Ardent Health Inc (ARDT) 2025 Q2 法說會逐字稿

Thank you for standing by. My name is Greg, and I will be your conference operator today. At this time, I would like to welcome everyone to today's Ardent Health second-quarter earnings conference call. (Operator Instructions)

Thank you. I'd now like to turn the call over to Dave Styblo, Senior Vice President of Investor Relations. Dave?

Thank you, operator, and welcome to Ardent Health's second-quarter 2025 earnings conference call. Joining me today is Ardent's President and Chief Executive Officer, Marty Bonick; and Chief Financial Officer, Alfred Lumsdaine. Marty and Alfred will provide prepared remarks, and then we will open the line to questions.

Before I turn the call over to Marty, I want to remind everyone that today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission.

Except as required by law, we undertake no obligation to update our forward-looking statements. Further, this call will include the discussion of certain non-GAAP financial measures, including adjusted EBITDA and adjusted EBITDAR. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release, which was issued yesterday evening after the market closed and is available at ardenthealth.com.

With that, I'll turn the call over to Marty.

Thank you, Dave, and good morning. We appreciate everyone joining the call and webcast. We have a lot to cover today, so let's get started. This past July marked our one-year anniversary as a public company. As I reflect back over the past year, I'm proud of the financial and operational progress we've made while remaining true to our purpose of delivering exceptional care to our patients.

I want to begin by reinforcing why Ardent is well positioned to drive long-term shareholder value despite broader market conditions and pending regulatory changes. While the policy environment may introduce future disruption, healthcare remains essential, and we believe that creates opportunity for strong, well-positioned companies like ours.

Ardent's leading positions in growing midsized urban markets, combined with an aging and increasingly complex patient population, continue to drive demand. Our expansion beyond the hospital, particularly around outpatient services, is generating new revenue streams and positioning us well for value-based care.

Our strong balance sheet and differentiated joint venture model support both core growth and expansion into new markets. We are building a track record of disciplined execution, delivering results that have met or exceeded expectations in each of the four quarters since our IPO. In 2024, we grew revenue by 10% and adjusted EBITDA by nearly 60%. In the first half of 2025, revenue increased again by 8% and adjusted EBITDA rose by over 20% compared to the prior-year period. Looking ahead, we are confident in our ability to sustain strong performance, supported by our IMPACT program, which I'll discuss in more detail later.

Turning to our second quarter performance. I'll cover four key areas that highlight our progress and future direction. First, I'll discuss our strong demand backdrop and continued financial progress. Second, I'll update you on progress around our strategic growth initiatives. Third, I'll highlight the latest innovations we've deployed to drive clinical transformation. And fourth, I'll review our thoughts on the regulatory environment and our plans to drive continued performance supported by our IMPACT program.

Starting with demand and performance, our strong positioning in eight growing midsized markets, combined with initiatives to improve capacity and efficiency, drove 6.6% year-over-year admissions growth in Q2, supported by 9.2% growth in inpatient surgeries. While total surgeries declined 0.2% year over year, this still reflects a sequential improvement from the 0.7% decline in Q1. This robust demand translated into strong financial results that align with our 2025 plan, even in the face of ongoing industry-wide payer denial headwinds.

Adjusted EBITDA grew 39% year over year with 200 basis points of margin expansion. We generated $117 million in operating cash flow and improved our net leverage ratio to 2.7 times, down from 3.0 times at the end of Q1. Importantly, and as we anticipated, CMS renewed the 2025 New Mexico DPP program in late June. This program is pivotal in continuing to support providers and caring for this vulnerable population across New Mexico, which is vital as Medicaid covers nearly 40% of the state's total population, 55% of birth, and about 60% of children.

Moving on to growth, we continue to make meaningful progress in growing market share and expanding our outpatient footprint, a key pillar of our long-term strategy. In May, we welcomed Chris Schoeplein as our Chief Development Officer, whose deep industry experience will be instrumental in scaling our business.

On the ambulatory front, we have shovels in the ground on multiple new projects and expect to open five urgent care centers and two imaging centers in the second half of 2025. These will complement the 18 urgent care centers we acquired earlier this year. Over the past 12 months, we've significantly expanded our urgent care footprint and increased market share, meeting both consumer demand and fueling growth in our core markets.

