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DATE

Wednesday, Aug. 5, 2026 at 10:00 a.m. ET

CALL PARTICIPANTS

• Senior Vice President of Investor Relations - Dave Styblo
• President and Chief Executive Officer - Dave Caspers
• Chief Financial Officer - Alfred Lumsdaine

TAKEAWAYS

• Revenue -- $1.62 billion, representing a 1.4% decrease primarily due to a 3.9% decline in net patient service revenue per adjusted admission.
• Adjusted EBITDA -- $115 million, reflecting a 32.3% decrease driven by lower surgical volumes and the prior year comparison involving two quarters of New Mexico DPP benefits.
• Adjusted EBITDAR -- $157 million, including an add-back of $41.6 million in rent expense paid to real estate investment trusts.
• Net Income -- $17 million, or $0.12 per diluted share, representing a decline from $73 million in the prior year quarter.
• Adjusted Admissions -- 89,326, representing 2.5% growth compared to the prior year period.
• Admissions -- 41,104, reflecting a 1.0% decrease primarily due to volume softness during April and May.
• Total Surgeries -- 31,755, representing a 2.9% decline driven by weakness in both inpatient and outpatient settings.
• Inpatient Surgeries -- 9,106, a 7.5% decrease reflecting a shift of certain procedures to outpatient settings.
• Outpatient Surgeries -- 22,649, representing a 0.9% decrease compared to the second quarter of 2025.
• Emergency Room Visits -- 156,896, representing 0.2% growth year over year.
• IMPACT Program Savings -- at least $70 million for 2026, increased from the previous $55 million target following managerial layer reductions and operational streamlining.
• Managerial Structural Savings -- $30 million to $35 million on an annualized basis, reflecting the elimination of layers at corporate and field locations executed in the second quarter.
• Payer Contract Benefit -- $5 million to $10 million in 2026 adjusted EBITDA, following a June renewal that improved rates and terms for outpatient services.
• Contract Labor -- 2.2% of salaries, wages, and benefits, down from 3.8% last year as the company reduced total contract labor spend by 42%.
• Salaries, Wages, and Benefits -- $676.2 million, representing a modest 0.7% growth despite inflationary pressures.
• Professional Fees -- $327.8 million, reflecting 10.4% growth, which slowed from 12.9% in the first quarter of 2026.
• Supply Expense -- $279.6 million, representing a 3.3% increase compared to the prior year.
• Operating Cash Flow -- $197 million for the second quarter, representing a 67% increase from $117 million in the same period last year.
• Stock Repurchases -- $13 million, with $34 million remaining under the current authorization as of June 30, 2026.
• Net Leverage -- 0.8x, or 2.6x on a lease-adjusted basis, providing flexibility for future capital deployment.
• Revenue Guidance -- $6.4 billion to $6.7 billion for the full year 2026, with management signaling a bias toward the lower end of the range.
• Adjusted EBITDA Guidance -- $485 million to $535 million for the full year 2026, reaffirmed as operational savings are expected to offset a $25 million volume headwind.
• Net Income Guidance -- $110 million to $163 million for 2026, revised downward from the previous range of $129 million to $183 million.
• Capital Expenditures Guidance -- $225 million to $265 million for 2026, remaining unchanged from previous projections.
• Adjusted Admissions Guidance -- 1.5% to 2.5% growth for the full year 2026, consistent with previous expectations.

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RISKS

• Lumsdaine stated, "For revenue, we're now biased towards the lower end of our $6.4 billion to $6.7 billion range. This view reflects the weaker second quarter volumes and assumes these trends remain below our original expectations in the second half of the year," indicating sustained pressure from volume softness.
• Lumsdaine noted, "Our outlook now incorporates a headwind of approximately $25 million from lower volumes in the second quarter and lower volume expectations for the rest of this year," explicitly framing the volume environment as a negative consequence to earnings.

SUMMARY

Management at **Ardent Health, Inc.** (ARDT -0.81%) focused the second quarter on addressing volume volatility through operational efficiency initiatives and payer re-contracting efforts. The company implemented a structural reorganization to reduce managerial layers and accelerated its multiyear IMPACT program to mitigate revenue pressure from lower surgical volumes and insurance exchange shifts. Operations were centered on standardizing care across its 30 hospitals and leveraging technology, including virtual care and predictive demand tools, to optimize capacity. Executives described a capital allocation strategy that balances service line expansion in high-growth markets with shareholder returns through share repurchases.

• CEO Caspers reported that in the Texas and Idaho markets, "virtual nurses completed 58% of discharge in June," part of a virtual care rollout aimed at managing capacity and reducing patient monitoring hours.
• Lumsdaine noted that the steeper 7.5% decline in inpatient surgeries was largely due to the removal of procedures from the inpatient-only list, though the financial impact was a modest $1 million to $2 million.
• Management confirmed that individuals losing insurance exchange coverage are not all moving to self-pay, with Lumsdaine stating a "material portion of impacted individuals are finding other insurance coverage."
• CEO Caspers cited the move of "lower-margin procedures, including ENT and ophthalmology out of the hospital" as a deliberate strategy to free up room for higher-margin services like cardiology.
• The company reached the one million mark for ambient listening sessions in the second quarter, which Caspers indicated resulted in "greater than a mid-single-digit improvement in productivity" for providers.
• Management opened a patient logistics command center called CORE this fall, which Caspers stated is designed to reduce labor costs while standardizing inbound patient transfers.
• CEO Caspers emphasized the goal of "building a culture that works as one team aligned around one plan and delivering with one standard" to drive faster decision-making and consistency across the network.

