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

All right. Good afternoon. Welcome back to the UBS Healthcare Conference. With me on stage here today is Acadia Healthcare, one of the largest providers of behavioral health services in the country. Joining me is CEO, Chris Hunter -- new CEO, Chris Hunter; as well as Chief Financial Officer, David Duckworth. My name is Andrew Mok, and I am the health care providers analyst here at UBS. So gentlemen, welcome.

Thanks for having us.

Thank you.

Great. So Chris, as the new CEO of Acadia, can you help us understand how your past experience, most recently running the group and specialty business at Humana might shape the forward growth strategy of Acadia?

Yes. No, thank you, Andrew. A few things I'd say on that. I think just having a payer perspective is helpful in a lot of different ways. And obviously, I did run one of the business lines that you mentioned, but I also was Chief Strategy Officer for 5 years and got to see a number of different things. And I think as we're thinking about Acadia in the future, I think just the perspective around how payers think of the world, their expectations around actually proving outcomes, particularly for value-based constructs, which is a little early in behavioral health. But just also how they see the world, I think, is a really good perspective to have. I think also, I was able to do some things at Humana around partnerships with some innovative, young technology companies, put together the first virtual health plan before COVID with the Company Doctor on Demand, and we're able to do a number of innovative things with companies like Accolade, et cetera, to help grow the business that I think are relevant. But I think the biggest thing is just having a payer perspective and seeing the challenges that we had with access to care and just quality mental health was something, whether it was the employers that we served or the TRICARE military beneficiaries, the 6 million members in the East region that Humana had, it was just a theme and a challenge that came up repeatedly. And so I think having an understanding of that on the payer side really will serve me well and hopefully, the company well as well.

Absolutely. And are there any services or opportunities that jump out to you as you kind of assess the company with the new lens that may be underinvested or underpenetrated today?

Yes, I think it's a really unique situation to have 4 lines of business with such significant demand tailwinds for all 4. I think the 1 area that I think is a particular opportunity is around our joint ventures where Acadia has been able to announce 7 today. There's 9 that have -- 7 that are operational, 9 that have been announced. And then we just have a growing pipeline of opportunities where we can partner with a large health system in a market to put together a facility and to serve members much more quickly. And I just think, given the demand that we continue to see where these partners are coming to us and they don't have the expertise around behavioral health, but they're also bringing a lot with a strong brand in that market, clearly, the clinical staff, strong payer relationships, that it's a really nice partnership. And we'd like to see those even move more expeditiously.

Got it. And maybe talk us through how you source those JV partnerships? What characteristics or criteria are you looking for in new partners? And what are the benefits that you bring to the table?

Yes. I think there's always a series of criteria in every market, and health care is different, health care is local. But we start out by looking at the dynamics in the individual market. We look at the brand strength. Sometimes, if there isn't a health system, we'll look to do a de novo facility. But if there is a health system and they have strong recognition, we look at the level of competition, we look at payer relationships. We look at community relations. We look at the potential referral business that they'd be able to offer. There's just a whole series of dynamics that we take into consideration. And ultimately, there's a bit element, too, in terms of hearing them talk about their strategic vision and where they're trying to take their respective plans and how that fits with us. And I think it's just been very productive in terms of sitting down and trying to align on the future, and they increasingly are very deferential to us and just the expertise that we're able to bring being so focused on behavioral health. And it's just been -- it's been a very good and productive partnership to date, but we continue to build this pipeline and we'd like to see it go even faster.

Excellent. Let's talk a little bit about labor. Acadia has delivered positively differentiated results on unit labor costs for the past year, while many other health care providers broadly and behavioral health care providers specifically have struggled. If you had to highlight the single most important driver of the company's outperformance, what would that be?

Yes, I'll start. If there was one thing, I would say it's simply execution. There are some advantages with respect to our mix of services and the staff composition that's related that we have. But we are very focused in working with our operators at the local level to ensure that they have support from our corporate services to ensure that they're getting the help that they need when there are staffing shortcomings, when there are clinical challenges such as COVID flares that have obviously happened particularly early this year. I think we have really done a good job. And certainly, the company had put in some very effective practices before I arrived to really ensure that there is a level of support that the operators can expect. And there is an expectation that they will come to us regularly and not wait when there are shortcomings and challenges in their local markets. We give them the resources that they need. And I think, it just -- it's good old-fashioned blocking and tackling and execution, but that really is what has enabled the company to put up the results that it has and I think that we'll be able to continue to do so into the future.

