Earnings Call Transcript - THC Q1 2026

Operator, Operator

Good morning, and welcome to Tenet Healthcare's First Quarter 2026 Earnings Conference Call. I will now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin.

William McDowell, Vice President, Investor Relations

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's first quarter 2026 results as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; and Sun Park, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. And with that, I'll turn the call over to Saum.

Saumya Sutaria, Chairman and Chief Executive Officer

All right. Thank you, Will, and good morning, everyone. In the first quarter, we reported net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.16 billion, which represents an adjusted EBITDA margin of 21.6%. We are pleased with the start to the year, performing above our previously provided expectations. As anticipated towards the end of last year, the operating environment is dynamic. There are payer mix shifts, seasonal effects and insurance enrollment uncertainty in the exchanges and Medicaid that impact demand. Despite these challenges, we delivered a clean quarter characterized by disciplined operations, benefits from execution on our previously described expense opportunities, stable volumes despite headwinds and, as a result, significant free cash flow generation. USPI generated $484 million in adjusted EBITDA, which represents 6% growth over the first quarter of 2025 and a robust 22% of our full year 2026 adjusted EBITDA guidance. We are pleased with USPI's start to the year as we set an aggressive EBITDA target as a percent of the full year for the first quarter that we were able to exceed. We have seen a pattern over the last few years with a modest shift towards an increased distribution of cases and, therefore, earnings into the first quarter. Given our focus on acuity, same-facility revenues grew 5.3% at USPI, highlighted by double-digit same-store volume growth in total joint replacements in the ASCs over prior year. Our operations in the first quarter were somewhat impacted by two major winter storms and uncertainty from vendor cyber attacks; however, our operating teams managed through them and were able to reschedule many of the procedures, lessening the overall impact in the quarter. We have a robust pipeline of assets interested in joining USPI this year. As such, we've had a particularly strong start to the year investing $125 million in the first quarter to acquire seven ASCs. Additionally, we have commenced patient care at three de novo centers. This represents half of our targeted full year spend already completed in the first quarter. Turning to our Hospital segment. First quarter 2026 adjusted EBITDA was $678 million, which was nicely above our expectations and represented 27.5% of our full year 2026 adjusted EBITDA guidance. We reported 16.7% EBITDA margins in the quarter, which were driven by disciplined expense management and growth initiatives, which offset the expected impacts of unfavorable payer mix and reductions in exchange enrollment. The results in the quarter reflect no significant changes in supplemental Medicaid program revenues compared to our original expectations. We have seen declines in exchange coverage with same-store exchange admissions down about 10% compared to first quarter 2025, but not yet at the level we assumed as the average for the full year. We continue to assess the overall environment for effectuation rates and the impact on future exchange volumes, but we believe we have the tools to manage this impact under a variety of scenarios. We continue to make investments in technology to enable growth and streamline operations. We are executing on the expense initiatives that we discussed on our fourth quarter 2025 earnings call and are recognizing the benefits. These initiatives include engagement tools, which are improving recruitment and retention efforts, process automation to address length of stay and capacity controls, which improve our clinical throughput. Among these things, we are executing on AI-related capabilities in our hospitals, physician practices and the global business center to drive further efficiencies, most of which have been useful for supporting and extending the productivity metrics of our team. Importantly, we have learned that while all of these tools will not work in a pilot state, setting up a governance that either green-lights for rapid scaling or red-lights for shutdown helps us remain focused. We have included third-party EMR-integrated solutions which will increase our clinician productivity, decrease administrative burden and improve patient access through programs such as ambient scribe, automated discharge summaries and autonomous professional fee coding in various pilot programs. Additionally, we have increased back-office AI automation, which is improving productivity and consolidating third-party spend to reduce costs. For example, we have almost doubled or more the productivity of our Conifer analytics team. As we look forward, we are actively identifying and piloting agentic workflows to further transform business processes. So far, our work has enabled us to more than offset the expected and unexpected headwinds that arose in the quarter. Regarding full year 2026 guidance, as in prior years, at this time, we are not addressing the underlying outperformance in our business units during the first quarter. We're pleased with our year-to-date performance, we're reaffirming our full year guidance, and we'll address our expectations for the full year in the future. As a reminder, after normalizing for the non-recurring items that were reported in 2025 in the first quarter of '26 and excluding the headwind from the expiration of the premium tax credits, our 2026 adjusted EBITDA is expected to grow at 10% at the midpoint of our range. And finally, we continue to see significant opportunity to utilize share repurchase at our current valuations. We repurchased 1.35 million shares for $318 million in the first quarter of 2026 and expect to continue to deploy capital for share repurchase over the balance of the year. In conclusion, we adapt to the environment, focus on strong clinical quality, recommit to helping our doctors have an easier environment to operate in and focus on delivering reliable earnings in this transitionary period. Our balance sheet is strong, and our diversified asset mix with a focus on ambulatory care gives us a significant strategic advantage in the market as we look ahead. And with that, I will turn it over to Sun for more details. Sun?

