Acadia Healthcare Company, Inc. (ACHC) Earnings Call Transcript & Summary

Okay. I think we'll go ahead and get started. 10:50 Eastern Time. This is Whit Mayo, I'm UBS' health care, facilities and managed care analyst. It's my pleasure to have the management team from Acadia joining us today. We have Debbie Osteen, the Chief Executive Officer; David Duckworth, the Chief Financial Officer; Gretchen Hommrich, that runs the Investor Relations efforts for the company. So thanks, guys, for taking time today. Really appreciate it.

Maybe just a good place to start just to get some of these questions out of the way is just the impact of COVID-19 across all lines of your business. I don't know if there's an update that you wanted to share in terms of how the overall business is performing today versus maybe earlier in May or earlier in April. Anywhere you want to start on that topic would be great.

Well, I'll start with the U.S. and I think we've been pleased that we continue to see signs of improvement. We -- as a reminder, in the month of April, our same-facility patient days declined 7% compared to last year. And for the first 2 weeks of May, our same-facility patient days have declined about 2.5% compared to last year. So we have seen stability really in the RTC and CTC all through this pandemic. But what we've seen in the first part and actually latter part of April and into May is acute and specialty service lines are continuing to improve. And just to note, we don't include the U.K. in this metric, and we also don't have our CTC business in any of our patient day stats. But I think as we look at just the overall U.S. service lines, we have started as states have reopened. And each one is different, they're all in varying stages of reopening. But I think as we've seen that happen, we've started to see our ER calls and admissions increase, as well as from mental health professionals. We're continuing to use telehealth as a mechanism for assessment and also communication with referral sources. But the business that we and referral patterns that we've had prior to this, I think, are starting to come back. And we're not at a point where we want to see it as a trend. But I do think the 2.5% is much improved from April. And so we're very focused on continuing to do what we can to focus our marketing and our spend here in the U.S. on making sure patients will access the services when they need it. And then, if it's okay, Whit, I'll switch to the U.K. I think our volumes there continue to be stable. They are a little different than the U.S. in that they have a longer length of stay. As those who are familiar with Acadia know, we have -- similar to April there, seen our same-facility patient days are -- declined by about 5%, so it's stable from April. I think one thing to point out is that the U.K. is just beginning to reopen and I think was a little bit behind the U.S. So as the stay-at-home orders there start to be rescinded, we think the business will start to open back up in our shorter length of stay programs. One of the dynamics in the U.K. is the commissioning process. And frankly, through NHS, there are case workers that assess patients during the pandemic. Those case workers were staying at home, complying with the order, but also were redeployed into the med/surg area for the -- just combating COVID. So our team is working very closely with the NHS. They have asked us to prepare capacity planning. They believe, NHS believes that we will see increased demand from patients that have not accessed care through our service lines, and frankly, other companies.

That's great. Maybe just to go back to the CTC business and maybe even this, the addiction business. Just curious how COVID may have impacted those 2 businesses. I mean we're hearing patients getting 2-week supplies of methadone or methadone-like drugs. And anything notable to call out? I just wasn't sure if the census in like a Sierra Tucson is down or if it's even up in this environment.

Well, I think we don't see specialty or substance use as discretionary, so we've continued to have admissions through this whole process. Certainly, they're not immune to what happened overall to the company. But CTC, actually, we saw a little -- a slight increase in volume in that service line. I think one of the differences, which you point out, is just the way that medication has been delivered. And I think that with stay-at-home orders, the patients were getting their meds. But we do have a therapeutic component in our CTC service line which we are using in telehealth. I'll be honest, it's not always -- we're not accessing all of our patients in that way, but certainly are offering it. But I think that's one service line that has been pretty solid and pretty consistent through the whole pandemic.

Yes. No, that's helpful. As you think about just the recession and the impact overall on your business. I mean I think, historically, we've generally viewed the behavioral mental health market to be somewhat countercyclical in many ways. I don't know if anything has changed or influenced your views on that. Just, Debbie, any high-level thoughts about how you think the downturn in the economy may impact the demand for your services, and even on the clinical side, maybe your cost structure. I know you've got a number of initiatives underway, but thinking about just labor and nurses coming back into the workforce. Just any views would be helpful.

