Ardent Health, Inc. (ARDT) Q3 2025 Earnings Call Transcript

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Overview

The earnings call summary and Q&A reveal several challenges: widespread payer denial activity, reduced Q4 guidance due to shifts in expected benefits, and increased professional fees. Management's vague responses and uncertainty around future guidance, combined with pressure on margins and ongoing denial issues, suggest a negative sentiment. Despite growth initiatives and the IMPACT program, the near-term headwinds and lack of clear resolution strategies point towards a negative stock reaction.

Key Financial Performance

Adjusted EBITDA Year-to-date adjusted EBITDA is up 30%. Adjusted EBITDA increased 46% in the third quarter to $143 million, with margins expanding 240 basis points to 9.1%. This growth was driven by strong volumes, revenue growth, and improved salaries and benefits as a percentage of revenue.

Revenue Revenue grew 8.8% in the third quarter to $1.58 billion compared to the prior year, driven by adjusted admissions growth of 2.9% and net patient service revenue per adjusted admission growth of 5.8%. Excluding a one-time revenue adjustment, revenue growth was 11.7%.

Admissions Admissions grew 5.8% in the third quarter, driven by double-digit increases in exchange and managed Medicaid and 8% growth in non-exchange commercial. Year-to-date admissions grew 6.7%, well above the 2% to 3% population growth in their markets.

Surgical Volumes Total surgeries increased 1.4% in the third quarter, reversing a small decline of 0.4% in the first half of the year. Inpatient surgery growth was 9.7%, while outpatient surgeries declined 1.8%.

Cash Flow from Operating Activities Cash flow from operating activities during the third quarter was $154 million, compared to $90 million for the third quarter of 2024. This improvement reflects better operational performance and cost management.

Lease Adjusted Net Leverage Lease adjusted net leverage improved from 2.7x to 2.5x in the third quarter, reflecting better financial discipline and cash flow management.

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Operating Highlights

Outpatient Build-Out: Several urgent care and imaging centers opened in the second half of 2025. Plans for 2026 include opening 2 ambulatory surgery centers, 4 urgent cares, and a freestanding emergency department.

Market Growth: Ardent's markets are growing 2 to 3 times faster than the national average, supported by demographic tailwinds and rising care complexity.

IMPACT Program: Initiatives launched to optimize costs and strengthen margins, including contract renegotiations, staffing adjustments, and supply chain improvements. Expected to generate over $40 million in annual benefits by early 2026.

Revenue Cycle Transition: Transitioned to the Kodiak RCA net revenue platform for enhanced real-time reporting and efficiency.

Strategic Investments: Strong cash flow and balance sheet enable investments in new markets and operational transformation without compromising financial discipline.

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Risk or Challenges

Professional Fee Expense Growth: Persistent challenge with professional fees growing at an accelerated rate in 2025 (11% in Q3), impacting adjusted EBITDA guidance. This growth was expected to moderate but has instead increased, contributing to a significant portion of the guidance reduction.

Payer Denials: Increased payer denials in Q3 2025 after stabilization earlier in the year, leading to further pressure on adjusted EBITDA guidance. This trend is expected to persist in Q4.

Labor Costs and Staffing Adjustments: High labor costs, including contract labor, have been a challenge. Targeted workforce reductions and renegotiation of labor contracts are being implemented to address this issue.

Supply Chain and Operational Efficiency: Efforts to optimize supply chain and operational efficiency are underway, but inefficiencies in these areas have impacted margins and financial performance.

New Mexico Liability Reserves: A $54 million increase in professional and general liability reserves in the New Mexico market due to adverse claims development and social inflationary pressures.

Revenue Adjustment from Accounting Transition: A $43 million revenue reduction due to a change in accounting estimate related to the transition to the Kodiak RCA net revenue platform, impacting Q3 revenue.

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Guidance & Outlook

Adjusted EBITDA Guidance: Revised full-year adjusted EBITDA guidance to $530 million to $555 million, reflecting persistent industry-wide cost pressures, particularly around professional fees and payer denials. These pressures are expected to persist at elevated levels in the fourth quarter of 2025.

Revenue Guidance: Maintained revenue guidance of $6.2 billion to $6.45 billion, representing 6% growth at the midpoint.

Margin Expansion and Cost Optimization: Targeted initiatives under the IMPACT program to optimize costs and strengthen margins are expected to begin contributing in the fourth quarter of 2025 and continue ramping through 2026. These include contract renegotiations, targeted staffing adjustments, and supply chain improvements.

Professional Fees and Payer Denials: Professional fees are expected to grow in the low double digits in the second half of 2025, higher than previously assumed. Payer denials have increased and are expected to remain elevated in the fourth quarter of 2025.

Future Growth Investments: Plans to open several outpatient facilities, including urgent care centers, imaging centers, ambulatory surgery centers, and freestanding emergency departments in 2026. These investments aim to support long-term growth and expand margins.

Operational Efficiency Initiatives: Initiatives include precision staffing, optimizing contract labor, accelerating speed to hire, vendor consolidation, commodity standardization, and tighter inventory management. These are expected to drive measurable impact in 2026 and beyond.

Payer Contracting and Revenue Cycle Management: Proactive steps to reduce denials and align payer contracting to maximize net yield. Early results are promising, with broader impact anticipated as initiatives scale in the near term.

Labor Cost Management: Renegotiating vendor contracts, particularly in anesthesia, to introduce more flexible cost structures. Replacing locums with full-time hires to reduce costs.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What are the headwinds and tailwinds for 2026, and is EBITDA growth expected next year?