Got it. And has labor been a constraint to your volume growth at all? Or do you suspect that it may be going forward for the next several months as we still kind of come out of a tight labor market?

I mean we've been able to continue to work through it. I mean there's headwinds every day, no question, market by market, but I think the company has proven its ability to do so. I mean, David, I don't know if you'd like to add anything?

Yes. We do face from time to time, just as a facility encounters a higher level of COVID cases, for example, that could be the reason for a staffing challenge if they do have some of their employees that are out. And they do reach out to us, and we very quickly, every day, identify those facilities that may need support. That support could just mean helping them navigate the COVID challenge in terms of physically dealing with isolating the patients and having the right safety protocols in place, or it could just mean making sure we get the employees back quickly or recruit or have some level of staff to compensate for that employee absence. And we've been successful in making sure that we have those resources. I'll say, if we do encounter a challenge that creates a volume limitation, our goal is to make sure that it's quick, that we work through it and bring the right resources and attention to it, and we've been able to do that. We're in a lot of different markets. I guess we're 2 years into managing through the pandemic, and the team has done a fantastic job. And we would certainly say that the staffing challenges that we have encountered have been very market specific and very temporary.

Got it. That's helpful. And when we look at the BLS data, the most recent data points point to decelerating inflation in psychiatric facilities as well as increase in supply. Has that been consistent with your experience in recent weeks and months?

Yes, we have been -- the BLS data, I know has been a focus, and it's good to have a data point like that out there for investors to look at, analysts to look at. But we have not been tracking to the BLS metric. There's a number of reasons we think for that, just the sampling of our facilities that are represented in that metric is very low. And as we -- we're also in different service lines, so the industry codes can differ compared to that BLS metric. But we have looked back actually over a longer period of time, 5-plus years, and we have never tracked exactly with the BLS metric. So we've had years where our wage inflation has been above what's reported. And then more recently, we've spent the last year being below that BLS inflation metric. And so I think that speaks to the different service lines that we're in, but also just historically the proactive approach we've had around pay. I think we entered the pandemic and the more recent challenges probably in a better place, and that's allowed us to be more measured with our wage inflation increases. And we also think the BLS metric incorporates premium pay. And we've gone through the last year or so with a lower level of premium pay than we think a lot of other providers that are reporting into that data. So we did see the moderation in the most recent month that was reported, but we haven't been correlated exactly to that metric over the last year.

Okay. That's helpful. And you mentioned strong execution, new hires as being a point of differentiation in some of these labor trends. Where have you had success in sourcing new hires or finding new supply for the psychiatric and behavioral services?

We have a great recruiting team at the corporate office, and we have local recruiting resources as well. And what our corporate recruiting team is able to do is really specialize in recruiting different types of employees and then also looking at our markets that may need more assistance and really bring additional resources to that market and what we may already be doing at a local level. And we've had success in recruiting the different types of employees that we need. Chris mentioned a minute ago, our different service lines all have a slightly different staffing mix and profile of what employees we need. So we are recruiting, depending on the service line in the market, different types of employees. It's not only nurses and counselors and therapists, it's other types of employees. And where we find them really depends on that employee type. And some are -- obviously, an RN is different than other jobs where you may have a wider pool of employees that you're pooling from. But our recruiting team locally and at our corporate level has done a great job just staying proactive and making sure that we have the staffing resources we need.

I would just add, when we do have a need, usually, it's around RNs, and that's usually on the acute side, and we'll use contracting partners for that and have very -- have built very good relationships there. But our dependence there has been relatively low compared to the industry, around 2% of labor.

And why is that? Why has the reliance on contracts labor been consistently low in that 2% range? Meanwhile, volumes and demand continues to be strong, the labor market has tightened up. How have you kept that contract labor so consistently low?