Okay. I'll take part of it and David may want to add something. But I mean, my experience and really many of the team here went through the last recession. I think that, as you point out, mental health is fairly resilient in a recession, much less impacted compared to med/surg facilities. So as I thought back about our occupancy and volumes in my prior company, and I think individuals that, frankly, were with PSI previously, the occupancy and volumes stayed pretty stable actually. And they weathered the recession without a lot of disruption. I think actually, we might see a different component here, which is the Medicaid expansion, which was not really in place during the last recession to any large degree. I think that -- we think demand and the pent-up demand is going to be a factor as we weather this and as we go through perhaps more individuals losing their employment. We really think that the demand factor because of the nature of this was not just economic, but because of the nature of the self-isolating at home, both here in the U.S. and the U.K. that, that will be a factor in us being more resilient because I think that there was a medical component, but there's also a mental health component to what everyone has just gone through. And so we believe we're going to see an increase in demand as we go through this. Do you want to add, David?

And just on the clinical labor side. In the U.S., I think we've seen our employees just provide a tremendous level of service over the last several weeks and have not had an issue with our staffing here in the U.S. In the U.K., we did have a higher level of staff absences. And we're able to manage through that and really saw that peak in early April, but that was a greater challenge there. But the team has done a great job bringing those workers back. And really, we have seen some positive trends on the labor in the U.K. from a recruiting and retention standpoint, and we see that actually improving. As we are emerging, we think there will continue to be more recruiting opportunities for us in the U.K. to make further improvements to our staffing position. So just a good labor environment at the moment in terms of us having the staff for our services.

And I think, Whit, one thing that I think is a factor here is individuals want stability certainly with all the turmoil that's happened. And I think that what I saw in the last recession, and also I think we're seeing it now, is individuals want to keep their employment. We may see nurses want to stay in the workforce a little longer, and we certainly saw that during the last recession. I know in talking with the management in the U.K., they feel like people would rather have a stable full-time position rather than work for an agency or for -- as a registry employee. So their turnover, as David mentioned, has improved. And I think people just feel like, "I want to stay in a stable environment." And we see that here in the U.S. as well, where full-time employment is something that I think our workers want to make sure they keep. And we certainly will need them if we see this surge in demand, so there will be opportunity. Even with mental health tech, I think that might be losing employment in other industries to -- for us to train and use in our facilities.

Yes. And thinking about the demand that you may see increase on your business, I think you have maybe a call center operation within your addiction business. Maybe I'm incorrect. But is there any anecdotes that you can point to around evidence that supports a view that we may see increased demand for mental health services? I'm not sure about social media leads or anything that you may be looking at real-time.

Well, and I think real-time is the key because, yes, we do have a call center, and we also have a marketing platform that does allow us to see our data real-time. That helped us manage through this crisis, frankly. I think there's 2 components. One is just the experts that are looking at past SARS and other pandemics and how the mental health -- those that had mental health issues cope with that. There's demonstrated increase in mental health treatment and those needing not only substance use, but also just treatment for depression, suicidal ideation. But I think the other thing that we look at are just our own crisis line, but also the SAMHSA hotline. There's been a 900% increase in March call volume. That's continued into April. So individuals, I think, as they were staying at home and they were making sure that they were staying inside, safe, I think that what we will see and what we expect to see is that's not able to be postponed for any length of time. So our experience in the past, and my experience certainly, is that we will see the impact on really the most vulnerable through this. And I think that in the U.K., the NHS has identified the same dynamic. We have a crisis line that we did start a hotline, because as people transition from more of the fear around seeking help, we have tried to provide other vehicles. We are doing calls with our former patients and doing well checks to ensure that they are still coping as they go through this. So we've got a number of initiatives that are just making sure they can access help when they need it. And also, keeping in touch with referral sources, which we've done virtually through using telehealth and other mechanisms, which we plan, frankly, to continue those even as we move through and out of this. We think those have been effective for us to reach a larger number of referral sources as well as patients.

That's all super helpful. I think a number of us are going bananas, so I think we can all relate to this. CARES Act. Any update, David, around the money that you've received? I wasn't sure if you have gotten any more or not.

At this point, we do not have a significant update than what we talked about as part of our quarter earnings release. We did receive $20 million of the initial allocation. And I think around $70 billion of the now $175 billion for health care providers has been allocated. We are very closely monitoring that remaining allocation. We did have our acute facilities receive that $20 million. So there's a part of our business where we are still trying to get funding. And that's mainly for our specialty business and other service lines that did not participate in the initial allocation. So we're evaluating the criteria, going through the attestation process. We do believe based on the lost revenue and expenses we've incurred around supplies and other costs that we should keep substantially all of that $20 million. And then, of course, separate from the $20 million, we've had other benefits that are more from a cash and balance sheet perspective, mainly relating to the Medicare advance payments and some other tax-related benefits, and that's about $80 million of second quarter cash benefits in addition to the $20 million. So we're still closely monitoring it. And -- but that's the update we provided in the quarter, very similar to how we would summarize it today.