Sun Park, Executive Vice President and Chief Financial Officer

Thank you, Saum, and good morning, everyone. We had a nice start to the year in the first quarter of 2026, generating total net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.162 billion. First quarter adjusted EBITDA margin was 21.6%, driven by disciplined operating expense management, including good progress on the expense initiatives that we outlined last quarter. I would now like to highlight some key items for both of our segments, beginning with USPI. In the first quarter, USPI's adjusted EBITDA was $484 million, with adjusted EBITDA margin at 36.7%. USPI delivered a 5.3% increase in same-facility system-wide revenues with net revenue per case up 5.6%, and same-facility case volumes down 0.3%. As Saum noted, volumes were impacted by the winter storms early in the quarter, and while we were able to reschedule many of the procedures, there was an overall impact. Turning to our Hospital segment. First quarter 2026 adjusted EBITDA was $678 million, resulting in an adjusted EBITDA margin of 16.7%. This represents 27.5% of our expected full year 2026 adjusted EBITDA. Same-hospital inpatient adjusted admissions rose 0.6% in the quarter and were impacted by a decline in respiratory admissions of 41% compared to first quarter 2025. This driver represented a 90 basis point reduction in admissions growth in the quarter. Revenue per adjusted admission declined 1.5% year-over-year in the first quarter of 2026 due to the impact of reduced exchange volumes within our overall payer mix and the year-over-year impact of the $40 million favorable out-of-period supplemental Medicaid revenues that we reported in the first quarter of 2025. Exchange revenues represented about 6% of consolidated revenues in the first quarter of 2026, a 9% decline from first quarter of 2025. Our consolidated salary, wages and benefits was 40.5% of net revenues in the quarter, consistent with our performance from the prior year despite the net revenue headwinds, demonstrating our ability to flex our operating model. Overall, operating expenses per adjusted admissions were also favorable to our expectations, which contributed to our outperformance in the quarter. In the first quarter of 2026, we recognized an onetime approximate $40 million favorable revenue adjustment as a result of the completed Conifer transaction. This amount was included in our original guidance. I would also note that this adjustment is not included in our revenue per adjusted admission calculations. We recorded supplemental Medicaid revenues of $304 million in the first quarter of 2026, consistent with what we assumed in our guidance. Importantly, we did not benefit from out-of-period supplemental Medicaid revenues related to prior years in this quarter. We're pleased with our ability to manage through the various dynamics throughout our first quarter and feel we have the ability to deliver on our commitments over the balance of the year. Next, we will discuss our cash flow, balance sheet and capital structure. We generated $978 million of adjusted free cash flow in the first quarter. As of March 31, 2026, we had $2.97 billion of cash on hand with no borrowings outstanding under our line of credit facility. Additionally, we have no significant debt maturities until late 2027. During the first quarter, we repurchased 1.35 million shares of our stock for $318 million. Our leverage ratio as of March 31, 2026, was 2.24x EBITDA or 2.83x EBITDA less noncontrolling interests, driven by our strong operational performance and financial discipline. We remain committed to maintaining a deleveraged balance sheet and believe that we have significant financial flexibility to support our capital deployment priorities and drive shareholder value. Let me now turn to our outlook for 2026. As Saum noted, we are not making any adjustments to our full year 2026 outlook at this time. While we had strong fundamental outperformance in the first quarter and have continued confidence in our ability to achieve our full year targets, it is early in the year, and we will plan to revisit our full year guidance as needed in subsequent quarters. As such, we are reaffirming the full year 2026 guidance that we initially provided in February. Our outlook continues to exclude any contributions from potential increases in supplemental Medicaid programs that have not yet been approved and finalized by CMS. For second quarter 2026, we expect consolidated adjusted EBITDA to be 24% to 25% of our full year consolidated adjusted EBITDA at the midpoint. We expect that USPI's EBITDA in the second quarter will also be 24% to 25% of our full year 2026 USPI EBITDA at the midpoint. Turning to our cash flows for 2026, we continue to expect adjusted free cash flow after noncontrolling interests in the range of $1.6 billion to $1.83 billion. This range includes the payment of about $150 million in tax payments for the Conifer transaction this year. Excluding these tax payments, this would represent $1.865 billion of adjusted free cash flow after noncontrolling interests at the midpoint of our 2026 outlook. We remain focused on strong free cash flow conversion from our EBITDA performance, including the continued outstanding cash collection performance of Conifer, while continuing to invest in high-priority areas of our businesses. Turning to our capital deployment priorities. We are well positioned to create value for shareholders through the effective deployment of free cash flow. First, we will continue to prioritize capital investments to grow USPI through M&A. As Saum noted, we have had a strong start to the year and have a number of future opportunities to support our $250 million annual target for USPI M&A. Second, we expect to continue investing in key hospital growth opportunities to fuel organic growth, including our focus on higher acuity service offerings. Third, we'll continue to be active in share repurchases. We continue to see significant opportunity at our currently compressed valuation multiple. And finally, we will continue to evaluate opportunities to retire and/or refinance debt. We are pleased with our strong start to the year and remain confident in our ability to deliver on our outlook for 2026. We continue to execute our strategy across our transformed portfolio of businesses resulting in a more predictable, more capital-efficient company that is well positioned to drive value through effective capital deployment. And with that, we're ready to begin the Q&A. Operator?