Continuing on to our clinical care transformation, we advanced multiple initiatives focused on improving physician and nursing workflows, reducing burnout and turnover, enhancing patient outcomes, and ultimately driving incremental earnings. Our virtual care strategy is delivering strong operational and financial results with virtual nursing now scaled in East Texas and Idaho. This model reduces administrative burden on bedside nurses, lowering nursing cost of care by $30 per patient per day, and reducing voluntary turnover by 600 basis points in these units last year.

Similarly, our virtual specialty consults in our outlying hospitals in East Texas have reduced unnecessary transfers to our tertiary hospital by 85%, preserving capacity for higher acuity and out-of-network patients and boosting both volumes and rates. We're also leveraging technology to improve clinical outcomes and efficiency.

Medical wearables deployed across several markets enable continuous vital sign monitoring, reducing mortality by up to 15% and shortening length of stay by roughly one-third of a day in our pilot group. In parallel, we're rolling out AI-enabled scribe technology to assist with real-time clinical documentation. Following a successful pilot to reduce documentation time by 41% and had 100% of participating providers reporting improved satisfaction, the tool is being adopted company-wide across multiple specialties.

These innovations are part of our broader commitment to quality, operational excellence, and a best-in-class workplace culture. This commitment is being recognized as nine Ardent hospitals were named in Modern Healthcare's Best Places to Work. The Tennessee honored Ardent as a top workplace. And 81% of our eligible facilities earned an A or B in the latest Leapfrog Hospital Safety Grade report, well above the 56% national average.

Finally, turning to the regulatory environment, we recognize investors are closely monitoring two key developments: the Big Beautiful Bill, or OBBBA, and the possible expiration of enhanced exchange subsidies. We aim to provide as much transparency as possible on how these may affect our long-term growth outlook.

Like our peers, we are disappointed by the passage of the OBBBA due to substantial Medicaid funding cuts that threaten coverage for vulnerable populations. If implemented as planned, these cuts would begin ramping in 2028, disrupting care delivery for millions. We know investors are particularly focused on OBBBA's impact on the DPP programs, including Medicaid rate reductions and a provider tax cap of 3.5%.

We expect a de minimis impact to earnings in 2026 and 2027, with the majority of the financial effect occurring between 2028 and 2035. In a worst-case scenario, we estimate this could ultimately result in an EBITDA impact of $150 million to $175 million by the time the cuts are fully effective all the way out in 2035, assuming no material changes to the legislation.

However, we do anticipate the net impact will likely be lower, supported by, at minimum, the rural hospital fund and other state-level supplemental programs, though these are not yet finalized and cannot be quantified at this time. We also understand concerns around the potential expiration of enhanced exchange subsidies at year-end.

Ardent has seen nearly 40% growth in exchange admissions in the first half of 2025. However, reimbursement rates for this population are less favorable and are more closely aligned with Medicare than commercial rates due to the high denial activity and a disproportionate share of ER visits, which are typically margin dilutive. In fact, we are sending termination notices to some exchange plans where reimbursement has been inadequate and, in some cases, net rates that have been well below Medicare. This will free up capacity to absorb high-quality demand that we have had to previously turn away.

All that to say, the key takeaway here is that our current exchange population currently contributes less to EBITDA than its volume might suggest. There is a misconception that any revenue decline here would directly impact EBITDA, which is not necessarily the case, especially as we remain agile in adjusting operations to meet demand.

Obviously, there are a number of moving parts, but we are committed to providing visibility as the policy landscape evolves and are optimistic about working with policymakers to mitigate the bill's more harmful effects. To proactively address these headwinds, we've already begun identifying opportunities to leverage our scale and centralize platform to streamline workflows, embrace automation and AI, and sharpen operations.

Under the leadership of Dave Caspers, our new Chief Operating Officer, we are accelerating these efforts through our IMPACT program, which stands for improving margins, performance, agility, and care transformation. Alfred will share more detail as we build a robust mitigation plan ahead of 2028.

These regulatory pressures underscore the importance of scale and strategic partnerships. We believe these pressures may accelerate M&A opportunities as hospitals and health systems seek transactions, partners, and capital to navigate these uncertain waters. We are well positioned to offer a variety of relationships with these systems over the coming years.

In summary, we are pleased with our second-quarter results. The operational workflow initiatives I've highlighted are starting to bear fruit, and the execution of our strategic growth priorities is creating strong momentum as we enter the second half of the year. And importantly, the timing the OBBBA provides allows for us to plan and implement mitigation strategies before the full impact takes hold. All of this puts us on track to meet our full-year 2025 financial guidance, which we are reaffirming today.

With that, I will now turn the call over to Alfred.