INDUSTRY GLOSSARY

• Adjusted Admissions: A measure of combined inpatient and outpatient volume calculated by applying a ratio of gross total revenue to gross inpatient revenue to the total number of admissions.
• Adjusted EBITDA: A non-GAAP measure of earnings before interest, taxes, depreciation, and amortization, further adjusted for non-operating items, restructuring costs, and equity-based compensation.
• Adjusted EBITDAR: Adjusted EBITDA further adjusted to add back rent expense paid to real estate investment trusts (REITs).
• ASC (Ambulatory Surgery Center): A healthcare facility focused on providing same-day surgical care, often at a lower cost than hospital-based settings.
• Capacity IQ: An internal data framework used by the company to match patient demand with available clinical capacity across its healthcare system.
• CORE: A singular patient logistics command center used to standardize patient flow and manage inbound transfers.
• DPP (Directed Payment Program): A state-run program, such as in New Mexico, that provides supplemental funding for healthcare services provided to Medicaid beneficiaries.
• HICS (Health Insurance Marketplace/Exchange): The insurance marketplaces established under the Affordable Care Act where individuals can purchase health coverage.
• IMPACT: A multiyear strategic program at Ardent Health focused on achieving cost savings, operational standardization, and care transformation.
• SWB: Salaries, wages, and benefits, representing the largest component of operating expenses for the healthcare provider.

Full Conference Call Transcript

Operator: Hello, and thank you for standing by. My name is Lacy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Ardent Health Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Dave Styblo, Senior Vice President of Investor Relations. You may go ahead.

David Styblo: Thank you, operator, and welcome to Ardent Health's Second Quarter 2026 Earnings Conference Call. Joining me today is Ardent's President and Chief Executive Officer, Dave Caspers; and Chief Financial Officer, Alfred Lumsdaine. Dave and Alfred will provide prepared remarks, and then we will open the line to questions. Before I turn the call over to Dave, 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. Reconciliation of these measures to the closest GAAP financial measure is included in our quarterly earnings press release and supplemental earnings presentation, which were both issued yesterday evening after the market closed and are available at ardentthealth.com. With that, I'll turn the call over to Dave.

David Caspers: Thank you, and good morning. I want to begin by thanking our 25,000 team members for the way they continue to adapt, improve how we operate and deliver high-quality care to our patients and communities we serve. To frame today's discussion, I'll focus my comments on 3 areas: first, where we stand, including the strength of our current platform; second, where we're going, including my priorities and the opportunities ahead; and third, what you can expect from me. Let's start with where we stand. The Ardent platform is built on a strong foundation with clear opportunities to improve our performance.

With 30 hospitals and over 280 sites of care, attractive markets growing 2 to 3x faster than the U.S. average and strong joint venture partners, we are well positioned to capture market share. Over the past 2 years, we have broadened our access points and strengthened partnerships by acquiring and/or building over 25 urgent care and ASC facilities. These investments expand our ability to care for patients across the most appropriate care setting while also targeting volume growth. In addition, strategic partnerships, specifically with Ensemble and Epic, are strengthening our revenue cycle and clinical capabilities. In short, we are well positioned, but there is more work ahead.

Since transitioning into this role, I've leaned into areas where I see the greatest opportunity to optimize and accelerate performance, and I want to share the progress already underway. I'm encouraged by the momentum of our IMPACT program. On the cost side, I'm pleased with improvements in SWB, which grew just 0.7% year-over-year as we reduced contract labor spend by 42%. We have taken deliberate action to build a more efficient enterprise by intentionally redesigning our structure and standardizing how we operate. IMPACT is more than a savings program. It's also designed to increase our agility and transform care. We accomplished that in part by leveraging technology with our strong clinical engine.

That engine is a strategic collection of assets, including our partnership with Epic and Ensemble, our virtual care platform and our growing AI capabilities. It's the backbone that makes standardization and efficiency possible while empowering our people to deliver consistent, high-quality personalized care across the network. Our virtual care rollout with hellocare.ai is an early proof point. In Texas and Idaho, our first markets to go live, virtual nurses completed 58% of discharge in June, and we reduced the hours spent monitoring patients by 18%. Looking ahead, it positions us to capture additional volume and better manage capacity so we can deliver the right care at the right time in the right setting.

In supplies, we are beginning to harvest gains by consolidating vendors, renegotiating contracts and streamlining physician preference items. On the IT front, we are rationalizing our application portfolio to eliminate any redundancy and reduce waste. Turning to revenue. We are taking a more disciplined data-driven approach to payer contracting, using price transparency data to identify where our rates lag the market as we work through our contract portfolio. In many instances, our rates rank below the 50th percentile, and we believe we can drive them higher given our strong market positions while improving contract terms and yield. We're already seeing evidence this strategy is creating meaningful improvement.

An early proof point is a June renewal with a key payer in one market where outpatient payments were materially below market benchmarks. The new contract improved both rate and terms, and we now expect stronger economics from this agreement. We estimate this will add between $5 million and $10 million to this year's adjusted EBITDA that wasn't in our previous guidance. We've also brought greater structure and dedicated leadership to how we grow, organizing around our highest value service lines, such as cardiology and women's and children's.

This work is guided by Capacity IQ, the framework we introduced last quarter to match demand with capacity across our system, directing capital, physician recruitment and assets to where we see the strongest growth and returns. It's an area you'll hear more about going forward. That's where we stand. Now this is where we're going. My focus is on delivering more consistent financial results, growing EBITDA, deploying capital effectively and executing against our targets in a way that supports long-term shareholder value. At a high level, our 3-part growth strategy is unchanged.

It remains focused on, number one, strengthening EBITDA margins through operational excellence; two, accelerating strategic growth in core markets and services, including new ways to optimize how we reach and engage customers at scale; and three, pursuing disciplined M&A. Within this strategy, sharper operational execution is my highest priority. We will continue to manage through the health care head and tailwinds. But as an operator, I am laser-focused on the performance that we can directly influence, how we staff, how we contract, how we allocate capital, how we standardize and how we hold ourselves accountable. As part of that, we are building a culture that works as one team aligned around one plan and delivering with one standard.

