ARDT - NYSE

Greetings, and welcome to the Ardent Health Third Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Dave Styblo, Senior Vice President of Investor Relations. You may begin.

Thank you, operator, and welcome to Ardent Health's Third Quarter 2025 Earnings Conference Call. Joining me today is Ardent 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 a 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. Ardent finished the quarter with 2 contrasting realities. On one hand, our performance reflects a continuation of growth momentum we've experienced across our business, driven by robust demand, improving surgical trends and disciplined execution. Year-to-date, adjusted EBITDA is up 30%, and we've made meaningful progress on margin expansion, cash flow and our balance sheet with lease adjusted net leverage improving 1.5x since our IPO last summer. On the other hand, our earnings performance this quarter did not meet our expectations. As noted in our release, we've revised our full year adjusted EBITDA guidance to $530 million to $555 million, reflecting persistent industry-wide cost pressures, particularly those around professional fees and payer denials that have proven more durable than anticipated. We view this revision as a prudent recalibration grounded in a pragmatic assessment of current conditions and establishing a reset baseline from which we can build. These pressures are not demand driven and our revenue guidance remains unchanged, but our earnings pull-through has been impacted and we are taking decisive actions to address it. Through our IMPACT program, we've already launched targeted initiatives to further optimize cost and strengthen margins. These actions have been building momentum and are expected to begin contributing in the fourth quarter and will continue to ramp through 2026. With strong demand across our markets and a solid balance sheet, we remain confident in our ability to deliver sustainable growth and long-term shareholder value. To frame today's conversation, I'm going to focus my comments on 3 key areas. First, I'll walk you through our 3Q results and the strong demand environment. Second, I will provide color on the industry headwinds that are impacting 2025 earnings more than previously anticipated. And third, I will provide details of how we are already working to address and mitigate these challenges. Let's start with our third quarter performance. At a high level, we generated strong volumes and revenue growth driven by improving surgical trends and sustained strength in industry demand. Our markets are growing 2x to 3x faster than the national average and are further bolstered by rising care complexity, structural trends that reinforce our long-term growth thesis. Ardent's leading positions in these growing midsized urban markets give us a durable advantage, and these demand dynamics provide a strong foundation for continued strategic inpatient and outpatient growth. Our strong platform combined with initiatives to improve capacity and efficiency drove admissions growth of 5.8% in the quarter. This is a continuation of the favorable trends we've observed in the first half of 2025 with year-to-date admissions growing 6.7%, well above the 2% to 3% population growth we see across our markets. Additionally, adjusted admissions increased 2.9%, landing near the top end of our 2025 guidance range of 2% to 3%. Surgical volumes also improved with total surgeries up 1.4% in the third quarter, reversing a small decline of 0.4% in the first half of the year. Turning to financial performance. Revenue grew 8.8% in the quarter or 11.7%, excluding a onetime revenue adjustment that Alfred will detail later. Adjusted EBITDA increased 46% in the third quarter to $143 million, with margins expanding 240 basis points to 9.1% and further lowering our lease-adjusted net leverage from 2.7x to 2.5x. Of note, third quarter adjusted EBITDA included approximately $15 million to $20 million of earnings we previously expected to realize in the fourth quarter. Excluding this timing benefit, underlying third quarter adjusted EBITDA was below our expectations, which we factored into our updated guidance. That's a good segue to the second topic of today's discussion: industry headwinds. While our revenue growth has been strong, earnings did not reflect the level of pull-through we anticipated. First, professional