Great. Medicaid. I wanted to go back to this just for a second in the context of the recession. And I think FMAP matches have gone up to some degree for states, but a number of articles and press reports out about the strain that this will clearly put on a number of budgets. Maybe it's too early to comment. But Debbie, just any thoughts about what this may mean for your residential treatment business and how states may or may not respond. I mean maybe you see more of a federal response to give additional money to the states, but just wasn't sure what your view was today.

I do think, Whit, that it is early, and we haven't had any discussion on rate cuts with states at this point. I think that each state will handle their budget differently. Frankly, we're in 40 states. We're very diversified. I like that about Acadia that we have such a wide geography that we cover. But I do -- we believe that because this is more of the vulnerable population, that states would not go to mental health as a first line to cut. I think that we're going to watch it very carefully. But I do think, again, back to demand, that I think that's going to factor into what states might look at as far as possible solutions to this. And I have and we keep very close contact with just what's happening in Washington. And we do think there could be further relief or stimulus to support the states, which would certainly be helpful as they go through this. But right now, it's probably early, and we certainly haven't had signals about cuts.

Great. I want to transition, make sure we get enough time to devote to the U.K. operations. Obviously, the situation with COVID has added some complexity to the sales process. What are you looking for to resume the process? And maybe just an update around what you learned the last -- this last process when you were soliciting bids. And maybe how you think about changing the strategy? Just any update around just the thoughts around the divestiture of the U.K. business.

Well, I'll take a part of that question and then David can add. But I think we have continued dialogue with the advisers in the U.K. And as we announced, we suspended really until market conditions improve there. I think that what I consider to be positive is that the interest levels in Priory remain strong from our potential buyers. I think that, certainly, as you look at the demand that could happen there in the U.K., I think that Priory is one of those assets that's very well positioned. So as the U.K. and Priory transition out of the crisis, I think that what will happen is there will be really validation of Priory strength and of the service lines. Certainly, we will continue to view this as a way to maximize value, and that has to be in place. But we feel that the advisers, with their contacts with these potential bidders, have validated that. I think they want the opportunity to go back into the process. We were in the second phase of it. And I think that there's certain due diligence that needs to be accomplished with respective management team as well as site visits, which we determined was not feasible, and certainly, with the country and the stay-at-homes, it wouldn't have been possible anyway. So that is one factor. And then, David, do you want to talk a little bit more about the market conditions?

Yes. In addition to just the logistical challenges there around the final steps of the diligence and facility site visits, the financing markets, I believe, have improved recently, but we still want the improvement to be at a point where an acquisition transaction like this could be accomplished. And so we're just waiting to see that, the healthy debt market to support the financing of an acquisition transaction. And hopefully, the markets there continue to improve. And at that point, we will evaluate the time line for the transaction.

Okay. Maybe talk a little bit about how that business Priory was performing relative to plan through the first quarter. And an update around some of the retooling efforts, kind of a new word for all of us, and I think yourself as well. Where you are in that process? I think it's probably been delayed a little bit, but wasn't sure if you're still targeting the same retooling numbers that you've talked to in the past.

Well, I'll talk a little bit about the retooling, which, you're right, is a different term that's used there in the U.K. But I think we just had really a slight delay with -- it's a few weeks. I think construction continued until the country implemented the stay at home. But last week, construction started back. That was one of the areas that was allowed to reopen there. I think we're going to be on target for the beds. We expect that we will reopen them by year-end, which was our time line. We actually opened 24 beds in April, and we did that with a block contract with NHS, which I think we're going to continue to see that happen as we bring -- and it's our objective, as we bring the retool beds back online to obtain block contracts, which is really helping us ramp back up. It's an assurance that we will be paid for those beds, which, again, I think, goes back to -- really back to NHS and just this understanding that they want to make sure these beds are available to them for the services that we provide. So we don't foresee any obstacles to do that. I think that our staff, as David mentioned, we had a large number that were self-quarantining through this, but those numbers have been -- that they have declined pretty dramatically over the last few weeks. So I think we're set for the retooling. And David, do you want to talk about the first quarter?

Yes. And we have seen positive trends in the business. We mentioned the labor trends gradually improving. And early in the first quarter, we certainly saw that. A lot of our occupancy growth was projected to happen over the course of the year. Part of that was around the retooling beds coming back online. So the volume trends were positive early in the year. And we're still positive. We may have a disruption in the timing just given some of the short-term length of stay services, have seen about a 5% decline. And so we think that can rebuild fairly quickly. So the timing looks different. But I think where we projected this business to be, continues to be our outlook and was supported by the trends that we saw early in the quarter.

