... Yeah, good morning, everyone. I'm Steve Baxter, the healthcare services analyst here at Wells Fargo. We're very pleased to have Ardent Health with us. So Ardent is operating health systems across a portfolio of acute care and other sites of care within the six-state portfolio. From the company, we have CEO Marty Bonick and CFO Alfred Ljungquist. Thanks again for being here. Did you want to make any opening remarks, or should we just kind of get into the Q& A?
Let's just dive right in, thanks.
Okay, fantastic. So yeah, I guess maybe first, as a relatively newer publicly traded hospital company, maybe can you just spend a minute or two discussing, you know, kind of the key pillars of Ardent strategy, you know, the markets that you're in, and kinda how you maybe are the same or different versus some other hospital companies, maybe the public markets you're more used to looking at?
Yeah, thanks, Steve. So Ardent is operating out of eight markets in six states. We're heavily concentrated in the South Central, with Texas, Oklahoma, New Mexico being our largest markets.
Yeah.
And then, through our differentiated joint venture model, we have entered into Idaho, Kansas, and New Jersey with nonprofit partnerships and academics. We operate in mid-sized urban markets, where we can have a footprint of hospitals and then the ancillary outpatient clinics and building the outpatient side of growth. That's a core portion of what we're focused on right now. You know, we've been doing this for twenty years successfully as a private company, and then last summer, went public. Our growth mandate is really broken down into three parts that we talk about.
The first is just growing inside of our core markets, and so, maybe similar to some of our peers, or dissimilar to some other peers, we are staying focused on the eight markets that we're in today, and we want to grow deeper roots. We've got leading positions in these markets, and these markets are growing on average about three times faster than the U.S. average. That is a bit of a differentiator for some of our peer group. We've got leading positions, number one or number two, in the majority of the markets that we operate in. We've got strong hospitals, strong positions, and we're continuing to grow those services.
But we all know that healthcare is moving outside the outpatient environment as well, and that's an area where we've been a little bit under indexed, compared to our peers, but represents a big growth opportunity for us. And so we're focusing on growing our access points. We've always had really strong clinic systems, but we need to grow the urgent care. We want to grow the ambulatory surgery centers-
... imaging centers, and the complementary pieces to the hospital, so we can have a continuous ecosystem for patients that are seeking care. 'Cause not everybody lives inside of a, you know, a hospital on their average day. If I look in this room, I'm guessing most of us, we're not inpatients in a hospital, but we all need healthcare services, and so we're trying to build a system to emulate that, and that's part of our consumer-centric strategy. How do we reach more people, give them care on their terms where they need it? And then, when they do need that facility-based care, we have them covered with our strong inpatient presence.
Yeah, and the JV model with the not-for-profit and academic systems is definitely something that stands out as different. I mean, maybe just spend a minute talking about, you know, how the company came to be interested in pursuing this type of arrangement. How does it produce good returns for Ardent as a company?
Yeah. So, Ardent bought a company called Legacy Health Partners back in 2017, I believe, and this was Denny Shelton's company after he left Triad. Denny's focus was to partner with nonprofits and do joint ventures, and so we acquired that company. It was a well-performing company, and those assets have continued to perform well and gotten stronger. But that did, you know, introduce this model to us. As we've studied, you know, what went well with that model and where were some of the challenges, we've really leaned into the academic side. So if we look at our University of Texas partnership in East Texas, we're really seeing the benefits of that play out. We can bring the strength and the of the operating and integrating experience that we have.
You know, we have one instance of Epic across our entire platform, so we can run that very lean and very efficiently, and that is our clinical operating system backbone that academic systems largely gravitate towards, and so it makes for a good system for us to play out, but we bring, again, the strength of our integrating operating experience. They bring generally reputation. They bring the opportunity to bring teaching and research programs to these communities, and they've helped us to recruit specialists that would be much more difficult to do in a traditional community environment.
And so, as we look at our East Texas market as a sort of a hallmark example of what the possibilities can look like when you've got two organizations, the university and Ardent, like-minded in terms of what growth can-
Yeah
... can look like, it's pretty transformative. I always like to say that if you live in Texas, everybody loves the University of Texas, unless you're an Aggie. And, you know, we've painted that town orange. We've changed the reputation of, you know, our image in that community, and more importantly, we brought in high-end services that we couldn't have done as easily ourselves. So, NICU services, the system we acquired didn't have a NICU. It's hard to have a strong birthing program if you don't have a NICU to go with that. We've added that NICU service a few years ago, and now we've tripled the program. We're having to expand it. It's been a wild success.