fee expense growth. This has been a persistent challenge across the industry for several years now. For Ardent, growth peaked at over 30% in 2023, moderated to 12% in 2024 and was expected to moderate further this year. Instead, professional fees increased 6% in the first quarter, 9% in the second quarter and accelerated to 11% in the third quarter. We now expect second half growth in the low double digits versus the high single digits previously assumed. This accounts for roughly half of the 2025 adjusted EBITDA guidance reduction. Payer denials were the second factor impacting our adjusted EBITDA guidance outlook. After a sharp increase in denials beginning in the second quarter of 2024, trends largely stabilized through the first half of 2025 consistent with our outlook. However, these payer pressures moved higher again in the third quarter and our updated adjusted EBITDA guidance reflects the development of this trend throughout the second half of 2025. In summary, our updated outlook prudently assumes these industry headwinds observed in the third quarter will persist at elevated levels in the fourth quarter. While these dynamics are industry-wide, we are taking decisive action to mitigate their impact and strengthen our performance, which brings us to my third and most important takeaway, what we are doing to close the earnings gap. We are taking swift and decisive action to improve our near-term earnings profile while maintaining a disciplined approach to strategic investments that support long-term growth. Immediate priorities, including contract renegotiations and targeted staffing adjustments are already underway with additional initiatives ramping in early 2026 that are expected to drive measurable impact across revenue cycle, labor and supply chain performance. Under our IMPACT program, we have launched an expanded set of margin enhancement and efficiency initiatives. As an example, we've renegotiated terms of an exchange plan to secure meaningful rate improvement with an additional step-up in 2027. We've recently completed a targeted reduction in workforce, and we revised the key agency labor contracts to lower base rates and reduce premium pay. These 3 actions will phase in during the fourth quarter and reach full run rate benefit in early 2026, generating an expected annual benefit of more than $40 million. Beyond these near-term actions, we are executing on initiatives to build momentum in 2026 and beyond under the leadership of our Chief Operating Officer, Dave Caspers. These include precision staffing to better align patient care resources with real-time volumes, optimizing contract labor and accelerating speed to hire. We are also driving supply chain discipline and savings through vendor consolidation, commodity standardization and tighter inventory management. In our operating rooms, our OR excellence program is focusing on improving case mix and evaluating additional service line rationalization opportunities to ensure the right surgeries happen at the right time in the right setting. While payer headwinds remain an industry-wide challenge, we are taking proactive steps within our control to drive sustainable improvement. We've mobilized a multidisciplinary team that combines expertise in clinical operations, contracting and revenue cycle management to respond with an integrated strategy. This team is leveraging innovative processes and advanced analytics to reduce denials and aligned payer contracting to maximize net yield. Early results are promising, and we anticipate broader impact as these initiatives scale in the near term. We are also taking steps to rightsize professional fees. We are renegotiating certain vendor contracts, particularly in anesthesia to introduce more flexible cost structures that better align with patient volumes, helping to eliminate excess fixed costs in our business. Additionally, given our increased scale, we are strategically replacing [ locums ] with more cost-efficient full-time hires. Collectively, these initiatives are strengthening the organization and will better position us for future earnings growth. While industry headwinds remain, we are confident in our ability to execute with discipline and deliver long-term shareholder value. With that, I'll turn it over to Alfred to provide more detail on our third quarter financial performance and outlook.