Thanks, Marty, and good morning to everyone. Building on Marty's comments, I'll walk through how our financial performance reflects the strength of our strategy, the resilience of our platform, and our disciplined execution. As Marty indicated, CMS' approval of the New Mexico DPP program for calendar year 2025 is an important continuation of funding in the state of New Mexico that ultimately results in improved access and high-quality care for the Medicaid population.

As expected, the financial benefit from the New Mexico DPP program in Q2 includes the impact for the entire first half of 2025 and is fully consistent with the EBITDA contribution assumptions embedded in our full-year 2025 guidance that we've previously outlined. We're pleased with our second-quarter results, and our execution across numerous key strategic initiatives help set the stage for attractive long-term growth.

Despite facing an environment of increasing payer denial activity from already historically elevated levels, we executed on our key financial targets, including revenue and adjusted EBITDA. Second-quarter revenue increased 11.9% to $1.65 billion compared to the prior year, driven by adjusted admissions growth of 1.6% and net patient service revenue per adjusted admission growth of 10.2%.

Meanwhile, adjusted EBITDA increased 39% in the second quarter to $170 million and adjusted EBITDA margin increased 200 basis points to 10.3%. Year to date through the second quarter, adjusted EBITDA grew 23% and margins expanded 100 basis points from the prior-year period. From a volume standpoint, Q2 admissions growth was strong at 6.6% and adjusted admissions increased 1.6% year over year.

Admissions growth was strongest in the exchanges, up approximately 35% year over year, while commercial, excluding exchange plans and Medicaid admissions, both increased approximately 8%. Inpatient surgery growth was 9.2% in the second quarter, while outpatient surgeries declined 3.8%.

Moving on to cash flow and liquidity, we ended second quarter with total cash of $541 million and total debt outstanding of $1.1 billion. Our total available liquidity at the end of the second quarter was $835 million. Cash flow from operating activities during the second quarter was $117 million compared to $120 million for the second quarter of 2024, which benefited from favorable changes in working capital related to supplemental programs.

Capital expenditures during the second quarter of 2025 totaled $46 million, and we expect that to ramp during the second half of the year. Our total net leverage as calculated under our credit agreements was 1.2 times, and our lease adjusted net leverage was 2.7 times at the end of the second quarter, which is an improvement from 3 times at the end of the first quarter.

Our strong balance sheet and liquidity position not only support our current operations but also enable us to pursue strategic growth opportunities, particularly focused on joint ventures with academic partners in the acute care space. With regard to the pipeline, we continue to see increasing interest in our differentiated joint venture model from potential partners that are in the exploratory phase. We'll evaluate all potential opportunities in a disciplined manner, and we have the balance sheet to move forward when a stockholder value-enhancing opportunity presents itself.

As Marty outlined, our IMPACT program is a cornerstone of our strategy to drive sustainable margin expansion and operational agility. We're accelerating underlying initiatives to focus on the next 24-month period to unlock efficiencies, enhance performance, and proactively address the evolving regulatory and reimbursement landscape. More specifically, the strategic objective of IMPACT is to pull forward cost efficiency activities already embedded in our long-term margin expansion target of 100 to 200 basis points and identify additional opportunities that can be used to mitigate incremental headwinds.

These cost savings and margin-enhancement initiatives span the gamut of opportunity, including supply chain management, workflow and workforce optimization, leveraging of technology and AI, as well as payer contracting enhancements and supplemental revenue opportunities. In closing, we remain on track to achieve our 2025 financial outlook, which we are reaffirming today, and are planning for 2026 and beyond to successfully navigate through the regulatory and payer headwinds.

Before opening the line to questions, I wanted to mention that we are now S3 eligible following the one-year anniversary of our IPO. Accordingly, we intend to file an S3 shelf registration statement in the near future as a procedural matter, which will provide optionality for primary, secondary, and debt offerings should the market environment and events warrant. We have no active plans to raise capital. We view this shelf as providing important financial flexibility for the company as a good corporate housekeeping matter.

With that, I'll turn the call back over to Marty for some closing comments.

Thank you, Alfred. As we look back on the quarter, we are proud of the continued progress we're making as we implement our strategic growth initiatives and leverage the consumer-focused platform we've built to create long-term stockholder value. We are pleased with our year-to-date results and CMS' renewal of the 2025 New Mexico DPP program.

We believe Ardent is well positioned for the future. We operate in attractive growing markets and maintain a strong balance sheet to support growth. We continue to sharpen our focus on market share growth, taking a disciplined approach to evaluating opportunities in both the ambulatory space as well as acute care hospitals. With leverage of 2.7 times and ample cash, we will continue to assess opportunities to execute on this strategy.