Last summer, we brought in specialists that are capable of doing ECMO services, which these are very high-end cardiac surgeries, life-saving surgeries, one step below transplantation. There was no ECMO services across all of East Texas, and that's a pretty big geography when you look at it. So patients were either getting transferred to Dallas or Houston or San Antonio, where they were, you know, likely dying in a hospital bed somewhere. And so we brought that service in. We've already. I was meeting with our physician, who leads that program, a couple of weeks ago. We've already outgrown our expectations, and we're looking to bring on another partner.
And so, you know, bringing these high-end services into these communities is something that would have been much more difficult to do without the university's involvement, and physicians like having that connective tissue to the faculty, being part of the university. And so, there's lots of benefits where we say one plus one can equal three.
... Yeah, and then when we think about your markets, you know, obviously, the demographics you highlight, you know, look very, very strong, attractive. When we think about the competitive dynamics in your market and in sort of market share dynamics, I guess, where is the company from, you know, maybe a share perspective? And when you're competing, you know, are you competing largely against, you know, not-for-profits, or do you see the for-profit hospital companies in your market?
Yeah, we, we are, again, in these, mid-size urban markets, they're growing very fast, but, but we are actually, not competing against, any of our, for-profit peers, with the exception of one hospital in, Amarillo, Texas, where we are already the market share leader in that area. But we're largely competing with local and regional nonprofits. Good, strong competition, but, but not the same level of competition that you're gonna see in that major metro. So we like those mid-size urbans because, we can get a good foothold, we can land, we can expand, and we've seen that play out. You know, I started my career with, Hillcrest System in Tulsa, which got purchased by Ardent in 2004, and at the time, Tulsa was, Hillcrest was a distant number three in that market.
Today, you know, we've climbed, and we're commanding number two in that market, and a real strength, and we've been able to see how that relationship has grown as we've continued to invest in the services, invest in our positions, and-
Yeah
Now investing in the ambulatory.
Okay, great. And then as we pivot a little bit to, you know, the results the company's seen this year, I guess, you know, what are kind of the quick highlights from, you know, the first quarter, or I should say, the first half of the year, and maybe in particular, the second quarter, both on, you know, sort of financial performance on the EBITDA line, and then just volume trends would obviously be great to hear about?
Yeah, I'll start with volumes 'cause that's the lead indicator. Again, we've got strong positions, strong growing markets, and we're seeing our fair share of that, and then some, based upon our strategies, and so our volume has been very, very robust, and inpatient admissions up significantly, year over year. I think we're leading the peer group in terms of, growth. Combination of things, things like I talked about in terms of how we're growing our acute services, and, you know, we see strong demand. Our markets are growing. We're seeing good uptake from that, and we're really focusing on our efficiencies. Our centralized transfer center, this is something that we've been working on over the last couple of years. It's starting to bear fruit.
We're able to bring in, you know, high-end cases from around the region, not just our local metro area, but getting roots deep into the outlying communities, to bring in patients that need that higher level of care, and it's paying off for us. Our length of stay efficiency is helping us to get that bed turnover more efficiently, better use the labor that we have, and you know, allow us to preserve capital in terms of you know, our bed utilization. So we're expanding into the outpatient, which is a capital-light strategy, but building access points, trying to rationalize services. You know, surgeries, I think, across the sector have been down.
Yeah.
Ours were down, but a bit of that is self-inflicted and intentional. We've been talking about our service line rationalization strategy. Again, trying to preserve those inpatient ORs and that the hospital-based ORs for the most acute patients. We have taken out some high volumes of lower acuity procedures, and we've seen that in our outpatient results, but the corresponding impact is we saw about a 7% increase in Q2- in our inpatient surgeries ... which is
Very strong and, you know, very indicative that our strategy is working. And so, all of those strategies are leading to, you know, improved results. You know, our focus around margin expansion is happening. There's certainly some headwinds in the industry that we're overcoming, and we believe in our strategy that we still have more to go, and that's what we talked about in our Impact program of, you know-
Yeah
... being able to continue to drive continued margin improvement and accelerating those efforts under our new Chief Operating Officer, David Kasper, and we're driving that focus to make sure that we can pull even more margin through with the activities and strategies we're pursuing.
