Thank you so much for joining us for the Bank of America Health Conference. My name is Joanna Gajuk. I cover healthcare facilities and managed care at Bank of America. Today, my pleasure to start this day with Ardent Health Partners, one of the largest health systems in the U.S. Today with us is Marty Bonick, CEO, and also Dave Styblo with IR. I guess we're going to go right into Q&A, right?
Sounds good. Good to be here with everybody.
I guess one of the key topics for hospitals, I guess always, but recently too is, you know, volumes. Pretty good number actually in Q1. It was higher end of your full year guidance, right? There was some calendar ahead when, you know, there was flu. Maybe you can talk about that. Obviously, you know, curious to know, you think this is sustainable? Should we expect, you know, you come in for the year towards the higher end? How should we think about the Q1, you know, implications for the rest of the year?
Yeah. 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 to who ended up in a hospital. But, you know, all through last year, we were saying that volumes were strong and durable. And we're back to the new normal, you know, post-pandemic. We saw good growth in our markets, primarily because we're in, again, eight mid-size urban markets. They're growing about three times 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. Again, I think it goes to the fact that we're beyond this quote unquote pent up demand that the payers seem to be talking about. You know, 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.
I guess inside your volumes, right, outpatient and not yours, but also other hospitals, outpatient were somewhat, you know, weaker maybe a little bit. Is there something to call out? Obviously, there is the calendar impact that impacts the outpatient more than inpatient. Is there something in it's going on? Maybe you can talk about the inpatient versus outpatient trends and how.
Yeah, 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 ORs and, you know, allow us to backfill with inpatient surgical growth. We certainly saw that happen. On the outpatient side, I don't think we're seeing anything different than, you know, 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, you know, with the economic uncertainty. You know, people may be making decisions, but, you know, we haven't seen a big systemic issue around that. 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 had 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. That is why we're focusing on expanding the ASCs and our urgent cares and other outpatient services in our core markets.
Right. I guess to that point, maybe you can expand on the strategy, right? How much, because I guess you're guiding to long-term volume growth of 2%-3%, right? How much of that, you know, is coming from outpatient, to your point, because you kind of have a lower base? As you continue to add, how much of that 2%-3% you assume is going to come from outpatient growth?
That's certainly a factor. I mean, we haven't quantified exactly how much of that. That 2%-3% growth is, generally speaking, to the core growth of our markets. You know, the position we have in there, we think that the outpatient side will complement that. You know, I 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 eight 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, you know, the clinics are the front door to the health system. And so we partner with physicians.
We, you know, go very deep into the primary care, the specialty care, and, you know, the pull through into the facilities ultimately comes from having those relationships with those patients. We see this all complements each other. 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.
Do you have a target in terms of, you know, average outpatient locations per hospitals that you're trying to get to? 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 one?
Yeah, no, we do not have a target per se. You know, we certainly look at the number of clinics that we have, you know, but that is not a perfect ratio. We have got primary, secondary, and tertiary level hospitals. Each of those different market locations can support a different level of growth. It is not as simple as setting a target. We do know that increasing the urgent care access points is key. That is one of the first things we said we were going to do, and we are doing that. That is the front door into the system. A lot of people that do not have a primary care physician are going to use that urgent care as that immediate, I need help, I want it now, and I do not want to wait to get an appointment.
Once we pull them in and we put them on our Epic EHR platform, we can see, oh, Joanna, you do not have a primary care. We can recommend one that is in your neighborhood that is taking new patients, and we can get you scheduled in there for the follow-up you need or if you need that specialty appointment. We are going to schedule in that urgent care before you leave so that you are not having to wait or go to Dr. Google to try to find that next level of care. We can pull you through that ecosystem. Once you are inside of that, we can make sure that you are getting the services, the preventative screenings that you need and what have you and building that relationship that is going to help to take you through that journey.
I guess before we—oh, sorry.
