Good morning again, and welcome to the 2025 Jefferies Healthcare Services Conference. I'm Brian Tomkiewicz, Healthcare Services Analyst here at Jefferies. With us this morning is Ardent Health, one of the larger hospital operators in the country, and joining us this morning are Marty Bonick, the company's CEO, and Alfred Lumsdaine, the company's CFO. Marty, thanks for doing this.
Great to be here. Thanks for hosting this in Nashville. It's an exciting time in the city and just really bringing so many healthcare services operators and investors to town. It's really great to see how this has transformed the city.
Yeah, it's awesome. Really appreciate you being here. Maybe let's start. State of the Union, what's going on with Ardent?
It's been an interesting year. We've lapped the one-year mark since going public. We set out in talking about Ardent Health as really a growth story. We said that we've got 30 hospitals and over 280 assets across eight markets and growing, eight urban markets across the country. We said we're going to focus on growth. We're going to grow outside the core business, outside the four walls of the hospital, growing into urgent cares, ambulatory surgery centers (ASCs), imaging centers, and really just the supporting services that it takes on top of our physician clinics to build a robust healthcare ecosystem in each of those eight markets we operate in. We said we'd also look for opportunities to grow outside of those core markets.
We've made great strides in growing the urgent care platform, growing our outpatient services, putting shovels in the ground on new ASCs, some new imaging centers, some additional urgent care centers across our footprint. We know that the M&A pipeline is growing. We hired a new Chief Development Officer this summer, and our partnership model in which we partner with either academics or nonprofits has been widely received. I think there's growing recognition of what we can offer to new communities and academics that want to grow their footprint, but do it in a way where they've got a partnership with a proven operator. All things over the last year that we said we would do are very much in line with our expectations. The good news is our markets are growing. We're seeing that growth.
We're seeing that pull-through, and with our operations efforts from everything from service line rationalization to transfer center improvements like the stay improvements, we've really benefited from that on the top line and seeing strong admission pull-through.
Maybe before we proceed, Alfred, I'll ask you something kind of different from the usual investor presentations that you guys do. We have a diverse audience here. If you can just give us a little bit of an introduction on Ardent Health, you know, what do you guys do, what kind of growth should we be expecting, and just any guidance or angles that you've given long-term, anything you can share with us.
Yeah, absolutely. Happy to kind of walk through our growth algorithm. I mean, yeah, Marty's kind of touched on who we are. You know, 30, you know, we, our roots are in acute care, but as Marty touched on our growth, which is both in the, I'll say M&A, growing new markets, as well as building out the ambulatory settings in our existing markets. We've talked about a third growth leg, which is to expand our margins. We've put out a target of mid-teens EBITDA margins. We focus on EBITDA because we have 11 assets that are under long-term leases, in order to get to apples to apples. We've said we'd like to expand margins 100 to 200 basis points in the next three to four years. We're trying to accelerate that margin expansion to hit 100 to 200 in the next, ahead of the OBBA cuts in 2028.
When we think about our long-term growth algorithm, relatively simple, we're in growing markets. Our markets are growing on average three times faster than the U.S. average. That's a rising tide or a tailwind that lifts all boats. We've said from a top-line perspective, we're targeting mid-single digits top-line growth long-term. Think of it as kind of 2.5% to 3% from a volume growth perspective, 2.5% to 3% from a rate growth perspective. Call that 5% to 6% top-line. With that dynamic of margin expansion that I talked about, we think we can grow EBITDA margins faster, faster than top-line growth. Think high single digits long-term.
Marty, maybe I'll piggyback off of that, right? The OBBA obviously has a $150 to $175 million EBITDA impact on you guys. You have this impact program that's going to work to offset some of that. If you can walk through what exactly are you guys doing to try to offset some of that impact.
Yeah, and I'll just step back on that too. There's a lot contained within the OBBA. The first will actually be a bit of a tailwind we expect with the Rural Health Transformation Fund. Those rules just came out last week, and states will apply for these. While it's unknown yet how the states will disperse funds throughout the states, throughout hospitals across their states, I've been saying this is going to be, I think, healthcare's version of gerrymandering of which hospitals are rural. Even CMS said that doesn't necessarily have to go to rural hospitals. If we look at our footprint in a traditional sense, we've got a mix of primary, secondary, tertiary hospitals. We think that perhaps a third of our hospitals may qualify. We expect there to be some benefit.