Yeah, and obviously, in this business, you know, I think people are used to some normal variability in volumes in a quarter-to-quarter basis. But I think one trend that did kind of stand out across the industry in the second quarter was slower volume growth at the adjusted admissions line than we saw in the first quarter. As you step back and, you know, had more time to kind of study those trends, you know, do you feel like there are any conclusions to draw from that, or would you put it more into the normal variability camp?
I can't speak for the entire industry, but for us, I would say, you know, our lower adjusted admissions, that's formulaic, and so given the strength of the inpatient surgeries, our inpatient admissions, it's just disproportionately weighted there. You know, we don't have as much footprint on the outpatient side. We're developing that. You know, added 18 urgent cares this year, building some ASCs right now and imaging centers, but not having some of those outpatient assets is-
Yeah
... is restraining our growth.
Right.
You know, we know that the demand in the markets there, you know, we saw strong organic growth in our markets pre-pandemic.
You know, we had a few years that were anything but predictable during COVID, but the last couple of years have been really solid, and we're back to seeing the, you know, the strength of our markets, the strength of our strategies, and just that solid demand for services. So I think, you know, for us, it's largely normal variation, and that skew towards that higher acuity inpatient that's just driving some of those results.
Got it, and then, yeah, you commented on the inpatient strength. I think that, in general, seeing inpatient running kind of so much stronger than overall volume levels is really something that, you know, we don't see all the time in this space. Can you just expand a little bit on, you know, what is really driving, you know, the inpatient strength? Obviously, the, the focus on, you know, the acuity and things like that you talked about are obviously a big part of it. Any kind of other impacts, like I know, Two-Midnight Rule, for example, was like a big impact last year. I don't know whether you're seeing any kind of lingering tailwind from that. Would love to just understand the inpatient trends a bit better.
Yeah, last year, again, normal seasonal patterns, I think, were largely intact, benefited by about 200 basis points of Two-Midnight Rule impact. For us, that was pretty consistent throughout the year. There was a couple of payers that lagged, and so I think we might see a modest tailwind, but I wouldn't, you know, really put any big headline on that for our continued growth. I think that this is the debate in the industry right now between the payers and the providers. What is it? Is this pent-up demand, or is this return to normal? For us, you know, we feel very strongly this is return to normal.
Again, we're in growing markets, and you know, the only thing that's happened in the last five years is that population's gotten older, and it's gotten sicker. And so, if you look back at the macro trends, you know, I think volume, you know, and post-COVID volume trends across the nation, you know, have been fairly steady and growing at a normal sort of population growth rate. I think our perspective is that the payers maybe didn't adjust their expectations for that return to normal as much as you know, we've seen. But we feel very good about the demand and the continued need for those services in the market.
Got it. And I know that, you know, denials have obviously been, you know, a point of attention. Just update us, I guess, on what you're seeing on the denial side of things. Is the elevated rate of denials, you know, although I'm sure not something you're pleased with, stable at this point? And I think what is in the company's control to be able to start to effectively, you know, manage some of those denial levels lower as you move over the next couple of years?
Yeah. We really saw denials start spiking in the middle of last year.
Yeah.
You know, so about, you know, we'll say end of Q2 of 2024. They've continued to increase this year, albeit at a slower pace than last year. Now, that's initial denials. Final denials have increased at a much slower pace, which is indicative of, you know, our efforts. You know, we believe most of the denial activity is around request for information, which, you know, takes time to document and get the denial overturned. But ultimately, you know, we do get paid for the services we're providing largely. So, you know, it has manifested itself inside of our cash flow conversion. Certainly, there's been some buildup, even though our AR metrics really look very strong compared to our peers. But, yeah, there has been a dynamic of cash flow conversion that has slowed down.
It's, you know, we think it's tied, you know, as Marty touched on, some of the challenges in the payer community with the underwriting, and that's manifesting itself in, you know, a slower payment cycle.
Okay. And as we think about the cost side, it generally seems like things are, you know, a bit calmer than they were a couple of years ago. Still some pressure in certain categories, you know, like professional fees, for example, seem like they're still, you know, running kinda elevated levels of growth. What are you seeing on the cost side? Maybe just update us on the professional fee expectations and maybe what you're seeing elsewhere, just in terms of, like, base labor in your business.
