Hello and welcome to the HCA Healthcare 3rd Quarter 2025 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Frank Morgan. Please go ahead, sir.

Good morning and welcome to everyone on today's call. With me this morning is our CEO, Sam Hazen, and CFO, Mike Marks. Sam and Mike will provide some prepared remarks and then we'll take questions. Before I turn the call over to Sam, let me remind everyone that should today's call contain any forward-looking statements, they're based on management's current expectations. Numerous risks, uncertainties, and other factors may cause actual results to differ materially from those that might be expressed today. More information on forward-looking statements and these factors are listed in today's press release and in our various SEC filings. On this morning's call, we will reference measures such as Adjusted EBITDA, which is a non-GAAP financial measure. A table providing supplemental information on Adjusted EBITDA and reconciling net income attributable to HCEA Healthcare, Inc. is included in today's release. This morning's call is being recorded, and a replay of the call is available later today. With that, I'll now turn the call over to Sam.

All right, good morning, and thank you for joining the call. As reflected in our earnings release for the third quarter, the company produced strong results when compared to last year, with 42% growth in diluted earnings per share as adjusted, 0.6%, which was driven by broad-based volume growth, improved payer mix, more utilization of complex and additional revenue from Medicaid supplement. you will see in this morning and our outlook for our teams continue to execute our agenda at a high level across many operational measures, including quality and key stakeholders satisfaction year over year. I want to thank our 300,000 HCA colleagues who once again demonstrated excellence in what they do. As a team, we remain disciplined in our efforts to improve care for our patients by increasing access, investing in advanced digital laws to enhance capacity and gain efficiency, making it easier for our patients, physicians, and the communities we serve on the upcoming year. Before I get to these, I want to comment on the enhanced premium tax credits. We continue to advocate strongly for the extension of this program for the 24 million Americans who depend on it for health. we believe there is greater recognition by legislators of the negative impact this issue will have on family individuals. At this point, however, we still do not know how this policy will play out. It causes the fluid nature of the federal policy environment to our views on demand and the cost environment. We continue to see solid demand across our long-term. As it pertains to operating costs, we expect mostly stable trends in the last couple of years. As usual, there are some pressures in certain areas. It is important to know preliminary views may change before our fourth quarter to provide you with our guidance for 2026. So let me close with this. To complete another successful year for HCA Healthcare, we believe the company is well positioned to sustain high levels of performance in the years to come. Organizationally, we provide capabilities to execute at a higher level through our previously restructured management team and improved Effectively, our networks have enhanced service offerings for patients with more outpatient facilities, greater inpatient capacity, and financially, because of the increased cash flow and stronger balance sheet, we have the resources to invest more in our strategic agenda. I'd like for more information on the quarter and our updated guidance.