A lot of the application that's been outlined for the Rural Health Transformation Fund is really about CMS trying to reward hospitals, providing technology and infrastructure that's going to improve Medicaid lives, Medicare lives, and improve outcomes. We've already made a lot of investments in that at Ardent Health. We think that we're well positioned to benefit from those funds when they come. For the next two years, we expect there to be some modest improvement in that. In 2028 is when that $150 to $175 million that you talked about could come into play. We've quantified that, and just to put a placeholder out there of what we believe is most likely the worst-case scenario. A lot can change between now and then. There's still a lot of uncertainty in terms of how things play out.
We do expect the states are going to be able to, will likely be contributing some money to offset that. The federal government has always said Medicaid was a state and federal partnership. I think at least the signaling is that the federal government said states are not contributing enough. Given the situation of healthcare across the country, you still have roughly a third of hospitals losing money. This would be catastrophic for a lot of hospitals. We're going to be okay. We expect things to get better from that quantification that we put out there. To the impact side, what are we going to do about it? We know that we've got opportunities for improvement. You know, everything from the revenue cycle and our partnership with Ensemble Health Partners that really has allowed us to stay ahead of a lot of these payer challenges, and they are tougher.
Our partnership with them and the millions and tens of millions of dollars that they're investing into AI and machine learning and really, you know, just getting ahead of the system and making sure we've got good, clean bills that can go out the door and capture the money due for the services rendered. We believe that there's opportunities on that end. We see opportunities on the supply chain side. We've brought in a new COO, and the focus around our operations has continued to progress in getting our teams honed in terms of making sure we're providing the right supplies at the right time and doing that in partnership with HPG, our large GPO vendor. There's the staffing side and the technology side. Healthcare is always and always will be a very people-dependent business.
We've seen our reliance upon contract labor normalize and come back down, getting closer to pre-pandemic levels. We've left a little bit in to service the demand for service, strong demand for services and volumes we've had. Through technology, we expect to continue to make gains to make our hospitals easier for patients to receive care in, easier for our clinicians to deliver care. Ultimately, that should yield some productivity gains over time. The investments we've made in virtual nursing are helping nurses at the bedside to do their work and do it well and have that supporting backup of another nurse coming into a patient's room. Patient wearables are helping to reduce our length of stay, and they're helping to offset unplanned admissions to the ICU. It's something that's a safety issue.
It's a quality issue for patients, and it's helping to take some of that mental and physical burden of vitals off of our nurses and caregivers. Similarly, we have a virtual attending program that we've rolled out in our East Texas market that we're able to, instead of transferring patients from the hospital to the specialist at a higher level of care, we're bringing the specialist to the patient, which is helping us to increase our volumes in our outlying hospitals. We think all of these things are going to yield an impact, and under our COO's leadership, helping to accelerate that and try to get ahead of some of these planned cuts coming in 2028.
The 100 to 200 basis points that Alfred's talked about in terms of that margin expansion, which was before we were talking about three to four years, given the technological advancements we're seeing and the strong pull-through of our early operational endeavors, accelerating that into the next two years to try to get ahead of these cuts.
That's awesome. Maybe as I think about state-directed payments, we've seen a few states apply post-OBBA or right before to qualify under the grandfathering act part of it, right? Texas approved there. Just curious, how are you thinking about the benefits of Texas and what are you looking for in terms of other states coming up on state-directed payments?
Yeah, good question. The Texas approval actually will not have a meaningful impact to us, according to our projections. Some of the increases related to more urban hospitals as well as children's hospitals. As we look at the redistribution or the economics of the new preprint, we think very potential, very small impact to Ardent from a Texas standpoint. Kansas, their preprint was just approved. We have one hospital in Kansas. There'll be a small impact from they increase their provider tax rate from, I think, 3.5% to 6%. Small impact. We don't have a significant presence in Kansas, but anything's a good increase. That really, I would say, very minimal impact from other states that we're in doing anything from kind of accelerating applications in order to get ahead of the grandfathering. We don't see a big impact in terms of those types of grandfathering.
Obviously, with the programs that were approved last year, Oklahoma and then New Mexico, which got reapproved in June of this year, we've seen a significant lift. Previously, we were under-indexed in terms of the number of beds that we had compared to the other large hospital chains. Now we look very similar in terms of the number of beds and proportion of beds that we have in states with SDPs.
Got it. Marty, one of the things that people are focused on right now is health insurance exchange subsidies, right? You and I have had discussions over the last few months about the lobbying efforts that you have, that you've been doing along with other hospital CEOs here in Nashville. Is there anything you can share with us in terms of the reception you're getting in D.C. and what you think the impact would be or how it all plays out and any mitigation that you can push through if the expiration happens at the end of the year?