I think it's our proactive focus on recruiting is part of it. And I also think just a lower overall reliance on RNs as a company might be part of it. Certainly, in our acute service line, as we think about the mix of different types of nurses, we do have a higher mix of RNs. But in our other service lines, we do have a greater utilization of other clinical employees, but even other types of nurses. And usually, where we see contract labor, it is with that RN. So our staffing mix, certainly, we think, helps us. We're in a lot of different geographies. We do not see the need for contract labor across all of our markets. It really depends on of which market we're looking at and where they are with recruiting and other efforts or just where the market is in terms of the supply of nurses. But we've done a great job. I think it's through recruiting, and I think it's through the different service lines that we have.

Great. In early 2021, you unveiled a four-pronged growth strategy to underpin your 10% EBITDA growth target through 2025. So first, Chris, just wanted to get your take and impressions on that target. Do you still think that those are viable targets today? And maybe help us break down the components of that 10% growth, whether it's pricing versus volume? Or organic versus inorganic growth?

Yes, I would just start and say, I mean, I'm on week 6 here, and so still spending time working through it. But there's nothing at all that I've seen that would lead me to have pause on what's been publicly communicated before. I think there continues to be a lot of demand tailwinds, and we've executed well and we'll continue to do so. Do you want to talk about just the breakdown of the 10% EBITDA?

Sure. Sure. We did initially share that target in February of '21, and then had a number of announcements throughout 2021 that really laid us -- or led us to lay out the next 3 years of bed additions for the company. So the announcements that we've had, really throughout the last year-or-so around new joint ventures, will lead to bed additions within those joint ventures and within our existing facilities and other de novo facilities that we are opening. That volume growth through bed additions is the key component of our EBITDA growth expectations. We do think that there's 3% to 5% volume growth within our same facility volume growth and patient day increases. And then probably another 1% to 2% volume growth, it's at those new facilities that are not yet in our same-facility grouping, which is those facilities that we've had opened for more than 1 year. So as we think about it, that would be a combined 4% to 7% volume growth. And then in addition to that, we do think that there's pricing that will allow our volume to continue to grow. And we think the team does a nice job, as we grow our volumes, having margin improvement opportunities and efficiencies, which often come from just leveraging the cost structure. So as volume grows, it's at a higher margin. And so those are the other 2 components that really get from that volume growth to the 10% growth. And to clarify, that is without M&A. M&A can be more difficult for us to estimate at any given year what exactly it will look like. So that 10% is just from the growth pathways that are joint ventures, de novos and facility expansions.

Yes. I would just add, I mean, we obviously continue to look hard at M&A, both larger transactions and tuck-ins, and we'll continue to do so. There's a lot of opportunity in the business right now. From, to David's point, looking at adding beds in existing facilities, building out de novos, doing these joint ventures, there needs to be an appropriately high bar to get an M&A deal done, and the company has done a really nice job historically of setting those parameters, and those remain in place. But we do think there will be M&A opportunity over time.

Got it. And you mentioned pricing being a component of the building blocks to 10%. When we look at your recent pricing trends, it has been ticked up where it's better-than-usual rate increases. At the most fundamental level, what's been driving those better rate increases? Is it supply-demand imbalance? Better state finances? Higher cost inflation? Just what are the key drivers of that?

We did report in the first quarter a few weeks ago, a 6.2% revenue per day increase on a year-over-year basis. And that continued a strong trend that we saw in that metric throughout 2021. We, of course, are in different geographies, have a very diversified group of payers across commercial, Medicaid and Medicare and then our different service lines. But I think broadly across those service lines and payers, we have seen rate increases. And I think as we work with our payers on rate increases, we're talking to them about a number of longer-term initiatives and services that we're adding and just making sure locally and across the country that they understand Acadia, understand our local facilities and the value that we add. And I know there's a lot of importance from their perspective on the services we provide and the quality care that we provide. And so the -- just the demand would probably be the key driver of our revenue per day growth that we've seen. Of course, there are other factors like cost inflation that are part of those discussions and will be going forward more than historically part of those discussions with payers. But the team has been proactive over the last several years about getting consistent rate increases and making sure that the value of our services is understood at the state and the payer level.