Yeah, I think from a labor perspective, things have stabilized now. I've been in this business for almost thirty years, and we've always had a nursing shortage. It's just how acute is it at any given moment?
Yeah.
You know, we've certainly come down from that peak pandemic, but during that pandemic, we lost about two times the normal attrition rate of nurses, and we hadn't graduated two times the number of new nurses coming in. So I think the industry is still, you know, grappling with that. For Ardent, you know, we're really focused on our culture and creating organizations where people want to work, and when that shows out, we have no nursing unions. Modern Healthcare names their best places to work. Nine of our 30 facilities were named to that list, and they only picked 75 across the country, so we've got over 10% of the award winners of Modern Healthcare. So it says a lot about our focus on people, our focus on our culture. That translates into patient satisfaction and quality.
Yeah.
All of those things are important to have a healthy workforce, and we've seen that contract labor continue to come down as a result. So, Q2, we were about 3.8% contract labor as a percent of SWB. Pre-pandemic, we were in the low threes, so we're inching down, but we've stairstepped down. We expect that to slow, partially because the demand for services has been so strong.
Right.
And so we've opted to keep some contract labor in the system to be able to service that extra demand, where we can strategically deploy it. You know, we're really focusing on and leaning into technology. I mentioned Epic before as our clinical operating system. They're doing a lot in terms of AI initiatives to help improve the quality and efficiency of care. We're adding on to that with our virtual nursing and virtual attending programs, which is helping our virtual nursing pilot, where we've deployed that in Texas. We've seen about a 600 basis point reduction in nurse turnover. So improved retention, which then leads to improved satisfaction, which leads to reduction in contract labor, so-
Yeah
... we also are seeing benefits from our patient wearables, our virtual attending program, and then most recently with ambient listening. So we've got a lot of focus on technology to make an impact in the delivery of care, and start to see that reduction in, or at least slowing down the inflationary impact of just the general labor creep. On the supply side, you know, we've made strides over the course of the last year and seeing that ratio of supply expense % of revenue come down closer in line with our peer set. We know that there's still opportunity there. And then purchased services and physician services, as you mentioned, purchased services, pretty stable.
Physician services, as you mentioned, is still elevated compared to normal inflationary levels, but moderating from that peak in 2023, where we did see, you know, about 130 basis points drag on the business. That's been coming down. You know, we expect that to continue to be a bit of a headwind, but a lessening headwind compared to what it's been over the last couple of years. We've got a partnership with a new anesthesia company that we're working with that, you know, is we expect to provide some stability in terms of those, you know, sort of constant contract churn that you've been seeing in the industry.
And then, you know, when we think about, you know, the margin profile of the company today, obviously, you know, there's some comparison differences between, you know, more heavier reliance on a leasing, you know, model versus peers, which is, you know, again, easy enough to adjust for. But I guess when we try to compare your margins versus peers, you know, that's a consideration. And where do we think about, you know, where the company believes its margins could end up over the next several years as you're able to kind of, like, continue to optimize the company?
Sure. Let me take that. We look at our margins from an adjusted EBITDA perspective. So to your point, we do have a number of
... of our hospitals are at least through REITs, and we add that back to EBITDA. That is a little bit different, just so we get apples to apples from a margin, comparison. You know, we ran over 12%, in Q2, which was a 200 basis points improvement from 2024, and we think we're on a trajectory to get margins to a mid-teens perspective, which would be, you know, very comparable, to our peer set.
Okay. And then, you know, you do have, you know, impact from, yeah, it's actually literally called your Impact Initiative, where you're trying to drive, some margin improvement across your business. I guess, how do we think about the key sources of potential margin improvement? Like, what are the key buckets that allow you to deliver this, and, you know, how do we think about the pacing of that
Yeah, I mean, we look at the Impact program, you know, just sort of spread out across the P&L, starting on the top side. You know, our partnership with Ensemble has been generating results and improved yield for us, even in this more difficult payer backdrop. They're putting a ton of capital into AI, to just improve the documentation quality, making sure we're getting clean bills out front and reducing the impacts of denials, helping with the pre-ops and admissions on the front side. And so we know that there's additional opportunity in the revenue cycle. Our contracting strategy and network strategy is another piece of that. With transparency data, we have better insights in terms of where we have opportunities to close some of that gap.