Thank you, Sam, and good morning. The company produced solid results. The demand for health care services was strong in the third quarter, with same facility equivalent admissions increasing 2.4% over the prior year. Our surgical volume growth also improved, with same facility inpatient surgical volume of 1.4% and outpatient surgical volume of 1.1% in third quarter over the prior year. Same facility ER visits increased 1.3% in the quarter over the prior year. commercial and medicare er visits combined increased 4.1 percent in the third quarter of 2025 to prior year whereas medicaid and self-pay er visits were both down to prior year we have also seen a slow start to the respiratory season in 2025 which is impacting the year over year growth rate in our admissions and er visits by an estimated 50 and 70 basis points our net Stat revenue per equivalent admission growth in the quarter reflected strong payer mix, improved dispute resolution results, consistent case mix index, and increased Medicaid state supplement payment revenues. Regarding payer mix during the quarter, SANE facility total commercial equivalent admissions increased 3.7% over prior year, with exchanges growing 8% and commercial excluding exchanges growing 2.4%. Medicare increased 3.4%, Medicaid increased 1.4%, and self-pay declined 6%. Regarding Medicaid supplemental payment programs, as we've said in the past, these programs are complex, bearable in timing, and do not fully cover our costs to treat Medicaid patients. considering these programs in isolation the revenue growth from these programs drove about half of the overall increase in net revenue per equivalent admission in third quarter compared to prior year and we saw an approximate 240 million increase in net benefit to adjusted EBITDA from these programs in the third quarter of 2025 over the prior year this increase was largely driven by Tennessee program payments and the approvals of grandfathered applications in Kansas. We were pleased with our operating leverage and expense management in the quarter. The improvement in adjusted EBITDA margin was driven primarily by good performance in labor and supplies. As expected, we did see contract labor expenses flattened the prior year. Same facility contract labor was basically flat in third quarter of 2025 to the prior year and represented 4.2 percent of total labor cost in the third quarter of 2025. the increase in other operating expenses as a percentage of revenue in the quarter was driven primarily by increased expenses related to medicaid state supplemental payments and to a lesser extent to both enhance and accelerate our resiliency program as we prepare for the future. Through these efforts, we continue to identify a robust set of opportunities across revenue and cost to improve efficiencies. Our adjusted EBITDA in the third quarter reflects our strong operating performance and the increase in supplemental payments. We would also note the estimated $50 million impact from the hurricanes in third quarter of 2024. Moving to capital allocation, we continue to execute our strategy of allocating capital for long-term value creation. Cash flow from operations was $4.4 billion in the quarter, with $1.3 billion in capital expenditures, $2.5 billion in share repurchases, and $166 million in dividends. Year to date, we've been able to defer approximately $1.3 billion in federal income tax payments to the fourth quarter due to the IRS providing relief to Tennessee taxpayers in the aftermath of severe weather in the early April. Our debt to adjusted EBITDA leverage remained in the lower half of our stated guidance range, and we believe our balance sheet is strong and well positioned for the future. So with that, let me speak to our 2025 guidance. As noted in our release this morning, we are updating the full year guidance as follows. We expect revenues to range between $75 billion and $76.5 billion. We expect net income attributable to HCA Healthcare to range between $6.50 billion and $6.72 billion. We expect adjusted EBITDA to range between $15.25 billion and $15.65 billion. We expect diluted earnings per share to range between $27 and $28. We expect capital spending to be approximately five billion we now anticipate our supplemental payment full year net benefit to be 250 million to 350 million favorable comparing full year 2025 versus 2024. this guidance update does not include any potential impact in 2025 from any additional approvals of grandfathered applications under the act and at the midpoint this guidance assumes a 120 million dollar decline in net benefit from medicaid state supplemental payments in fourth quarter of 2025 versus the prior year due to one-time payments in the front consistent with our comments on second quarter call we believe our hurricane impacted markets will produce approximately 100 million dollars in adjusted EBITDA growth in full year 2025 over 2024. Year to date adjusted EBITDA in our hurricane markets is modestly below prior year and we are anticipating all of this growth we are increasing our earnings guidance at the midpoint of adjusted EBITDA about 450 million this represents an expected 250 million dollar increase in net benefit from the state supplemental payment programs and 200 million dollar increase from operational performance with that i will turn the call over to frame for questions thank you mike as a reminder please limit yourself to one question so we might give as many as possible in the queue an opportunity to ask a question

freely you may now give instructions to those who would like to ask it thank you and 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, please press the star one again. And we ask that you please limit yourself to one question and one follow-up. Your first question comes from Anne Hines with Missoula Securities. Please go ahead.

Great. Thank you. And thanks for all the detail on the DPP programs. Can you remind us, I know there's other states that have preprints for preprints and for approval for grandfather programs can you remind us what states are still pending and any quantification of what could be incremental would be great thank you good morning Ann so just as you think about kind of the states there's several that have applied under grandfather information we've mentioned Florida before and and certainly that one's under review.

There are a few others as well. I might mention, you know, Georgia and Virginia as well being in that list. We do not expect that CMS will be approving these additional grandfathering programs during the shutdown. I would say that we have reports that indicate though that the reviews between CMS and these states are active and those reviews continue during the shutdown i might also mention that you know we were encouraged coming up to the shutdown and several states had approvals coming into the shutdown so i think we're in a pretty good environment we we're at this point not going to uh size those potential applications until they get approved but i did note in my comments and i'll note again that the updated guidance that we gave you just now on this call does not include any potential impact from the applications that are still a pending review with CMS.

Great, thanks.

And your next question comes from the line of AJ Rice. We'd credit, please, please, ahead.