While we have made meaningful progress standardizing operations across the enterprise, I see additional opportunity to reduce variation and strengthen consistency in our execution. As such, I am keenly focused on the executive level KPI-driven decision-making, reducing unwanted variation and strengthening our accountability. Carrying forward our impact savings momentum is a top priority. IMPACT is not a 1-year project. It's a multiyear strategic imperative, and it is building momentum. We have increased our 2026 savings target twice from $40 million originally to the $55 million target established in the fourth quarter of 2025 earnings call to now over $70 million expected to be realized this year.

We will continue to evaluate our portfolio and take action where we see opportunities to sharpen our focus and improve our margins. That will entail assessing and evaluating all aspects of our operations. And if an asset or service line is not the right long-term fit, we will act thoughtfully and with discipline. An example of this is our intentional service line rationalization work in the second quarter. We moved lower-margin procedures, including ENT and ophthalmology out of the hospital to free up capacity for higher-margin service lines. As we wrap up, I want to be clear about what you can expect from me.

First, we will push Ardent to be more nimble and faster while maintaining our strong commitment to patient care, quality and safety. We will measure what matters, focus on fewer but more important priorities and pivot quickly as necessary when circumstances change. Our response to the second quarter volumes is a testament to this approach. We quickly flexed staffing and implemented additional nonclinical actions that support our confidence to reaffirm our 2026 adjusted EBITDA guidance. That agility reflects the strength of our team and our ability to execute consistently with speed. Secondly, I recognize the importance of delivering on our financial commitments to the investment community.

Consistency and credibility matter, and you can expect us to remain focused on disciplined execution and accountability. And third, you can expect me to bring steady leadership and rigorous operational discipline with consistency, which ultimately supports long-term shareholder value creation. We have the right leadership team, operating model and market positions to advance our strategy. And now our focus is delivering consistency over time. I'm enthusiastic about the opportunity ahead and look forward to working with our team members, providers, partners and the investment community. With that, I'll turn the call over to Alfred.

Alfred Lumsdaine: Thanks, Dave, and good morning, everyone. Thank you for joining us on the call today. I'm very pleased with how our team responded to a challenging volume environment in the second quarter. Surgeries were down materially in April and May before rebounding with modest growth in June. Our leaders managed through these dynamics with discipline, focusing on the controllables and as a result, delivered strong results and cash flow. As I'll discuss later, we've taken the necessary actions to maintain our full year 2026 adjusted EBITDA guidance despite a softer volume outlook. I'll begin with second quarter results. We reported revenue of $1.62 billion and adjusted EBITDA of $115 million.

In early June, we indicated that the business experienced broad-based volume softness during April and May, with surgeries and admissions down 5% and 2%, respectively, compared to the prior year. These trends improved in June with surgeries and admissions returning to modest growth. For the full second quarter, surgeries and admissions declined 2.9% and 1%, respectively. And although July volumes are still below our original expectations entering this year, like June, they are improved from April and May volumes. During the second quarter, we executed 2 initiatives that are already beginning to benefit our financial results.

First, as Dave mentioned, we successfully negotiated a key payer contract renewal in one of our markets effective June 1 that is now expected to generate earnings above our original 2026 plan. Importantly, the improved rate and terms are part of our broader strategy to enhance our revenue yield through payer contracting. Second, we streamlined our structure to reduce managerial layers at both corporate and field locations. We expect these actions to generate $15 million to $20 million of additional savings this year with a full annualized impact of $30 million to $35 million. As a result, we're increasing our 2026 impact program savings target to at least $70 million, up from $55 million communicated previously.

These actions are almost entirely nonclinical in nature and are intended to improve accountability and speed our execution. Collectively, the payer contracting and structural actions helped mitigate some of the volume-related earnings pressure in the second quarter, and the associated earnings improvement will be at full run rate as we enter the third quarter. In terms of the other key metrics, second quarter adjusted admissions increased 2.5% year-over-year. Net patient service revenue per adjusted admission decreased 3.9%, reflecting the benefit in the second quarter of 2025 from recording 2 quarters' worth of the New Mexico DPP program as well as the surgery decline that produced a lower acuity service mix.

From a payer standpoint, our exchange admissions declined 8% year-over-year, and we saw a corresponding increase in self-pay, but these trends were manageable and largely contemplated in our original guidance. As Dave also noted, we managed our labor expense very well during the second quarter with SW&B growing a modest 0.7% year-over-year. In addition, we reduced our contract labor spend by 42% year-over-year and contract labor as a percentage of SW&B improved to 2.2% in the second quarter from 3.8% a year ago. As expected, year-over-year professional fee growth slowed to 10.4% compared to 12.9% in the first quarter and supplies increased 3.3% year-over-year. Payer denial trends were consistent with the previous 2 quarters.

We continue to work closely with our revenue cycle partner, Ensemble, to drive targeted denial management and recovery efforts, and we see additional opportunities to improve yield going forward. Moving on to cash flow and liquidity. We're pleased with the robust operating cash flow of $197 million generated in the second quarter compared to $117 million a year ago. Our first half 2026 operating cash flow was $137 million, up 47% from $93 million in the first half of 2025. Capital expenditures during the second quarter were $39 million, and we expect that to ramp through the year.

Additionally, we repurchased $13 million of stock in the second quarter, leaving the company with a remaining authorization of $34 million at June 30, 2026. We ended June with total cash of $724 million and total debt outstanding of $1.1 billion. Our total available liquidity at the end of the second quarter was $992 million, and we finished the quarter with total net leverage of 0.8x and lease adjusted net leverage of 2.6x. Our strong balance sheet gives us flexibility, and our capital deployment approach remains return-driven and disciplined with a clear preference for high-margin service line, ambulatory growth and operational investments. Turning to our guidance.