Thanks, Marty, and good morning, everyone. I'll focus my comments on third quarter performance, detail the 2 nonrecurring items we noted in our release and elaborate on our outlook for the business. Building on Marty's comments, we again delivered strong volumes during the quarter. Third quarter admissions growth was 5.8%, driven by double-digit increases in exchange and managed Medicaid, and 8% growth in non-exchange commercial. Inpatient surgery growth was 9.7% in the third quarter while outpatient surgeries declined 1.8%. Total surgeries grew 1.4% in the third quarter, which is continued improvement from a 0.7% decline in the first quarter and a 0.2% decline in the second quarter. Adjusted admissions increased 2.9% in the third quarter and are up 2.4% year-to-date, consistent with our 2025 outlook of 2% to 3% growth. Now turning to financial performance. Third quarter revenue increased 8.8% 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 nonrecurring adjustment that I'll discuss in a moment, revenue growth was 11.7%. Adjusted EBITDA increased 46% in the third quarter to $143 million compared to the prior year, and adjusted EBITDA margin increased by 240 basis points to 9.1%. Year-to-date through the third quarter, adjusted EBITDA grew 30% and margins expanded 150 basis points to 8.7% compared to the prior year. The largest driver of the third quarter margin improvement was in salaries and benefits. As a percentage of total revenue, salaries and benefits improved by 90 basis points to 42.9%, or by 200 basis points when excluding the onetime revenue adjustment. Inside of this dynamic, we're pleased with our contract labor improving to 3.5% of salaries and wages in the third quarter down from 3.8% in both the first and second quarters of this year and down from 3.9% in the same prior year period. Moving on to cash flow and liquidity. We ended the third quarter with total cash of $609 million and total debt outstanding of $1.1 billion. Our total available liquidity at the end of the third quarter was $904 million. Cash flow from operating activities during the third quarter was strong at $154 million compared to $90 million for the third quarter of 2024. Capital expenditures during the third quarter totaled $59 million, and we'd expect a modest increase in capital spending the remainder of this year. At the end of the third quarter, our total net leverage was 1.0x, and our lease adjusted net leverage was 2.5x, which is an improvement from 2.7x at the end of the second quarter. As Marty outlined, our third quarter adjusted EBITDA did not grow as fast as we previously projected due to the elevated level of professional fees and worsening payer dynamics. As a result, we're revising 2025 adjusted EBITDA guidance to $530 million to $555 million, which at the midpoint implies growth of 9% and 20 basis points of margin expansion. However, we're maintaining our previous revenue guidance of $6.2 billion to $6.45 billion or 6% growth at the midpoint. Before concluding, I'd like to elaborate on the 2 nonrecurring items we recorded in the third quarter. First, we recorded a $43 million revenue reduction as a result of a change in accounting estimate during the quarter. This change in estimate reflected our transition to the Kodiak RCA net revenue platform. As many of you may know, Kodiak is an industry-leading revenue cycle platform with more than 2,100 hospital customers, including public, private and not-for-profit health care systems. At the simplest level, this is a change in methodology to one that recognizes reserves earlier in an account's life cycle, all other things being equal. This transition reflects a strategic move from an internally developed model to an efficient and scaled system with enhanced real-time reporting capabilities, all of which are important as we grow in scale. As we indicated in our earnings release, the $43 million adjustment reduced total revenue for the third quarter, but is excluded from adjusted EBITDA. Second, we recorded an increase to our professional and general liability reserves of $54 million, fully attributable to our New Mexico market. This reserve change primarily relates to adverse claims development for a single provider who Ardent has not employed for several years as well as overall social inflationary pressures in the New Mexico market. The $54 million adjustment was recorded within third quarter other operating expenses but is excluded from adjusted EBITDA. I want to be clear, we consider both of these items isolated matters, and they were not a factor in revising our 2025 adjusted EBITDA guidance. So as we think about the business on a go-forward basis, we remain encouraged about our ability to drive durable top line growth. Our volumes have been quite strong, and we continue to execute on initiatives to optimize demand to our system. From an earnings perspective, we have a number of opportunities that we can control to drive improvement of our adjusted EBITDA base. As Marty already mentioned, many of the revenue and earnings enhancement initiatives under our IMPACT program are well underway with others expected to begin in the near term. Execution with discipline and urgency is paramount and a top priority for our entire organization. Our strong balance sheet and liquidity position give us the flexibility to invest through cycles, pursue strategic growth and support operational transformation without compromising financial discipline. We're continuing to support future growth with our outpatient build-out. In the second half of 2025, we will have opened several urgent care and imaging centers. And in 2026, we expect to open 2 ambulatory surgery centers, 4 more urgent cares and 1 freestanding emergency department. Further, our strong cash flow generation and balance sheet give us the flexibility to support strategic growth into new markets. Collectively, this positions us well to deliver long-term shareholder value, grow adjusted EBITDA and expand margins over the next several years. With that, I'll turn the call back to Marty for concluding remarks.