Operator, Operator

Our first question comes from Ryan Langston with TD Cowen.

Ryan Langston, Analyst, TD Cowen

Payer denials this year appear to be broadly accelerating across the industry. Are you seeing this activity increase in your business? And maybe is it more MA versus commercial? And is the rise in uninsured or uncompensated care you're seeing primarily related to the exchange subsidy expiration, or is there anything else you could call out there?

Saumya Sutaria, Chairman and Chief Executive Officer

Thanks for the question. Payer disputes, many of which can result in denials and back and forth, are high. They have been high, and they are too high for what is appropriate, especially when comparing back to pre-pandemic periods as a marker. In our business, we have not seen a net impact of disputes and denials change this quarter relative to last year. So while denials and disputes remain elevated, we did not see a meaningful trend this quarter that was different than before. We can only guess, of course, but with the slight increase in uncompensated care, some of it is likely related to the expiration of the exchange subsidies.

Operator, Operator

Our next question comes from A.J. Rice with UBS.

A.J. Rice, Analyst, UBS

If I look at the last number of quarters, there's been consistency of outperformance in the hospital segment overall. I wonder if you could talk broadly because we haven't talked about markets in a general sense. Are there some markets where you've implemented strategies that you'd call out that have been particularly successful? And as you look across the portfolio, maybe discuss some markets that still have an opportunity for significant improvement as you deploy new strategies to improve their performance.

Saumya Sutaria, Chairman and Chief Executive Officer

Thanks, A.J., and I appreciate you calling out the strength of the hospital business over the last few years. We have been focused on a broad strategy of increasing acuity, focusing on our ability to succeed with our transfer centers, adding new surgical programs and increasing our emergency-related services, especially trauma programs. This is a global strategy implemented locally, and we have opportunities and are implementing initiatives in every market that we operate in. Based on the portfolio shifts we made, we remained in markets where we thought execution of our strategy would be successful. Enrollment in the exchanges differs state to state and will impact markets differently, including the uninsured piece. But when you step back, the opportunity to find efficiencies, support services for hospitals and automation opportunities are available in each market. Some markets are larger, so the dollar impact may be greater in certain areas, but the initiatives are scaled appropriately. Our first quarter earnings were driven by consistency across markets in terms of efficiency opportunities. Another factor was disciplined flexing of our cost structure. We anticipated winter storm impacts and were able to maintain salary, wages and benefits as a percentage of top line by flexing even though revenues were challenged. So some of this is continuing to maintain that old-fashioned discipline of anticipating and flexing intra-quarter, which is also available in all markets.

Operator, Operator

Our next question comes from Jason Cassorla with Guggenheim Partners.

Jason Cassorla, Analyst, Guggenheim Partners

I wanted to go back to your prepared remarks around your efforts around length of stay and throughput improvements. You're clearly seeing the benefits there given length of stay has been down about 3% in each of the past six quarters by our math, but that improvement is coming despite your high acuity service line focus, which would naturally carry a higher length of stay. Could you double down a little bit more on the length of stay opportunity for you and what that run rate looks like as you move through the rest of the year and beyond?