I was going to say to put some data around that. Talked about this before, but we acquired six urgent care facilities in East Texas. 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. In addition to that, 15% of those 45 then had a follow-up care within 30 days. That just creates the whole longitudinal care program that we're trying to instill throughout the organization. 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.
That's the first step. ASCs obviously are generally a higher margin business, usually a better payer mix, and, you know, 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. It is an area where Ardent has historically been a little bit under-indexed, and we see that white space to grow in our markets. Then imaging centers, freestanding ERs, that again, every market is unique in terms of its saturation, what it can hold, what it can support. We see all of those as great avenues for us to continue to build out the network.
I guess before we move to the next topic, because very topical, you know, yesterday was around apparently some acceleration in utilization. So any comments that you might have, you know, what you're seeing, say, in April versus March or Q1?
Yeah, we're not talking about April volumes right now, but, you know, 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. You know, we are very, you know, bullish in terms of, you know, the positions we're in our markets, the growth of our markets, and seeing that trend continue.
Right. Moving on, a very interesting part of Ardent's story is the joint venture model, which is very unique for the hospital, publicly traded hospital companies. Maybe you can walk us through kind of the benefits, you know, to Ardent and also to the partners from having that joint venture model.
Yeah, no, it is, I think, unique to us. 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. Most of the academic health systems across the nation, the large academics have invested in Epic. You know, having that continuity of communication and care across different settings is important. Most of the academics are looking at that as they contemplate a partnership. You know, that's something that we definitely have, you know, built into our system that is an attractor. For us, you know, if we go into a new market, you know, we bring our operating expertise, the systems and structures we put in place to be able to operate facilities, you know, in a very efficient way.
You know, healthcare is challenging. Physician recruitment, patient loyalty, brand recognition, all of those things are important. The academic system partnerships that we focused on, we believe can complement each other in very strong ways. For us, it brings that X factor in. I'll talk about the 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 five years later, and we've improved the services, we've improved the physicians collectively. You know, we turned that into a positive margin, and it's still a growing margin story for us.
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. There is just this flywheel effect that can happen. I would say if you live in Texas, everybody loves UT unless you're an Aggie. We've painted that town orange. We've changed the trajectory of what that looks like. We brought services that did not exist. Last year, we opened up an ECMO program, which is sort of advanced cardiac lifesaving care. There was no ECMO program in all of East Texas before this partnership. We brought that to them. This is really, you know, we saw this really proliferate during COVID. That advanced end-stage lifesaving care is not something that's easy to do.
have got to have the specialists, the specially trained physicians, nurses, what have you. Our ability to recruit because of the university partnership and that academic prestige and halo that goes with it allowed us to bring in the subspecialists in that East Texas region that probably otherwise would not have come. That is an example. We have grown our teaching program in that market significantly in terms of the residents and fellows that we are training in that market. There is just a lot of opportunity for us when we think about this as a one plus one equals three scenario.
Part of the joint venture structure is also your, I guess you employing and affiliating with a lot of physicians. Can you talk about this a little bit more? Like what's the role of the physicians and why that's important to you?
As we look at these mid-size markets, you know, the physician-patient relationship is key. It goes back to, you know, 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. You don't want to wait until a patient is, you know, having an emergency, calls 911 and gets in an 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've 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, you know, partnership there. Having the physicians is key.
You know, again, we saw over 1.2 million patients, but only 157,000 were admitted last year. Those other patients are patients that may at some point need that higher level care. Building those physician relationships, we're building those connections for longer-term longitudinal relationships that Dave was talking about.
I guess switching gears a little bit, a lot of, you know, is happening in D.C. Curious to hear your opinion about the latest, right, 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, you know, how do you think it's going to get finalized?
Yeah. I mean, obviously, it's a proposal and it's just that. I would say that, you know, 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. 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, you know, talked about being grandfathered in, which we think is a strong positive indication of what we had been messaging and expecting to happen. It still has to get passed by the Senate. You know, I think that they've got an even tougher road.