Yeah, I mean, I think we're going to be watching it play out largely over the course of this week. Do we have a federal shutdown? Certainly, the rhetoric level has continued to increase, not only about health exchanges, but you see the Democrats even talk about rolling back some of the impacts of the triple B. I think that's probably, you know, unlikely on that second part in the near term. I think the health exchanges is a real issue. While it may not be getting the talk in the leadership levels, I think quietly it is. You know, the Republicans are trying to avoid a government shutdown. I think they're acknowledging that healthcare coverage is not a partisan issue. From my perspective, our perspective, we've always believed that coverage is good.
If you look at the state of the United States today, we're more covered as a country than we've ever been. We may not have government healthcare for all, but we have it for all who need it. We've got Medicare for the elderly, Medicaid for the lower income, and we've got the health exchanges for that gap supported by private insurance and employer-sponsored insurance. We're always going to be advocates for coverage, and that's a good thing. You know, taking that away is only going to exacerbate problems with access to primary care, specialty care, and chronic care conditions. That being said, as we look at our profile, Ardent has about 7%, 7.1% of our revenue coming through health exchanges, which is up from last year.
We did see an uptake in some of our non-Medicaid expansion states like Texas that had significant growth this year for us, but it was in plans that were not great plans for us, respectively. If we look at our health exchange business comparatively to our commercial business, it's far less lucrative. As we look at what the potential range of outcomes could be, we look back to Medicaid redeterminations last year. There was a lot of hand wringing and going, "Okay, this is going to be bad. People are going to lose Medicaid. This is going to be harmful to the healthcare industry." What we saw is those that were redetermined, the largest portion, super majority, re-enrolled in Medicaid. Then there was a portion that disenrolled but found commercial insurance or health exchange insurance, which is good.
There's a small percentage that did go uninsured, but net-net, it was a slight tailwind. We think the same could be true, at least in our markets for health exchanges. In our markets, these mid-size urban, there are not as many depth and breadth of plan options. Some of those options, just frankly, have not been good business. To the extent that somebody moved out of the exchange and again found a traditional employer-sponsored plan, we see that as a good shift for us. I'm always going to be pro-coverage and the citizens should have access to affordable healthcare insurance. If people did go into a traditional employer-sponsored plan, that would likely be a benefit to us.
Maybe a question for both of you guys. As we think about volumes, right, in general, utilization has been elevated since COVID. We're past the COVID wave, post-COVID wave, but we're still seeing volumes trend at a fairly healthy level. How are you thinking about the trends for volumes going forward? Maybe just if we're taking a two to three or two to five-year view, and what are you doing to drive referral flows and volumes to your hospitals?
Yeah, I'll start and Alfred can chime in. We've not subscribed to this concept of elevated utilization or trend. We're back to very much a normal trend. If you look at the course of the last couple of years, this has always been a cyclical and seasonal business. The last two years have been very, very aligned with what we saw pre-COVID. We had strong organic growth in our markets pre-COVID because of the strength of the markets and the strength of our positions in those markets. We're back to seeing, you know, sort of business as usual. The only thing that's happened is that the population has largely aged five years and gotten sicker. That could be addressing some of the utilization as we've just got an older, sicker population.
We were growing before, and that's before we had, you know, sort of the strategies in place that we do today. Now with our outpatient development plan and stringing together, you know, the access and the continuum of services, that's only further reinforcing our belief around the demand for services. Alfred talked about our markets growing 3% a year, about three times faster than the U.S. average. We expect that to be sort of table stakes. We've seen greater admission growth this year, largely because of some of the service line rationalization efforts we've done, our focus around transfer centers, our focus around length of stay, and then our focus around technology to better optimize our capacity footprint. We know that we are shifting that market share and growing market share on top of the growth in the market itself.
Long story to say that, you know, we feel very good about the durability in our markets, our positions in those markets, and further bolstered by our expansion to the outpatient and, you know, just providing a better continuum of care.
Yeah.
I can't really add to that. I'd say in summary, demographics are in our favor in three different ways. Our markets are growing fast. The population is getting older and getting sicker. Those dynamics really work in our favor. We've been under-indexed in our market in those ambulatory sites of care. Now that we are dedicating CapEx, dedicating growth, that will also certainly create additional demand inside of our markets.
Maybe I'll piggyback off that comment. As I think about capital deployment, Marty, I mean, obviously the job of a CEO is to figure out capital deployment, right? How are you thinking about where you're deploying capital between ASCs, outpatient, all the network building stuff versus returning capital to shareholders or building new capacity within your hospital? Just curious how you're thinking about all these things.