A:Management stated that they will provide 2026 guidance during the fourth quarter call in February. They acknowledged strong durable demand and growth in their markets, with positive tailwinds from their outpatient development program and the IMPACT program. However, they refrained from giving definitive guidance on EBITDA growth for next year.

Q:Are there discussions about implementing a share repurchase program?

A:Management stated that it would be premature to discuss a share repurchase program. They emphasized that the Board is committed to optimizing shareholder value and will consider all options over time.

Q:Why won't the malpractice development lift recurring accruals, and how will the revenue yield be impacted by the payer denial issue?

A:The malpractice charge is specific to the New Mexico market and relates to social inflationary pressures and a specific provider no longer employed by Ardent. Management believes this is a headwind but not a recurring issue. Regarding revenue yield, the change in accounting estimate under the Kodiak platform results in earlier reserves for accounts, leading to a one-time adjustment but no expected ongoing differences between the new and old models.

Q:What was the $15 million to $20 million benefit in Q3, and how does it affect Q4 guidance?

A:The $15 million to $20 million benefit in Q3 was initially expected in Q4 and is related to the DPP component in certain markets. This shift contributes to the reduction in Q4 guidance, which is also impacted by payer behavior and professional fee dynamics.

Q:How widespread is the payer denial activity, and what actions are being taken to address it?

A:Payer denial activity is widespread across managed care products, including Medicare, Medicaid, and health exchanges. Management is ramping up contracting, integrating internal teams, increasing appeals, and issuing demand letters to address the issue. They expect this level of denials to persist in the near term but are taking aggressive actions to improve throughput and ensure fair payment.

Q:How should the 2025 base be considered for modeling purposes?

A:Management suggested that the current guidance, adjusted for the $50 million to $55 million headwinds and the $40 million IMPACT program benefit, could serve as a starting point for modeling 2025. However, they emphasized the uncertainty around policy and payer behavior.

Q:Is volume growth contributing to margin pressure, and are there alternative strategies to improve margins?

A:Management stated that their IMPACT program includes service line rationalization and a focus on high-acuity growth to improve margins. They are committed to expanding margins and believe their platform can deliver mid-teens EBITDA margins over time.

Q:What drove the increase in professional fees, and is it tied to specific contracts?

A:The increase in professional fees is attributed to pressures in radiology contracts this year. Management has better visibility into these trends and expects moderation as they renegotiate terms with preferred partners.

Q:Is the payer denial activity specific to Ardent or seen across Ensemble's network?

A:Payer denial activity is seen across the industry, but Ardent is outperforming national benchmarks with Ensemble. The environment has become more challenging, but Ensemble remains a strong partner.

Q:Does the rebasing of 2025 change the timeline for achieving mid-teens EBITDA margins?

A:Management acknowledged that near-term headwinds could extend the timeline for achieving mid-teens EBITDA margins. They are focused on accelerating IMPACT initiatives to offset these headwinds and will provide more details in 2026 guidance.

Q:How are exchange market dynamics, such as New Mexico's enhanced subsidies, affecting the business?

A:Management noted that New Mexico's plan to fully fund enhanced subsidies could cushion potential headwinds. They emphasized that their exposure to exchange lives is lower than the industry average, and they are monitoring state-level dynamics closely.

Q:Is the IMPACT program being expanded or accelerated?

A:The IMPACT program is both expanding and accelerating. It includes initiatives in revenue cycle, supply chain, and SWB, with benefits expected to ramp up in Q4 and continue into the next year.

Q:How are growth initiatives being affected by near-term profitability challenges?

A:Management stated that growth initiatives are not being deterred by near-term challenges. They continue to invest in outpatient platforms, ambulatory surgery centers, and partnership models, supported by a strong balance sheet.

Q:How much of the payer denial headwind can be addressed through renegotiating or exiting contracts?

A:Management is actively renegotiating contracts to address margin erosion from payer denial activity. They cited an example where terminating a contract led to better rates and terms, and they are accelerating these efforts as part of their impact initiatives.

Q:What is the status of commercial negotiations for 2026 and beyond?

A:Approximately three-quarters of contracts for 2026 have been negotiated. Headline rates have edged down, but management is focusing on improving contract terms to enhance yield and address denial activity.

Q:Why is denial activity higher, and is it tied to specific states or rates?

A:Denial activity is not tied to specific states or higher rates but is a result of payers becoming more aggressive with policy changes and technical denials. Management is focusing on improving contract terms to mitigate these issues.

Q:Review of Unclear Management Responses

A:Management avoided providing direct answers to questions about specific 2026 guidance, the exact timeline for achieving mid-teens EBITDA margins, and detailed quantification of IMPACT program benefits for 2026. They also used vague language when discussing payer denial activity and its resolution, as well as the broader implications of exchange market dynamics.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

ARDT Transcript

Ardent Health, Inc. (ARDT) Q3 2025 Earnings Call Transcript

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The earnings call reveals mixed signals: moderate revenue growth and reaffirmed guidance suggest stability, but concerns about regulatory approvals, payer behavior, and economic pressures pose risks. The integration of new clinics and ongoing M&A activities are positive, yet supply chain challenges and increased claim denials could hinder profitability. The Q&A session highlights uncertainties, particularly with the New Mexico DPP. Overall, the sentiment is neutral, balancing modest financial performance with potential headwinds.

ARDT Slides

Ardent Health Q1 2025 slides: Revenue up 4%, company reaffirms full-year guidance

2025-05-06

Ardent Health Q2 2025 slides: Revenue surges 11.9%, EBITDA jumps 38.9%

2025-08-05

Ardent Health Q3 2025 slides: revenue up 8.8%, stock plunges on guidance cut

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