We're maintaining our outlook for full year 2026 revenue and adjusted EBITDA, and I'll provide some additional context around each of those. For revenue, we're now biased towards the lower end of our $6.4 billion to $6.7 billion range. This view reflects the weaker second quarter volumes and assumes these trends remain below our original expectations in the second half of the year despite the volume improvements in June and July. We remain confident in our adjusted EBITDA guidance range of $485 million to $535 million. Our outlook now incorporates a headwind of approximately $25 million from lower volumes in the second quarter and lower volume expectations for the rest of this year.

We expect to fully offset this headwind with $20 million to $30 million from the 2 actions I discussed earlier. Just to reiterate those actions, we expect $15 million to $20 million of higher impact program savings this year from workforce reductions and $5 million to $10 million of higher-than-expected earnings from payer recontracting. We have full visibility into both of these items since they were both executed during the second quarter. From a timing standpoint, we recognized only a small amount of the $20 million to $30 million of expected impact in the second quarter.

Since the associated earnings benefit will be at full run rate entering the third quarter, we expect to be able to fully offset the projected earnings impact of lower volumes in the second half of the year. As a result, we would expect third quarter adjusted EBITDA to improve from the $115 million in the second quarter and approach the first quarter adjusted EBITDA of $124 million. Finally, we're reaffirming our original $35 million exchange headwind for this year. So far, actual development compared to key assumptions has been encouraging. Volume declines have been less pronounced than expected, and our data indicates that those losing exchange coverage are not all moving to self-pay.

Instead, we're seeing some trends that indicate a material portion of impacted individuals are finding other insurance coverage. We're continuing to monitor these dynamics, of course. But overall, we remain confident in the $35 million net impact for the year. So as I wrap my prepared remarks, it's clear this industry has been through some overall very fluid dynamics this year. Navigating industry crosswinds requires discipline, planning and decisive execution. This leadership team will continue to take swift and deliberate actions to position Ardent to deliver in the near term while also building a stronger company for the long term. With that, I'll turn the call back to Dave for concluding remarks.

David Caspers: Thank you, Alfred. I want to leave you with 3 key takeaways. First, operational execution and consistency are our top priorities. We moved quickly to respond to a softer volume environment and have taken actions that position the company to deliver on our commitments. Second, we have a strong platform with attractive markets, leading positions and meaningful opportunities to improve performance as we continue to standardize operations and drive growth. Third, we have the right team, strategy and financial strength to execute on our plan and create long-term value for shareholders. With that, I'll turn the call over to the operator for questions-and-answer session.

Operator: [Operator Instructions] Your first question comes from the line of Ann Hynes with Mizuho Securities.

Ann Hynes: Just on the payer contract changes on the outpatient side, how many more markets do you think you have opportunities to get to market rates?

Alfred Lumsdaine: This is Alfred, Ann. Good question. And it's a difficult one to give you kind of a uniform answer. I mean I would say we have opportunity across all of our markets that our -- I think we have talked in the past that our revenue integrity function was somewhat siloed and the -- I call the revenue cycle management component was not fully integrated with the contracting component. And now we have integrated those. We brought in new leadership. We've taken a much more data and market-driven approach and candidly, just being more thoughtful and, I'd say, strong in our position that we need to be paid fairly in our markets.

And so I would say that there is opportunity across most of our markets for improvement.

Ann Hynes: And just as a follow-up on the surgery, your inpatient surgeries declined much more than outpatient, which is kind of the opposite of what we're seeing with other hospitals. What was driving that decline?

Alfred Lumsdaine: A couple of things. This is Alfred again. I would say, yes, clearly, our inpatient was a much steeper decline. I think clearly, the inpatient-only list did have an impact. When we look across our markets, we saw a majority of the inpatient decline was a shift from inpatient to outpatient. So with that -- and a majority of that shift was procedures that were on the -- coming off of the inpatient-only list. There's good news embedded in there, I would say that when we quantify the economics underlying that shift, it's actually a very modest impact from the move. We would put it in the quarter, maybe between $1 million and $2 million of net impact.

So overall, very modest.

Operator: Our next question comes from the line of Jason Cassorla with Guggenheim.

Jason Cassorla: Great. Maybe just a follow-up on the volume side. Obviously, it's great to hear that you had some recovery in June and July. Was that broad-based? Or was that recovery within selected service lines? And then the second half expectation, are you assuming that for the second half, you're running at like the second quarter run rate or where you ended up in June and July? And then I guess it's difficult to predict the macro, but based on how you're seeing pressures on visit conversions into procedures and surgeries, would you consider 2026 as effectively an easy comp or more of a baseline for you to grow off of?

Alfred Lumsdaine: Got you. Jason, this is Alfred. In terms of -- and I think I've got the components of your question. The first was the recovery that we saw broad-based. And I would say, absolutely, essentially across all of our volume metrics, we saw improvement in the June and July time frame compared to the April and May time frame. So very, very broad-based, really, again, across all of our volume metrics. In terms of how we think about the rest of the year, June and July, we really are assuming the quarter volumes and projecting that out rather than the June and July, taking that in isolation. And again, we're going to be cautiously optimistic.

We'd love to see the type of volume improvement that we've seen in June and July extend through the year. But again, we want to take a prudent approach as we work on our cost structure in the organization. And again, going back to the actions that we took inside of the quarter, we were very quick to -- off of the weakness in volumes in April and May to take what I would call decisive action to ensure that we've got the appropriate cost structure regardless of what the volume environment that we were faced. And then I apologize, I forgot the third part of your question.

Jason Cassorla: Yes. Just if you think given what you've seen volume trends this year, is this representing more of an easy comp for you? Or do you think this is like the new baseline for which you kind of normally grow off of? So any thoughts there for next year?