Hi, everybody. Thanks for the question. Just to maybe ask on the public exchanges, so there's been some chatter and some of the managed care companies are talking about anticipating a potential step up in volumes in the fourth quarter, elective procedures, because people are worried that they're going to lose coverage or their co-pays and deductibles will go up dramatically. I wonder if you're seeing an early scheduling for surgeries, for example, elective surgeries or anything else that would indicate that we might see that in the fourth quarter and then if we do get um disruption where people go off during the traditional open enrollment period but then reset uh are able to reset because an after open enrollment uh special enrollment period is set up would you be able if people show up in your emergency room are you basically set up so you could get them re-signed up if that's the possibility under the special enrollment provisions if we get an extension but it comes late you know if

you think about the eptcs and what happens with these exchanges um you know i would i would mention a couple things i mean right now we're really not sizing uh given the fact that um there's going to be an enrollment period as you know that opens up here in a couple of weeks when we get to the fourth quarter call aj we'll have a lot more information you know first about what is the deal potential potentially that comes out of the, you know, do they get extended? If they do get extended, you know, what is the form of that extension? And then third, to your point, is time. You know, do we end up with a special enrollment period at the end? And so it's really difficult to size the potential impact of that until we get, and that's when we'll intend to do that. But we do have, you know, our financial counseling teams through our Paralon revenue cycle that helps our patients both with things like Medicaid and with exchanges. It's, you know, the idea of them being able to do that on site is not something that we can do, but we certainly can connect them to the appropriate resources to help them navigate that. And I think we've mentioned this in previous calls, we have structured our efforts here as we've gone through the balance of this year into next year to really beef up our resources with Paralon and Broadly as the patients navigate coverage, both on Medicaid and on the exchanges. And we feel really good about our preparation in that area. And we're going to try to help our patients navigate this season the very best that we can.

Okay, thanks.

Thank you. And your next question comes from the line of Pito Chikaring with Deutsche Bank. Please go ahead.

Hey, good morning, guys, and thanks for taking my question. You know, the quarter was a pretty strong beat, even if we exclude the subliminal payments in the 3Q, but guidance didn't go up at the midpoint of the range. Can you give us any color on how would you think about the range of guidance, and also if you can help provide a bridge from 3Q into 4Q?

When I think about fourth quarter growth rate, there's really two main considerations. that I would think about, and then the third being just operations, but the first would be the hurricane impact for sure, and then the second would be the decline in state supplemental payments that I noted our year. You know, when we take those two factors into consideration, we believe the implied growth rate is still solid for fourth quarter, you know, in the kind of high single-digit range of 87. And then the other note I would give you, when you take those same considerations into into account you know our sequential growth from third quarter to fourth quarter uh is in line our review in the fourth all right thank you and your next question comes

from the line of ben hendrix with rbc capital markets keys go ahead uh thank you very much just a quick follow-up on the sdp guidance um is uh how much in there did you recognize in the fourth air in the third quarter and is included in guidance for tennessee specifically and did you recognize anything in the quarter and in guidance related to Texas? None of that got approved later in the quarter. I just want to see if you're including anything in there. Thanks.

So Tennessee was the largest driver of our net benefit in third quarter. We did receive cash in the third quarter of 2020, and we began occurring this program. So that's the update on Tennessee. Texas, as you know, we did receive approval of the grandfathered application. as this approval was really an enhancement to an existing program this was really accrued just in our normal manner for third quarter 2025. I might note being though that this grandfathered application really only had one month of impact for third quarter. The third one that we mentioned on calls Kansas where we also received approval of the grandfathered application we received caps for this program in third quarter 2025 as well this is a calendar year program so nine months of impact recorded in third quarter thank you and then let me just mention like always with these programs you know we always talk about their complex and variable there were another over pluses and minuses you know that you see across our portfolio of programs so these three states with those pluses and minuses of all the other programs really led to the app all right

thank you and your next question comes from the line of brian thank you with jeffries please go ahead hey good morning guys and congrats on the quarter um mike you know i appreciate your highlighting uh how you guys have done really well with expense management uh labor and supplies so just curious as i think of supplies cost you you guys have done a great job over the last few years keeping that fairly steady at what point do those contracts reset and then maybe the follow-up question for me on cost too is, as we think about your efforts to mitigate Medicaid cuts from 28 forward, when do we start seeing those efforts come through the P&L? I mean, I'm guessing a lot of those initiatives will start way before 28. Thanks.