Saumya Sutaria, Chairman and Chief Executive Officer

Appreciate the question. The two things—acuity and throughput—are intricately linked. To maintain available capacity to service high-acuity needs that arise in the community or from outlying hospitals, you must have strong throughput and capacity management to ensure bed availability. As acuity goes up, there is a length-of-stay headwind because cases are more complex and longer. However, we are pleased that we are managing overall length of stay to something better than breakeven in our reported metrics, which creates capacity in our hospitals. Part of the strategy is capital avoidance on additional capacity that's unnecessary when you can improve productivity. These tools we are trying out are adding to our traditional length-of-stay management that we've focused on for the last four to five years. The linkage between throughput improvement and our ability to handle high-acuity cases is core to our strategy.

Operator, Operator

Our next question comes from Brian Tanquilut with Jefferies.

Brian Tanquilut, Analyst, Jefferies

This is a tough quarter, so congrats on beating that bottom line. Maybe just on the Medicaid side. A lot of your peers have spoken about Medicaid trends, whether that's immigrants not having paperwork. I'm curious, what are you seeing in the Medicaid book? And as we've seen uncompensated care step up across the space, how much of that is Medicaid versus maybe exchange members versus other dynamics?

Saumya Sutaria, Chairman and Chief Executive Officer

I appreciate it. I will be careful because some of this is speculative, but we see Medicaid a little bit down, particularly in places like California, which suggests some disenrollment or lack of renewal among populations that may not have qualified under federal rules. We also operate in many important border communities and do work for broader community populations. We see some hesitation in those populations at times. We partner with FQHCs in those markets, and there is a tone of hesitation. The impact to hospitals has been minimal because we are treating people who are sick and need care. The outpatient side—primary care and other services—has seen more impact and hesitation to come in for routine care.

Operator, Operator

Our next question comes from Scott Fidel with Goldman Sachs.

Scott Fidel, Analyst, Goldman Sachs

My question ties to the last two. From the acuity and case mix perspective, overall for both the hospital and USPI, how do those rates look year-over-year? Maybe you could layer in the tailwind side—the proactive service line expansions and investments—and the headwind side—the dynamic environment impacts that we saw in some end markets in the first quarter.

Saumya Sutaria, Chairman and Chief Executive Officer

For USPI, acuity is clearly increasing. We are likely the largest single provider of outpatient joint replacements across our nearly 570 assets at USPI, many of which do orthopedics, and we're still posting double-digit growth in total joint replacement surgeries off a high base. Demand is present if you create the right operating environment for surgeons. We continue to push our high-acuity strategy. Service lines like urology and robotics are growing quickly; we have over 150 robotic surgery programs in ASCs that are general surgery-based. The services that are declining are high-volume, low-acuity areas, where we are less focused. On the hospital side, we've been pushing the high-acuity strategy for five years, and it shows in CMI, margins and net revenue per case. This quarter had some differences due to weather and a decline in the respiratory business, which temporarily reduced CMI, but we offset that by flexing and focusing on other hospital work. I don't think one quarter with significant respiratory impact changes the overall trajectory.

Operator, Operator

Our next question comes from Craig Hettenbach with Morgan Stanley.

Craig Hettenbach, Analyst, Morgan Stanley

On the back of the $125 million invested in USPI in Q1 and a really strong start to the year, can you talk about the M&A engine—what's working—and also why Tenet might be a preferred acquirer of choice in the marketplace?

Saumya Sutaria, Chairman and Chief Executive Officer

What's working is USPI's multiyear track record of acquiring assets and adding value to them. Our clinical quality performance is consistent, our ability to bring facilities in network and perform is consistent, and our supply chain and purchased services agenda helps reduce costs and create efficiencies. Our business development team helps centers go from single-specialty to multi-specialty or design OR operations more efficiently. We work on sharing protocols and scheduling to enable more efficient use of ORs. Physicians and MSOs know that we execute well. Health system partners contribute to our quality improvement agenda; institutions like Baylor and Memorial Hermann bring expertise and contribute to partnerships that improve performance. All of these have created a virtuous cycle of reputation enhancement. We remain selective with robust diligence processes and still say no to more centers than we say yes to, focusing on opportunities that support USPI's growth algorithm.

Operator, Operator

Our next question is from Justin Lake with Wolfe Research.

