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

Frank Morgan here. We're back with our next fireside chat with Acadia Healthcare Company. With us today, we have the CEO, Debbie Osteen; along with CFO, David Duckworth. Welcome, guys. Thanks for being at our conference.

Thank you.

I thought what we might want to do first is really start out more at a high level, and we'll drill down from there. But basically, let's start off talking about maybe the overall regulatory and reimbursement backdrop for your business. What do you really see out there from a regulatory standpoint on the horizon that we should be aware of, both good and bad?

Yes. I think, Frank, it's been very stable. And I believe that there are some positive trends that we can mention. The survey process and regulatory process continues, and it really did even through the pandemic, more focused around infection control. We've got a very strong clinical team here, and they did very well with those surveys. But just generally, I think the one that I think about, and it's not -- I think a lot of discussion about is just the change in telehealth that I think was favorable for certainly our industry. The expansion of just the reimbursement and allowing some of the more fluid across state lines as well as just the regulatory environment around telehealth itself getting relaxed was a positive. We believe that there is discussion right now about how that's going to be in the future. But I do think that we've turned a corner with telehealth. And we think it's a way to really expand what we're doing here and also to really give another access point to the patient. If you think about the new administration, and President Biden, I think before the election, and I've been pleased to see even after, he's very supportive of mental health. And he's also very focused on trying to eliminate stigma but also enforcing parity. And parity was passed in 2008, it was a favorable for the industry. But really the compliance and reinforcement of that, I think Biden has done more around that. And just recently, he is requiring the managed care players and insurance companies to give a report about how they are complying with parity. And I think that just seeing that and having them go through the exercise of showing how they are complying is a favorable for our company, but really the whole industry. And then from a reimbursement point of view, I think that there were some things done certainly in the previous administration and the support for patients and communities, which what that did, Frank, is it really mandated coverage for the medication-assisted treatment. For Medicaid, that was put in place in October of 2020. There were a lot of states that moved that actually and accelerated it. And then the Medicare coverage that was mandated, that started last January 2020 for the MAT services. And I think just to me, the general climate and focus has been how to support mental health. There's such a dramatic need and that's only escalated with COVID and what a lot of us have gone through. In adults, 50% now say they have an issue with mental health or substance use. So if you take that, I think, fortunately, they've seen the administration to be looking for ways to support that through, not just federally but through the states as well.

Got you. Well, let's go back on the telehealth side. What were you able to do that you had not been able to do previously? And maybe give us some examples there. And then -- or any of those provisions, are those -- do those have a termination point? Or do you think those would get extended?

Well, for -- the first is when we're reimbursed for those services. So what I think, even though there have been a lot of discussion about telehealth, the reimbursement was not matching the dialogue. And I think that what changed with the pandemic is allowing practitioners to offer telehealth in lieu of an office visit and getting paid for that visit. And I think that -- and also the state lines, there was a lot of restriction about what could be done and whether you had to be licensed in certain states, so that changed as well. But we also used it really as an access point for assessment of who needed to seek our services. And I think, again, the reimbursement around that was favorable, and they made an effort to make sure that they were trying to pay for these services rather than the in-person with partial and IOP. CMS has said they're going to continue to pay for these services. I'm sure there'll be discussion around what they pay and who they pay. But overall, I believe that most, if not all of the managed care plans, will also have some coverage. And we're certainly advocating for that to be as it was last year because I do think -- when we think about access to our services, rural areas and other -- even just across our states with our national programs, it's a real positive to be able to assess and also then even offer services through telehealth.

Got you. What -- did CMS lead on this effort? Did the managed care or the commercial market follow? Is that how it worked when the...

Yes. I do think they were a leader there, Frank. And I think that was a very positive thing to show that they saw this issue of people not being able to access being stay-at-home orders and other things, and really stepped forward. And I do have to give the administration credit for that. And then as you said, the other payers followed that, and we're also very supportive of it.

Got you. And the actual reimbursement that you got -- so on the government side, this included -- if it were Medicare, if it were Medicaid and then you say the commercial side followed along with that. What were the rates like? Did you get paid equal as if it were an in-person visit or an assessment? A normal office visit or an assessment? Was the rates the same?

I mean I don't know all of the rates, but I can say generally, they were comparable with what would have happened if you've gone to the office. And I think that was what, I guess, was the catalyst for some of the telehealth companies. But also really just physicians that might not have used it before because of reimbursement, and maybe they're not being as comfortable, the catalyst here was that they were paid the same rate as they were for the office visit.

Got you. You sort of touched on this, but maybe if there's a need to expand any more, any other thoughts down at the state level. If you look at state-based reimbursement programs, and even looking at the managed Medicaid part of the market, are you seeing anything there that's notable?

No, it's really been very stable. I think the states recognized the importance of mental health and just the fact that they need to be supporting that through reimbursement. So we've -- yes, we've seen a lot of stability there. I don't know, do you want to add anything, David?