And good morning. You know, we have a robust ongoing effort with supplies that we communicated multiple times in the class. I mean, certainly to health trust, a lot of effort in flight on our contract renewal cycles. We tend to run two-year cycles, some contracts as many as three. And so those renewals flow as follows. And we spend a lot of effort, you know, in those contract negotiations. And that's certainly one component of our supply expense annual trends. The second component would be a mix of technology and so as you're aware you know every year there's a there's new technology coming in and then there's management of technologies it goes through its maturation cycle that's a big part of our overall management our resiliency plan is our effort and so we have a very active resiliency plan supplies is one of those areas that we are continuing to both enhance and accelerate our resiliency plans focused on appropriate management of supplies and the utilization. Bridging into the future, you know, the other component that we're keeping a close watch on our tariffs to work through a very diligent effort to manage the tariff risk, both in terms of, you know, sourcing the way that we negotiate with contracts, our vendor partners on contracts, and then also in terms of, you know, moving products and moving choices of products So a lot of work in flight with supplies that I think you've seen not only help us, you know, manage supplies over the last several years, but we believe will continue to give us a very strong platform moving forward in our ability to manage supplies. You asked about resiliency, and, you know, really, we've had a longstanding resiliency effort in the company. As we've noted on the last couple of calls and noted again today, our work to both enhance and accelerate our resiliency plans continue. These are widespread across both our corporate platforms and our field platforms. We're really proud of the entire team at ACA helping us to find additional opportunities to drive efficiencies. We're doing this through benchmarking. We're doing this through a robust focus on digital tools. Sam talks often about digital transformation, and it certainly applies to our resiliency and efficiency efforts. It's a big part of what we're doing. And then third, we're focused on, you know, our shared service platforms and the strength that they give us and the ability to expand their influence across the company is helpful as we continue to move forward. So a lot of good work going on with resiliency. As we get into our fourth quarter call, we will intend to provide additional comments about our resiliency effort when we get 20- Mike, let me add to resiliency.

I mean, we think about resiliency, really a financial resiliency culture within HCA that Mike's alluded to, and it's not event-driven. It's really a part of our culture within the discipline thinking, the discipline resource allocation, and the discipline execution. But holistically, we also think about other aspects of resiliency across the organization. And I alluded to this in the fact that we had restructured. We're now embarking upon a more aggressive effort to develop our people, enhance the capabilities of our C-suites across our facilities and so forth, prepare for succession play, all these things that go into having a very durable organization. And we have great people in HCA. We want to make them greater through our development programs. And we've asked our human resource department to invest even more in ramping up capabilities there. The second aspect of resiliency that's beyond financial, it's something I'll call network resiliency. Our organization within sort of the marketplace is also advancing resiliency with respect to adding more outpatient facilities, improving throughput within our facilities, investing in very targeted ways to improve our overall competitive positioning, and then just operating at an even more excellent level when it comes to patient satisfaction, all these important fundamentals that help us endure through whatever cycles we have. And so our resiliency agenda is broad. It's across these three dimensions, and it puts us in a very strong position, we believe, to navigate tailwinds, compete on the ground, and produce solid outcomes. And we've got a pattern of doing that, and we're enhancing that now with technology. We're enhancing it with new capabilities within our shared service platform, as Mike alluded to, and we're further enhancing it with development of our people. All right.

Thank you. And your next question comes from the line of Whit Mayo with Learing Partners. Please go ahead.

Hey, good morning. I was wondering how you guys are thinking about capital deployment for next year. Obviously, you have the capacity to increase buybacks or the dividend or whatnot, but I know you evaluate every year. So I just wanted to take your temperature on preliminary thoughts. And I think what I mean is like, where do you think you will be spending differently versus prior years? Thanks.

With this, Sam, you know, we're not ready to give you our financial plan for 2026 yet. I think it's a reasonable assumption to assume, and it's going to be somewhat consistent with the – and so we need to get through the planning process that we're in now, see how some of the federal policies we will refine and define, Just as you're of HEA is around resiliency and cost discipline and so forth, culture around capital allocation and finding the most productive ways to allocate it to benefit our patients and that thinking in 2026.

