Thank you for standing by and welcome to Ardent Health First Quarter 2026 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer in session. If you would like to ask a question during this time, simply press the star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press the star one again. Thank you. I would now like to turn the conference over to Dave Stiebel with Senior Vice President of Investor Relations. You may begin.

Thank you, Operator, and welcome to Ardent Health's first quarter 2026 earnings conference call. Joining me today is Ardent President and Chief Executive Officer, Marty Thonic, and Chief Financial Officer, Alfred Lumsdain. 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 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 artithhealth.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. During the first quarter, we built on the positive momentum exiting 2025 to deliver strong financial results. Revenue increased 7% and adjusted EBITDA grew 26%. Both adjusted admissions and higher acuity surgical activities showed positive growth, even with the transient impacts related to weather and a light flu season, which reflects the underlying demand in our markets. Importantly, our strong first-quarter results underscore the resiliency of our operating model and disciplined execution amidst a challenging backdrop. Further, this performance reflects effective cost management across the organization and prudent investment decisions. Our first-quarter performance is a solid start to the year and provides increased visibility and confidence as we track towards our 2026 financial targets. To frame today's conversation, I'm going to focus my comments on three key areas. First, I will cover first quarter results. Second, I will provide an update on the IMPACT program, our work to improve margins, performance, agility, and care transformation. And third, I will share updates on key 2026 focus areas. Let's start with first quarter results. We had a good quarter that included strong cost management, particularly in SWV and supplies, that drove 110 basis points of adjusted EBITDA margin expansion. I'm pleased with how we navigated transient challenges in the quarter. Like many of our peers, we experienced severe winter storms in certain markets in lighter respiratory season. This resulted in fewer admissions and some disruption to our typical seasonal pattern. As conditions evolved, we acted swiftly to reschedule surgeries and adjust labor to align with volume, mitigating the impact on performance. We also have been strategically focused on surgeon recruitment and productivity as a part of our Capacity IQ strategy. Capacity IQ is our system-wide approach to managing capacity and demand strategically, aligning where we invest, how we deploy clinical talent, and how we utilize assets to drive volume, mix, and throughput across the enterprise with a focus on key service lines. Collectively, these actions helped drive first quarter total surgery growth of 1.2% year-over-year, which is a 100 basis point improvement over full year 2025 growth. Adjusted admissions increased 2%, which is in the middle of our 2026 guidance range. At the same time, labor management was strong again, and the significant improvement that began in the fourth quarter persisted into the first quarter. Specifically, we reduced salaries, wages, and benefits expense per AA by 1.4% in the first quarter. Supply expense per AA growth was a modest 1.7%. Taken together, these results reflect improving execution across labor and supply cost, reinforcing our focus on consistently delivering results through the controllable aspects of our business. I now would like to shift to the two industry headwinds we've previously discussed. First, payer denial trends were stable in the first quarter compared to fourth quarter, and we continue to work with Ensemble to drive improved denial management and recovery efforts. Secondly, professional fees were consistent with expectations in the first quarter and are tracking in line with our 2026 target. While it's early in the year, we are encouraged these headwinds are stabilizing consistent with our expectations. turning to our impact program. We continue to be pleased with our progress against our initiatives to further optimize costs and strengthen margins. Importantly, we remain on track to deliver $55 million in savings this year. The improvements we began delivering in the fourth quarter of last year continued to manifest on the P&L in the first quarter, reflecting consistent execution and durability. Precision staffing initiatives resulted in first quarter salaries, wages, and benefits expense growth of only 0.6%. Additionally, we reduce contract labor expenses by over 40% to $15 million in the first quarter, driving a 160 basis point year-over-year improvement in contract labor as a percent of salaries, wages, and benefits expense. In addition to labor discipline, we are driving incremental supply cost efficiencies under the IMPACT program. First quarter results reflect a broader set of strategic initiatives to leverage our scale and purchasing power with vendors, including improved rebates on physician preference items by moving to a single or dual-sourced vendor model. We also renegotiated key cardiovascular and MedServe's distribution contracts, which are beginning to yield savings. What's also important is that these margin improvement activities are not episodic. They represent repeatable operating improvements across staffing, supply chain, and throughput embedded into how we run the business. Lastly, I'll shift to an update on some key 2026 focus areas, starting with outpatient We continue to advance our ambulatory strategy, expanding capacity in markets where we see strong demand and attractive returns. During the first quarter, we opened four urgent care centers across our Texas, New Mexico, and Idaho markets. For the remainder of the year, we expect to open two ASEs, one freestanding ED, and one urgent care facility. Once fully rammed, these assets should drive incremental volumes. We're also focused on using AI and digital tools in a disciplined way to support consistent execution and improve operating efficiency across the enterprise. Our approach is practical and operational, deploying technology where it helps us to transform care delivery, enabling us to better manage staffing, enhance patient safety, and use resources more effectively. For example, in February, we announced a partnership with HelloCare AI to implement an enterprise-wide AI-assisted virtual care platform across more than 2,000 patient rooms. Deployment is underway, and we expect all markets to be completed by year-end. Within this initiative, virtual patient monitoring, including virtual sitting, is already live across our markets. This centralized technology-enabled model strengthens patient safety while allowing us to deploy clinical resources more efficiently at scale. It has already demonstrated the ability to prevent harm in its early use. While our initial focus is on patient safety and care quality, these tools also support our broader labor efficiency and cost discipline objectives as we scale the platform. So to summarize, the first quarter represents a strong start to the year and managing through transient admission volume softness. Our model continues to demonstrate durability and resiliency, and execution against our impact initiatives is translating into stronger operating efficiency and margin improvement. While we recognize the healthcare environment remains dynamic and certain external factors are outside our control, our focus remains squarely on the elements that we can control, cost discipline, operational execution, and capital allocation. That discipline gives us confidence that we are on track to deliver on full-year financial targets we established on our fourth quarter's earning call. With that, I will turn the call over to Alfred.