Finally, we remain focused on operational excellence initiatives to drive margin expansion over the next several years. I want to close by thanking our more than 24,000 team members and 1,800 employed and affiliated providers who continue to deliver exceptional care to patients across the communities we serve. Together, we are focused on making healthcare better and advancing our purpose of caring for our patients, our communities, and one another.

With that, I'll turn the call back to the operator for questions.

(Operator Instructions) Jason Cassorla, Guggenheim.

Okay, thanks. Maybe just on the managed care front, I believe you comp that denial headwind that you've been calling out next quarter. Is that correct? And you've discussed terminating exchange contracts. Can you give us a percentage of what of your exchange admissions that those terminated contracts represent? And then just broadly, if you can just update us on what you're seeing on the managed care front kind of on a go-forward basis? Thanks.

Jason, this is Marty Bonick. I'll start and then turn it over to Alfred. We've seen significant growth in our exchange volume this year, in particular, compared to years past. And unfortunately, some of the plans that we've seen that large growth have been providing not great rates in terms of what they're yielding. And so we have terminated one of those plans but have not quantified the percentage, but it is one of the larger plans that have been generating the volume increases for this year so far.

And I would just add, Jason, from a denial perspective, and I think we've been pretty transparent, we saw a big step-up in denials occur towards the end of Q2 last year, which has persisted and, as we indicated, has even grown this year, even though as a company, we're well below the national average in terms of initial denials. But it is -- they have consistently grown. We think the year-over-year comps eases up because of how -- the timing at which they increase last year.

In terms of the terminated contracts, we're not going to quantify the exact percentages. But what we're trying to demonstrate is a very rigid view of if we cannot make the contracts work because of denial behavior, yes, the front-line rates may be great, but denials are eating into our profitability. We're not going to be afraid to term those contracts and replace that volume with better-paying volume. I mean, as we've, I think, been clear, our volumes are strong; our hospitals, by and large, are full; and we're going to focus on those payer sources where we can be compensated appropriately.

In terms of what we're seeing from a rate perspective, our -- so far this year, we're about 65% contracted for 2026. We still have some open negotiations going on. We continue to see, I'd say, a consistent pattern in terms of the type of rates that we would want and expect. And a big focus is on closing some of those gaps where we're seeing, we'll just call it what it is, the denial activities being exploited and closing those, we'll say, holes where we can from a contractual perspective to -- again, to be sure that we're getting paid appropriately, timely.

Got it, thanks. Appreciate it. And maybe just as a follow-up question, I wanted to touch on your ambulatory strategy and the expansion opportunity there. You've executed on an urgent care deal early this year. You've got a handful of new centers expecting to open up later this year. I guess, is there a way to frame the average number of ambulatory access points for every inpatient asset you have? And where would you expect that to get over time?

And then just broadly, on your ambulatory strategy, what would be the additive kind of volume benefit from this strategy relative to volumes inside of your markets relative to population growth and the like? Just trying to get a feel of how additive the volume picture could be on this -- on your ambulatory strategy going forward. Thanks.

Yes. Great question. This is Marty again. We don't have a specific target of ambulatory assets per hospital today with that number is close to double digits. But we look at each one of our markets in terms of what is the capacity and what is our opportunity, what we're trying to do is ultimately grow the number of unique patients served in each of our markets.

Because we believe there's a trickle-down effect that once we get them into the system through an urgent care or primary care office that we're able to then have follow-up care and multiple touch points with those patients over the course of their life. And so that is our primary focus in making sure that we've got the right access points in the right locations to capture that new patient volume.

In terms of the downstream effect, we've talked about this before. We're still ramping the earlier acquisition we did this year. But if we look at last year, about 45% of those patients that came into the urgent cares we acquired in the first half of last year were brand new to Ardent, and about 30% of those go on to have follow-up care within that first 30 days and even a larger number after that.

So not all of it will translate into inpatient admissions, but it may translate into other outpatient procedures, specialty visits, surgeries, et cetera. So we do think that this is part of that strong growth that we've seen. It's just continuing to open up the access points in our markets. And I think the top-line admissions numbers and surgery numbers are speaking for themselves.

Great. Thank you.

Ben Hendrix, RBC Capital Markets.