And your next question comes from the line of Justin Lake with Wolf Research. Please go ahead.

Thanks. Good morning. A couple things here. First, I think you mentioned payment dispute resolution is one of the drivers of revenue growth, pricing growth in the quarter. How much of a benefit there? And then another question on DPP. It sounds like your DPP number for 2025 benefit will be somewhere in the 2.3, 2.4 range billion this year.

Is that the right number? and before any of these additional data approvals come through what's the right run rate that we should think about going into 2026 you know when we normalize for stuff that might have been at a period thanks guys so let me walk through uh nraa real quick and then we'll talk a little bit about supplementals you know when i when i think about our net revenue per equivalent admission growth in the third quarter to prior year you know first thing and i'm missing this in the comments Justin, but the first thing is about half of the growth was related to state supplemental payment increases. I'll also mention, and it's the next biggest driver's payer index, as we noted, with various, and that's the overall growth in net revenue per unit. Case mix index was pretty consistent. It's just up a tick, about 30 basis points to prior year. As we've noted in past calls, we continue to work on our dispute resolution activities, and they did provide some service. And so those combined really drove the net revenue per unit growth. I think on, you know, as I think about for the year, and just keep in mind that we noted that we expect, and part of what drove the earnings guidance is the net benefit, you know, we're going to be about $250 million better. So, you know, you would just apply that. Now, if you just take something on a payment program, full year guidance I think that gives you a sense that you know now we're expecting it to be 250 million to 350 year 25 to full year 24 and that gives you a sense of our kind of our early thinking or as we as we kind of finish guidance right here will come in at this point I did note and I and there's a lot of volatility here that guidance update does not include any additional impact from any other state supplemental payment programs that may get approved by CMS in 2025 once the government.

Thank you. Your next question comes from the line of Andrew Mockway at Barclays. Please go ahead.

Hi, good morning. Last quarter, you called out a few underperforming regions outside the hurricane markets. Can you give us an update on those markets and how addressable those issues are near term? Thanks.

It mentioned that we had two of our 16 geographic divisions that had some challenges in the second quarter. One of those, I'm happy to say, has recovered. But within our portfolio geographical base, we've seen, again, very strong company in the third quarter, and we're confident that we'll be where we need to be. I think an important point here is, you know, the third quarter over the second quarter is always a challenging period. You've got summer dynamics with vacations, physician, and in this operations, we're good mix of volume from the second quarter to the third quarter. Seasonality aspect to this particular year versus some of the other years that we've seen. And I'm really proud of our teams and how they push through that. And again, with a large portfolio, you always have none of them are material in and of themselves individually because we have other divisions that intend to And your next question comes from the line of Matthew Gilmore with KeyBank.

Please go ahead.

Hey, thanks for the question. I thought I might ask about the growth in surgeries. It was a little bit of an improvement this quarter versus last quarter. Sam just mentioned some of the seasonal dynamics. Can you give us a sense for some of the service lines that are maybe doing a little bit better? Just anything to highlight there?

For outpatient surgery, we had strong general surgery activity, our urological service. On the inpatient, some abilities are orthopedic surgical capabilities, cardiac. All of these were up and had very good performance on a year-over-year basis. So, again, diversification is a powerful diversification amongst these service lines. Milues for delivering care to our patients, all of it sort of works and create, again, the enterprise performance that we're able to produce. But those are some of the categories that moved favorably. We had a couple that were positive. Again, from one quarter to the other and not really indicative of anything structural. Our gynecology business on an outpatient in the third quarter was slightly down. So, you know, that's one item that was down, but it was covered by some of these other areas. And then within the inpatient side, you know, our neurosurgery business was down modestly, and that impacted the inpatient business, but it was overcome by some of these other areas.

You know, Matthew, I might also mention outpatients need to be below prior. We're seeing that in really good growth in overall net revenue in outpatient surgery and the translation to earnings.