Thanks, Marty, and good morning, everyone. Building on Marty's comments, we're pleased with our first quarter performance and the momentum we've generated early in the year. Before I summarize first quarter results, I'd like to share some general context on flu and severe weather dynamics. As we've previously discussed, while flu fluctuations can impact volume metrics, they tend to be lower acuity events. As such, flu volatility typically has a less pronounced impact on earnings than on revenue, but still requires disciplined operational adjustments to flex staffing and manage costs accordingly. As for this year's winter storms, they affected ardent markets in Texas, Oklahoma, and New Jersey. We managed through these events very well, and I commend our clinicians and leaders for their response and their commitment to patient care. With that said, first quarter revenue of $1.6 billion represents an increase of 7% compared to the prior year. Adjusted EBITDA for the first quarter increased 26% over the prior year to $124 million, with the associated margin expanding 110 basis points to 7.7%. Similarly, pre-NCI adjusted EBITDA margin expanded 100 basis points to 11.5%. During the first quarter, we recorded a $10.9 million pre-tax gain within other operating expenses from an increase in the carrying value of an investment option that we hold in a privately held company. Excluding this benefit, adjusted EBITDA growth was 15%. In terms of volumes, first quarter admissions decreased 1.1%. However, adjusted admissions grew 2.0%, which is right at the midpoint of our full-year guidance range of 1.5% to 2.5%. Additionally, total surgeries grew 1.2%, driven primarily by outpatient surgery growth of 1.7%. As Marty mentioned, we continue to make significant progress optimizing our labor expense. As a percent of revenue, SW&B improved 260 basis points compared to the prior year period, reflecting our focus on precision staffing and reducing reliance on contract labor. Contract labor as a percent of SWNB improved to 2.2% in the first quarter from 3.8% in the year-ago quarter and 2.6% in the fourth quarter of 2025. Additionally, employed labor rates were favorable. Our average hourly rate per FTE for the first quarter of 26 was up just 1% year-over-year. As a percent of revenue, supply expense improved 50 basis points compared to the prior year, benefiting from our impact program initiatives specifically related to enhanced leverage with vendor contracts and improved rebates. Professional fees as a percent of revenue increased 100 basis points compared to the prior year period, and sequential quarter growth was 2.4%. This was fully consistent with our expectations. For context, professional fees for Q1-2026 have a tough year-over-year comparison given the step-up that started in the third quarter of 2025. Moving on to cash flow and liquidity, we ended the first quarter with total cash of $610 million and total debt outstanding of $1.1 billion. Our total available liquidity at the end of the first quarter was $0.9 billion. 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. Cash used in operating activities during the first quarter was $60 million, compared to $25 million used in the first quarter of 2025, which benefited from the collection of business insurance proceeds related to our 2023 cybersecurity incident. As a reminder, the first quarter is traditionally our weakest cash flow quarter, largely due to payment timing on year-end accruals, including 401k matching and annual incentive payments. Capital expenditures during the first quarter were $28 million, and we expect that to ramp through the year. We finished the quarter with total net leverage of 1.0 times and lease-adjusted net leverage of 2.6 times, an improvement from the 3.0 times at the end of Q1 2025. So as we look to the rest of 2026, we continue to be mindful of various industry factors, including potential exchange disruption and macroeconomic conditions that could dampen consumer sentiment. We're very pleased with our first quarter results and the increased confidence and visibility we have towards achieving the $55 million of impact program savings. At the same time, it's still early in the year, and we believe it's prudent and appropriate to maintain our full-year financial guidance, including revenue and adjusted EBITDA. So with that, I'll turn the call back over to Marty for concluding remarks.