Thank you, Alfred. I want to leave you by reinforcing 3 key takeaways. First, we operate in a strong and durable demand environment. Our markets continue to grow 2x to 3x faster than the national average, supported by demographic tailwinds and rising care complexity, structural trends that reinforce our long-term growth thesis. Second, we've prudently adjusted 2025 guidance to reflect industry pressures. And importantly, we've already begun implementing decisive actions to mitigate these challenges. Under our IMPACT program, we are harvesting operating efficiencies through initiatives in labor, supply chain and revenue cycle that will strengthen margins and position us for sustainable growth. Third, we remain financially strong and strategically positioned to create long-term shareholder value. Our balance sheet and cash generation gives us flexibility to invest through cycles and deploy capital to support long-term growth. Looking ahead, these fundamentals position us to expand margins and grow adjusted EBITDA over the next several years. Before I turn the call over for questions, I want to take a moment to thank our 24,000 team members and 1,800 affiliated providers across Ardent. As the health care industry continues to evolve, we are deeply grateful for their continued commitment to our purpose, caring for people, our patients, our communities and one another. Their resilience and focus enable us to adapt and improve how we work while continuing to deliver exceptional care to our patients. With that, I will turn the call over to the operator for our question-and-answer session.

[Operator Instructions] And our first question comes from the line of Jason Cassorla with Guggenheim.

Great. It sounds like the payer denial and professional fee pressures are going to spill over into next year. There doesn't seem to be much incremental DPP development in your markets at this juncture, but there's the rural transformation fund to consider. You've discussed $40 million of annual run rate benefits from the IMPACT program next year, and demand in your market seems durable at this point. I mean your volume growth speaks to that. So maybe just stepping back, I know it's early, but for 2026, could you just help frame the headwinds and tailwinds that we should be considering a bit more? And then ultimately, if you would expect to grow EBITDA next year?

Jason, this is Marty. I appreciate that. Yes, as we -- you've covered a lot in that question. As we think about where we're at, we're going to wait until our fourth quarter call in February to provide that '26 guidance, so we'll have a more complete view of pro fees and payer dynamics and progress on our income -- or our IMPACT program and the economy. And so there's a lot of things in there. But yes, you framed it right. We see strong durable demand as we go into next year. Our markets are growing. We're well positioned in those markets, and we're still executing on our outpatient development program. So a lot of positive tailwinds as we look at the growth side. Our IMPACT program, we do expect to -- it is ramping, and we expect that to continue to provide benefit, but it's a little bit too early to give definitive guidance in terms of what that growth is, where we do expect to see our long-term growth thesis continue and both EBITDA growth and margin over the next several years.

Okay. Got it. And maybe just as a follow-up. Even with the EBITDA headwinds this year, you're still producing solid free cash flow. You talked about the M&A environment, the pipeline you have, the puts and takes on how that's materializing in this volatile backdrop. Your leverage is in a solid spot. You've got $900 million of available liquidity. You've got growth opportunities ahead of you. There might be some IPO or other ownership nuances to consider. But are there discussions around the consideration of implementing a share repurchase program at this juncture? Or any thoughts around that?

Jason, it's Alfred. It would be premature. We wouldn't want to speak to the Board. But I think management and the Board are committed to optimizing shareholder value. And so over time, I'm confident the Board will look at every option to optimize shareholder value.

Next question comes from the line of Whit Mayo with Leerink Partners.

I just wanted to go back to the malpractice development and why you think that this won't lift your recurring accruals given that the frequency is higher and the size of the claims is higher, and why we shouldn't also expect that your revenue yield is impacted on a go-forward basis with this payer denial issue? Or I'm sorry, not payer denial, but the revenue cycle change.

Sure. Thanks, Whit. This is Alfred. There's obviously 2 questions incorporated there. I'll speak first to the New Mexico medical malpractice charge. As we indicated, 100% of that charge relates to the New Mexico market where we have seen significant social inflationary pressure in medical malpractice cases the past several years. So this is not new. There has been an increasing dynamic year-over-year of increasing premiums, increasing costs in the New Mexico market. The amount recorded in our charge represents our best estimate for Ardent's liability for this market, for the adjustment for those pressures. And for an individual provider who was with Ardent between 2019 and 2022, and who is no longer employed by Ardent and for whom the statute of limitations has expired. So I guess the short answer to your question is, yes. We do believe the environment we're in. This is a headwind to the business and has been for a number of years. This adjustment was specific to the specific set of facts around a single provider and a single market. Moving to the AR charge. I would say at the simplest level, we -- this is a change in accounting estimate. Our current net revenue model, the one that we've moved to under the Kodiak platform reserves for an account earlier in its life cycle as compared to our internally developed model, which had utilized a 180-day cliff at which time an account became fully reserved. So I would say the difference is reserve timing between the 2 models, and it results in a reduction in net revenue just upon implementation. And that reduction is essentially attributable to the fact that Ardent is a growing company. And so it's adding reserves to that, call it, that growth layer, and it's a onetime adjustment. Going forward, the models would essentially produce the same results. So we would not expect going forward, any difference between the existing or the model that we've moved to under the Kodiak platform and our previous internally developed model.

Okay. And I think I heard -- maybe it was Marty that referenced maybe $15 million of a benefit in the third quarter that was favorable versus expectations? Maybe I got that number wrong. If you could just maybe provide a little bit more detail on that?