Justin Lake, Analyst, Wolfe Research

Just a couple of numbers questions. First, your guidance assumes $250 million of exchange impact for the year. Do you have a number for the quarter relative to what we might have thought as a $60 million or $65 million run rate? And then on DPP—in your slides you talked about DPP down $22 million for the year—does this include the $40 million out-of-period decline so that you were actually up about $18 million excess?

Saumya Sutaria, Chairman and Chief Executive Officer

Good question. Sun, do you want to take those in reverse order?

Sun Park, Executive Vice President and Chief Financial Officer

Justin, it's Sun. Yes, you're right on the DPP question—our DPP figures include the $40 million out-of-period amount, so if you normalize for that 2025 out-of-period item, it would be a slight increase year over year. On the exchanges, we mentioned that exchange revenues in Q1 were about 6% of our consolidated revenues compared with about 6.5% in Q1 of 2025, so that's roughly a 9% to 10% decrease in exchange revenues year over year for the quarter. So I would say the Q1 exchange impact is roughly half of the overall year-over-year reduction that we referenced in February, and our guidance range of a 20% reduction and $250 million overall impact for the year remains consistent with what we expect given the data so far.

Operator, Operator

Our next question comes from Kevin Fischbeck with Bank of America.

Kevin Fischbeck, Analyst, Bank of America

Two questions. First, the Q1 exchange impact is lower—was that expected because you assumed a ramp for the year, or was that an area of outperformance? Second, you mentioned flu and weather disruptions. Any way to size the EBITDA impact to both USPI and the hospitals from flu and the weather disruption?

Saumya Sutaria, Chairman and Chief Executive Officer

I can take the latter part. We monitor respiratory ER traffic, admissions and related metrics. Respiratory admissions were down about 40% in the quarter and had an earlier effect. Over the quarter, January to February to March, things improved steadily month-over-month. By March, revenue, admissions and volume intensity were increasing, but because we had anticipated the early-quarter impact, we had already taken cost-flexing actions. Also, we executed a systematic cost agenda starting in the second half of 2025 that produced savings. The combination of anticipating the need to flex, other cost improvements and month-over-month operational improvement during the quarter allowed us to outperform our hospital expectations despite the headwinds. Regarding expectations, we had used a simple linear assumption for the year; the first-quarter exchange impact was a bit less than that simple linear assumption, which aided outperformance.

Operator, Operator

Our next question comes from Ann Hynes with Mizuho.

Ann Hynes, Analyst, Mizuho

Maybe we can shift to the Washington outlook. Is there anything that you're paying attention to on the regulatory and legislative outlook, especially on the regulatory side with the upcoming outpatient rule? Is there anything on your radar that we should be aware of?

Saumya Sutaria, Chairman and Chief Executive Officer

We are keenly awaiting the outpatient rule, especially given CMS and HHS commentary supporting care in lower-cost settings. We are hopeful for more robust outpatient rate support, while not expecting particularly positive changes on the inpatient payment side. Other than public commentary from CMS, we do not have proprietary insights to share. From our perspective, we want to stay on the right side of the value equation—efficient health systems that are accessible and surgical care at scale at a lower cost. USPI is well positioned, and the outpatient rule direction would align with our strategy. USPI had a clean quarter despite noise, and you don't see much impact from exchanges or Medicaid in that business.

Operator, Operator

Our next question comes from Pito Chickering with Deutsche Bank.

Pito Chickering, Analyst, Deutsche Bank

Looking back at hospitals in the first quarter, I understand there's $22 million of loan payments offset by recoveries of $40 million this quarter. When we normalize the margins into the rest of the year, can you walk through how we should think about hospital margins excluding the $40 million as a bridge into the rest of the year? Generally, the year is better than the first quarter because of a strong fourth quarter.

Saumya Sutaria, Chairman and Chief Executive Officer

If you step back to our guidance for the year, in the Hospital segment we expect about 10% normalized year-over-year growth. We are executing expense management initiatives from the second half of 2025 that will show benefits in 2026. The respiratory volume impact in Q1 is a headwind to margins because those admissions are capacity filling and margin accretive; we overcame that through flexing and other improvements. As operations return to normal and as we execute on the efficiency strategy, we expect margin growth in the Hospital segment over the year. We feel confident about the balance of the year.

Sun Park, Executive Vice President and Chief Financial Officer

Pito, to add: our Q1 hospital margin was 16.7%. If you normalize for the onetime $40 million adjustment, you should consider that when comparing. Also, the exchange impact likely grows over the rest of the year from Q1 levels, which will damp margins on a run-rate basis. When it's all said and done, the implied full-year hospital margin in our guidance—about 15%—is still aligned with our expectations.