Thank you, Alfred. I want to leave you with three key takeaways. First, our first quarter results reflect execution of performing the environment, demonstrating the strength of our operating model, and ability to deliver strong earnings, even when volumes are below typical levels. Second, our IMPACT program is delivering measurable and repeatable results under Chief Operating Officer Dave Casper's leadership. The structural operational improvements we have put in place are strengthening performance, and we remain on track to achieve our 2026 savings commitment. Third, we remain financially strong and disciplined with a balance sheet and strategy to position us to create long-term shareholder value. The strong start to the year gives us increased confidence in our 2026 financial guidance and serves as a solid foundation to continue building momentum as the year progresses. Before I turn the call over for questions, I want to recognize our 25,000 team members and 2,000 affiliated providers across Ardent. This is a time of significant change in health care, and their resilience, agility, and unwavering commitment to our purpose have been critical to our progress. Every day, they continue to adapt, improve how we operate, and deliver high-quality care to the people and communities we serve. Their dedication is the foundation that allows us to navigate change and position Arden for long-term success. With that, I will turn the call over to the operator for our question and answer session.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press the star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, and simply press the star one again. Your first question comes from the line of Jason Casurla, with Guggenheim, please go ahead.

Good morning. Thanks. Maybe to start on seasonality, could you just help us in how we should be thinking about EBITDA progression for the rest of this year? You have a number of moving pieces with Medicaid supplemental payment timing, some of the headwinds you kind of discussed, run rating, impact program benefits, and the like. I guess any help with how we should think about the second quarter, including if you expect EBITDA to be roughly in line with the first quarter when excluding the one-time investment gain benefit, and then, you know, the exchange headwind remains out there, but any help around the second half in terms of EBITDA progression would be helpful. Thanks.

Sure. Hey, Jason, this is Alfred. Yeah, happy to talk about seasonality at a high level, you know, typically baseline on what, like many, we see. Then, historically, you might see a stronger Q2 than Q3 on a C. We would actually expect comparable to each other, as we've discussed. We'll see a ramping of those quarters more in line with one another. In terms of Q1 to Q2, I would think we would see a largely driven by. Now, from a supplemental program standpoint, we don't have anything significant, you know, any approach like that. There's always going to, when we think about that step, I'm actually excluding.

Got it. Okay, very helpful. And then if I could just follow up, I wanted to ask about payer mix trends. It would be helpful if you could give us a sense of volume growth or volume trends, I guess, by payer in the quarter relative to the 2% total volume growth. And then maybe if you could just focus specifically on commercial excluding the exchanges, how you're seeing demand develop, if you think there's kind of any impacts at this point from the macro environment, or anything else, kind of note on commercial excluding exchange volume trends. Thanks.

This is Alfred again. Yeah, from a payer mix perspective, I would say that what we saw in Q1 was relatively consistent with our expectations. We did see perhaps from exchange, but generally speaking, that we grew on the core commercial excluding exchange. Perhaps there's a little bit of macroeconomic dynamic in play there. but got it.

Thank you.

The next question comes from the line of Matthew Gilmore with KeyBank. Please go ahead.

Thanks for the question, and good morning. Maybe asking on the contract labor dynamic, obviously really impressive results there. Can you give us a sense for some of the initiatives that are allowing that performance?