Yes. This is Alfred again. Marty noted that we, in third quarter, we had roughly $15 million -- somewhere between $15 million and $20 million of benefit that we previously had expected in Q4. So when you think about the reduction in guidance, it's relatively evenly split between Q3 and Q4, maybe a little bit more weighted towards Q4 simply because we still are not -- until we see tangible evidence of the turn in pro fees and payer behavior, we're still expecting a little bit of an acceleration of those dynamics.

But what exactly was the $15 million? Was it DPP or something?

There was a DPP component in that.

Next question comes from the line of Scott Fidel with Goldman Sachs.

Just to just put a bow on Whit's last question. So just on the $15 million to $20 million, just so we make sure that we're modeling 4Q correctly. So it sounds like -- is that just all in revenue per adjusted admission and pricing in terms of how we should be thinking about that $15 million to $20 million? Or are there other line items on the expense lines that are affected as well?

No, I think that's fair. This is Alfred. I think it's fair to say it's all in the [ rev per. ]

Okay. And then I guess my real question would be around the payer denials and I guess sort of how you maybe think about the exit rate in terms of where that sits. I know that you gave us sort of the details in terms of how much of the guide down it reflects. Just thinking about, I guess, as you try to address this, how widespread first would you say that those -- the ramp in denial activities are across your key payers? Is it 1 or 2 of maybe who we would think to be the most likely suspects or is it more broad-based? And then I guess you're thinking about '26, and I know you're not ready or comfortable yet to provide guidance. But how will you, I guess, contemplate that level of payer denial sort of pressure, I guess? What would you sort of think about sort of just taking the 4Q and annualizing that and then sort of try to work off of that and see what you could improve and that could be upside? Or do you think that you'll be able to implement initiatives that could start to bring that down in '26 relative to the 4Q run rate?

Scott, this is Marty. I'll start, and I'll let turn it over to Alfred for the second half of your question. But yes, as we look at the payer denials, we saw that initial step up in the second half of last year largely stabilized and then started to drift up and accelerated as we went into this third quarter. It's largely across the managed payers, and we've got some good data statistics to show that, which is informing how we are changing our response. Clearly, we're delivering the care. We know that the services we're providing are necessary and warranted and the payers, through policy changes and impacts are either just downgrading claims, denying claims or slow claims, all of which have had an impact, which we're describing here. The managed care -- the managed products, Medicare, Medicaid health exchanges are the culprits, and it's fairly uniform across all of those different categories. We've ramped up our contracting. We've integrated how we are approaching this from an internal perspective in terms of our teams coming together, working with our revenue cycle partner, working with our legal team, ramping up our litigation efforts and demand letters as a result because we know that these services were warranted and provided and taking steps to get more aggressive in our response and action for their behavior and push back on us.

Yes. And just taking off on Marty's point, again, obviously, we're not prepared to speak to 2026 but -- in terms of financial details. But in terms of the things we're doing, Scott, as we mentioned, putting a finer bow, final denials in Q3 were up 8% over the first half of the year. So we are expecting this. We think it's prudent to continue to expect this level of denials for the immediate future. But in terms of the actions that we're taking, and we've significantly stepped up the number of appeals we're filing, I think we're up in terms of -- over the prior year, like 60% in terms of appeals. Appeal turnaround time by the same token is down 25%. And then just taking off on Marty's point on recent organization -- recent organizational changes, that has resulted in us filing 60 demand letters with payers with delinquent adjudication just in the last 90 days with an expectation of somewhere of a $15 million benefit. These are just some of the actions that we're taking. So to your point, I mean, I think it's prudent to not expect that payer behavior is going to change in the foreseeable future. And we're focused on what are the things we can do to improve the throughput and to get paid for the work that we're doing fairly.

Next question comes from the line of Kevin Fischbeck with Bank of America.

I appreciate that you're not interested to talk about next year. I don't think almost any hospital company has talked about next year. But you have said a few times that the second half is creating a base up of which you think you can grow. Can you just help us think a little bit more about how you view this change of guidance and how if you were to pro forma the 2025 base, how we should think about that? And then we can make our own decisions about how that grows next year. Is that like the current guidance but annualized the [ 50, 55 ] And then maybe add back [ 40. ] Is that like a good way to start about 2025 on a normalized basis? Or is there something else that we should be thinking about the timing of the $15 million to $20 million? How to think about that as I try to think about what a core base '25 looks like?