Alfred Lumsdaine: Yes, I think really tough to say. We're in, as I mentioned in my prepared remarks, a really fluid environment with -- from a volume standpoint. And I think underlying that is economic uncertainty as well as some of the changes with, of course, the exchange subsidies as one example. So difficult to predict the volume going forward. Again, I come back to what I just mentioned is that we want to be sure we have the position for success regardless of the volume overlay. And again, we're going to be hopeful for the future, but prepared for the current.

David Caspers: Jason, this is Dave. I want to build upon what Alfred mentioned. I couldn't agree more about how pleased we are with our team's agility and their action around IMPACT. We will and do continue to plan to have the right projects and opportunities lined up to ensure our success either way. On that note, we are somewhat encouraged by what the top of the funnel holds. And I think inside of your question, the conversion language that you mentioned is very accurate. And it will be very -- it is very important for us to meet the consumer where they are with the solutions that will help them at this particular time for us to keep their trust.

So when they are ready to do what will be necessary, we're ready to take care of them.

Alfred Lumsdaine: If there's good news -- this is Alfred again. There's -- again, just tailgating off what Dave said, if there is good news embedded in here, it's that we are firm believers you can't defer care forever and that there would be pent-up demand built for the future.

Jason Cassorla: Got it. Very helpful. And maybe just as a follow-up. It sounds like professional fees and denial trends were in line with your expectations in the quarter. I know you'll comp the big step-up in those headwinds, so to speak, next quarter. But I guess looking back over the past couple of years, you've seen some pretty big step-ups in both denials and professional fees developing around the second quarter or third quarter time frame or at least when you've called it out.

So I guess in that context, it is a dynamic environment, but are there any like benchmarking or contracting or anything else that gives you visibility or confidence that you won't see like a further stepped-up pressure for professional fees or denials at this point?

Alfred Lumsdaine: Sure. Thanks for the question. Yes. As you said, very, very difficult to predict the future. But what we do know with -- starting with professional fees is that we are seeing those very much in line with our expectations this year. We are expecting the year-over-year trend of increase to be decreasing in the back half over the front half. So -- and as we've said in the past, we've seen a full reset of essentially all of those contracts. And so again, we would expect that rate of increase to slow. In terms of denial trends, I think that's a little bit harder to predict. It goes a lot off of payer behavior.

As we've mentioned, we're working on our payer contracting to strengthen contract terms to improve our ability to enforce and improve those denial trends and working very closely with Ensemble on a number of initiatives, strengthening our joint operating commissions and our payer governance. We're leveraging AI to help identify denial patterns and prioritize high-value opportunities, et cetera. So there's a whole litany of work we're doing together to position us to improve off of our current [indiscernible]. And again, we have not seen so far this year any evidence of escalation of those denial trends. It's been very stable.

David Caspers: Adding on and building on just a bit. In the prepared comments, you heard very specific language around operational rigor. And that rigor and the results in pro fees represent the work that we've been underway. And an example of keeping pro fees well under control has to do with tightly managing operating rooms and the costs associated to those operating rooms. And as you saw in our results, that balancing act between managing the right volume in and managing pro fees is critical. And just kind of putting a bow on it that to me is what represents operational excellence and rigor.

Operator: Your next question comes from the line of Matthew Gillmor with KeyBanc.

Matthew Gillmor: Maybe starting off on the service line rationalization. I guess I was hoping you could help us think through kind of the broader strategy there and just the service lines that you are targeting and what the opportunity is as you're moving some of the lower-value service lines away from your health systems? And then, Alfred, could you just give us a sense for how we should expect that to impact the surgical metrics, especially on the outpatient side as you execute that rationalization?

David Caspers: You bet. This is Dave, and thank you for your question. We've stood up a team that we call products and services who are leveraging the tools that we referred to in the previous quarter called Capacity IQ. That team is a collection of individuals who have led service lines in the past, real estate, construction, M&A, to name a few. And those teams are using the tools at a system level and market level to ensure that we are looking at every asset and service line and doing the right work to optimize margin and meeting the customer and market where its needs are and where the margin opportunity is.

I think it's a little early to be able to tell you what that is going to bring for specific value and specific changes. What we're encouraged by is the clarity we're getting on our key service lines, as you heard mentioned in the earlier remarks around cardiology, women's and children. And you'll see us focus in, in those areas, strengthen our service lines, strengthen the consumers' journey in that and be able to really manage and improve standardization across the financials as we do that. So for now, that's where I'd like to leave it, and we will continue quarter-by-quarter to shape exactly what those actions are. But no, we're very excited to have that team in place.

We're seeing some of the fruit of their work now and more to come.

Alfred Lumsdaine: And the second part -- this is Alfred. Matt, the second part of your question in terms of how do we think that will impact our surgical volumes across the back half of the year. As we mentioned, we're really not baking into our assumptions that significant improvement we're taking second quarter and really expecting to be at that volume level across the back half of the year. So you can think of that would mean surgical decline in the low single-digit range, similar to what we saw in Q2. And as Dave indicated, a lot of work happening across getting the service lines optimized, focusing on the higher profitability lines we're adding.

We've got a number of physician starts slated in one individual market. We have over 20 specialists scheduled to start over the back half of the year. So again, it does take time to get this fully optimized because of the time to wind things down, wind things up, and you can end up with a little bit of, I'll say, disassociation like we saw in Q2, but we're very confident in the strategy.

Matthew Gillmor: Great. And then on the exchange topic, it sounded like you're trending better than the $35 million you baked in, at least for the first half of the year. I was curious, in your mind what you thought would cause the exchange headwind to grow in the back half. Maybe there's just a healthy dose of conservatism in there as well. But just wanted to get your sense for how that may trend in the back half of the year.

Alfred Lumsdaine: Sure. Thanks, Matt. This is Alfred. Yes, we -- I think we always expected the trends to grow throughout the year. Maybe we didn't foresee some of the macroeconomic pressures that might cause somebody to come off and not pay their premium and lose coverage. But we certainly saw that growth from Q1 to Q2 and, again, remain very comfortable with our original assumption set and the $35 million impact. And hopefully, potentially, there could be some conservatism in there, but that's how we'd like to -- we're just trying to be thoughtful and planful because this is an area that is developing as we speak.