And I was curious, on a go-forward basis, how much more room do you think you have to go there, or do you get to a point on contract labor where it actually becomes inefficient to drop it down any further hey matt this is marty yes a great question um the team has been very focused on this and we talked uh last year about keeping some contract labor in in order to be able to process the amount of transfers coming into our hospitals and making sure we can capture that demand as we've continued to refine one of the things that we did last year was renegotiated a key con agency contract with a major vendor to improve both our rates and then we've gone back and systemically looked across our footprint in terms of where the best utilization is so we can still maximize the volume while making sure that we've got the right labor in place to drive the performance we call that precision staffing and so we're focusing on both the speed to hire scheduling premium paying overtime across our footprint so that we can reduce our limitations on contra outside contract labor where we've gotten to. We've seen a continued seasonal progression, or I'm sorry, a sequential progression downward on contract labor, and we are now in line with where we were pre-pandemic, and so I think we're stabilizing out where we would probably expect to see that land. We are just about 2.2% of SWB in Q1, which is a demonstrable improvement from the 3.8% in the first quarter of 2025, been the 2.6 percent in Q4 of 2025.

Great. And then following up on some of the exchange discussion, I heard Alfred's comment about a 1% to 2% growth in exchanges. Can you just help us sort of level set in terms of the $35 million of EBITDA headwind from exchanges, how that was sort of factored into the accounting with the assumption that some of those exchange volumes you saw in the first quarter may actually end up being uninsured. Sure.

This is Alfred, Matt. Yeah, no, a good point of clarity. You know, I think what we saw in Q1 was relatively consistent with our expectations from the $35 million. We certainly, working with, in addition, you know, you saw within the exchange while admissions were up, you know, just a little, you actually saw a big movement into, you know, and that carries the actual throughput from a revenue, a long way to say.

Okay, thanks very much.

The next question comes from the line of Scott Fidel with Goldman Sachs. Please go ahead.

Hi, thanks. Good morning. I'm interested if you could give us an update just on how discussions may be percolating in the background around JVs and, you know, sort of what the activity level, you would say, Marty, has been like their year to date, you know, relative to maybe the last year. I know, you know, it's been slow out of the gate here the last couple of years on that. And, you know, maybe what do you think the catalyst may be, you know, to getting a JV or two, you know, announced looking out, you know, the next six to 12 months?

Hey, Scott, this is Marty. You know, we've, from the onset, we've had a tri-part growth strategy the first thing to continue to improve our margins on our core book of business second expand our outpatient footprint within our core markets and then third opportunistically look for m a on that last point as we've talked about we've had under chris schepplein our chief development officer's arrival growing conversations in that space we continue to remain optimistic about our opportunities for either jv or outright acquisition opportunities but we are being very conservative and prudent in terms of where we're going into. Given the macro uncertainties in healthcare, we want to make sure that as we look for new target opportunities, they either complement our existing markets or our new markets that we feel that we can go in and make a difference in in terms of having the right growth characteristics. Again, our markets are growing better than the average U.S. rates. We're looking for markets we can enter with similar characteristics and we do believe they're out there and we're making continued progress from our perspective on how we look at that, but these are going to be strategic and methodically placed as we continue. So the pipeline still looks strong and we're making sure that any potential M&A that we do is going to be accretive to the organization.

Okay, thank you. And maybe a follow up, maybe for Alfred, around, I know you've already given us a few pieces of the volume story and the exchanges and commercial. Maybe if you could expand that out to some of the other government lines in terms of thinking about Medicare with both fee-for-service and Medicare Advantage, what volume trends have looked like there, and then as well around Medicaid. I know some of your peers have talked about Medicaid evolves being, you know, a little lower than expected just around some of the conversions there. Just curious what you've been seeing on the Medicaid volume side as well. Thanks.

I'll start on the Medicare side. We, you know, saw strength in the Medicare line in Q1, particularly in the MA line compared to the traditional fee-for-service, but overall Medicare and Medicaid was essentially flat down just a hair, you know, I believe is largely from...

And this is Marty, that was from a revenue perspective on an admissions basis, you know, a little bit down in both the Medicare and Medicaid line. We talked about the impact on flu and respiratory being a little bit lighter, which which is typically seen in that Medicare category, a lower case mix index generally with that population. So, nothing outside of the implied guidance that we gave around, you know, volumes mix.

Okay. Thank you.

The next question comes from the line of AJ Rice with EBS. Please go ahead.

Thanks. Hi, everybody. Your adjusted admission growth of 2%, that's a little better than what we saw from peers. And I wonder if you look at it, you mentioned obviously some lower intensity stuff with flu getting impacted, but what across geographies, across service lines, anything to call out there that areas of particular strength that are worth noting?