You know, one of the things we talked about in our investor conference back in November of 23 was what I termed the staying power of HCA Healthcare. And that staying power is really connected to three points. One, the relevance of our systems within the communities that they serve. The second thing is the scale across the company when it comes to just the sheer size of HCA healthcare. The fact to that is the diversification. And so you're hearing about how the diversification provides what I call staying power for our organization, allowing us to push forward with our agenda, produce solid returns on our capital, and create better outcomes. Thanks, guys.

And your next question comes from the line of Scott Feidel with Goldman Sachs. Please go ahead.

All right. Good morning. I was hoping if you could maybe drill a bit more into the Medicare volumes in the quarter and break those down for us between Medicare Advantage and then fee-for-service year-over-year and sequentially, and then just observations on case mix or acuity that you're seeing in the volume trends within those two categories of Medicare. advantage was up 4.8% in the quarter over prior year.

And then I think, let me just look, what was traditional? 90 bits, yeah. Traditional was up 90 bits. You know, a case mix index, the traditional Medicare case mix index was actually up a bit, and Medicare advantage was pretty flat to prior year. So those would be the two components of Medicare, you know, in the quarter i think one of the things that we we noted you know i'll go kind of more of a macro statement here is the improvement in our volume trends in third quarter to prior year versus second we saw that in medicare you know medicare combined was up 3.4 percent on adjusted admissions you know medicaid was up 1.4 percent after being down for several quarters and then as we noted we saw good movement in our overall commercial business as well with self-play being down 6%. So overall, you know, really good operational growth, good demand growth across our payer categories, really with the one exception of being self-play.

Thank you. And your next question comes from the line of Ryan Langston with TD Callen. Please go ahead.

Thanks. We've heard a lot of news on the pickup of hospital usage in AI, particularly in revenue new cycle. Can you give us a sense on how your initiatives there are progressing and how much runway you see with the advances of technology in the future? Thanks.

You're right. I mean, there's been a lot of commentary around this idea of utilization intensity and maybe coding intensity and the like. And I think it's important to note that we can't speak to all of the dynamics that the payers see across their various geographies and line of insurance. We've already noted from a pure volume perspective, you know, what we're seeing volume wise. I do think that both Medicare Advantage, the exchanges, you are seeing, you know, pretty good volumes this year, at least from HCA. And that's really the extent that we can speak to. As it relates to coding intensity, we think about that as case mix index. And from a case-mix index perspective, it's pretty consistent with prior year and with trends. I think it was up 30 basis points in third quarter of 25 versus third quarter of 24, and actually down a little bit sequentially from second quarter. As we look at the individual lines of insurance, whether it's Medicare Advantage, Medicaid, exchanges, and commercial, we're really not seeing any material changes in case mix index compared to prior year at the detailed line level as well. It's always important to note our coding practices remain consistent and accurate as verified by multiple layers of audits. Specifically related to AI, we do, as Sam mentioned, you know, we're deep into our efforts around digital transformation across our company including in our revenue cycle in terms of ai automation and our revenue cycle right now is really specifically focused on working to respond to the growing denial and under payment activities from the payers you know we have noted before we are also both piloting and rolling out ambient ai documentation tools designed to help our physicians be more complete more accurate and more timely in completing their clinical documentation so that's a that's a quick update of what we're seeing in

the utilization space all right appreciate it thanks and your next question comes from the line of Rajkumar with Stevens Inc please go ahead morning thanks for the question I'm just kind of maybe focusing on the expense side and and pro fees just maybe kind of any color on how that trended you over year and as a sense you know if we kind of bridge towards 26 and think about and how that's, you know, historically been a drag of $40 to $50 million in the past for EBITDA on a quarterly basis. How do you expect that to trend, you know, in 4Q in 2026, and what kind of opportunities are still there to maybe potentially achieve break-even in 2026?

So our same facility professional fees increased 11% over the prior year in third quarter 25 versus third quarter 24. I'll note it's about a 1% sequential increase the second quarter of 2025. So, you know, professional fees continue to run hotter than, you know, just average inflationary levels across the – if you think about our cost structure. I might note that, you know, this is a bit more related to anesthesia and radiology this year. And so, that's a bit of an update on pro fees. professional fees on an as-reported basis, you know, still represent about 24% of total. Remember, Valesco was an acquisition. It's in part of our employee base. And so we don't really call that out separately other than, you know, just to say generally, and Sam might know additional, we're pleased with our really making Valesco as we're thinking about not only the ability to manage the cost structure of emergency physician management and hospital medicine. It also really helps us with our strategic work around things like case management to improve our linked stay and the ability to manage our emergency rooms and drive really good emergency room efficiency. So the work around Valesco continues to mature and I'm really proud of our operating and our physician management teams for the really good work around Valesco. Sam, I would say.

