply chain initiatives and then down to things like, we'll call it, services like professional services like IT licenses, what can we do? We've seen pressure on -- as more stuff has moved to the cloud, there's maybe been a little bit more pressure coming from those vendors on just sort of the belief that there aren't a lot of good alternatives. And so we've really looked at okay, how do we source those? What opportunities can there be to make product switch? And how can we actually reduce the number of licenses we're using. We're working with a third-party on a -- we've actually brought in a third-party to help us to move faster and add additional impact initiatives. But the last thing I would also call out, impact program also means enhancing our revenue opportunity. So not just on the cost side, but what are we doing to drive better rates and not just better rates, but better terms with our payers. We've talked a lot about internally we've reorganized our managed care team to integrate with our revenue cycle team, creating what we call a revenue integrity function. So that when we're at the table, we're not just looking at top line rate, but also the underlying terms, how are we dealing with authorizations, denials, payment terms. Don't have a lot of data points, but we do have 1 recently large completed managed care negotiation that we had to take to essentially the weekend before it expired because we -- through the transparency data, we learned we were significantly underpaid in the market for outpatient services, but weren't getting the type of traction that we felt was appropriate in our negotiations. So we've had to get more aggressive for lack of a better word, in our negotiations in order to ensure, while we still, in many of our markets are still, we think, the value leader inside of the market, but that we're getting reimbursed appropriately.

Great. And switching gears to the more on the policy side. How are you thinking about the proposed changes to CMS's state directed payment programs -- and what could that mean for your Medicaid exposure over time? Anything you'd like to highlight in terms of timing or where you feel most inflated?

Yes, there's probably not a lot. I'd say new there. I mean stuff comes out every day, but we quantified our exposure over the full implementation of the BBB reductions in state directed payment programs at $150 million to $175 million by 2035. Now a long time between today and 2035, we'll see if those actually go in place the way that they were crafted, Oftentimes, when you have forward starting reductions, you see those being delayed, deferred changed. We're -- but what we know is that it has the loss drafted today, that's our exposure. Going back to Dave's comment about Dave Casper, again, it plays to that overall environment. We want to be in a position to execute to operate and win in whatever reimbursement environment that we're working in. And so as we look forward, I would expect our impact programs to continue to expand and grow and work towards us enhancing our margins. We've historically talked about are moving towards an EBIT -- adjusted EBITDA margin in the mid-teens. We've not factored -- we've not sort of renewed that expectation off of the BBB cuts until we kind of get a better feel for what the environment looks like going forward. But -- we continue to view the multiyear journey of the impact programs as the way we continue to enhance our margins over time. Having said that, we do think there will be other opportunities, assuming that the BBB cuts happen the way that they're crafted. We do think they're -- I mean, there are programs that exist today at the state level that we would be eligible for would those cuts happen. That could be partial offsets, we would also think that there would be incremental state level programs that could provide some offsets to. But we can only control the controllables, and that's what the focus on the -- on our impact programs really drives down to.

As we're thinking about the proposed Medicaid work requirements too, what are you thinking about around potential impact to coverage or demand across your markets there?

Yes. I think the recently issued CMS rule there was really consistent with our expectations. I think the number of the disenrollment there at full run rate of 3 million lives was a little bit lower than some of the other estimates we had seen off the CEO. And other third-party research. But -- so it's certainly a challenge to try to model and forecast that. But certainly, it's been part of our business planning and our strategy. And again, I'll come back to for what Alfred, he just mentioned there. Again, we are preparing and equipping the business to navigate through these crosscurrents, whether it's the Medicaid enrollments the exchange BPP final parameters rule that came out where you're likely to have a little bit more exchange disruption on the margin next year, right? So we are preparing and equipping to navigate through these as well as '28 and beyond with the DPP headwinds there. But largely as expected, and that will likely stagger a little bit. So you may not really reach that full run rate impact. And so you move towards the second quarter of the year. But yes, overall, consistent with our expectations.

Awesome. Pivoting over to the margin side. I would love to talk a little bit about the professional fees. I know they've been a multiyear headwind for you guys. And I'm curious where things stand today and what you're seeing as you -- you progress through the year.