Yeah, the good news is based upon our ability to pull through a lot of this volume and continue to grow, it's really helped our balance sheet. It gives us flexibility and optionality. When we went public last summer, we did talk about deliberately focusing expanded capital outlay going into that outpatient development that Alfred just talked about. We've been doing that, and we will continue to reap the benefits of that. Selectively, we were able to find some acquisition opportunities that really got some things jump-started on the urgent care side. Now we've got shovels in the ground and a couple of ambulatory surgery centers, a couple of imaging centers, about five more urgent cares. We expect that to be a modest but consistent pace over the continuing years as we partner with physicians and partner with our communities to expand those services. That will be a continued theme.
We also said that we would look for the right opportunities to deploy capital into new hospitals that either complement our existing footprint in our existing regions or grow into new regions. The good news is our balance sheet, our net leverage, or at least adjusted leverage, is about 2.7 times last quarter. Expect that to continue to improve absent large M&A. It gives us the firepower to be able to deploy capital where it's necessary. We see all of those as opportunities to continue to develop and build upon the positions that we have in our market.
Alfred, as I think about what Marty just said, right, when I think about the service line rationalization strategy that you've laid out, shifting lower acuity volumes out of inpatient to outpatient, how much runway is there to drive margin improvement and drive efficiencies and productivity across the system?
Yeah, I think there's a couple dimensions to that. Our main campuses are full. You know, they're running at, you know, at or near full capacity, and our ability to ensure that the right procedures are seen in that setting is a margin-enhancing activity in and of itself. We don't want to lose that volume that's being pushed out. As a consequence, being in those, you know, I'm never going to call anything that we do inside of a health system capital light, but those ambulatory settings are capital light, or if you will. As we add urgent cares, the ability to keep higher acuity ED visits coming to the hospital, and then the lower acuity things that can actually be seen in an urgent care, that's a margin-enhancing activity.
Because those sites of care do carry a lower fixed cost component, we can get the best of both worlds by seeing those higher margin, higher acuity inpatient or hospital activities, and also increasing margins by investing in those ambulatory sites of care, which on their own carry margins at or above the average margins for the health system.
If I could shift gears a little bit, on the last earnings call, I think you called out headwinds from managed care denials or rev cycle challenges. Curious, you know, how are we addressing this? I mean, how are we thinking about mitigation and really pushing back against these denials?
We are pushing back because, you know, we hear a lot of, hey, the managed care companies are saying that, you know, their margins are being hurt by upcoding. We feel strongly that that's, you know, a false narrative. From our perspective, we carry all of the regulatory risk. We're not going to code upcode. Now, we do think accurately coding, the ability to capture the fulsome nature of an interaction has gone up because of technology. To ensure that we're not undercoding and actually getting paid for the work we're doing, our ability to capture that and code, you know, at the appropriate levels has gone up. Perhaps that's flowing through from a payer standpoint. It is, you know, when we think about just the RCM cycle, it is, you know, it is an arms race.
We are on a full outsource arrangement with Ensemble Health Partners from back, middle, and end. That allows us to have a much more robust response than we could on our own. Ensemble's doing NPR about eight times the size of Ardent. Their investment in technology, in AI is multiples to what we could afford to do. We feel like we do punch above our weight class in terms of our ability to respond to this elevated denial, which has not shown, you know, while it's perhaps trended, the rate of increase has perhaps decelerated, continues to be one of our biggest challenges.
I just add in there, the best defense is a good offense. Ensemble is the first leg in that stool in terms of the investment that they're making in AI and technology to make sure that we get reimbursed for the services that we provide. The second is, we're the only investor-owned that's embraced Epic. Epic is the KLAS leading EHR system. It's much more than that. It's our clinical operating system. It is that financial background. It does provide visibility into our entire system from scheduling, registering, and making sure we've got good documentation. A third is a partnership we just announced recently with Ambience around physician ambient listening.
A lot of systems are doing this, but integrating that with Epic, with Ensemble, we believe is going to provide that offense that we can have the documentation that makes it harder for a claim to get denied because we're giving all that information up front, making sure we've got clean and accurate bills and thorough bills to make sure we can get justly reimbursed for the services that we're providing.
That's awesome. At this point, we have six minutes. I'll open it up to the audience for questions if anyone wants to raise their hands. While we wait for questions, I've got one more. Since you mentioned Epic, how are we thinking about the clinical and quality benefits and financial benefits of all the investments that you've made in tech? Epic is not cheap, obviously, right?