This is Alfred, Kevin. Thanks for the question. Yes, obviously, like you said, given the policy uncertainty and exchange uncertainty, it would be imprudent to speak to 2026 at all. But as we think about the exit run rate for 2025, again, we think it is prudent to think about the current headwinds. We think an appropriately prudent reset, which is what we've done to incorporate that is the right thing to do. And again, it would be too optimistic to think that pro fees are going to take a turn in the other direction and payer behavior. At the same time, we've already articulated some of the things that we're doing. Marty talked about the impact initiatives and the $40 million, which is actually simply incremental efforts that we've made recently that should fully manifest in the run rate next year. And there's a lot of other things we're doing from an IMPACT perspective. It's focused, I would say, in 7 buckets around revenue integrity, productivity, payer disputes, supply chain, management, purchase services, revenue cycle management and professional fees. And so we have strategies across all of those buckets. The things we can do that are in our control to combat these headwinds. Again, we think as we forecast out, it's appropriate not to believe that things are going to change fundamentally, but then what are the actions that we can take to tangibly offset that. So we would expect that $40 million to grow next year in terms of the potential offsets in IMPACT program. Again, would be preliminary to actually quantify all those dynamics for 2026.

Yes. Okay. That makes sense. And I guess just my second question would be, yes, you guys are growing very well. I guess though we've seen another company kind of grow by shrinking, if you will, and focusing on high-margin businesses. I just wonder, is there any scenario where some of the margin pressure that you're seeing is because of some of the volume growth that you're pursuing? Or do you believe that the cost issues are really kind of separate from that? Just trying to think through if there was another option or opportunity to improve margins in a different way.

Thanks, Kevin. This is Marty. Yes, as we think about our IMPACT program, this is part of that. That IMPACT stands for improving margins, performance, agility and care transformation. And so we've talked a lot about our service line rationalization efforts and we're seeing the pull-through of growth, 9%, 9.2% growth in surgeries, strong adjusted admissions growth. We're growing that outpatient platform. And through our transfer centers, we've seen robust inpatient growth better than most of our peers. And so yes, as we look forward, we are looking at those conversations to make sure that we're maximizing the opportunities to bring the right acuity cases in there into the hospital, into our platform and making sure we can service those patients well. So yes, that's definitely part of our thinking as we continue to rationalize our services, rationalize the programs and focus on that high acuity growth. So that is part of the IMPACT program that we'll be expecting to see continued progress on as we go into next year.

And this is Alfred. I would just add to what Marty said. We are committed to expanding our margins. We're not -- again, we're not speaking to 2026 as we sit here, but we continue to believe that we have a platform that can deliver mid-teens EBITDA margins, and we are focused on creating shareholder value, not just through growth but by also growing margins.

Next question comes from the line of Matthew Gillmor with KeyBanc.

This is [indiscernible] on for Matt. I just wanted to ask on the professional fees. It seems like they stepped up pretty quickly. I just was asking kind of what drove this? Was this tied to any one specific contract? Any additional color that you could provide just kind of what transpired during the quarter would be helpful.

Thanks, Matt. This is Marty. As we look at the last several years, we sort of detailed out how these fees have grown, and they are moderating, just not quite to the extent that we anticipated. But what gives us a little bit more confidence is this has gone in cycles, and we've seen the rise in ER, anesthesia. This year, we've seen a little bit more pressure on radiology. And so as we lap through these contract renewals, we've got better visibility with the terms in which we're negotiating. We've got preferred partners in most of these specialties now that are giving us the ability to pool our resources across markets and make sure that we can demonstrate strength and visibility in terms of these trends. And as we've lapped through now, most of these specialties that gives us better visibility that we will continue to see moderation as we go forward, hopefully at a slower pace than what we've experienced thus far. But yes, this year, the radiology step-up accounts for a lot of the increases that we've seen.

Helpful. And then just as a follow-up, I wanted to touch on the partnership with Ensemble. I guess are they seeing similar payer denials across their network? Or is this more isolated to your partnership?

Yes. So as we look at the national statistics, we're still outperforming sort of the national benchmarks with Ensemble. So they've been a strong partner to us, and we've seen a step up and that step-up is seen across the industry. We're not -- I'd say we're growing the trend of denials inside of that and still better than average across the industry, but more than we had expected. So they've been a strong partner for us. We know they're investing a lot in their capabilities just to continue to make sure that we've got clean claims going out the front door and taking away those opportunities for denials to happen. And we can see that in that and the payers have just gotten more aggressive at unilaterally either down quoting claims or flat out denying claims to [indiscernible] is an example that stands out as continued pressure across the industry. So those are -- Ensemble is performing very well, better than the average. It's just that the entire environment has gotten more difficult.