Operator: Your next question comes from the line of Ben Hendrix with RBC Capital Markets.

Benjamin Hendrix: I was hoping you could provide a little more detail on some of the mix -- payer mix dynamics that you saw in the quarter. You mentioned migration from exchanges to uninsured, and that's consistent with your peers. But wondering if you were able to pick up a notable number of members in other group employer plans or other types of coverage.

Alfred Lumsdaine: Ben, this is Alfred. Yes, obviously, we're not immune from the dynamics that our peers have all reported on in terms of the exchange pressure and the growth in self-pay volumes, which we clearly have seen. I'd say potentially, again, as we just look across the peer set, it seems like in the markets we're in, there's been a little bit less pressure on the loss of exchange lives. And maybe a little different than what we've heard others say. We have certainly seen some amount as we look at our data, a material amount of individuals who've lost HICS coverage go into other forms of coverage, both commercial and governmental programs of coverage.

So that gives us a little bit of -- I wouldn't call it optimism, but the movement seems to be a little bit better than what our underlying assumptions were. Now when we look at our payer mix, I mean, most of the pressure this year has been in the coverage areas that carry the higher co-pays and deductibles. I mean that, to me, speaks to economic pressure. And again, I come back to potentially some pent-up demand because when we look at the top of the funnel, we look at our stats related to urgent care visits and physician clinic visits. We're actually seeing very nice growth in those areas.

It's not translating its way through to the higher acuity procedures, specifically or most pronounced in those coverage in those payer categories that carry the higher deductibles. So that does, to us, speak to some amount of macroeconomic pressure and potential pent-up demand.

Benjamin Hendrix: Great. Appreciate that. And just a real quick follow-up on your outpatient contracting commentary. You noted opportunities for continued contracting benefits in other markets. Just wanted to get a sense of how much of a gating item that is for continued ASC development and build-out of those capabilities in the other markets.

Alfred Lumsdaine: Sure. I think it goes hand-in-hand. As you change the mix of sites of care, you've got to have it tightly coordinated with your payer contracting strategies for sure. So yes, I'd say it very much goes hand-in-hand.

Operator: Your next question comes from the line of Kevin Fischbeck with Bank of America.

Kevin Fischbeck: I just want to follow up on the volume commentary first. I guess, is there a good theory for why April and May would have been so weak and then June and July having come back? I mean I appreciate some of the things you said about deductibles and things like that. But that seems like a pretty significant move from deductibles that have been causing that pressure and then the rebound. Is there anything else that you could point to as to why it was so weak and maybe why this might be proved conservative to use the quarter number instead of June, July numbers?

Alfred Lumsdaine: Yes. No, thanks for the question, Kevin. This is Alfred. Yes, I mean, I guess we would have a number of theories. But at the end of the day, it does strike us as that there is some overall, I'll call it, macroeconomic pressure, again, as we look at the payer mix sources of the service lines or the coverage areas like Medicare, Medicaid that don't carry the same levels of deductible and co-pays where we saw more consistent demand across those months. And so that gives us some optimism for the back half. But again, we are loath to bake optimism into our consideration for our go-forward guide.

So again, we'll be cautiously optimistic, but it is a very volatile backdrop. And certainly, we could see an acceleration of exchange lives lost. So again, don't have a lot of speculation, but it is -- it was a very pronounced trend.

David Caspers: Building on what Alfred is saying, this is Dave, which I think speaks to why we -- headwinds, tailwinds, why we believe operational rigor really matters and the IMPACT program really matters. There is some portion that's very hard to predict. But what is not hard to predict are those things we have control over. We have control over how we staff. We have control over how we utilize our resources, how we utilize our facilities. We are very focused -- laser-focused on the IMPACT program and ensuring that we will deliver that value either through top line or through expense improvement.

And that's the power of IMPACT and the power of us having the teams that are identifying the projects, the intentional redesign of the work, the speed to implementation, which we execute every single Friday, the follow-through and measurement of that work to ensure that we can deliver our financials and be consistent.

Kevin Fischbeck: Okay. Great. And then I guess on the repricing dynamic, I guess the $5 million to $10 million pickup seems like a pretty relatively large number for one market. And then in an earlier answer, you indicated that there were multiple markets or almost all of your markets where you thought there was an opportunity. Should we be thinking about that type of size across multiple markets? Or is that -- was that somewhat unusually large? And then if there is that kind of opportunity, over what kind of period can we expect you guys to capture that?

Alfred Lumsdaine: Sure. This is Alfred again, Kevin. Yes, that was one contract, one market. Now it was a large contract in one market. Not all contracts carry the same level of opportunity. And of course, renewal cycles are generally 2- to 3-year period. So I would suggest we're looking at a similar 2- to 3-year period. And negotiations are hard. As I think we've clearly messaged, we're taking a more data-driven approach.

And we believe we have -- because now we do have good -- with the transparency data really now telling a story and being able to decipher it meaningfully, we do think we have a great opportunity to have data-driven conversations to partner potentially with certain payers to get a better outcome. If we're wildly underpriced in a market, it certainly doesn't do the payer any good to continue to take us out of network. But the negotiations are never easy. And we've already seen examples this year where we, in multiple markets, have had to send letters to -- had letters go out to members about potential disruption. That's not where we want to go.

But if it takes that to yield being paid fairly, we're willing to have those conversations.

Operator: Your next question comes from the line of Scott Fidel with Goldman Sachs.

Scott Fidel: For the first question, Dave, I wanted to ask you a strategy question. Maybe just sort of lining up some of the previous core elements of the strategy in terms of what you're thinking now for the future. And particularly, when the company went public, there was a lot of focus on the JV opportunity, the joint venture opportunity with major health systems. And over the course of the last couple of years, I would say that narrative has definitely sort of quieted down pretty substantially.