The only thing I would add there, Mike, is I would say generally we do expect continued financial improvement as we carry forward into 2026. We haven't finalized their budgets yet either, and so we don't have a number specific to that, but we are seeing progression performance of Valesco. And beyond even operational improvements, as Mike was alluding to, we expect patient engagement improvement and other clinical efficacy, if you will, from the opportunity that we have with validation now. So we're excited about what the process is.

And your next question comes from the line of Ben Rossi with J.P. Morgan. Please go ahead.

Good morning. Thanks for taking my question here. Regarding maybe the capacity for incremental volumes, I appreciate your commentary regarding the stable operational backdrop and some of your existing efforts and patient throughput. But I guess as you think about 4Q and the typical seasonal uptick and utilization, how would you characterize the incremental cost to manage additional throughput or free up additional capacity? And then are you seeing any variance across your markets in being able to ramp up this capacity in a cost-effective manner?

Well, the short answer is we don't see any significant capacity constraints at this particular point in time. If you recall from a couple of years ago, we had capacity constraints that were driven mostly by staffing and not having the workforce that we needed to take care of the patients who desired service in our facilities. We don't have that issue today. We've improved the net headcount of the company, and we believe we have good programmatic efforts in place today to put us in a position to carry full workforce necessary to meet the demand that we expect in the fourth quarter. And really on into next year, we're excited about some of the other operational initiatives that are being put forward with our emergency rooms. We have very specific surge planning that we're preparing in the past years to improve our preparation and anticipation of demand surges in whatever periods we have. So we feel much better about our capacity on the labor side coming online in 2026 than we had this year. And that will add physical capacity and align with the workforce capacity that we're creating and put the company in an even better position.

The work that we've been putting forth to manage length of stay has also been very helpful. Third quarter showed really good performance around length of stay, but into 2026, that also gives us the ability to make additional room for operating teams and our case management teams. your next question comes from the line of Jason Casola with Guggenheim please go ahead great thanks good morning just wanted to ask about the hurricane impacted facilities I know you left that the same in guidance there's a big step up in the fourth quarter but how should we think about the ability to recover the remaining 150 million or so headwind versus the 250 million total headwind back in 2024 would you expect to recover the majority of that remaining headwind when next year or how do we think about growth off that?

Thank you.

So, you know, let me walk back through just quickly the way the hurricane markets have flown. It's kind of transverse this year. You know, as you may recall, as we started the year, we actually thought that our 2025 full year EBITDA would be about flat with 2024. And 2024 had this $250 million hit from the hurricanes. and really that 250 million dollar hit was a hit to our pre-storm run rate of earnings so think about them to 23. as we're now updating guidance we're you know we believe that we'll recapture call 100 million of that uh in 2025. the the real impact here now is just the continued and lingering effects of that storm and mostly in our north carolina markets while volumes have recovered in North Carolina. The payer mix has deteriorated and we're having to use a significant amount of premium labor to staff those facilities. And so that's the driver there. It's too early to get 2026 guidance, but, you know, just to give you a sense of kind of how it's moved through the first three quarters of the year, you know, first quarter of 2025 was about flat the prior year. Second quarter was you know was a bit negative modestly negative and third quarter 25 to 24 combined for hurricane markets on EBITDA was again about flat so that's why we said in fourth quarter we do expect that you know all plus that 100 million dollar improvement in year-over-year EBITDA will happen in the fourth quarter we will give more guidance on our fourth quarter call when we give full year of 2026 guidance about the hurricane markets, but hopefully that helps as it relates to the movement through the year.

All right. And your next question comes from the line of Stephen Baxter with Wells Fargo. Please go ahead.