Okay. On the block grant, just to make sure that everyone is on the same page. It's kind of like riding a tube and a lift, we don't always understand the terminology. There's revenue that's associated with these programs, right? So the NHS will pay you money to help assist in the retooling efforts, correct? Is this the way it works?

No. I'm glad you asked the question. Let me explain. The block contracts occur right usually before the reopening of the retool beds. And it's basically a contract that allocates a certain number of beds for NHS or for local commissioners to utilize. And there's no regard to how many are in those beds. Those beds are paid for at a negotiated rate. So if you are reopening 24 beds and you are ramping and you start ramping census up, you're paid for the full 24 beds despite what the number of census. Obviously, NHS, because they have these block contracts, believe they will use them and they will fill the beds, but it just allows us some -- a little bit of room to get occupancy back up. But at the same time, we're being paid for all of the beds by NHS or the commissioners.

Okay. I want to make sure I cover everything that was important here. Debbie, about a year ago, I think you provided a target for some cost-saving opportunities that you identified in the organization. I think maybe $20 million over a 1, 2-year time frame. Any updates around that opportunity? Do you think it's bigger, smaller? Is it delayed as a result of this, or no change?

No. I think that we -- our initiatives are on track. We have benefited from the change to our new GPO and our purchasing group. We put a procurement team in place at the end of last year, which has frankly been integral in really obtaining the PPE that we needed to make sure our facilities, our staff and patients were safe. We're making progress on the operational initiatives that we targeted. And we expect to be where we projected, which would be to realize at the end of the year $10 million in savings. I'll say also that, as a part of this process, Whit, last year, we put in a framework to manage our staffing in more of a real-time basis. We set up a dashboard which includes weekly visibility around our staffing as it relates to volume. So as we've gone through this, I think that has helped with just the impact of the pandemic. And while we can't match it exactly, our team here just did an outstanding job of really managing staffing to volume. And it's because of what we put in place last year around our whole performance initiative and using those tools to work our way through the pandemic.

Great. Also, I wanted to talk for a minute around the joint venture opportunity. I think you've been increasingly optimistic and bullish on the level of engagement and dialogue with a number of high-performing health systems looking to extend a service line around behavioral. Do you feel better about this opportunity going forward? Do you think that the pandemic will inevitably delay a lot of these conversations? Are you seeing any delays in some of the current projects that you have underway?

I think I said earlier that I was actually surprised at how active the discussions have been. I know they were very focused on just getting through the pandemic, but the team that we have focused on our joint ventures has stayed very busy. And so I don't see really a decline. I do think that we are hopeful we can announce several of these soon. We're working through the final stages, but it's not been a situation where I think our partners want to start to slow our discussions, our process that needs to take place before we can announce. It's still, I think, is a solid strategy for us because it allows us to enter the market with a partner. And I do think our partners and the potential partners believe that it's going to help them position for growth and really don't want to stop this. In fact, a few have actually, I think, stepped up their efforts, which -- we have over 30 in the pipeline. And I think that those have continued to be very viable and very strong for Acadia.

Yes. Can you remind me the economics on the joint venture? I mean you commit the vast majority of the upfront capital into the construction process. You're pursuing all of the -- I mean you're the one handling all the managed care contracts for the most part, I think, so it doesn't take a lot of time with your partners, I guess. I'm just kind of wondering the -- how you think about returns and just any change as it relates to the returns on them.

Yes. The ownership percentage can vary from one partnership to another. In general, I think the average for the joint ventures that we've -- that we brought online so far is somewhere around 75% Acadia ownership. And we do manage the day-to-day operations using the resources that we have at Acadia. And that includes payer contracting, putting the staffing in place and the other aspects of the day-to-day operations.

I think the advantage of the partnership is that you have a strong local brand, and they usually have an existing patient stream. So as we are entering a market, it allows us to accelerate our ramp-up of the operations because you're usually folding in beds that come from your partner. The other thing, while we do handle the negotiations with payers, we're able to leverage their position in the market as well as we look at payer rates. And so we think it still allows us -- while de novos, I think, are good, where you don't have a strong partner in place and there's an under bedding situation, I think with joint ventures, what it's done is allow us to really enter that market with a strong player. And in several of the joint ventures that Acadia has done in the past, we've actually added beds over and above what was contemplated on the front end, just to show that I think, over time, they've been favorable and really a solid strategy for the company.

Great. Last that I want to talk about. What do you think is the right -- if we look at Acadia 3 years, 4 years, 5 years from now, what do you think the capital structure, the balance sheet, the leverage looks like? What's the right level of capital that you should be spending a year? I mean I think you're running kind of double digits as a percentage of revenue, and that's probably not a fair way to look at it given the substantial spend that you have in this joint venture construction opportunity. But how do you sort of envision the balance sheet and capital spend 3, 4, 5 years out?