Alternatively, the company has definitely talked a lot more about increasing and advancing the outpatient strategy and then also the -- and then just the service line enhancements and recruitment that you've been doing with physicians. So maybe if you could sort of just walk us through all of those things and how those line up and then especially just because clearly, this is going to drive some of your capital considerations. If you still have the JV strategy as the key element, you probably want to retain more capital on the balance sheet. If not, maybe you'd be more aggressive around sort of deploying capital on those other opportunities.

So I would love your view on that, Dave, and maybe operate as well in terms of the balance sheet dynamics around that.

David Caspers: Sure. Thanks, Scott, for the question. A lot of parts to that question. And so I'm going to give you, I guess, what may seem like a more general answer to that deep question given the venue. First of all, if we start with, we do believe in our existing growth strategy, right? We still believe that the right markets matter significantly that, that growth has to outpace the rest of the growth in the U.S. Inside of that, the products and services team that we built is very focused. And looking at all M&A activity, that could exist and doing so in a very disciplined approach.

As you heard earlier with Capacity IQ, which is an intelligent engine that helps us to ensure we're making all of the right decisions with all of the right resources, that plays a critical role in our existing markets, ensuring that we improve our yield at the very same time that we look for those M&A opportunities. And that discipline and structure, it's taking us some time to really get exactly organized around the plan we want, the execution we want and the time line we want as well as the appropriate kind of opportunities that may or may not exist. Secondarily, inside of that, JV opportunity and JV partnerships.

Without going incredibly deep on it, I'll tell you that we're pleased with a good portion of our JV relationships. In particular, UT Tyler, Texas is an important relationship that is improving our results. It's improving our business, and we have great opportunities and great plans ahead there. So we will stay very focused on our existing strategy. No major pivots to that. We are, as I mentioned, with products and services, taking a deeper look at every single asset, every single service line to ensure that it fits our long-term strategy to grow value. And you can anticipate over the next quarter, we'll have [ quarter, ] quarters, we'll have more specific plans to walk through step by step.

But as for today, staying very focused on our existing plan. I hear you on the capital and the opportunities that exist. You can see we're organizing our team to advance further, and we will stay steadfast to make disciplined decisions that are best for us long term.

Alfred Lumsdaine: And the second part of your question, Scott, really is -- it's no different than really what Dave just articulated. We're taking a very balanced and opportunistic approach overall to capital deployment. Obviously, we love having a strong balance sheet and the opportunities that, that can create to be opportunistic. And you also saw in the second quarter, we repurchased $13 million of stock. We have, as of the start of the third quarter, another $34 million remaining under that repurchase authorization. The Board and the management team certainly believe that there's value in the stock and that it can be an effective use of balanced capital deployment.

So I would say as long as there is what we think could be a disassociation in the underlying value that there would be a bias to continue to repurchase shares.

Scott Fidel: And then just on the follow-up, this will be a much more surface level question, just a quick numbers question. I appreciate -- definitely intrigued around the commentary around seeing more of the HICS attrition members finding additional coverage. I'm curious if some of the peers have talked about like the ratio of their HICS attrition members going that are uninsured, and they've talked about like a 1:1 or close to that type of relationship. Have you been tracking it that way? Is there like a comparable ratio that you can -- obviously, it's lower, it sounds like, but that you could share with us in terms of what percentage are going uninsured versus finding initial coverage?

Alfred Lumsdaine: Yes. We certainly do track it in a multiple number of ways working with our revenue cycle partner, Ensemble, who, of course, has both our data as well as much broader industry data. I'd be -- because there are multiple ways to look at -- are you talking about all members? Or are you talking about a member who you saw last year and who has shown up for a new procedure this year? Are you talking the whole population? So we have certainly greatest visibility to those individuals who we saw last year and we saw this year and knowing what their coverage migrated to.

And I would just say of that cohort, it's -- there is a very material amount that are finding incremental coverage.

Operator: Your next question comes from the line of A.J. Rice with UBS.

Albert Rice: I just wanted to ask you about, first, some of the other expense areas where you seem to have done pretty well, salaries and benefits and supplies up modestly both year-to-year. I would think supplies got some help from the weak surgery cases. But anything to call out in either of those metrics in terms of what you're seeing and any initiatives around those that might be worth highlighting?

Alfred Lumsdaine: Thanks for the question, A.J. This is Alfred. Certainly, yes, we appreciate the call out. We are very satisfied with the overall expense management. As I said, the -- being able to control the controllables and having the operational rigor to be successful in a lower volume environment positions us well if and when volumes accelerate. We're particularly pleased in the SW&B. That's where we had the strongest response to what we saw as the weaker volumes early in the quarter. You heard us talk about the efforts to reduce our spans and layers across our managerial functions and create a more nimble, quicker and more accountable organization, and that's going to endure, again, regardless of the environment.

So that's the area where we've got the ability to respond most quickly. Supplies, I would say we believe we have more opportunity in the supply chain area to continue to drive -- that is -- to your point, yes, it tracks to improvement with just the volume and the acuity level being lighter. But we do think we have more opportunity across a number of areas in the supply chain. It just takes a little bit longer to create that impact.

Albert Rice: Okay. And then maybe for the follow-up, I know you've talked about what you saw in surgeries being perhaps partly dealing with more co-pay deductible issues in the first half of this year, given dynamics in the commercial market and the public exchange market. I wonder, are you allowing at all for a seasonal pickup later in the year when people maybe hit their deductibles and then start to come back in some of the utilization? And maybe just remind us, if you don't mind, along those lines, how does the comparison look versus last year? Did you see a lot of that activity last year in the third and fourth quarter?

So is it an easier or tougher comp in that regard?