Great. We talked earlier about the JV investments that you're making. CTCs are another area of increased investment in recent years. Can you help us understand the capital investment and staffing requirements for this business?

Yes. We are pleased with the performance of our CTC business, that is our medication-assisted treatment clinics for opioid use disorder. And we have grown that business to be 141 clinics in 32 different states. So we do have just a very strong platform and geographic footprint within that service line. We did open 10 new locations in markets that needed more treatment options in 2021. We're happy to see that level of growth. That was an acceleration from what we had done historically. And we think this year and the remainder of this year, we'll have, by the end of the year, 6 to 10 new clinics that we open. We've already opened 1 this year. So that's been a growing service line for the company. The investment into a new CTC does look different from an in-patient facility. It is typically a leased facility where we are investing, just build out for that clinic and what they need to make that lease space appropriate for those CTC operations, and it's typically somewhere around $1 million investment plus the lease commitment that we enter into. And Andrew, you mentioned the staffing of our CTC. It is different from an in-patient facility. The hours are different. So we don't have the full 24/7 staffing of those CTCs. And there are nurses that we hire. There's a physician, and then there's counselors as well as a clinic director. But the nurses, usually, you only need about 1 RN, and then the other nurses tend to be LPNs. So that -- it makes it a very different nursing profile compared to an in-patient facility that does have a higher level of RNs. And so it's a different staffing mix, different type of investment that we're making in those new facilities. But the team has done a great job just running that operation. It's full of opportunities as we look forward to what that service line can do for the company over the next several years, and we're positioned well with those new facilities.

Got it. And how should we think about the long-term revenue outlook and margin profile of this business? There seems to be record demand for these types of services and increased opioid abuse, even with -- even following some of the recent legislation. So just talk about the long term, what that means for this business and the long-term revenue outlook?

Yes. We do think that this service line will grow at a mid- to high single-digit revenue growth rate similar to the rest of our U.S. operations, and the de novos will be a key part of that. But then also, we do have capacity within our existing clinics to continue to treat more patients. And so that's a key part of the revenue growth. The margins are good in that business, similar to our other U.S. service lines. And so we're excited, the de novos and just getting those opened and ramped up will be an important part to continuing that revenue growth. You mentioned the disturbing updates around just the demand for that service. There's another record level of overdose deaths in the country for the most recent metric provided through the end of 2021. And that is a key part, we think, of addressing that issue is just getting more patients access to that treatment. And so we're focused on that in terms of how we grow, how we open those de novos, how we coordinate with the different states and cities within the states in terms of where more treatment options are needed.

Got it. And it's not just the drugs that you're providing in those facilities. It's also paired with group therapy and other ancillary services. Maybe talk to some of those ancillary services that are provided in the clinics.

Yes. It's essential because the counseling that we provide, the ability to have a trained counselor and physician and nurse interact with those patients as they come in for their medication, as they come in for their counseling and just really get an update on -- you can't just provide the medication because you don't, at that point, know exactly where the patient stands, and you can't really go more than a week-or-so without getting an update, making sure that there's not a situation that's changed for that patient. And then providing the counseling has always been, in our view, just a key part of providing that service. And so that continues. We've used telehealth some, where that's appropriate within that service line. So there's a combination of the medication and the counseling that we provide in the clinic and through the clinics to those patients.

Got it. And what level of patients are you treating in the average or typical clinic? What's the kind of a daily census number to point to?

Yes. We have -- in those 141 clinics, we do have over 62,000 patients that are being treated every day. And that would be the number of patients that have a daily medication, the counseling is not every day that tends to be weekly or biweekly, but that's around the number of patients that we have across our 141 clinics.

Got it. And there's been a lot written on the impact that COVID has had on mental health broadly. Can you compare and contrast the specialty demand that you're seeing with the traditional in-patient psychiatric hospital demand? Where are the key differences? And which service lines are most in demand coming out of the pandemic?