Hey, Jay, this is Marty. Yeah, we focused last year pretty heavily on expanding our access points, particularly in urgent cares, and we probably have a bigger disproportionate volume of clinics within our footprint. And so when you think about some of the weather impacts across the industry, and we were certainly part of that, it impacted admissions, but the strong outpatient services and access points continue to deliver for us, along with strong volumes on the ASC side. But nothing really to call out regionally, you know, pretty evenly spread across the markets, you know, the only caveat being where we had some weather impact, particularly in Texas, Oklahoma, and our New Jersey markets.

Okay. And then maybe for a follow-up, I know you mentioned that the payer denials is sort of trended in line with expectation. I wonder if I could get you to comment more broadly on what you're seeing with respect to managed care contracting generally, any change in sort of rate, update, trends, terms that they're asking for, and sort of where you guys are at for contracting for this year in 27.

Yeah, this is Marty again. We're substantially all contracted about 89% for 2026. Still seeing headline numbers, you know, similar to what we saw in the last year. To your point, we are focused on the terms within those contracts and just strengthening some of the language around denials and underpayments. As you referenced, we have seen that stabilize since that spike in the the second half of last year uh for the second straight quarter so we're encouraged by that and you're really working with our ensemble partners and internally to make sure that we're collecting every dollar for the services that we're providing so we're encouraged about the progress we're making and still more work to do denials you know remain too high across the industry um but with the way managed care is reporting out uh thus far in the year we're hopefully that uh that they've estimated their their run rates appropriately and that we'll see that pull through come back on the other side.

And this is Alcanej. The only other thing I would add on the managed care contracting front is we've continued to make investments in that in our team and in our focus in the transparency tools and utilizing that to ensure that we're getting, for 26, we do have some, you know, working very hard. We get the approval.

Thanks so much.

The next question comes from Anne Hines with Missoult Securities. Please go ahead.

Great. Thank you. Can you remind us from your what's embedded in your ACA guidance for just an increase in bad debt and deterioration of collectibles, and if that's coming in line with your expectations? And then my second question is just on professional fees. I know that you said it was in line with your expectations. Can you remind us what's embedded in guidance? Because some of your peers have noted that has come in worse than expectations. Thanks.

Hey Ann, this is Alfred. I'll start on the first part of your question. Yeah, with denials very much in line with our expectations, you know, what we would have expected, say no change there. Now, as you know, we embedded in our expectations, not a material improvement from the step up that we saw in the back half. We're pleased with the progress we're making.

And this is Marty. On the pro fee side, you know, very much consistent with our expectations. last year in the first quarter, note that we had about a 6% increase, which included a favorable settlement. And so, it's a little bit of a tough comp when you look at that first quarter comparison. But that pro fee step up that we experienced really started in third quarter of 2025. So, the comparison is going to be a little bit harder until we get to the back half of this year. But if we look at that sequential growth to get a better sense of the trend from Q4 to Q1, it's about 2.4 percent increase, which was definitely in line with our projections. So I can't speak about the other peers, but it seems like it's stabilizing where we had expected to. Still growing north of basic inflation, but in line with our expectations.

And this is Alfred and Marty's point. We would expect the year-over-year increase to moderate.

And the next question comes from the line of Kevin Fishback with Bank of America. Please go ahead.

I think I know the answer to this. I just want to make sure. Obviously, it sounds like you guys feel very good about the quarter. You talked a lot about increased confidence. You got kind of a one-time gain in the quarter. But you reaffirmed guidance. So I just want to make sure that I understand. Is this just kind of normal course? you wouldn't expect to increase guidance with Q1, and that's all this is, and you'll update normally with Q2? Or is there something more in Q1 that you're really kind of waiting to see and get more clarity on before you feel comfortable updating the outlook?

No, I appreciate the question, Kevin. I would just say as a matter of practice, we think it's appropriately proven not to touch.

Okay. All right. So this is kind of the way you would normally provide guidance in a given year. And then on the professional fee number, like, you know, what do you think the year-over-year growth rate should look like in the back half of the year? Because I guess 2.5% increase sequentially still kind of applies a pretty high year-over-year annualized growth rate in the back half. So I just want to make sure I'm thinking about that right.

This is Alfred, Kevin. I think, you know, we would expect it to moderate into single digits, high single-digit type range, you know, below.