If the first markup or the first, you know, draft proposal is something that I think is very manageable, something that, you know, is sustainable for us and does not push us backwards, that is good. You know, the other things, you know, that have been taken, seemingly taken off the table, FMAP changes and, you know, provider tax caps or what have you, those things are all, you know, inside of our current guide. We feel pretty good at where the process is today. You know, it is a long way to go before it is finalized.
I think, you know, fearing the worst of, you know, what people were talking about, seeing the first markup, we say, "Okay, this is something that is, you know, incremental change, but not monumental change at the end of the day." You know, we feel good about the first read and knowing that it probably gets better from here.
Right. And talking about DPPs, right? I guess we're still waiting for the approval, you know, one of the states, right? It's expected to bring, you know, a good chunk of, you know, EBITDA this year, right? Any other there and kind of how are you thinking about, you know, why there's a delay? Is there some sort of pipeline that, like, you know, they're going through all the.
The wheels of government at work, you know, I think is the answer. You know, if you look at the approval cycle, every state has to have their DPP program approved every year. Once a state has been approved, there has not been a case where it has not been reapproved. You know, there can be challenges or questions along the way, but they ultimately are, you know, every one of these across the 44+ states that now have these programs goes through this every year. Some have been going at it for years. New Mexico was approved in late 2024 for the second half of 2024. Immediately they put in the application for 2025, essentially the same application. There is no reason to believe that would not be approved. We know that there has been correspondence going back and forth between CMS and the state.
It was all kind of technical procedural issues. We do not see any red flags in terms of that and just working through its system. You know, we feel very confident that ultimately these programs get approved. With the energy and commerce markup or the proposal, you know, it gives us even more confidence that these things are going to happen. You know, the timing is, you know, a little bit suspect, but we have seen a number of state programs starting to come out of CMS, which is an encouraging sign. Tennessee was the most recent state, and that was a new approval that had not been there before. That application was in before the New Mexico one. You know, we are expecting to see New Mexico get approved and the other states to follow.
They hopefully just work their parts away.
Every state has to do it every year. Yeah, it's just New Mexico's next in line, hopefully.
Just thinking about, you know, broadly when it comes to this reconciliation bill discussions and DPPs and such, is there something to be said about, you know, states somehow, you know, delayed payments or something else is happening because they're waiting also on, you know, these different decisions or you haven't really seen anything like that?
Yeah. 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, you know, the program's approved. So, you know, cash flow timing should match up from that perspective.
Yeah, 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, you know, there's uncertainty out there, you know, what's going to happen?
Each state has a different payment program, but we've not seen any delays in state payments. Yeah, it's kind of our quarterly, summer, semi-annual.
Right. I guess moving on outside of these DPP programs, right, this year, it's helping margins, right? You also talk about, what, 100-200 basis points of the margin improvement over a long period of time through other company-specific actions. Maybe you can kind of bring us up to speed, you know, what's been done and what else is there left that's going to drive that margin improvement at the core.
Yeah. So, you know, in preparations before we went public last summer, we had really focused on turning Ardent from what had been largely a holding company into, you know, a more robust operating company. We had all the services and functions, but we did not necessarily have everything flowing through similar funnels in each of our different markets. We did a lot of that heavy lifting before we went public and sort of the cover of COVID. Now we feel like we have got a very scalable and robust system. That being said, we are much more centralized, more standardized, but we still have room for optimization. There are pockets of opportunity in the labor side. There are certainly opportunities on the supply chain side that we are continuing to go after, continued performance and revenue cycle. Then you add on the outpatient growth.
Those margins and those outpatient centers are generally better than the core margin. Over time, as we continue to build those, there are smaller chunks of EBITDA and smaller chunks of revenue, but the margin profile is better. As we build upon those things and stack them, we expect to see that have an impact as well. All of those categories build upon each other.