I'll start on that. I mean, I wouldn't say that we see higher demand for specialty than we do for in-patient psych. There just continues to be consistent demand across the board. And I'm sure many in the audience have seen the stats, but there were, before the pandemic, about 8% of adults had -- were diagnosed with a depressive condition. That's over 33% today, and we're at a situation where 55% of American adults actually that have a mental health disorder are not getting treatment today. So there just continues to be, unfortunately, a lot of demand in this country. I mean, obviously, fortunate for Acadia, but just societally, there will continue to be challenges. And history has shown that coming out of a pandemic, there is an escalation in mental health needs for several years on the backside of that. So we just can see -- we continue to see consistent demand. I wouldn't call anything out about specialty specifically. Would you add anything?

No. I think we certainly think, across all of our service lines, we're seeing an environment with increased demand. And we also see at many of our specialty facilities, there is a co-occurring or a mental health. And at many of our acutes, there's also a substance use co-occurring disorder that we're treating. So the important initiative for us is just developing the right programs for those patients, but the demand has been broad across all of our service lines and across all of the demographics that we really specialize in from the child and adolescent programs and up from there.

There's also been a growing number of behavioral telehealth options and outpatient services offered. How has that impacted your business or changed referral patterns for you?

Yes. We have a full continuum of care that we provide, and we have been focused on -- of course, for our acute business, that is the higher acuity. And we've been focused on adding outpatient programs so that in one situation, you may have a facility that leaves in-patient treatment but continues into an outpatient program, but you also have other patients that don't need the in-patient treatment are more appropriately suited to go directly into an outpatient program. And so we have been adding those programs within the markets that we're in, especially some of our larger acute and specialty programs and markets. It can also be a referral source often from a psychiatrist or a physician that has a private practice. We have a team across the country that maintains relationships with those physicians. They understand our different programs and facilities that we have. And so as they're talking to their patients, they're familiar with Acadia and where they might be able to refer one of their patients.

And the behavioral business is one that lacks a lot of market share data. You've clearly had strong revenue and volume growth over the past decade. So how do you assess your own growth and market share gains by segment? Have you done any look-back analysis in recent years during that accelerated volume growth?

Yes. We have looked at market data. It's probably harder for our industry than other parts of health care, especially with the different service lines that we're in. But we do look at the market data. We tend to look at a specific market as we study market share. And as we look back over the last several years for our existing facilities, we certainly feel like we are growing with the demand in that market, and we are opening new programs to correspond with what the demand may be in those existing markets. But even in those existing markets, we do feel like we're gaining market share. I think in other growth pathways where we think about opening a new facility or certainly opening a new joint venture, in those situations, we are certainly gaining market share. And that could mean that a joint venture partner has behavioral beds within their hospital that when we open a joint venture facility, those beds are moving into our freestanding joint venture facility. So that would certainly be an example where we are gaining market share. We don't necessarily aggregate that up into a nationwide market study. But there's a lot of markets with new facilities, especially where we can see that we're gaining share.

Yes. I would just add that we're always looking at this, and we're going to spend some time going a little bit deeper at growth patterns, profit pools across the entire behavioral health ecosystem, certainly looking at our business lines as well. And we're going to do an Investor Day later this year, which is the first one we've had, which I think will be an opportunity to not only speak directly to what we see is the growth opportunity, but also to go a little bit deeper in some of these lines of business. I mean you asked about CTCs earlier, that's frequently a question we get from investors that just don't understand that business as much. So we'll be able to bring that to life in a little bit more detail and begin to show how the lines of business fit together, I think, better along with the broader macro trends.

Great. And on a consolidated basis, about 50% of your revenue comes from Medicaid. How are you thinking about the impact that Medicaid redeterminations may have on your business following the expiration of the public health emergency?

Yes. We do. Medicaid, like you said, is 50% of our revenue. We have Medicaid in all 4 of our service lines, and it's across our 40 states. We do have Medicaid as a payer and even some out-of-state Medicaid payers. So our Medicaid relationships are in even more than the 40 states where we have a physical presence. And within Medicaid, there's a lot of managed Medicaid and other payers. And that's been a good payer for us across our service lines. We are closely following the potential for the Medicaid redeterminations. Of course, at the federal level and the state level, there's a significant focus on access to mental health and addiction treatment. And so it is hard to imagine a significant change in that coverage. But we're following that issue. I think it's like you said, there's the public health emergency that may be delayed and then there would be a period of time following that where I know some states will have to work through that issue. But our expectation is there would be coverage for those patients, but we are monitoring that very closely.