Well, I think, first of all, on the leverage, we do intend to lower the leverage for the company and have a capital structure in place that does give us more flexibility while staying at a lower leverage ratio. And we have not yet set a target given the pending U.K. transaction, but we do intend to be at a lower leverage. In terms of our cash position, of course, we have a significant amount of what we consider free cash flows that allows us to look at those investment opportunities and existing facility expansions as well as the joint venture and de novo transactions. And I think we are deploying more than $200 million a year into those opportunities. And we think that opportunity will continue. But we do have a lot of discretion with the $400 million or so of annual cash flows that we have. And expect going forward, even several years from now that, that would be the primary use of our cash flows.

Okay. One of the unique characteristics about the behavioral business has been the vast number of, call it, policy tailwinds that have been building around the industry where, I kind of say every payer has to pay more for the service, enhance the benefits and stop restricting care. You had the United lawsuit or case last year that I don't think had a tremendous amount of attention. I think it was with or versus UnitedHealthcare ironically. You've got a number of state waivers with substance use disorders within IMDs, the SUPPORT Act. Debbie, what do you think are the most important pieces of policy or legislation that you think will continue to shape a favorable demand curve for the industry?

Well, you mentioned the IMD. I think that, as there's been more flexibility to the states, to the waivers, I think that's very positive, because the freestanding behavioral facilities should be able to treat those that need care as adults. I think that, that's a positive, that it certainly played out. I do think that the Medicare coverage for opioid use behavioral disorder treatment is very positive. You give a group of sometimes under 65, those that are disabled, as well as those that are over an opportunity to access this kind of care. So I think those are favorable legislative acts that I think have been tailwinds and will continue to be. The other thing I'd just mention is just the change in the modified regulations for telehealth. And while it's not exactly a policy, it's certainly, there were a lot of regulations, and frankly, reimbursement, that were not necessarily matching, I think, the move and the focus on telehealth. So I think whether those will -- those changes, hopefully, most of them will be permanent. I know here in Tennessee, Blue Cross Blue Shield just announced that they will be a permanent part of coverage. And so at Acadia, we will use telehealth for assessment, referral, contacts, and certainly some of our partial and outpatient services as long as these changes stay in place. It's not going to replace -- telehealth will not replace a secure inpatient setting. So I don't see that as changing our business model on the inpatient side. But I do think it opens up opportunity for an additional patient population that perhaps would like to access care in this way. And I think we've seen through this, I guess, one positive is that I think that professionals are becoming more comfortable with it as well and using this as a way to deliver care really more around the outpatient and even the partial setting. So I think that's favorable for mental health. And certainly, I think that as we see what happens with the rates, people will keep this in place if there is -- right now, we're paid the same rate for a virtual visit as we would in in-person visit. And if that stays in place, then we'll continue to use this.

Yes. So we're almost out of time. I have maybe one more, just a follow-up on that line of thought. Just the payers certainly have come out and have enhanced a lot of benefits for their members. They're eliminating co-insurance for at least primary cares, certain mental health visits. We hear that they've relaxed around pre-authorizations and prepayments and denials, et cetera. Can you maybe just spend a minute talking about your experience with the payers in this environment? Have they been particularly helpful? Any comments would be great.

I mean I think they've been very helpful. They have recognized that we're all going through this crisis that was -- no one's ever been through. I think that in our discussions with them, and David mentioned it earlier, we've actually had them, without even being asked, volunteer to do advanced payments for us. I think that also just because I think they're trying to let us focus on what we need to, to get through the pandemic, I think they have been very collegial in what they have done from with respect with reviews and other things. I know that they still have a business to run, and we certainly have one as well. So we all -- we believe at Acadia of being collaborative with the payers, and they've certainly shown that they are collaborative. Our receivables and our revenue has not been interrupted in any way. So I think they've really gone out of their way to help us weather this. Do you want to add anything, David?

Yes. That's exactly right. They've been very supportive through this. And I think it speaks to the long-term relationships that we've built even before this.

Yes.

Well, great. Well, I think we'll just leave it there. We're a minute or 2 past, I think, our designated time. So Debbie, David, Gretchen, thank you so much for joining us today. Glad everyone's doing well. Thanks for everything that you're doing. And if anyone has any questions, please reach out to myself or my team. And I hope to see everyone at some point. Best of luck, everyone, and thanks again guys. Really appreciate it. Bye-bye.

Thank you.