Great. Thank you very much and apologies for the technical difficulty. I was wondering if you could kind of discuss your strong inpatient surgical growth that you saw, some of the categories you're seeing come in there, and maybe then just how this volume is informing your decision to channel capital perhaps toward higher acuity inpatient capabilities? Thanks.

Yes. Great question, Ben. This is Marty again. Our inpatient surgeries have been really strong, particularly in orthopedics, cardiology, and general surgery, which is exactly consistent with the service-line rationalization we've talked about. While we did note a little bit of a decline in some of those lower areas of outpatient surgery like ophthalmology or E&T, it has opened up the doors, so to speak, for those higher margin and higher acuity procedures.

So the program is working exactly like we thought. Obviously, orthopedics and cardiology being very strong procedures for us. The total volume of numbers may not compare to the loss of an ophthalmology. But when you look at the quality of revenue and earnings that those are going to be the exact types of service lines that we're looking to preference.

Thank you. And just as a quick follow up to some of your prior exchange commentary, in markets where you would or have opted or would opt to exit certain exchange networks, what kind of -- and you talk about there being opportunities to backfill that with some higher acuity, higher-paying volume. Would you expect that mostly to be commercial or Medicare? And kind of what -- how do you think case mix would evolve in those markets? Thanks.

Yes, I'll start. I mean, if you look at the national trends, Texas was one of the higher growth exchange states, and that's true for us as well. So as we look at some of the contracts where we've seen that growth but not great quality rates, we still believe that there's backfill as we look to optimize through our transfer centers. Even through this technology that we mentioned in terms of load balancing and keeping patients in secondary and primary level hospitals, that's freeing up capacity and demand for those other transfers that are coming in.

We've seen strong transfer growth and pull-through through our efficiency initiatives. And yet we know that there's still patients that we're not able to service. So I would expect that as we see that shift either to better rates in the commercial exchange business through renegotiation or other commercial endeavors, that's where we'd expect to see that volume pull-through along with our physician services strategy -- service line strategies that are generating that strong pull-through we talked about in orthopedics and cardiology.

And this is Alfred, Ben. I would just add to what Marty said. While we saw, obviously, the strongest admission growth in the exchange product at 35%, we saw strong growth across the other payer categories as well with Medicaid, as we indicated and core commercial, excluding exchange, up 8%. Medicare was up as well. So we feel the demand is there, and it really is a question of ensuring that we're optimizing the patient flow based off it and not accepting these types of HIX exchange contracts that are, again, where the yield is just unacceptable.

Thank you very much.

Craig Hettenbach, Morgan Stanley.

Thanks, and appreciate all the color on the regulatory front. Just following up on some of the things you said that you can potentially mitigate those pressures. Are there any in particular when I think about technology, AI, supply chain? What are some of the ones that maybe stand out at the top in terms of levers to drive some offsets?

Hey, Craig, thanks for the question. This is Marty again. Yes, the IMPACT program that we mentioned is exactly that. We've talked historically about improving margins 100 to 200 basis points over the next three to four years. Our IMPACT program would encompass that and accelerate. But you mentioned exactly the types of areas that we're focused on inside the company.

Obviously, labor and productivity is going to continue to be a disciplined focus for us, having the right people in the right place at the right time to do the right job. But at the same time, we know that there's going to be opportunities, continued opportunities in the supply chain, and we do see the impact of technology playing a bigger role in our transformation as we move forward.

So we talked about some of those things already, whether it's virtual nursing, virtual attending. Again, those are helping to drive not only efficiencies, whether it's length of stay or throughput through the hospitals, but also, again, that load balancing, which is allowing us to keep more volume in our outlying hospitals and create new volume opportunities for those transfers to pull into the tertiary facility. So all of those are fair game inside of our IMPACT program and what we see continuing to move forward.

That's helpful. And then just as a follow up, Marty, is there any update on just kind of the demographic and job growth trends in your core markets? I know you've been growing above the national average. So just looking for a pulse and kind of how some of the trends are on that front in your markets.

I don't have a specific on that, but I'll say that our recruitment and retention efforts have been continuing to bear fruit. We're continuing to see better-than-average retention or turnover rates, however you want to look at that. Again, that goes to our culture, but I think it also goes to the strong leading positions we have in our markets. So I would say that our demographics ,in general, are still growing faster than the US average. They're attractive markets and, by and large, favorable job markets for us to be in.

And this is Alfred, Craig, just echoing Marty's comments. And while we don't have specifics in terms of the underlying growth demographics, I think it is certainly as indicative of the strength of our volumes, we think, first and foremost, starts with the quality of the markets we're in and the underlying demographics in those markets. And again, we think it's evidenced by the volume growth that we saw is the primary evidence of that strength.