Alfred Lumsdaine: Thanks for the follow-up, A.J. Certainly, we would expect what we would call a normal seasonal pickup. Now that's off of a lower base. So it would still be lower, but we certainly still would expect one, just seasonal activity off of respiratory illness at the end of the year. But yes, with -- every year, as we look at the data, half 2 is stronger than half 1, and I don't fully expect that to happen again. We certainly didn't predict this, but again, as I've talked about potential pent-up demand, is there even a scenario where that seasonal dynamic is stronger than historically, given the economic uncertainty.

If you're now worried, we've all seen the headline rates with exchange coverage or exchange premiums next year going up double digits again and commercial premiums going up double digits again and deductibles increasing. Is there even a scenario where it's a stronger-than-normal seasonal bump? Possibly, but that's certainly not what we've incorporated into our outlook.

David Caspers: And A.J., to your -- this is Dave, to your question about how are we positioned for the back half should surgical volume come forward. Good news here. A lot of our rigor and work is around standardization and efficiency. And that work shows up in a couple of areas and in combination with salary with benefits. An example is this fall, we opened our singular patient logistics command center that we call CORE. That command center, it was an influence in reducing salary with benefits cost, and it is an improver for standardization and efficiency. That's just one example of how we'll be able to handle inbound transfers and inbound patient logistics better than ever.

So we're excited about the ability for impact, which you heard me mention before, this is not just an expense program. It is care transformation. And as we standardize and improve these efficiencies with CORE, we're going to be able to see more patients at scale with an improved expense structure.

Operator: Your next question comes from the line of Craig Hettenbach with Morgan Stanley.

Craig Hettenbach: Dave, going back to your comments about the top of funnel and 25 urgent care and ASCs. Can you just talk about kind of the pipeline? And any updated stats you can share with us in terms of just driving activity from that top of the funnel?

David Caspers: Yes, Craig. Specifically, top of the funnel that I'm focused on right now has a lot to do with referrals and patient transfers. Yes, of course, our provider efficiency and our urgent care availability for the patients, those certainly matter and those are certainly strong. But we've seen double -- low double-digit growth in referrals and transfers. And our ability to maximize that inbound patient flow is critical. And that's what gives us good positive signals about the potential business that's there. So for now, I'd like to just leave it on those 2 specifically.

And those 2 matter a lot because inside of the Capacity IQ, the patients that we are able to acquire via those 2 methods are critical patients to our financial formula. And they're also critical patients who desperately need care.

Craig Hettenbach: Got it. And then maybe building on the hello.ai kind of AI commentary. I saw the press release recently of Ambient Healthcare in terms of the uptake for Ambient [ scribes. ] I think it's well above kind of the industry averages. So how are you approaching that just from kind of an ROI perspective? Obviously, the use case is there and physicians like it. But anything else you would share on just kind of the rollout of that and what you see as the implications for the business?

David Caspers: You bet. I'm going to start with -- hello -- I'm going to primarily focus on hellocare.ai for now because the economics are very simple actually. Our ability to leverage hellocare.ai, which will be deployed in over 2,000 of our hospital rooms, the financials for that proof positive through our ability to handle virtual sitting appropriately, which is just a small portion. We are able to be ROI positive and take better care of our patients and reduce unnecessary patient falls, all off of improving virtual sitting and the technology that allows more patients to get better oversight by fewer team members using the technology. It's really critical and a really important part of making the financial dynamics work.

All of the rest is bonus above that, let alone how the customer feels or the patient feels about the experience, knowing at any moment they can get care on their -- in their room immediately is critical. When it comes to Ambient Listening, yes, we reached the 1 million mark last month. And we are seeing substantial time savings for our providers. The translation of that time savings into additional visits is something we're still working through because inside of there is a balancing act between respecting our providers' work balance, the quality of the product that's being produced. And so today, we're positive about it. You're right, the providers feel good.

It is greater than a mid-single-digit improvement in productivity. Now it is about realizing how we want to best use that productivity gain.

David Styblo: Operator, I think we've got time for one more question since we're at the top of the hour.

Operator: Our final question comes from the line of Benjamin Rossi with JPMorgan.

Benjamin Rossi: Regarding the IMPACT program, as you're adding the savings here under this scheme of operational rigor, do you think the incremental benefit realization is largely coming from pull forward on other initiatives that have been further in the pipeline? Or do you see opportunity to open up as surgical volumes were coming in softer? Just curious how you frame the additional savings opportunities being presented here.

Alfred Lumsdaine: Sure. I'll start. This is Alfred. Ben, yes, I would say for the most part, what we saw in June was a pull forward. Certainly, we have a -- as Dave said in his opening comments, this is not a project. This is not a single year focus. This is a multiyear strategic imperative to ensure that the cost structure overall is aligned. And so we intentionally went further and faster, faster implies a pull forward than in the past. And as Dave mentioned, I mean, this is something every Friday, we have the leadership team assembled to ensure that we're tracking, that we're improving, we're enhancing and growing the potential for the impact initiatives.

So it is -- I would say, the inventory of opportunity is expanding, but what we have executed on so far this year is largely a pull forward going faster.

David Caspers: [indiscernible] inpatient surgery. This is Dave. Just adding on to it. There's a really unique and powerful thing happening right now between both of those elements. Between products and services and service lines getting more clear and between optimization and the IMPACT program, those 2 were able to be clear on what we stand for and optimize what we don't. And that is really helping shape us. And that helps in the SWB intentional redesign, where do we need to be at our best and how do we want to design for it. And you may hear me mention one team, one plan and one standard.

As we reduce the number of spans and layers or layers in our team, it allows us to put design and execution more closely together. And when that is close together, you become more nimble. And so as we continue to go forward, you're going to see us be able to implement with speed, execute with speed and ensure that what we've manufactured and design comes true in execution.

Operator: This concludes today's question-and-answer session. Ladies and gentlemen, thank you for joining today's conference call. You may now disconnect.