Talking about costs, right? Maybe we can also touch base on what the labor situation is. It sounds like everyone pretty much seeing stable. Is there anything, you know, you would call out there in terms of use of contract labor, what the rates are, the utilization of that? I guess nurses versus also physicians, because I guess that's maybe one area of, I guess, labor that's growing faster in terms of the professional fees. Maybe you can touch on all these different pieces.
Sure. Yeah. So we've largely seen the workforce stabilize and sort of getting again back to sort of normalized inflation trends. You know, we typically budget, you know, somewhere around a 3% ± , you know, sort of cost of living adjustment into our staffing models and budgeting plans. You know, we saw that sort of normalize last year. We're seeing that, you know, expect that to continue into this year. Not expecting anything to change dramatically. What we have seen is a reduction from our peak in COVID of contract labor growing and slowly ratcheting back down. Again, we were down about 60 basis points this first quarter over the last quarter last year. You know, we're at 3.8% contract labor as a percent of salaries, wages, and benefits. We were in the lower threes pre-pandemic. We're getting closer to that number.
Based upon the strong growth of services in our markets, you know, 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. That sort of giveaway, takeaway with the nurses, you know, the turnover is incrementally helping us to reduce that contract labor down. You know, we saw some large step functions down from 2023 to 2024. We expect to see, you know, some modest improvement in 2025 as we continue to focus on that turnover and recruitment and retention activity with the nurses. On the physician side, we did see, you know, again, 2023 was a very challenging year for the industry.
2024 moderated a bit from the peak of 2023. 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. First quarter was a little bit better than expectations, but we know that there's still some headwinds. You know, 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. The impact of the surprise billing, you know, has trickled down through the industry, through the different specialties. You know, we hope that we're in the latter innings of this. It's still a little bit north of the inflationary environment that we've been seeing historically.
These professional fees, right? I think they're probably like 7% of revenues, right? It became like a, you know, a material, I guess, cost on your P&L. Does it also create pressure on margins, you know, structurally that, you know, 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, you know, there's no way it's going to come down, right? It maybe decelerates the growth, right? But like.
I think on the salary side, you know, yes, if you give a nurse a raise, you're not going to see that dollar come back. If you give a 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, you know, it is multifactorial. So, you know, we're really focusing on the managed care negotiations. We're still seeing above average, you know, above inflationary rate negotiations with the managed care plans. Principally, they're driving, you know, a lot of this increase in the physician subsidy cost. I mean, this is a squeezing of the balloon. It's, you know, we're pushing back and making sure that we're getting rates that help to offset those provider-based staffing headwinds. We don't think that this is, you know, 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.
Is there something you can actually do? Sounds like you have some contract up for negotiation later in the year. Is this something where you kind of, you know, feel good that you might be able to kind of like, I don't know, bring it down, the fees, right? Maybe like the rate of growth.
Yeah. Structurally, we've got some partnerships with some key staffing groups that, you know, are helping us to expand. 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. We can spread those across the footprint versus just dealing in a market-by-market basis. Structurally, yes, we are working on other things to combat just the general trend that we've seen in those inflationary costs and as a part of that plan to help moderate these things and get them back into a normal inflationary increase environment.
I guess part of the problem where, I mean, is the No Surprises Act, but also the Medicare rates, right, for doctors not really growing, but while they're being cut. What's your view of, you know, physician fee fix for this year? Obviously, it hasn't been, you know, included in the latest CR, but is there still hope that something might come later in the year and somehow, you know, help all these docs a little bit?
Yeah. I mean, from the conversations that we have with our trade associations and, you know, personal conversations in D.C., I think that the elected officials are very aware of, you know, the impact on physicians. And I, you know, we've heard that there's still talks and hopes that they will, you know, sort of permanently fix this doc fix issue that they've been sort of having to just re-up every year. And, you know, it's one factor in the bigger plan that they're trying to address. Ultimately, as I think, you know, having sustainable rates for physicians to be able to support that is, you know, something that I think Congress is aware of. It's complicated while they're trying to deal with all the other budget woes. 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, you know, this year, but I guess more kind of looking forward, I mean, going forward rate, right, adjustments or the rates calculated, right?