So, you know, the top half of the P&L, you know, a lot of focus on that side that we believe can still generate improved pull-through, and then it's just going through each of the different categories. I talked about, you know, some of the things that we're doing from an innovation perspective to impact the workforce, and this isn't just asking people to work harder and work with less, it's giving them the tools so they can work more efficiently and provide better care at the end of the day, and reduce our cost model for being able to do that in an environment where there's not enough nurses, you know, to go around for everybody. So, you know, we continue to see labor opportunities there on the G&A side.
You know, AI is, I think, in the early innings for our industry, but we're seeing promise there in agentic AI. In particular, I think is going to take some of those more repetitive tasks that we do and really help to create more efficient systems for us. We talked about supply chain and purchase services. So it really is going across there, but the last part of the impact that the care transformation really is where, you know, we expect to unlock some value as we accelerate the initiatives already in flight and identify new opportunities to improve.
Okay, got it. And then when you have the 100-200 basis points out there, is it right to think that that's, you know, maybe some kind of gross target, and there's areas of sort of headwind or investment that need to be funded from there? Or should we think of that maybe potentially more as a net target that you intend to deliver on?
Yeah, well, I think it's, you know, 100 to 200, pretty wide range.
Yeah.
I would certainly think, you know, from a gross perspective, we would be looking at the upper end and-
Yeah
... you know, perhaps a little less, you know, when you think about some of the headwinds, like professional fees, which, while it is increasing at a decreasing rate, is still increasing faster than our top line. Although, again, it has come down since twenty twenty-three every year.
Okay, got it. And, to pivot things a little bit more to the policy side of the discussion, the most, you know, near-term thing for the space does seem to be the potential expiration of the enhanced subsidies in the exchange market. Maybe just remind us, you know, your exposure to the exchanges, how you guys are thinking about the potential impact from enhanced subsidies. And then, again, just, you know, you're making some contracting changes in the exchange market that you discussed more recently. You know, what, what's that driven by, and how are you thinking about the impact of that?
Yeah, as an overall, you know, I think, our company, compared to the peer set, has been relatively under-indexed on exchanges.
Yeah.
You know, and maybe that's the mid-size markets we're in. We've still got, you know, good uptake of commercial insurance and employer-sponsored insurance plans, but we did see a rather significant spike this year in the exchange business, particularly in our Texas markets, where they didn't expand Medicaid, and so we saw uptake in a couple of programs that we're now in the termination proceedings with because they had strong uptake, but they have really poor pricing, and it's just upside down, so think of pricing that's more in line with Medicare than commercial, so you know, it's not particularly been a good growth business for us on that side.
So we think about, you know, certainly keeping Americans covered is should be job number one for Congress and for making sure people have access to good insurance. That being said, if the tax credits were to expire, about 7% of our revenue exposure today, you know, up from a couple hundred basis points from where it was last year. You know, not all those patients are going to become uninsured, right?
Yeah, of course.
You know, a lot of them are, you know, getting the exchange and using those programs without premium tax credits.
Mm.
Some will opt to move up. You know, those that move out will probably be the lower utilizers. And you know, we think that the people will end up going back and finding employer-sponsored coverage as well, which would be a net positive. And so we look at this somewhat similar to what happened with Medicaid redeterminations. I can't say it'll be exactly the same, but Medicaid redeterminations, after all, the angst around that turned out to be a slight tailwind.
Yeah
... to the industry and for us. You know, we think that the same could happen with the tax credits.
Yeah.
you know, while we want people to have coverage and access to insurance, you know, just given the geography and some of the plans that we have, the yield on those programs have not been as good. If we can encourage people to move back in employer-sponsored insurance, that would be ideal.
Okay. And then on the, you know, the Medicaid supplemental payment program side of things, like, obviously, you've gotten clarity in a couple of, you know, key states for you, on programs you've been waiting for that maybe were a bit delayed relative to the kind of the early mover states. So that's obviously good to see. So now that that's done, like, as we think about potential for more of these programs, like, there is seemingly a sort of last-minute push to maybe get some additional programs finalized before, you know, we see maybe a pause go into effect and kind of the grandfathering provisions end around these programs. Do you think there's more to do in your states?