Yes, it certainly has been sort of a, we'll call it a 3-year journey, which we really go back to the changes to the no surprise billing Act and how that has sort of shifted responsibility for or created environment for a lot of compensation has shifted out of the pairs to the providers and how that has worked its way through essentially every specialty now starting with anesthesiology, hospitalist, and then particularly acute on the radiology side in 2025. We think essentially, all contracts have now been reset, I'll say multiple times. And while we don't sit here and imagine that or expect that, that will go to just sort of an ordinary cost of living type inflationary environment. We do think the -- as we get to the back half of '25 and start lapping some of the big step-ups that we will see a deceleration of the rate of increase. So far, Q1, we were right on track almost to the penny with our expectations. And so that gives us confidence in that we've sized this right for 2026. Now as we go forward, part of the question. So what -- how do we think about this for '26 and beyond? I mean I do think, again, the reset has happened we still will see inflationary pressure and likely at above inflationary rates. But we see a deceleration. I think working with our vendor partners is a part of that, ensuring how are we optimizing our efficiency in partnership with those vendors. And I do think I can imagine as radiology, for example, technology will be a helper in terms of easing the burden of not having enough radiologists -- so again, I'm optimistic that the rate of change will be decreasing going forward.

Great. Great. And then another headwind for you all recently an important theme lately has been around denials. Can you discuss what you're seeing in terms of payer behavior today and particularly around denials and reimbursement trends?

Yes. It's certainly been an extraordinarily challenging element for the whole industry and Ardent specifically over the past 2 years. We saw a big step up in the first half of 2024 and then got surprised with another leg up in denial activity in the big -- in the last half or into Q3 of 2025. So -- so starting from a very elevated level, I would say we've seen both a stabilization and maybe a little bit of an improvement. I would say I would remiss not to mention the very difficult work we've done internally to standardize a lot of our processes, work with our Ensemble Health to ensure that advantage of their AI in both responding to and avoiding denials upfront and then working on the collections on the back end. So early positive signs out of that work. And I think you're hearing from the MCOs better performance on their own internal underwriting and maybe that has an element of decelerating some of it. But again, I'm not certainly ever going to declare victory on that to mention. But I do think there are early positive signs of potential improvement. But again, I would say, not inconsistent with our expectations for the year.

Great. And I love that you mentioned some of your AI initiatives. Could you just expand a little bit more on what you're doing company-wide?

Yes.

And how that fits into real.

Yes. I mean I think I hit on almost every dimension. And a lot of that ends up being procured through the partners that we work with have already talked about Ensemble and how they've made figure investment into AI over the past 12 months. it also touches on the delivery of care. And I think that's probably a little bit of slower in terms of how it gets implemented, but we, for example, everybody talks about their AI scribe capability that we work with a company called the ambience, where we've gone from -- we went from a pilot program to a full organizational deployment within a 12-month time period. And with extraordinarily high physician satisfaction, enhancements to physician productivity. I think the reduction in documentation time is something like 5 hours per physician, which now means that we can address some of the access and see more issues and see more patients. And we're actually now capturing the richness of the interaction because if something wasn't documented, it can't be built even if it happens. So now we -- it improves the documentation for purposes of ensuring that we're compensated appropriately. So another example. At the back office level, Ardent has kicked off, transitioned to a new EHR -- ERP, Workday is our selected ERP that will be a 2-year implementation, which I think comes at the perfect time because -- so with it allows us to reengineer our processes while the AI revolution is happening, so it's coming at a perfect time. So Workday and that ERP implementation. We'll bring a lot of embedded AI with it. As does we're on -- for EHR, we're on a single instance of EPIC. EPIC continues to incorporate a lot of AI into their platform, which we then have access to through our single instances of EPIC. So yes, there's just -- it's it becomes a part of everything you do and touch. So yes, I would say it's not 1 initiative it touches almost every initiative.

Great. And then maybe jumping back, I know we talked quite a bit about the impact program today, but would love to hear just what that looks like day-to-day across the organization and what you see could really drive the most impact near term? And then I know you've already mentioned broadly, but if you want to go into detail about any areas that might be driving additional improvement thus far.

Yes, I'll touch on top of mind, and Dave, please jump in on any MS. I do think it starts at kind of the blocking and tackling at workforce management/productivity, how are we -- it's the largest expense in any health system and how are we organized how are we optimized on our workforce management dimensions. I've touched on supply chain initiatives I've touched on IT licensing initiatives and those revenue enhancement initiatives, although, sure, I'm leaving some things -- as I mentioned, we are bringing in a third-party consultant as well just because we don't want to leave any dollars on the table. And we think really having -- how we win going forward will be to out execute and that is the rallying cry around. And again, as a lot of the genesis of how we think Dave is positioned to lead the company going forward.

Great. And I also want to talk about your outpatient strategy and where that can potentially go long term and some of your key priorities are under ASC build-out?