Pito Chickering, Analyst, Deutsche Bank

The uninsured payer mix declined year-over-year in the first quarter, which I thought would have been increasing. How does that fit within your guidance?

Saumya Sutaria, Chairman and Chief Executive Officer

We should watch and wait. Effectuation rates and other enrollment dynamics are important to track; the first quarter can be a relief valve for premium payments. Our planning assumes the challenge could increase and we plan accordingly in a disciplined way to manage to the earnings guidance we provided. If the impact is less than assumed, that creates upside potential for us. Right now, after this quarter, our mindset is focused on strategy execution, expense opportunities and how the exchange, uninsured and Medicaid markets play out as potential upside.

Operator, Operator

Our next question comes from Whit (Benjamin) Mayo with Leerink Partners.

Benjamin Mayo, Analyst, Leerink Partners

I wanted to hear more about reserving and revenue recognition for exchange patients. What are the underlying estimates for attrition and maybe what was the exit rate on the decline in volumes within March?

Sun Park, Executive Vice President and Chief Financial Officer

On reserving, through Conifer we monitor patient coverage and premium payment status patient by patient when we can, and we pay close attention to those details. We believe we are appropriately reserved on our overall patient population, including exchange enrollments. In Q1, exchange admissions were down about 9%, and exchange revenues were roughly down 9% to 10%, so it's about a one-to-one relationship for the quarter. We will continue to observe trends as the year develops. From a month-over-month perspective, overall volumes improved through Q1 into March, which gives us some confidence for our guidance. January tended to be stronger for enrollees, which helped January numbers, but it's still early to call a definitive trend.

Operator, Operator

Our next question comes from Stephen Baxter with Wells Fargo.

Stephen Baxter, Analyst, Wells Fargo

I wanted to ask about the same-hospital revenue per admission decline of 1.5% in the first quarter. There are a lot of moving parts with Medicaid and exchanges, but also less flu which could push this metric up. Could you give a better sense of moving parts that impacted that metric? And are you seeing anything on commercial that was a headwind in the quarter that should get better through the year?

Sun Park, Executive Vice President and Chief Financial Officer

On a comparable basis, revenue per adjusted admission in the Hospital segment was down 1.5%. A large component of that was the $40 million favorable out-of-period supplemental Medicaid revenue we reported in Q1 2025, which did not repeat in Q1 2026. Combined with the reduction in exchange volumes, those two items were worth roughly 2% to 2.5% of headwind to net revenue per adjusted admission. When you normalize for that, the decline is closer to 50 basis points to 1%. Flu impacted admissions, but in the context of our total adjusted admissions and net revenue base, flu is a relatively small component.

Saumya Sutaria, Chairman and Chief Executive Officer

To clarify, the one-time Conifer $40 million adjustment was excluded from the revenue-per-adjusted-admission calculation because it was not related to case volume. The biggest driver of the NRAA decline was that out-of-period item in 2025. Our acuity strategy is working well and we are not worried. We outperformed on earnings despite revenue dynamics, reflecting flexibility and operating discipline in this environment. In coming months we expect more insight into how the exchange and uninsured Medicaid market settles for the year, which will inform any updates to guidance.

Operator, Operator

Our final question is from Andrew Mok with Barclays Bank.

Andrew Mok, Analyst, Barclays

You mentioned that exchange volumes were down 10% and you had expected unfavorable payer mix. But when I look at the managed care mix disclosure, it looks relatively stable year-over-year. Can you help us understand what you saw on payer mix inside of that, including the moving parts on the government side?

Sun Park, Executive Vice President and Chief Financial Officer

Andrew, when we report managed care, that also includes managed Medicaid and managed Medicare within that component. We saw reasonable strength in managed Medicare and other managed care categories, so as a percentage of total revenues, the managed care mix remained relatively stable. That stability helped offset the exchange impact to some degree. Q1 payer mix trends were acceptable, but we need more trending and data into Q2 before making more detailed comments.

Saumya Sutaria, Chairman and Chief Executive Officer

Qualitatively, as people come off the exchanges, some pick up commercial coverage through new employment or other avenues, which is positive. We also had strength in Medicare. Our work on appropriate utilization and interactions with Medicare Advantage has been favorable, which aligns with our acuity strategy. So in Q1 the headwinds were more mitigated than a straight-line full-year assumption, and that helped drive outperformance.

Operator, Operator

We have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.