I appreciate the early commentary on 2026. I'm wondering if there's something that you can speak to that gives you confidence in achieving the long-term volume range at this point. And I guess the question would really just be, you know, without exchange growth, you'd be below the range this year. So I'm sure you thought about that even with an extension, you know, exchange volumes could potentially be flat to down next year. But I'm wondering how you're thinking about what the other moving parts are, whether that could be, you know, more normal levels of Medicaid or self-pay growth in there, too.

I realize the past is not prologue here, but we've had 18 consecutive quarters of volume growth. So that gives us a pretty confident foundation that we can continue to navigate through different dynamics within our markets. As I mentioned, we have more capital coming online next year. We have outpatient facilities, so our outreach is growing. We're building new relationships with physicians. All of that's woven into our thinking around, we continue to believe that population is growing in many of our markets, and there's going to be this consistent level of demand. The exchange piece of it is a small component of the overall, again, diversification that we have as a company. And so when you add all that up, we feel pretty confident that the range will accommodate some of the movement within our overall demand equation.

Thank you. Your next question comes from the line of Craig Hadden back with Morgan Stanley. Please go ahead.

Yes, thank you.

On the 600 to 800 million resiliency program you laid out a few years ago, just give us a sense on kind of how you're tracking to that and then how you think about any additional levers to extend that further over time, whether that's technology or increased AI adoption. yeah so in our investor day back in 2023 we highlighted our you know our resiliency plan including that that target of 600 800 million dollars you know we've been working hard on that and and uh but but the other thing that we highlighted so yes some of those dollars helped us to 24 and 25 but as we've gone through you know really the last 12 to 18 months we've been focused at both enhancing and accelerating our development of our resiliency program and our execution of our resiliency program. And that development piece is key. We think about this as a program. In other words, as we have work streams that we identify, we work those through, we pilot them, we execute on them, and then we roll them out to scale. And then literally every day we're hunting for new ideas and our teams are really attuned to the this idea of the pipeline of resiliency and identifying new ideas and as new ideas come into our resiliency work stream efforts those ideas again are piloted they are verified within our markets and then we try to roll them out at scale and so think about the resiliency program with all of our benchmarking work with all of our digital technology and development. We have a robust series in flight for AI, machine learning, and automation. And then lastly, as I mentioned earlier, this notion of continuing to expand the impact of our shared service platform. Those can bond, you know, really give us encouragement. This resiliency program is not a static one-time event. It is a program that allows us to develop financial resiliency well into the future.

I think, Mike, some of that's reflected, I mean, if you just look back in 2023 when we gave the update on the resiliency program, and you look at the core operating margin of the company at that particular point in time versus what it is now, it's improved in the margin advancement that you're seeing in the results of the company. And we're continuing to, as my knowledge, with best practices, with benchmarking to deliver more efficient servicing agenda, not one that's static.

I think one more question.

We're running out close to the end of the- Yes, your last question comes from Joshua Raskin with NEPREN Research. Please go ahead.

I appreciate that. So I wanted to ask about cashflow conversion. You know, we've seen the ratio of EBITDA that converts to free cashflow, sort of move from the 30% range into the 40s. And I think this year you're on track to almost 50%. So maybe talk about the factors that are driving that. Is that a shift to outpatient? Is there impact from, you know, the strong pricing, including the subpayments, you know, and I guess most importantly, do you think that's sustainable over the next couple of years?

You know, there's three or four things I would note that are driving our strong cash flow from operations as we think about it. You know, one certainly is just we had really solid, that strong operational performance that we continue to highlight, you know, as we think about the strength of our revenue cycle operations and with Paralon, you know, we turn that revenue into cash. And so that's a piece of that. And you're working capital management plans we we have a pretty robust working capital management strategic plan that includes not only event days and they are but include things like inventory levels prepaid levels and that work around working capital continues to assist us as we think about growing the cash flow the other point and i made this on the call but it's important though is that year-to-date, we have been able to defer $1.3 billion of estimated federal income tax. And so keep that in mind as well. But when I think about the long term, this idea of clearing out your revenue cash and the strength of Paralon and the strength of the working capital management plans of the company, I think, put continued strong management and performance around cash flow.

Thank you. And that is all the time we have for questions. I would like to turn it back to Mr. Frank Morgan for some closing remarks.

Thank you for your help today, and certainly good luck with the rest of your earnings season. If anybody has any questions, we're around today.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.