Yes. It's certainly been -- it's a long-term strategy. We -- as we sit here today, we're still underrepresented on the outpatient assets inside of our markets. While we have a market-leading clinical enterprise. We believe in most of our markets, we have in the last 2 years, grown our urgent care enterprise, which is the -- often the front door to the health system in today's environment, we moved from only a handful of recent care to now 46, I think, across our markets, which is I don't want to ever call that built out, but it's closer to built out than not. Still underrepresented on some of the other sites of care. So ASCs, we only have a handful, we have a couple under construction. Now that will be growing that footprint will be a combination of M&A and de novo maybe skewing a little bit heavier towards de novo just given the dynamics and the costs and the multiples involved in often purchasing those types of assets. We do think there will be opportunities on freestanding ED and perhaps even the opportunity to have freestanding ED combined with urgent care because so often, you have ED needs level patients showing up at urgent care and vice versa. So anyway, and that all attributes to a little bit of a step up in CapEx. Historically, the company has run a little bit under 3% of revenue in CapEx spend this year, it will be over 3% the growth over time, largely attributable to that de novo investment in ambulatory sites of care, and we could see it even get to the mid-3s here in the next couple of years as that investment in our existing markets continue to ramp. But going back to some of the other underlying dynamics that we see in the industry, we do see the consistent movement of certain things out of inpatient settings into outpatient settings, meeting the consumer where they want to be met in potentially lower cost settings. So yes, that continues to be a strategic imperative for the organization.

And I think that's a great transition. Just overall, I would love to hear how you're thinking about capital deployment today across internal investment versus M&A?

Yes. No, great question. Yes, we -- again, the company historically has been pretty judicious on its CapEx spend running historically under 3% of CapEx, which our revenue for CapEx Relatively low for the industry, although some are reflecting the markets we're in as well as the fact that we have maybe more of an OpEx investment relative to our size in our clinical enterprise because of the types of the markets we're in. And as I mentioned, we would see a little bit of a step-up in that completely driven by our investments in ambulatory sites of care. But we are going to continue to be active in the M&A market to source new markets to enter. We want those markets to be similar to the types of markets that is it today. We want to be in high growth, high population growth, higher economic growth type markets. We think that's a rising tide. Again, hasn't been a lot of opportunities at the right multiples to enter those markets. But we kind of a bad news, good news, we do think, as with some of the crosscurrents that we're facing into, will likely yield more interest in potential M&A opportunities going forward. But those will really be opportunistic. We've maintained an extremely -- a balance sheet with 2.5x lease adjusted net leverage, we would have the opportunity to take on more leverage for the right acquisition, although as we sit here today, have over $1 billion in capacity for M&A, should the right opportunity come along. But the message I would want investors to be clear on is that, that will be done in an extremely disciplined way and that we have so much opportunity to grow margins, to build out our existing markets that doing a bad deal, which could just be a good deal at a bad price. It's still a bad deal -- that's our first order of business is to be very disciplined.

Element capital deployment. Obviously, we have a share repurchase authorization that we put into place in the fourth quarter last year for $50 million, we executed $3 million of that in that quarter. And so again, that's an element that we may pull that lever, given certain pricing and market conditions. But I want to just remind you that that's out in the market as well.

Great. And as we wrap up here, what do you think investors most often misunderstand about the Ardent story today?

Yes. I come back to the basics that we -- while there -- the industry is considered as a whole, what are the things that make Ardent different is where I focus -- we are smaller than our public peers. But I would like to think that also allows us to be more nimble and I do think that, that matters in the current operating environment and the go-ahead environment. And we have an opportunity to expand our margins because we have been less optimized historically. Again, a bad news, good news that I think that allows us to grow our margins going forward. And then I come back to Ardent has really been focused on being in the right markets and by we define the right markets as being markets that are growing faster, both population and economically as well as having a model that allows us and takes advantage of having partnerships with [indiscernible] and other not-for-profits, which yields in many type relationship. We cite our relationship, as an example, in East Texas with the University of Texas Health System. Leveraging the brand that UT brings as well as their -- they've built the medical school on our campus, the access that it gives us to train clinicians, doctors, nurses, really yield a very powerful relationship. And so I think it is a differentiator in the Ardent story. And so again, we're very excited about the future both as a continuation from the thesis that we've had and, again, under Dave's leadership and the operational enhancements to the enterprise.

Sounds great. Well, I want to thank you both for joining me today and joining us here at the Goldman Sachs Healthcare Conference.

Our pleasure. Thank you.

Thanks.