Got it. Thank you.

Kevin Fischbeck, Bank of America.

Great, thanks. I guess I wanted to go back to some of the comments you made about exiting some exchange contracts and then backfilling that to free up capacity. I guess, how often are you at capacity or near capacity within your facilities? And then I guess, how easy is it to backfill that with, say, commercial volumes, which will be more profitable than government or insured volumes?

Yes, Kevin, welcome back. This is Marty. Yes, as we look at our facilities, we've got primary-, secondary-, and tertiary-level hospitals. Our tertiary level hospitals are, by and large, pretty full on a day-to-day basis. And so it's a continuous effort by our teams to manage the throughput and volume capacity. So we're very focused on length-of-stay initiatives, efficiency, and the transfer pull-through. But we have seen that improve.

And again, as I've mentioned before, we are still leaving some volume on the table of incoming requests that we're just not able to service at a given time based upon that tertiary capacity. So things that we're doing within our service line initiatives, and our physician outreach teams are catering to those specialties and hospitals that have those higher-level complex patients that need that tertiary level transfer.

So we do believe that as we balance out this exchange bubble and we start to move this towards others, that service line initiative, our physician outreach strategy will yield high-quality admissions coming -- continuing to come into the facility. So that is where our focus is on that.

At the same time, our technology improvements, we mentioned the virtual attending, that is helping to keep sort of patients that we would have normally transferred from our own system into a tertiary care back in those beds in that primary- or secondary-level hospital. So we see that as a great pilot that has demonstrated traction, and we will be continuing to expand that to our other large markets.

Okay. That's helpful. And I guess going to the acquisitions, the outlook there, you talked about the JV model. I guess, have the discussions changed at all either from the partners that you're talking to because of the bill? Or has your interest in doing deals changed at all because of the bill? Is the hurdle any higher than it was before these cuts were being proposed? Thanks.

Yes, great question. If anything, I would say that our -- the amount of outreach and discussions have increased since the bill. And it was ramping before the bill at anticipation. But again, bringing on Chris Schoeplein, our new Chief Development Officer, with his background and experience in working with non-profit and academic systems, we're encouraged by the number of conversations and the quality of those conversations that are coming in.

In terms of our outlook, it doesn't change our outlook or appetite for growth. It will require us to be disciplined in terms of the markets that we enter into and understanding the state dynamics and what's happening specifically with their DPP programs or their provider tax cap rates. And so it will strategically hone where we go looking for those opportunities, but it doesn't dissuade us from our long-term growth outlook.

Okay, thanks.

Matthew Gillmor, KeyBanc.

Hey, thanks for the question. Maybe asking about the Big Beautiful Bill discussion, I appreciate the estimate that you all provided in the worst-case scenario. Are you able to break down that $150 million to $175 million between work requirements, supplemental payments, or other provisions? And is it fair to assume that the impact would be much more weighted to 2030 to 2035 versus the periods that are within this decade?

Hey, Matt. This is Marty. Just to start off, yes, we haven't really put something specific on work requirements. We think that at a high level, one, we're a little bit insulated and about 60% of our revenues are from states expanded Medicaid. So the others are not going to be subject to that same level of scrutiny. And we do think that the work requirements may play out ultimately like the redeterminations did last year.

There was a lot of consternation about what's going to happen against redeterminations. And as we saw, it turned out to be a slight modest tailwind for us and for the industry. So we do think that given the relatively small percentage of the population in Medicaid that would be subject to that work requirement and largely lesser utilizers of care in that exchange, we don't see that as being the impact. Now as we think about the more structural impacts of the BBB, we do think that that will ramp just slightly heavier in the early years and then moderate out.

Okay. Thanks for that. And then as a follow up, could you provide a little bit of detail or discussion around the trend with outpatient surgeries? I know you mentioned it was up sequentially, but still down year over year. Is there a service-line rationalization occurring there that's impacting results, but just love any perspective or commentary on that trend.

Yes, good call out. Yes, definitely still some service-line rationalization, ophthalmology and E&T being the largest drivers of where we're seeing those declines. And again, those tend to be relatively short but high-volume cases -- short duration but high-volume cases. And so it magnifies the optics around the percentages. But again, it has freed up that capacity for higher-quality inpatient service lines that's modeling exactly as we would have hoped and expected with higher quality and higher acuity inpatients backfilling that, albeit at smaller total numbers, but with higher percentages.