Okay, perfect. And then just maybe last question, any color on volumes and how they progressed through the quarter? You know, I guess it sounds like, you know, Q1 obviously impacted by storms. Was it relatively consistent, you know, through the quarter or was there kind of a ramp as you exited March relative to January?

This is Marty. You know, definitely saw January impacted by volumes, some rebound in February, and then sort of the normal spring break activity you would see in March and into early April. So, definitely a lumpy start, but exited consistent within the range of expectations around our volume, and it's exhibited with our 2% AA growth. It feels like we're squarely in place to continue that trend.

All right. Great. Thanks.

The next question comes from the line of Benjamin Rossi with JP Morgan.

Great. Good morning. Thanks for taking my question. Just following up on the denials commentary, across collections, how are denials, underpayments, and bad debt interacting throughout the year?

And then are you seeing more situations or changes in patient behavior where maybe an initially insured patient accounts are ultimately behaving more like self-pay due to denials or coverage changes so this is alfred uh ben i i i would say we haven't seen any uh any uh pronounced changes in uh in that activity and working real uh closely with ensemble um and you know candidly our collections have been uh you know quite strong both uh through the end of last year and and through q1 so um yeah i would not say we've seen any uh okay and then

just on the expense side regarding supply management look to be a bright spot following your previous supply chain initiatives and procurement and some of the increased cadence and some of the impact program are there any areas in particular outperformance to call out and how do you consider the sustainability of this performance as you pursue your broader margin improvement goals this is marty yeah our impact program you know had a number of focuses you know we talked about some of the swb supply chain was definitely another target that we've been focusing on um we expect that those things will continue to ramp as alfred said in the second half of the year but we're pleased with the progress we've seen thus far um we've got a number of different initiatives that are included in there it's it's a lot of uh different tentacles that touch the supply chain but you know first quarter results included improvements on rebates physician preference items moving to either single or dual source vendor models and we'll be continuing that throughout the year so we're pleased with the progress that we saw in the first first quarter and expect that continue um to produce inside of our savings on the impact program, as you mentioned. There's a number of things that were happening in focusing on cardiovascular, med-surg distribution contracts, and all of those things are starting to produce as we expected.

Understood. Thanks.

The next question comes from the line of Craig Hedenbach with Morgan Stanley. Please go ahead.

Yes, thank you. Marty, so as you continue to kind of deploy and adopt AI tools, how are you thinking about kind of the tangible impact on the business just from a margin perspective in kind of reasonable timeline of that kind of flowing through the margins over time.

I think we're very much still in the early innings. You know, from a platform perspective, we're fortunate to have strong partners like Ensemble. They're deploying over $100 million of capital into their AI and tech stack that we're benefiting by and starting to see the impacts of from a yield perspective, as Alfred talked about, with some of the denials and recruitment of payments and cash flow. With Epic, there's a lot of embedded technology in there that's going to aid our clinicians in terms of making better decisions, but also providing better efficiency and pull through through the organization, whether that comes from surgical scheduling, optimization, physician interactions, and then other things that we've invested in with ambient listening, some of the AI tools that we're using at the bedside or helping with both productivity, length of stay. And as we mentioned, the virtual cost or the virtual sitting and the virtual nursing program that we're doing is improving both patient care and will lead to cost improvements. But we're in the early innings of this. Each of these are going to have small but incremental improvements to the SWB and to our efficiency across the organization. And we're very excited about the future improvements to come as we look at productivity across our physician practices, our business practices, and clinical throughput. So, I would say we're early, but we do expect this to be part of our margin progression, and this is the care transformation component of our impact initiative.

And the only thing I would say is we're equally excited about the incremental access that these tools will provide in terms of improving throughput and improving patient hours.

Got it. Thank you. And then just to follow up on the M&A backdrop and understanding kind of the disciplined approach you're taking, are you seeing much, any change in terms of asset values across the space as you evaluate the pipeline?

This is Marty. You know, I think that we're seeing for the types of assets we're looking, I mean, these are not changing from sort of industry multiples. I know that there's been some headline numbers on single assets that are getting bought up by strategics but we're going to be very disciplined in our m a prospects um to make sure that whatever um we engage with on that is going to be something that we can see you know near-term accretion called the first you know year to two um and a de-levering from whatever purchase price we get into but there's different methods um you know that we're looking at in terms of how we might partner with different people uh and through that jv process but uh too early to tell but you know we're going to be very disciplined in terms of what we we chase and not go after things that have a high price tag to it. Okay, thank you.