Got it. And as recession concerns creep into the market, 50% Medicaid payer mix, maybe talk to the Acadia's performance. I don't think they were public during the last recession. If you can comment on performance throughout the last recession or just items of consideration, what are the defensive or resilient qualities of Acadia if we do indeed kind of progress into a recession here?

We do believe across our service lines that the services we provide are essential and not discretionary. And I know Acadia was not public in the last recession, but there were a couple of public companies, and those companies did see, throughout that recession, resilient volumes. And not that it's an exact comparison, but in the early stages of the pandemic, I know we were asked that question a lot just around the discretionary nature if there is any in any of our service lines. And really, there wasn't. And we saw, at that time, that played out in a different way, but that our services were resilient and remained steady from a volume perspective. And I know that played out for the couple of companies that were public and reporting their behavioral volumes in the last recession. So we would expect to see that again. We're managing cost and just making sure that we're prepared. I think we have just an operating team that's really able to manage through the business and any challenge that we encounter across our different markets, but feel like we're positioned well.

Got it. And I want to spend the last couple of minutes here talking about capital deployment. I think your current guide for CapEx this year is about $365 million at the midpoint. You did $50 million of CapEx in Q1. Talk us through the accelerating investment in CapEx spend throughout the year. What should we expect from a timing perspective? Where is that CapEx, growth CapEx being spent this year?

Yes. So just as earlier we talked about the joint venture announcements that we've made last year and how those are now in the pipeline where they're entering the construction phase, that is leading to a step-up in our CapEx as we go through 2022. And we factored into our guidance really a back-end loading of those investments. And what we're doing is really positioning the company to open a greater number of new beds and new joint venture facilities in 2023 and 2024. So the step-up is within the $50 million of CapEx that we reported in the first quarter, around $39 million of that was expansion. The remaining portion would just be the normal maintenance of our facilities. But we think that $39 million could step up to around $75 million as we exit the year. And that would be the level that we would expect to see then from there moving into next year. But that goes along with historically about 1 joint venture facility a year being opened. And we think we'll ultimately be, in the next couple of years, at the 4 or 5 level. So a lot of that step up we would attribute to the joint ventures. There's, of course, other categories of expansion spend like existing facility bed additions, the in-patient de novos where we do not have a partner, that is staying more stable, and the acceleration in CapEx is really related to the joint ventures.

Can you comment on the de novo construction? What's the -- what level of CapEx may be earmarked for de novos? And how is the accelerating inflationary environment impacting de novo costs and project time lines?

Yes. We've done around 1 wholly owned de novo a year. We're also looking at an acceleration in that number because there are a number of markets that remain significantly underbedded. So we're looking at more de novos. And the cost can depend on the market and the construction costs can vary from one state to another. But it can be at the -- somewhere in the $30 million ballpark for a new in-patient facility. We are factoring in, as we approve projects today that will be built over the next couple of years, a higher level of inflation. But we're also looking at ways to offset that efficiencies in the design and construction process or even the ability to acquire a building that we can renovate and repurpose to use for a behavioral facility. So the team is doing a nice job looking for those markets that need a new de novo facility and then looking for ways to offset that construction cost inflation.

Great. And in the final minute here, any closing or parting words you want to leave with the audience here today?

Just that I think we've got a lot of opportunity ahead of us. I had the benefit in my second week of having all of our top operators come in from all over the country, and they had not been able to get together in 2.5 years. And we were able to talk a lot about the position of strength that the company has, but also the number of things we could do strategically because we're operating upmarket with the higher acuity cases. And I think that just opens up a number of degrees of freedom strategically. But I think it all starts with continuing to execute on our base business, our 4 lines of business where we continue to have such strong demand. And we will continue to innovate from that, so it's going to be an evolutionary process versus a revolutionary process. But we're very excited about the future and just we'll continue to execute and look for opportunistic M&A and just keep driving the business.

Great. Thank you so much for your time today. And please enjoy the rest of the conference.

Thank you.

Thank you.