And this is Albert, Matt. The one thing I would add as well is that there's still some impact from two-midnight rule as states have moved from OPs to inpatient as well. So that has a small impact too.

Got it. Thank you.

Ben Rossi, JPMorgan.

Great. Good morning and thanks for the question here. So one of the features we've been trying to figure out is your visibility into some of the longer-term prospects for these Medicaid supplemental programs. I appreciate that it's early here, but based on conversations with your state and federal partners for more recently approved programs in New Mexico and Oklahoma, do you believe that these programs will qualify for one of the rate cap exemptions through 2028 within the OBBBA, the May 1 grandfather deadline, or related good faith application effort for renewals this year?

Can you repeat that last part, Ben? It sort of trailed off.

No, just curious if either of these programs will qualify under the OBBBA's grandfather clause for exemption to the rate cap through 2028.

So you're -- and I'm sorry, it's just your line is very faint. So you're asking if they'll qualify for a grandfathering provision?

Yes, the exemption provision within the OBBBA.

Yes. Our expectation is that these programs have been approved. They've been -- now have been approved twice. And so yes, there is no reason to think they wouldn't fully qualify.

Okay. Now, I think I got you. Yes, so this is Marty, Ben. Yes, we don't see Oklahoma or New Mexico any different than we see Texas or any of the other 44 states that have been approved. They are approved programs. So there should be no additional risk or different risk than any other. And so now that the bill is approved, I think we do have solid visibility to say that these programs are durable. And yes, there will be some structural changes over time, which is what we quantified in the $150 million to $175 million potential impact.

And again, we put that out there as what we believe based upon what we know is a worst case given that the states are going to have to react. We're taking measures from our IMPACT program to proactively get ahead and mitigate some of the potential consequences of that. But we do expect that the states are going to have to step in here as well. These programs are critical to the Medicaid populations that each of the states have to sponsor. And as the federal government is trying to shift some of that responsibility back to the states, we do expect that the states are going to have some reaction that will help mitigate this.

Again, we benefit by these programs in serving this patient population, but so do every other hospital on the non-profit front. And so this is a critical piece of how we fund healthcare in this country. And so again, we see no differentiation between New Mexico and Oklahoma and any of the other approved programs. They are approved programs, and we expect them to be durable.

And just to be clear, New Mexico and Oklahoma, there were no changes that were pushed through concurrent with the passage of the BBB. So again, these both had been approved well before there was this administration. They had been submitted. So yes, there -- we would have zero expectation that they wouldn't fully qualify for those grandfathering provisions.

Great. I appreciate the additional color there. I guess just as a follow up, just thinking about capital expenditures, CapEx picked up during 2Q, but through the first half of the year, it's trending well below your now reaffirmed CapEx guide. I can appreciate that you framed CapEx being more back half weighted and probably should pick up as you roll out some of these de novo urgent care and imaging facilities. I guess, could you just discuss forward CapEx priorities right now and if there's been any shift in your near-term priorities in the wake of this bill?

Yes. I would say our expectations are very consistent with our -- all our prior commentary and our expectations going forward. Historically, the company has run about 3% of revenues weighted towards the acute side of the business going forward. We see that trending at or above 4% as we make more of a shift towards investing in the ambulatory buildout of our markets. Yes, no change. I think we historically had a weighting towards the back half of the year just as our internal processes. And yes, our expectations would be very consistent and our view towards CapEx this year is unchanged.

Got it. Thanks for the time.

Raj Kumar, Stephens.

Hi, good morning. Just one on the regulatory front. With the recent Medicare OPPS and ASC rule, they kind of proposed the elimination or the phaseout of the inpatient-only list and kind of seeing at where your outpatient and ambulatory footprint sits today, kind of what do you think that kind of happens in terms of balancing out with recent payer denial activities and then trying to push it down to less cost for your care setting. So maybe just trying to gauge your kind of your out -- view on kind of inpatient growth and if that's sustained at these current levels, just given these changing dynamics and policy?

Hey, Raj. It's Marty. Great question. Obviously, the inpatient-only list is not new and whether it only gets phased out or something changes in the near future. This is a clinical -- a question of clinical acuity. We've seen the shift from inpatient to outpatient been happening steadily and consistently over the last several years, particularly accelerated during COVID, and those trends haven't changed.

So we don't see a huge flood moving from the inpatient to the outpatient just because of that because so many of these patients have other comorbid conditions that require that higher level of specialization or inpatient attention. So it's something that we're looking at, but it really feeds into the focus of our growth strategy, which is growing beyond the core hospitals and into that outpatient environment.