Nothing in health tech is cheap. Let's just start there. We've got a really good relationship with Epic. What I like about them is that their investment in R&D is second to none. Yes, we spent a lot of money as a private company, over a quarter billion dollars investing in that platform. We can see the benefits play out in so many different ways, operationally at the bedside, just from bed management, that transfer center I talked about. All of that is visibility that we have from my desktop in here in Brentwood. I can see what's going on across all of our hospitals in one system.
The second part is, yes, they are making a ton of investment in AI and deploying the knowledge base that they have really across the globe to look at patient conditions and go, okay, what are the things that are driving outcomes consistently and what are the best practices that we can learn from each other as health systems? Yes, it's our proprietary installation of Epic, but we're benefiting by the user base across the globe, which I don't know that other systems are doing. I know there's a lot of companies trying to chase that, but that's native sort of in Epic's DNA in terms of how they see things.
Their Cosmos infrastructure, the AI, the ability for our physicians to query a patient that comes in with a rare condition and find other patients that have similar conditions around the globe, all of those things are going to lead towards improved outcomes. You couple it with their payer platform and their value-based care platform of how do we keep patients well and make sure that they're getting the preventative screenings that they need, addressing social determinants of care. All of those things are integrated natively through there. Epic's not really just an EHR as people think of them. It really is that clinical operating system backbone that really helps fuel our entire system and then allows us to partner with other innovative companies here in Nashville and beyond that are taking that to the next level.
We really feel like that investment is going to pay off for us in terms of our clinical benefits. We can see the enhanced volume increases that we've seen this year compared to our peer set. Our markets are growing and we're doing that, but we're growing more than our markets are. The transfer centers, the length of stay efficiencies, the bed management, all of the things that we get from that, we think are already paying off and will continue to do so in the future.
Marty, as we think about ancillaries and all the things that you can add, whether it's freestanding EDs, urgent care, ASCs, imaging, all these things, how are you thinking about JVs? We're seeing a lot of partnerships emerge in the health system space. Just curious how you're strategizing around that.
Yeah, our company was built on partnerships. We've got partnerships with community foundations, nonprofit organizations, nonprofit healthcare systems, and academics. We see the opportunity to continue to build. We like to say partnerships are in our DNA. It helps. If we can come in and we look at East Texas, we just took our board down there for a meeting to see the growth and transformation that's happened in that market since we've purchased it and the opportunity that still exists. That's fueled by that partnership. We're building a new medical school with the University of Texas. We've 10X'd the number of residents that we're training. We were doing in the 20s. Now we're doing close to 250. We see that number expanding as the medical school opens up later this year, or the new campus. The school's been in existence for a couple of years now.
All of those things really just help build a flywheel. The stronger we get, the stronger our partners get. The stronger our partners get, the stronger we get. We are training the future of our medical staff. They just opened up a new nursing school. They had the ribbon cutting last Friday. Those nurses are going to do their clinical rotations in our hospitals and become nurses for us. When we think about the challenges we have in this industry around workforce, we're trying to address those head-on. This is a way that we can clinically operate the hospitals and do what we do best while they continue to invest in education and research and training, which is what they do best. Collectively, we both benefit.
We see that model being replicable in other markets where you get a partner that says, "Okay, we want to grow, we want to build, but we don't necessarily have the integrating or operating experience to take that into a new community." We can de-risk that because we have that operating infrastructure, their brand, their reputation, their teaching affiliations. All of those things will help us de-risk our investment going into that new community. We really think this flywheel is powerful.
Marty, one of the things that we ask, we're going to ask everyone here today is, what's the one thing you think that investors underappreciate about the Ardent story? We'll leave it with closer remarks after that.
We think that we've got a differentiated joint venture model. We're well positioned. I think to a certain extent, the industry overhang around the regulatory uncertainty clouds things. Hopefully, as we continue to articulate and continue to demonstrate our ability to partner with institutions that are helping us address the headwinds, whether that's from a payer perspective or a workforce perspective, we can outpace these headwinds and really control our own destiny in terms of where things go. We're excited about the future. We're excited about the progress we've made. Nobody likes some of these changes that are being reported out there. We believe we've got strong plans to overcome them and to achieve them. We're looking forward to that and hopeful with continued performance, investors will see the same.
Awesome. Very, very happy you're here. Thank you so much, both Marty and Alfred and Dave Styblo, Jefferies alum. Thank you.
Appreciate that.
Thank you. Great to be here with you all.