The next question comes from the line of Whit Mayo with Leering Partners. Please go ahead.

Hey, I just wanted to get an update on the ambulatory strategy, just any views in the pipeline this year, maybe how much capital you think you're going to earmark for any of that development activity.

Sure, this is Alfred Witt. I think Marty talked about, you know, what we have in the pipeline from a development perspective, and that is certainly in our expectations at a little deployment standpoint. You know, we believe in a very basic development. I think you've seen the impact, though, of our ambulatory strategy flow through, as you've seen the type of growth numbers a little better than some in the industry from a growth perspective, and we think that's just a reflection of the increased investment and throughput in that investment.

And with this, Marty, the only thing I'd add to that is, you know, we did have a small incremental step up in our capital spend, and the majority of that is going to that growth inside of those core markets, but contemplated in the guidance that we gave out from a capital perspective To Alfred's point, we're making sure that the investments we're making in this ambulatory space, that it may have some startup cost or a small drag while they're ramping up, are, you know, not dragging down the company as we're building towards those higher margin activities in the out years.

Okay. And maybe just to follow up here on malpractice, I know we had a headwind last year that's nonrecurring, but just how did that mal develop within the quarter? And just any expectations, thoughts, observations would be great.

Sure.

Now, I appreciate that question.

Yeah. Clearly, we had the nonrecurring item. Now, Now, you know, it is a tough environment. The legislature takes the new laws. It's become very difficult to recruit physicians in the state. We think that will provide some relief over time from a premium perspective, but because the new law was untested, medical malpractice, we are encouraged and would expect.

The next question comes from the line of Ben Hendricks with RBC Capital Markets. Please go ahead.

Thank you very much. Appreciate all the commentary about the IMPACT program, the contract labor improvement, and supply chain efforts there. I just wanted to see if there was any kind of longer-term opportunity to fold the work you're doing around denials and professional fees into the impact program and work towards some longer-term targets. And to that point, is there any takeaways from the work you've done on Ensemble on kind of where DSO could go through continuous improvement programs or where you could get margin pickup on the longer-term professional fee mitigation?

Thanks for the question, Ben. This is Alfred. Yeah, we're obviously, you know, it's a very dynamic environment. We do have work streams embedded in the impact and play out internally in care team. And that's not so much just to isolate the negotiation of contracts, but as Marty indicated, you know, how are we actually the outcomes as are. But again, those play out, I would say, collections and recover. On your question on where could DSO go, we were very positioned to contain that.

And our last question comes from the line of Raj Kumar with Stevens. Please go ahead.

Hey, I appreciate all the, you know, the puts and takes with the kind of fixed volumes and the underlying dynamics between metal tiers. I guess, you know, maybe I'm just trying to figure out, since you guys have called out previously that that population may have not been as profitable for you as your peers, but then you did some recontracting last year in the back half. So, I guess just curious on any kind of commentary around, you know, per member profitability on those claims that have been paid so far.

This is Marty. Yes, there definitely has been a focus on strengthening the yield on those contracts as we go through. There's a lot of them, and we've got six different states to operate in, and so for right now, I'd say we're still in the early innings of seeing that improvement, and it's exacerbated by the metal changes that Alfred talked about, so we're getting better rates. now we're seeing some shift in that population to lower tiered metals. And so there will be some rebalancing. This is something that we're very carefully watching and adjusting to in real time as this population settles out and we get to see where things ultimately land with the effectuation of disenrollments and other things that are still projected to be coming. The good news is our states have been relatively stable in terms of re-enrollment into these plans, but we have to see where they settle out and then which plans they settle into to see how the recontracting efforts ultimately play through from a revenue growth perspective.

Got it. And then as my follow-up, I know other OPEX was higher, but then the DPP comp, maybe some reserving dynamics for the exchange population and then the increased malpractice. Any way to kind of bucket that, you know, as we kind of bridge you over a year, just kind of as we kind of better think about that cost rolling forward?

Yeah, I think you've hit the nail on the head in terms of the underlying driver. The majority is still medical malpractice.

Great. Thank you.

And we have no further questions at this time. I would like to turn it back to Marty Bonick for closing remarks.

Thank you all for your participation and questions in our first quarter earnings. We've entered 2026 with operational momentum, financial strength, and strategic clarity around our strategic objectives. We are confident in our ability to execute, and we appreciate everybody's support. Thank you for today's time.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.