Yes. We have seen positive coverage trends and support at the state level for access to mental health. And we saw that last year in our CTC service lines, where Medicaid, who's been focused on the opioid epidemic, is really focused on improving access within those state Medicaid plans. And was required to do that to begin covering, if they weren't already, medication-assisted treatment. So coverage at the Medicaid level continues to be stable. Within our acute business, coverage is stable. We're seeing most of that at this point is managed Medicaid plans. So we're very diversified within our Medicaid and across a lot of different payers. And we've seen a lot of stability and positive coverage trends throughout the different components of our state-level reimbursement.

Got you. I know we touched on the commercial environment to some degree. But have there been any observed changes in the view of commercial payers with regard to utilization management? Obviously, they've opened up on telehealth, but any other alternative treatment modalities that are out in the marketplace today?

Go ahead.

Well, I think we're focused on long-standing, strong relationships with our commercial payers. And we've seen a lot of good support from those payers over the last year continue to see strong rate increases from those payers. And I think the way we work with them, and the coverage that they provide has been very stable. We -- our team, I know, is focused on working with them as we admit a patient going through the medical necessity evaluation and all the processes that the different payers require. And so we've had long-standing good relationships with them across those commercial payers, and it's been stable for us.

As far as the utilization review, Frank, I mean, we didn't see a big change there. I mean medical necessity is required for inpatient and that level of care. And I think our team does a good job with making sure that we document that medical necessity. So I think while they've been collaborative, they have their part. And we also want to make sure that the patient gets the right level of care. And so there hasn't been any pressure. I think that is really appropriate for a patient. If they don't need inpatient, they need to move to the continuum. And we really have, I think, good relationships with the payers over a period of years, and that continued through the pandemic, but not a marked change, at least from our service lines in their behavior or views around mental health.

Got you. Maybe we'll switch gears a little bit here more to growth. You recently noted that the pipeline for JV opportunities includes about 30 projects -- or potential projects in different stages with 4 or 5 of those may open as soon as next year. So is there anything new that you're seeing in the JV strategy? Is there more or less of an interest on the part of local systems to participate in JVs? And what -- to date, what's been, you would say, really the pros or the cons of having JV relationships?

Well, one thing I was surprised about during COVID was the fact that our -- we have a lot of conversations going on. And we have -- as you said, we have a very robust pipeline of JVs. And really, what we saw rather than them focusing on COVID, which I know they were doing, our discussions continued and actually, this area, this growth pathway has actually accelerated for Acadia. We do have a very strong track record. We have 7 partnerships. But we have announced in the last year and then this year, 5 additional partnerships. But you layer onto that, the process is usually after we're chosen -- and that's done usually through a competitive RFP process. After we're chosen then we sign an LOI and its agreement to come to the final partnership agreements. And we do have several that we have not talked about yet. But we think that the advantage to working with a partner and a system, as you look at just whether to be build a de novo or to do a JV is that it allows us to enter a market that's attractive. You have an important system that you're partnering with. And as we do that, it really has expedited the ramp of our opening of facility. A de novo takes a little bit longer. If we don't go in with a partner, they're usually closing their beds and they're moving into the joint venture. And it also helps with staff because they also have staff, and we are very open to bringing them on to our partnerships. The other thing I think that we see as a pro and an advantage is we're able to leverage their managed care and payer relationships. So if you have an important system, they have good relationships with payers, and we're able to leverage that. That's a real positive for us. And certainly, as we ramp up, it's a positive. I think the other thing I'll just say is, I think this is where health care is moving to integrate the physical and mental health and look at that as a whole. Our partnership with Geisinger, they have a health plan. And so they're interested in inpatient but also that continuum. And I think that we're getting chosen -- Geisinger was a competitive process. It's an important system in Pennsylvania. But we're chosen because our other partnerships are positive and also the fact that we have expertise in the area. And we believe it's actually going to accelerate that growth pathway because I think these systems are seeing where the future is, but also just needing to focus on other areas within free use of their capital. We provide capital, the expertise and management. And also we're able to provide expertise around the design of the buildings themselves, which is something that we've done a great job here with. And we do a very good job. We've really tried to design something that's very safe but also very pleasant and pleasing to the patient, who don't stay with us very long, but we want to make sure the environment's right.

Sure. We know it's interesting as a -- you make the comment about how they really want to think more about integrating the behavioral with the traditional medical care. I know HCA who talks about being a large player in behavioral health care with a lot of units. Do you think the prevalent model -- I guess, maybe HCA aside, the prevalent model going forward will be the sort of the freestanding model, the partnership as opposed to the unit-based model, and they think they can meet their needs by having this relationship and doing it through an integration model?

I think that it will vary by system. I think there may be -- there certainly are med/surg systems that have units and may choose to maintain those. But I think what we have seen is just -- it just makes a lot of sense for both of us. So we come in as a pure play. We're focused on behavioral. They are a large system. And if they have a unit, and they see demand, we're able to work with their ERs. I think it just makes a lot of sense for them to have a piece because they want their mission to be fulfilled. And that -- the vetting of the partner and our company is -- can be a process. And I think that what they -- those systems that we are talking to and those that we've announced really feel like it's a win for them because sometimes these are not financially viable for them, and we're able to bring in not just the clinical part, but also the financial expertise to operate these hospitals. And they benefit from that, and they also fulfill their mission.