Like, what's your current thinking on whether you could see more action on Medicaid supplemental payments over the next, you know, three to six months?
Yeah, you know, Kansas has got a preprint that was in before the policy deadline, and you know, that could be just a modest tail, and we've only got one facility in Kansas, and so it's not a big driver. Texas, we know, has you know, got their next application in as well, but we think that that's largely gonna benefit more so the larger urbans and some of the teaching hospitals, so we're not expecting a huge pull-through. You know, for us, you know, just having the clarity around New Mexico, and New Mexico, you know, we had conviction last summer this was gonna be approved. It was approved. It was renewed.
You know, we see these being durable, and we know in the out years, as we get into twenty twenty-eight and beyond, you know, there could be an impact with the Big Beautiful Bill. You know, I think things-
Mm.
There's a lot of time between now and twenty twenty-eight to see what happens.
Yeah.
So with the DPP programs directly, we don't see a you know a lot of growth beyond what's already in the existing core, and we expect that to continue. What we do see is you know opportunities for the Rural Health fund that goes into play-
Yeah
... starting next year. Given our footprint, you know, we've got primary, secondary, and tertiary hospitals. We think that maybe a third of our hospitals might qualify for that rural fund-
Okay
and, particularly CMS is leaning into their distribution, focusing on innovation that's making.
Yeah
You know, an impact in clinical outcomes. We're well suited for capitalizing on that with the investments that we've already made, and so we're excited about that. And then we know that there are some physician programs and quality programs that are not directly DPP, but other governmental programs that might be offsets as we go there. So too early to quantify the impact, but a lot of you know, sentiment to say that this is not all bad news as we go forward.
Yeah, and on the Rural Health fund side, I guess, when do you think you might have more information about mechanically how that program is gonna work?
Yeah. So the states are all, you know, working to get their applications in right now. You know, roughly half the funds will go to the states, to the state direction, and then the other half will be at CMS's direction. You know, we've been in contact. We've certainly amped up our listening and our advocacy efforts this year with the, all the regulatory environment. But what we feel like we're very plugged into each of the states and how they're approaching things. Again, feel that we're well positioned with CMS in terms of how they're looking to dole out those funds for, you know, organizations that are using technology to make an impact in patient outcomes and access, and so we feel like we're well set up.
But, I think it's gonna be, you know, later into the year before we have more clarity on that.
Okay, and obviously, you know, a lot can happen before twenty twenty-eight, to your point, on the policy side of things, so we'll have to see how that plays out, but on the Medicaid supplemental payment side, you know, the company's size, seemingly the aggregate headwind that this could represent, and how do you think about, you know, your ability to kind of demonstrate same store growth during a period of potential significant reimbursement changes, albeit phased in over the course of kind of ten or so years?
Sure. You know, we're obviously very pleased that, you know, this did get, the reductions did get kicked out and don't start until twenty twenty-eight and then are phased in over a ten-year period. That phase in, you know, there's a little bit more of an impact early and then tails off a little bit later. We've quantified the full impact over the ten-year period as $150 million-$175 million. You know, which is not insignificant, of course, but as Marty already indicated, there are, there will be other programs that already exist, so uncompensated care programs that, you know, would actually be available as things sit today if those, you know, if those funds come out of those DPP programs as the bill instructs.
You know, we think the impact would be less than the $150-$175.
We're confident we'll continue to grow through that, even in that worst case scenario, that there is no change between now and then, but the other thing we think about is that, you know, we still operate in an industry that operates on very thin margins.
... you know, on average, you know, 1% margins in the hospital industry, and so we do think that there is a high likelihood that there will be some change between now and then. But we're trying to provide sort of the worst-case scenario, if you will, of what-
Sure
... you know, what the impact could be, but we're, you know, very confident it won't be as significant and that we'll continue to grow. Our expectations, our targets are, you know, largely unchanged as a consequence of the bill.
Yeah, if you look at our, you know, just our growth algorithm, you know, we've said about, you know, again, strength of the markets that we're in, about 2.5%-3% population growth.
You know, put a similar growth statistic on there for payer rate, and, you know, that puts you in the mid-single digits. This, you know, the potential takebacks, you know, in 2028, you know, might be three points of that, you know, but that's still positive growth, and we expect that even to pull through, to continue to outpace the revenue side. So, you know, we're still, you know, it's certainly a challenge. We're not waiting for that to come. We're getting ahead of that. That's why we're accelerating the efforts of our Impact Initiative and, you know, trying to drive that margin improvement quicker to be prepared for if that worst case happens.