Next question comes from the line of Raj Kumar with Stephens.

Maybe just kind of touching on the EBITDA margin expansion still targeting mid-teens. Kind of given the rebasing of 2025, that would kind of imply instead of $100 million to $200 million of core margin expansion, that's like 200, 300 now. Does that change the time line of achieving that mid-teens EBITDA target? Or do you think that over '26, '27 and '28, that time line still stays intact?

Thanks, Raj. This is Alfred. No, good question. And I think it's -- it would, again, be early to give specificity. I mean, it is fair to say, right, that with these headwinds that there is near-term pressure that wasn't expected and that all things being equal, that it would extend the time line out. And as we've said, we are focused intensely on accelerating and increasing the volume of the impact programs to offset these headwinds. So I think when we come to 2026 guidance, we'll be in a better position to frame those time lines out a little bit better and put additional quantification around the IMPACT programs. But again, the message I would want you to take away is that the we are intensely focused on increasing the aperture of offsets given these headwinds and are accelerating those -- that intensity in order to, as much as possible, stay on the time line.

Got it. And then kind of as my follow-up, just looking at the exchange markets, it seems like kind of one of your core states, New Mexico is looking to kind of fully fund the enhanced subsidies up to 400% of FPL, kind of do internal means next year. So it seems like a kind of cushion to the potential headwind on the enhanced subsidy side. And then you talked about your contracting dynamics in Texas. So maybe just kind of any updated framing you can provide on that front in terms of -- I know maybe not a -- probably not a number given that uncomfortability on 2026 framing, but just any kind of gives and takes on that front would be helpful.

No. Good question. And again, I think, I mean, great to call out that there will be the individual states are not going to sit by and a lot will obviously still depend on what is the ultimate outcome of the exchanges, still very much in the air and anybody's guess into where it ultimately land is. But I your example of what New Mexico has come out is a good one that -- and again, it's one of the reasons why it would be very imprudent to forecast. What we have obviously said and our exposure to exchange lives is lower than many in the industry. And although it has been the single largest driver of growth among our payer mix this year. So important to us. But as we continue to say, not an extremely highly profitable segment of our business. And yes, we're keeping a close eye on all those dynamics within the states. But again, good call out on the New Mexico land.

Next question comes from the line of Craig Hettenbach with Morgan Stanley.

Just going back to the IMPACT program. Is this really kind of an acceleration of pull forward in terms of time line? Or do you think over time, you could expand that program further? How do you think about that?

Craig, this is Marty. It's both. These efforts don't just produce immediate value. There's a number of things in line, and we sort of bucket them into the revenue cycle, supply chain and SWB. And so all of those things have various initiatives underway, that's what give us confidence that we'll see these things continue to provide benefit, and it starts to provide more benefit in Q4 and then continue to ramp as we go through the year. And we're adding to that. This is really a focused effort across the organization, led by our COO, Dave Caspers, and his focus in getting all of our teams marching in the same direction around these IMPACT initiatives. And so we've got good conviction that as these things continue to ramp that it's spurring more opportunities and presenting more levers for us to continue to pull, but it does take some time for this to get going, and we can start to see that momentum building, and we'll continue to build. So that's the way in which we're looking at that going forward.

Got it. And then just a follow-up, Marty, just given some of the challenges near term on profitability. How does that, if at all, kind of influence some of the growth initiatives that you have? Like can you kind of handle some of this and still kind of march forward? Or do you pause a little bit? How are you kind of planning around that?

Yes, no. I mean it doesn't impact our focus on growth. This -- we went public last summer with a thesis around growth starting in our core markets, and we've continued to execute on that. As Alfred referenced, we've opened more urgent cares. Next year, we'll be opening 2 ambulatory surgery centers at least that those are already well underway and continuing to build out that outpatient platform. Our Chief Development Officer has been very active since he began several months ago, building interest in our partnership model, both to continue the expansion of growth within our core markets as well as looking for new market opportunities. We've got the balance sheet to support that growth. And we don't -- we are not deterred by this short-term headwind. When we look at it, we're still showing with this guidance, 9% EBITDA growth. That's nothing to be ashamed about not as robust as we anticipated, but certainly strong growth helping us to delever the balance sheet and putting us in a position to continue to capitalize on these trends across the industry. So no, not deterred at all.