Got you. You mentioned in a lot of cases, these are competitive bid situations to -- as they go out to pick their partner. Who do you normally see in those -- who are your competitors that you most commonly run into in those processes?

Well, there's a few companies that I think are doing more of this. I know when I was with UHS in my previous life, it's -- this was an area that I started there. And because I think we can see that there was going to be a need for this and certainly a lot of movement towards the physical and mental health. So certainly, there are some bigger players like a UHS. But also some smaller that might see it as maybe more of a regional opportunity where they have a presence. But generally, the partnerships and dialogues we're having, they're looking for someone with this strong track record. And also, they visit our facilities, and they visit our partnerships, make -- they want to see the physical but also talk with the people that work within our partnerships. And so as they make their decisions, I think it's around who is our best partner to add this expertise. And then we want to make sure that our reputation and our mission is preserved. And we've been very pleased that they've chosen us, the ones we've announced. And also the ones that we will be announcing will be partnerships that I think you'll see really a way to get into a market where they are strong, and we're just going to add to that with the mental health focus.

Got you. Speaking of UHS, your largest competitor has talked about labor as a gating factor for their ability to grow. How are you able to meet labor challenges and to meet demand for services in your markets? And what is your perspective there?

Yes, Frank, we have always been focused on labor and had recruiting and retention initiatives in place throughout the company. Facility level, with a lot of support at the corporate level. And of course, we're located across 40 states. It can look very different from one market to the other. And there can be challenges from time to time. But we, I think, have done a great job just keeping it stable, making sure that we have the labor to support the volumes that we see. And I think we've done that through strong local leadership. That's important to our employees to have that and to be part of something that I know they believe in and are passionate about. And we've always had a focus on recruiting and retention initiatives. And I think what we've seen is even though there can be some temporary challenges, especially in the last year where from time to time, COVID had an impact on our supply of employees. But we've made sure with the focus on it, that those challenges are very much temporary. They've been isolated for our company. And it's a credit to our recruiting team, to our operations team and really our facilities who've worked through a challenging environment. But really kept our labor really consistent, really stable, even though we have seen from time to time those challenges. But we want to be the employer of choice within all of our communities. And so that's been our focus. And I think we have a -- with that focus over the last several years, have really done a great job there.

I think local leadership makes a difference, too, Frank, and just having that strong -- people work for people. And -- but we've also tried to be proactive. We're just making sure we're competitive with our wages. We do use overtime and agency. It's a small -- like 2%. It is actually down a little bit. But as we look at just our markets, we know there's competition. But we also know that it's important that we have the strong leadership with the CNO and the CEO there. And we're -- we've done well with that and not had to limit our growth with our bed additions and the other initiatives and openings that we've had. We've been able to pace those and actually exceed some of our expectations.

Right. I'm sorry, I did not catch what you said about agency about where your -- you said -- I heard you say it had dropped back down, but can you maybe reiterate your comments on the contract labor agency layer?

Sure. It's about 2%, and it's actually down from the prior year. We've had a real focus around making sure that we use agency only when it's absolutely necessary. And I think the team has done a good job of making sure we have that stable full-time base, using part-time as well. But agency is used as we need it. But we don't have a big percent. It's 2%.

Got you. I know as we were preparing to go live with this, we were talking about your successful exit from your U.K. operations. But I'm curious, now with your focus back here in the U.S., is there any portfolio refinement we might expect to see on the U.S. side as you evaluate what you have and where you want to deploy capital going forward?

Frank, I think as we completed the strategic review that we went through in 2019, of course, that led to the sale of the U.K. business, which we were very pleased to complete and position us well in the U.S. But as part of that, we also looked at our U.S. facilities. We did close a few small facilities, not really material, but I think that improved our positioning and improved the markets that we wanted to be in the service lines across those markets that we wanted to be in. So we've done some of that. We, of course, to some degree, will always evaluate whether there's an opportunity there. But we are currently very pleased with the facilities we have, the markets we're in and the platforms we have across our service lines. So don't expect that there's any further activity there based on the performance and the services we provide right now.

Our growth is probably more focused around acute just because there is such a strong demand, and our bed additions are usually in acute. CTC has also been an area that we've actually accelerated our growth. We're going to open 11 clinics this year. But as I think about last year and just the diversification that David talked about, I think it served us very well. And it really covers the whole range of behavioral health with all -- opportunity in every one of them but also demand very strong in every service line. So we feel good about what we have, and we want to grow it.

Well, that's good. You actually answered my last question, which was the mix of the business in your portfolio today. It sounds like you're happy with where that is today. And proportionally, you'll probably keep the same balance.

I think that's right. I think as we -- as I said a minute and David also mentioned, acute is probably the area that will grow a little faster just because of the JVs and de novos and the expansion beds.

Okay. Thank you so much. We're at the end of our time. I wish we could keep going, but unfortunately, the timer is going off. So thanks both of you, Debbie and David, for being here with us today. And we will definitely stay in touch, and have a great day.

Good. Thank you, Frank.

Thank you, Frank.

Okay. Bye.

Bye.