But to Alfred's point, you know, we expect that to be the worst case, and then things will likely get better from there.
Okay. And you touched on this earlier, but you know, development of outpatient assets is obviously a really important priority for the company. You know, you've been adding in urgent care and imaging. I guess, what do you see as the biggest areas of focus for the company, you know, over the next three to five years as you build out? I think obviously people default to thinking about things like ASCs, for example. Like, what are the highest return on investment for you at this point in time?
Yeah, and for us, we said last summer, we were gonna start with the urgent cares because those are access points, and we've got strong, you know, data now through Epic, that the six urgent cares that we bought last, well, the first half of last year, 45% of those patients were new to the system. You know, they had never been seen or treated before. On average, you know, our patients, that we see get treated about four and a half times, per year. You know, they're seen somewhere in our system, and many of them are seen outside the hospital. So we said outpatient growth is very key to, you know, a typical patient's life cycle, and so we're gonna continue to expand there.
Obviously, the ASC margins, you know, tend to be, you know, very robust, and you know, with the service line rationalization that we've done, it's not that the cases that we took out were losing money. They're profitable, just not as profitable as other cases and higher acuity cases that really need to be in the hospital environments. We made a trade-off, so we really see the opportunity to continue to invest in our communities and those ASCs as being a high target opportunity for us. In terms of if we had those assets, we would have moved those services, and we would have seen total volume growth instead of the reduction that we've ultimately saw over the course of the last eighteen months, so we see that as a high opportunity for us.
You know, we've gone from very low market share to, you know, about 50% market share in the urgent care-
Yeah
in our core markets, and so, you know, that strategy is working for us. And then the imaging centers, you know, perhaps some freestanding EDs, micro-hospitals. We've got some really high growth areas that don't need a new hospital, but might need, you know, healthcare services, and so we can build on the strength of our network. A lot of the things, the ASCs, the micro-hospitals, freestanding EDs, likely be de novo builds. Again, the multiples on those right now are not at an attractive place for us to consider buying those. There might be some one-offs, but I would say that we're gonna tilt more towards the build, which is gonna be a longer, you know, you're talking 18-24 month to get those there. We've got shovels in the ground on two ASCs right now.
A couple of imaging centers, five urgent cares, you know, but we see that being sort of a slow but methodical growth over the next several years.
Perfect. And then, you know, you do seem, you know, like, more potentially open to hospital M&A, than maybe some of the publicly traded companies that, you know, we're used to covering. What would make an attractive asset? How do you think about potentially buying an asset if it's, you know, performing well today or potentially acquiring assets that might need some significant work, and, you know, does any of the uncertainty that's out there on the policy front make these deals, you know, easier or maybe more complicated to pursue?
Yeah, well, you know, we went public last year, and with the expectation that we were gonna continue to grow.
Yeah.
We think that our differentiated joint venture model appeals, particularly to the academics, as they've gotten hit with NIH cuts and, you know, have their own challenges. They still want to grow but may not have the capital or the balance sheet to support that, or the integrating and operating experience to be able to effectively execute on that. So we see, you know, growing interest. We brought in a new Chief Development Officer this summer, Chris Schoepflin. He's got 17 years working with the nonprofits and sell-side advisory services, and so-
Really wired into the network, knows how those organizations think and operate and deliberate about potential partnerships, and we're building proactive connections with the academics and nonprofits to be able to opportunistically go and create our own opportunities versus waiting for deals to come on the market. But I think Alfred said before, we're gonna look for those mid-sized markets where we can get a good foothold of a grouping of hospitals, and then land and expand and continue to build on the strategy that's been successful in our other markets. So we see, you know, good opportunity. Certainly, the policy environment factors in now to the calculus of where we might go looking for those opportunities.
You know, the non-expansion states are gonna continue to be good targets, but selectively, there's certain pockets that are less impacted by the potential policy headwinds. And so, we're gonna be very selective in terms of what we go after, but we do, but, you know, continue to intend and continue to want to continue to grow.
Okay. I think that's all I have time for. Thanks so much for coming.
Thanks, Dave. Appreciate it.
Great discussion. Appreciate it.