Yeah. As we talk to people, I think Congress is tired of having to deal with this every year. It's like, okay, we keep re-upping this every year. Why don't we just fix this, you know? I do think that ultimately that there's some relief coming.
You mentioned commercial as a lever, right, to try to, you know, offset some of the pressure on professional fees. Maybe just broadly speaking, can you talk about your contracting with commercial plans in terms of, you know, where the rate updates are right now, right? Are they still kind of like mid-to-gold digits? Is there any pressure from the payers? Because obviously they all complain about high trend and this and that. Does that create sort of, you know, put you at a disadvantage, so to speak, where they're going to like push harder on this increase?
On the first part, we are still seeing sort of that, call it, mid-single digit rate increases. You know, I think that's very justifiable given 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. You know, I think that the mid-single digits is something that we're still, you know, holding our ground on and seeing success. We're essentially all contracted for this year and about two-thirds for next year. We feel good about how that's matriculating. You know, the negotiations are getting tougher. You're seeing more providers across the country go back to, you know, what I'd say sort of pre-pandemic tactics. These are arm wrestling matches.
You know, the payers, unless they're pushed, are going to push back. We are having to get more aggressive with those negotiating postures and, you know, taking things further and closer to and up to termination, whether that's notifying members in the markets about potentially going out of network. We are having to, you know, definitely ramp up as they intensify their pushback. We're having to do the same. Based upon the strength that we have in our markets, the positions as needed service providers in our areas, you know, we're must-haves in our markets. You know, we feel like we've got one, you know, 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. They need us in their network as much as we need them.
Maybe just on the commercial rate topic, contract rather, I think you mentioned some increasing denials, right? Is it something that you expect to kind of accelerate or you think, you know, from here maybe gets better? Is there something you can do contractually to kind of, you know, maybe go after this or sort of lower the level of these denials at some point?
Yeah. Last year is, I would say, not corresponding, but coincidentally with the increase of admissions coming from the two midnight rule. We did see an increase in the denial activity. They were not necessarily one for one or linear with each other, but in the second half saw a bit of a step up from there. You know, I'd say that they're holding right now, but it is something that we're watching very closely. You know, the very, very vast majority of these are getting paid. It's turning in more into a slow pay versus not getting paid. Our revenue cycle partners are, again, key in battling that, making sure we've got clean claims going out the door, that we've got good documentation to support that. Ultimately, we're providing the care.
You know, this is, it's really just a sad state of the way the industry works and that we've provided care and that we have to justify, you know, getting paid for the care that we deliver. You know, our revenue cycle partners are really strong in terms of knowing what the payers need so we can get clean claims. Our denial rates are, you know, I'd say, you know, doing much better than the industry averages. You know, we're still seeing pressure on that front.
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 a longer term. Maybe talk about kind of, you know, the targets or how you're looking at the market. Also, because of, you know, all the things we just talked about, the professional fees policy. Are you seeing more interest from the nonprofits or academics? Sort of, you know, hey, like we got to do something because the market is changing.
Yeah, certainly. I mean, it's a tale of two cities. You've got systems like ours that are doing well and you've got a lot of hospitals still struggling. We definitely have seen our pipeline increase. We're bringing down a new Chief Development Officer just to be, you know, 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 out 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. 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.
We are very, you know, 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. Maybe cash flow. How would you think about cash flow for this year?
From a cash flow perspective, you know, we haven't changed our guidance on that. You know, as we work through, you know, balancing out sort of the slow pay of the payers, you know, we're tightly managing our CapEx spend on the other side to manage that. You know, we expect that to continue as planned.
All right. Sounds good. Thank you so much.
Thank you.
Thanks, everyone. Right on time. All right. I think.