🏥 Ardent Health Deep Dive Part 2

Taking a closer look at Ardent's growth strategy, financials, and biggest strengths

PARTNERED WITH Happy Thursday, Hospitalogists!   Today continues my series on diving into Ardent Health, the recently gone-public hospital operator. And...surprise! I've decided to add a part 3 which will lead in to my series on publicly traded hospital operators' Q2 performance.   Part 3 will cover how Ardent stacks up to HCA, Tenet, UHS, and CHS including operating data/performance, profitability, and valuation. I'll also dive into potential risks, including hospital supplemental payment dynamics, believability of growth prospects, and noise with related party REIT ownership. All 3 parts will be published together at the conclusion of the piece next week. Last note: normally I would publish most of this analysis to my community, but I can't help myself with you guys. So instead, I would really appreciate a share or subscribing if you find this write-up useful! Thanks fam.  Let's dive in! As always, if you have anything to add, you know where to find me (just hit reply)   Thanks so much to UKG (who ironically is mentioned later on in this piece) and NeuroFlow for sponsoring today's send! Was this email forwarded to you? 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Register Now The Definitive Ardent Health Deep Dive Part 2: Diving into Ardent's Growth Strategy, Financials, and Strengths In part 1, we answered the question "Who is Ardent Health?" Now we're diving into an analysis of Ardent's S-1, growth strategy, financials, and my thoughts Ardent's perceived strengths as a health system. Ardent Health: TAM and Growth Strategy Ardent's self identified TAM is $800B, calculated by studying all 350 MSAs in the US, filtering out any MSAs over 2 million individuals, then multiplying those populations by per capita spending for both hospitals ($4k) and physician and clinical services ($2.1k) as seen in the example MSAs below.   Ardent as a growth strategy purposefully targets mid-sized urban areas. The firm also projected this TAM to grow to a whopping $1.4T (5.7% CAGR) over the coming decade as population ages. It's a numbers game! Along with targeting this mid-market segment, Ardent benefits from industry-wide macro tailwinds like most other larger hospital operators, including: General growth in hospital spend in the US (5.9% growth vs. 4.6% projected growth for overall GDP) Demographic trends, including an aging population Outpatient migration (given Ardent's JV-heavy model) As far as growth strategy is concerned, Ardent follows a pretty typical hospital growth model: Invest in high acuity service lines, digital front door and other tech implementations to simplify complex processes or enhance patient engagement, and bolster its outpatient footprint to maintain the integrity of its ambulatory network across core markets. Recruit and retain top specialist physicians (goes hand in hand with investing in high acuity service lines) Invest and prepare for a potential value-based care future (Ardent participates in several ACOs and risk programs) Grow Ardent's provider network and focus on physician alignment (1,723 aligned providers today) Evaluate and consider entering new mid-sized markets with similar characteristics to existing Ardent markets. Enter via inorganic acquisition or partnerships. Final note on growth: Given the language around value-based care, population health, and ambulatory care throughout Ardent's S-1 (along with some recent leadership appointments mentioned in part 1) you should start to see some of that capital invested into M&A or de-novos to build out ambulatory networks in existing markets, or enter new, attractive markets: "We have identified a robust pipeline of ambulatory opportunities, including ASCs, urgent care centers, imaging centers, and freestanding emergency rooms, which will create additional access points to attract and retain patients within our markets." Ardent Health Financial Overview Here's a look at Ardent's income statement.   In 2023, Ardent generated $5.4B in revenue. Through the trailing-twelve month period ended March 31, 2024, revenue bumps up to over $5.5B. Moving to year-over-year growth trends (with the compound annual growth rate, or CAGR, calculated over a 2.25 year period from 2021-TTM Q1 2024), Ardent struggled with the broader inflationary pressures during 2022 and 2023: Here's a look at Ardent expenses on a common-sized, percentage of revenue basis, where you can see Ardent's operating income, adjusted EBITDA, and net income profitability figures declining, then recovering slightly in TTM 2024: Looking at per-unit metrics like revenue and expenses per adjusted admission or patient day, the trend is easier to see: along with most every other hospital in 2024, Ardent is getting squeezed on professional fees - namely, inflationary pressures on finding coverage for hospitalists stemming from higher patient volumes.   There's also a bit of noise in the professional fees number you should keep in mind. Stemming from inflation, Ardent probably decided to outsource both its revenue cycle and environmental / dietary services to vendors (Ensemble and expanding a partnership with Sodexo, respectively) over the past couple of years. As a result, these costs shifted from Salaries & Wages to Professional Fees. Combining the two line items gives you a better picture of the overall expense trend, which is still not great.   From 2021 through today, Ardent has seen expenses rising faster than revenues, and this trend includes a $133M Covid relief fund offsetting expenses in 2021. For fear of being too reductionist, at the end of the day, you simply have to generate more revenue than expenses, and while still profitable, Ardent is in a bit of margin recovery mode overall. And we're seeing signs of improvement after seeing its Q1 2024 results. Ardent Health: There's Strength in Numbers Despite being in a bit of recovery mode financially, Ardent holds attractive qualities investors may find attractive. Here are just a few I want to point out:   Market Share Leader:   Within its current market footprint, Ardent holds leading market shares in most of its operating regions. The emphasis on scale and density within mid-size markets puts Ardent in a sticky position.   