Next question comes from the line of Ben Hendrix with RBC.

Great. I believe you mentioned in your prepared remarks the one exchange contract renegotiation, and I know you've called out elevated denial activity in exchanges on the second quarter call and potential to renegotiate or even maybe exit some contracts. I'm wondering just how much of this denial activity headwind you believe you could address in the near term from kind of shrinking your already small footprint in exchanges and exiting certain contracts or renegotiating.

Yes, that's a great call out, Ben. Yes. And the one contract that we cited in prepared remarks is just one example of the tangible things we're doing, and we put that into the revenue integrity bucket under our impact initiatives. And it is an example that -- to the earlier question, we're not just going to grow to grow from a top line perspective. We have to see profitable pull-through. And the changes we've made from an organization structure to create alignment between our revenue cycle and our payer operations should continue to yield more opportunities in this area. It does take time. It does take time to say, put out an early termination. And then hopefully, that can yield a renegotiation of appropriate terms. The example that we cited here was one where we were seeing a significant margin erosion in this contract from payer denial activity. We turned it, payer came back to the table, we negotiated a better rate and better terms to prevent the denial activity that we were seeing. And so again, just a tangible example, but a good call out of things that we are doing and accelerating from an offset perspective. And again, we'll be incorporating the strategies into our 2026 view.

[Operator Instructions] And we'll take our last question from Benjamin Rossi with JPMorgan.

Just following up on the negotiations and just where your commercial negotiations stand for 2026, 2027, and maybe now even 2028. I believe last quarter, you said you were about 55% for 2026. How are those conversations coming along? How much of those contracts have been negotiated at this point? And how do those contracts compare to the last couple of negotiation cycles?

Sure. This is Alfred. Good question. Compared to when we last spoke, we're about -- we're close to 3 quarters contracted for 2026. I would say the headline rates are -- have hedged down from historical levels. It is a tougher environment. You've heard it in all the payers. We're getting closer to what I would call the traditional type of increases. And we're very focused, not just on that top line rate, but also creating the things that lead to better yield under our contracts to stem some of the denial activity. So it's not just a -- it's important not just to think about a top line number, but more important to think about the ultimate yield under our contracts. And I would say that is a much greater focus than in past renewal cycles.

Got it. Appreciate the color. I guess just as a follow-up maybe on why you're seeing higher denials here. I guess just on your rates, were your rates here higher than the industry average in your markets? You've noted that your [ NJ ] pricing is the highest in the state? Or is there any particular states where your denial activity was higher or maybe where you're overindexed?

Ben, this is Marty. No, I wouldn't characterize it exactly that way. For the most part, we arethe value-based provider in our markets. While we have leading shares #1 or #2 in the majority of our markets, from a payer perspective, we're still a little bit behind a lot of those trends. And so our managed care team has been working to bridge that gap, but I wouldn't say that our rates are particularly higher in our markets, the activity across the payers, and I think that the pain that they're seeing is trickling down into the provider segment. So we know that we've still got opportunity to continue to bridge that gap and to strengthen our performance. But again, it's not just headline right, as Alfred was talking about. It's getting to the terms because more and more increasingly, we're seeing the sort of technical denials or payment slowdowns because of policy changes that are outside of the contract. And so we're trying to button down the hatches to make sure that, again, whatever that top line increase that we are able to negotiate with payers is translating into bottom line yield.

That will close the question-and-answer session. I would like to turn the call back over to Marty Bonick for closing remarks.

Thank you. As we conclude, I just want to thank the investor community for their interest in Ardent, and thank our teams across the company for their continued commitment and resilience in fulfilling our purpose. As we've talked about, we operate in a very strong and durable demand environment. And while these industry pressures have impacted near-term earnings, we've taken decisive actions to mitigate those challenges and continue to strengthen our performance. Our IMPACT programs are ramping and delivering meaningful efficiencies and our financial strength is going to give us that flexibility to continue to invest in our -- and pursue strategic growth. Looking ahead, we're very confident that these fundamentals position us to expand margin and grow adjusted EBITDA over the next several years. So thank you all for your continued support, and this concludes our call.