And so we continue to look with our team, and this is part of our Chief Development Officer's mission as well is to make sure that we're looking not only for inpatient acute opportunities but continuing to grow that outpatient program. And so ASCs and having the right complement of ASCs to catch the patients as they do shift from the inpatient to outpatient is part of our core strategy and where we expect to see more investments to come.

Great. And then as my follow up, just kind of thinking about how you frame the impact program and the possible acceleration of the -- realizing the 100, 200 bps of core margin expansion. So maybe just like, is that -- is this still a three- to four-year timeframe where you'll start realizing that sooner in like '26, '27? Or is it maybe two to three years? Just some clarification around that.

No, sure. Thanks for the question. This is Alfred. Yes, it's obviously something we're intensely focused on internally, just given both the payer denial headwinds, the regulatory headwinds, and being sure that the organization is ready to thrive in an environment where we have those uncertainties going forward.

And as we indicated, this isn't a new program. Obviously, we're putting it under the IMPACT name, both internally and externally. But to your point, there is a very intentional effort to accelerate such that we have those impacts from those initiatives embedded in the core operating platform as the highest impacts from the regulatory changes that felt beginning in 2028.

So it very much is an acceleration. We are trying to ensure that the bulk of that 100 to 200 bps is felt in the next 24 months ahead of the bulk of the regulatory impacts as well. And in addition to an acceleration focused intensely on that 24-month period, what are the other things that we can go do that we're certainly not limiting ourselves to 100 to 200 basis points. Marty did a great job framing the opportunities and the initiatives underneath that.

And it's not only on the cost side but also looking at what are the payer contract -- contracting opportunities, where can we close and improve the reimbursement environment because -- and help to limit the denial activity that we're seeing as well as optimize supplemental revenue opportunities. We touched on that at a very broad perspective.

But as if the cuts go into effect the way they're slated, what are the other programs at a state level that become available, where are those offsets, so all of this is a component of the IMPACT program. And again, we very much think it is an acceleration focused very intentionally on the next 24 months period under the leadership of our new COO, Dave Caspers.

Thank you. Appreciate the color.

Tim Greaves, Loop Capital.

Hi. Thanks for taking my question. Apologies if you gave some clarity on this already. But as far as the NextCare visibility and the pull-through you're seeing there currently, how is that performing versus what you expected?

Yes. Thanks, Tim. This is Marty. We have not opined officially on terms of where that's at. But internally, the NextCare transaction was a very important acquisition to us and expanding access points and doing it in a very accretive manner. We are seeing volumes consistent with our internal pro forma expectations related to that transaction.

And as we fully get that system embedded on our Epic platform, we'll have more visibility in terms of the downstream impact, in terms of new patients, as well as follow up once they're there. But the initial volumes are very much in line with our expectations and contributing to the strong volumes that we've reported this year for the first half.

Okay. Thank you for the clarity.

Whit Mayo, Leerink Partners.

Thanks. Alfred, what did the core pricing revenue per adjusted admission look like when you normalize for New Mexico? And it sounds like acuity was good within the quarter. Just any numbers around increases in case mix might be helpful.

Yes, I'll have to -- obviously, Whit, it did have a -- when we look at over a 10% growth, it was a big component of that. Probably between, call it, 6.5% of that 10% net per AA is contributing to that. I would say core rate increases is around 4%, if you want to call it that, very consistent with the type of increases that we've talked about historically.

Okay. Were there any kind of residual headwinds in the second quarter of last year from the cybersecurity, or were you back at normalized levels? And is this a proper comparable year-over-year increase in admissions?

Yes. This is Alfred again, Whit. I would say it's very tough to tease out 100%, but we feel pretty confident that you have a very small impact from cyber. What headwinds that were still persisting were probably offset by a little bit of tailwinds too from some demand that -- so yes, we think it's a very comparable year over year. Again, as we do think that it was a little bit of a tough comp just from the standpoint of payer denial activity ramping up as well as we had a one-time item in the Q2 a year ago of a sale of aged AR that was $7 million, $8 million. So again, from a year-over-year perspective, a little bit of that noise from a comp perspective, but we think, by and large, a good comparison.

Cool. Thanks.

All right. Thank you, Whit. And ladies and gentlemen, that concludes today's Q&A session as well as today's Ardent Health second-quarter earnings conference call. Thank you all for joining, and you may now disconnect. Have a great day, everyone.