Holding the #1 or #2 position in a market - with strong physician presence to boot - affords you with pricing leverage over payors and less heartburn over what your competition is up to. Adding to market positioning, all or most of Ardent's market populations are growing, with stable job markets and good commercial payor mixes - key for health system margin outperformance.   This table below is from an Ardent filing in 2018 (they didn't update market share for the 2024 go-around), but I'd be surprised if the market share figures were materially different from these: A Joint-Venture Heavy Model:   Ardent called out its joint venture model a differentiator, saying pursuing joint ventures allows it to scale more efficiently and effectively while establishing new access points within its desired markets. I completely agree, and any health system pursuing joint ventures, while more complex from a governance and control perspective, helps to diversify your business and share labor and capital resources, or leverage better rates.   Overall, as mentioned, 18 of Ardent's 30 hospitals operate under JVs. JV partners include material minority interests from nonprofit medical systems, universities, academic medical centers, foundations, and/or a combination of these entities. 9 hospitals are owned and operated through variable interest entities (VIEs) 9 hospitals are associated with UT Health East Texas JV are wholly owned by the JV's members and are not VIEs Dollars tied to JV's for Ardent include $1.6B of net revenue and $213.7M of net income. With hospitals and healthcare operating in an increasingly outpatient environment, Ardent's joint venture friendly model affords it more flexibility in its business model. Ardent can leverage existing and future joint ventures to find the right partners and focus on future value creation through avenues including ASC network development, urgent care / freestanding ED buildout, or population health initiatives.   Sorry fam - I think that was the most consulting buzz-word heavy sentence I've ever used. But it's late and I need to get this out! The bottom line is JVs = best of both worlds for health systems (when done well). Ardent Partnerships and Health Tech: Centralization = Competitive Advantage I'm channeling my inner Health API Guy on this one. Ardent is on one single instance of Epic across all of its facilities, and the health system called this fact out as a key differentiator for its organization when rolling out new tech or processes enterprise-wide. "We believe we are currently the only large investor-owned company that has embraced Epic and expect this platform will be highly beneficial to us as the industry moves further into value-based care models, and we believe Epic makes us a more attractive partner for emerging technology providers and facilitates physician use of novel technology" - Ardent S-1 Adding to this advantage, Ardent is actively investing in new and emerging areas, and partnered with SwitchPoint Ventures recently to find, incubate, and scale AI-enabled solutions within Ardent.   As far as priorities for Ardent, the health system called out virtual visits, RPM, chronic care management, patient engagement, and partnerships with firms like BioIntelliSense - an FDA-approved wearable device used for continuous monitoring of vital signs, leading to a decrease in length of stay of ~9 hours and a broader rollout in Ardent facilities.   To give you a sense for what Ardent is focused on in the tech and process improvement arena, here's a non-exhaustive laundry list of notable investments, moves, and partnerships Ardent has made: Winnow - a predictive analytics platform developed with SwitchPoint Ventures focused on clinician recruitment and retention (which was acquired by Aya Healthcare in late 2023, by the way) Polaris, also developed in partnership with SwitchPoint Ventures, focused on AI-enabled patient volume predictability BioIntelliSense, as mentioned, which helps address length of stay and improves continuous patient monitoring Ardent also seems to be piloting or using HealthCast to a similar end to monitor patient vitals under a deterioration index Signify Health (CVS-owned) on population health and transitional care solutions Cadence for remote patient monitoring and virtual care rollout EvidenceCare for real-time clinical decision support Finally, Ardent has notably rolled out a slew of services focused on strengthening its clinical talent and workforce: revamping health benefits (Quantum Health and Imagine360), new scheduling, payroll, and attendance features (Accenture / UKG Dimensions) workforce training and development (WeLearn and HealthStream), burnout reduction (Care.ai's virtual nursing program), and patient engagement (Loyal) Ardent Health's Competitive Strengths: Wrapping up In its S-1 Ardent argues the above factors I've laid out, including significant investment in tech, a centralized EMR instance, and flexibilities afforded by its lighter JV model puts the health system in good position to transition to wherever healthcare is headed - whether that's value-based care, fee-for-service, or something in between. "We believe that healthcare providers with leading capabilities and expertise in both fee-for-service and value-based care models will emerge as the long-term winners because the reimbursement landscape continues to evolve as third-party payors navigate the shift to value-based care models." Ardent Health S-1 Ardent argues its investments into its workforce and workflows, a centralized operating model, and its differentiated company culture leads to better clinician satisfaction stemming from easier care coordination, less burnout, and more efficiency / productivity.   As an outsider to Ardent, I can't answer as to whether or not any of that is true (really only the operators and clinicians can).   From a qualitative perspective, during my research, I read plenty of positive stories around Ardent's culture and the health system as an excellent place to work - the Ardent Way. Ardent's S-1 and PR is full of references to the quality and safety of its facilities. These factors are basically impossible for me to vet or analyze so I'm just going to take the word of these journalists and awards/designations at face value!   While Ardent has some questions it needs to answer as a public company I'll get into next week (and I'm sure investors will ask them), it's nice to read about a health system that seems to be engaging in health system transformation. I'm looking forward to hearing more from the health system's leaders soon on the public markets. 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