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

Awesome. Good morning, and welcome to the 2023 Jefferies Global Healthcare Conference. I'm Brian Tanquilut healthcare services analyst here at Jefferies. Our next company here is Acadia Healthcare. They're the largest independent behavioral health company in the U.S. And with us today are the company's CEO, Chris Hunter, and the company's CFO, David Duckworth. Guys, thank you so much. Really appreciate you are being here. Chris, maybe let's start. Obviously, a lot of exciting things happening at Acadia. You've been here about a year -- a little over a year now.

It is over.

Yes. So maybe just kind of like thoughts on what's going on with Acadia, how you feel a year into it.

Yes. I think we just feel great about the trajectory of the business. We continue to see record demand for all lines of business and have great payer partners. I think we're also in a coveted position of having a very strong balance sheet and multiple attractive ways to deploy capital, whether that's doing joint ventures like the one that we did a groundbreaking on last week with Intermountain in Colorado, which is a new state for us to doing de novos, to doing bed expansions on our existing facilities, to doing mergers and acquisitions. There are just so many attractive ways to deploy capital with the demand that we're seeing for our services and feel like we have very strong partnerships with our payer partners and then overall, have been able to continue to attract some really strong talent into the company as well while also promoting some of the very strong talent that we have also. So just -- a lot to like in Acadia right now.

Yes. Chris, you touched on strong demand, and I think there are so many factors that are driving that, but maybe if we can touch on those things, right? I mean especially across the different business lines because for the benefit of the audience, you have 4 different businesses essentially that you operate, right? So different businesses but all with strong demand. So maybe if we can walk through what's driving a lot of that? And how sustainable do you think that is?

Yes, I think it is sustainable. I think we're really fortunate that we have same-facility volume growth that for the last 3 years has been in the 2% to 4% range. And we have previously talked about a 4% to 6% expectation for '23. The demand side of the equation continues to be really strong. There are multiple things that are behind that. I think, clearly, you're seeing record overdose levels in our CTC business, 107,000 deaths last year alone. You're seeing suicide rates at a record high. You're also seeing coming out of COVID, kind of a de-stigmatization around mental health and more people that are willing to access services. So I think those are all things that are coming together. I think the other thing is that for our business and those of you that attended our first ever Investor Day that we had in December of last year in New York, we talked about our strategy around dealing with the higher acuity patients. I think one of the things that we continue to see in this environment is that those that are coming to us for behavioral health treatment are increasingly sicker and sicker. They have higher acuity needs and I think that's also something that is playing to our favor. So our occupancy percentages right now are very strong. And so just when you look at all the different ways that we can deploy capital, there are always trade-offs that you have to make, where you're going to get the best return but we feel like we have multiple options and just continue to be very optimistic on our future.

Maybe I'll pass this to David. David, one of the questions we often get asked is how you've had robust rate growth as well over the last year or so. How are you thinking about the sustainability of that rate growth?

Certainly, the success we've seen over the last couple of years, especially just with mid-single-digit rate increases on average and we've talked about that being broadly across our service lines, broadly across our payers where in the past, we would think of different payers being, on average, kind of a range of targets of what we might get across our payers. We're seeing it more consistently across different payer types and across our markets and service lines. Obviously, the demand, the importance of mental health, the integration and thinking about mental health as part of our payers' overall strategies in their markets, all of those have been positive drivers on our rate increases. And our team, both local leadership within our markets and our corporate managed care team, our government relations team, they continue to do a good job just telling our story, presenting our service offering at a local level and negotiating for rate increases. As we look ahead, we do believe mid-single-digit rate increases are the right target on average. We do have specific targets in 4 specific payers in a market, just depending on that market situation what the past rate increases might have looked like, where we believe we're positioned relative to what market rates might be. So it does vary some our strategy by payer, by market but we continue to think of our target on an average basis being mid-single digits.

That's awesome. Chris, I'll show you back to you since you talked about JVs and capital deployment, right? And I know you've laid out plans to add, I think, 1,000 beds next year and 1,000 beds again in 2025. So pretty robust outlook there but a lot of people are wondering, number one, how are you driving that much expansion, right? And a lot of JV interest is probably the other question, like why are hospitals coming to you guys? And why are they not doing this themselves? And then maybe the last part of the question for David is your ability to fund it. Obviously, the balance sheet has been delevered, but a lot of folks are asking, basically, are you going to burn all the free cash next year as you open 1,000 beds?

Yes. It's a great question. I think we have -- we tried to -- one of the reasons that we wanted to do the Investor Day was to demonstrate the visibility that we do have into our bed growth as you look into the future. So right now, we finished last year doing about 570 bed additions and we had right at 11,000 total beds. The growth that you're talking about that we laid out in our Investor Day is a real path to -- by 2025, increasing that from 11,000 beds to 14,000. And a big driver of that, our same facility bed additions has remained pretty consistent at 300 beds a year and that's always been a really strong return on capital. The big driver of that step-up from 670 bed additions that we'll do this year, to 1,150 next year and another 1,150 in 2025, which will get us to the 14,000. A big part of that are the JVs that we have been putting in place. And again, I referenced Intermountain earlier, I think these are Marquee Health Systems that are coming to us with the recognition that this is all we do. We don't have MedSurg capabilities. We are a behavioral health company, and this is our core competency. And so as they are frequently struggling to get some of these patients out of their ER and to treat them with the highest quality care. They're increasingly looking for a partner and we have done more JVs than anyone. We've done 19 and that number, our pipeline continues to grow, and we certainly expect to have some additional announcements this year as well but that has been just a fantastic way for us to deploy capital. It takes a little bit of time. These are definitive agreements that we've signed. So we do have visibility. The example that I just gave on Intermountain, we signed that transaction for a year ago. We just broke ground last week. That 144-bed facility in Colorado will become operational in the fall. So there's just a longer lifespan on the JVs but on the de novos, we also -- we're going to do 2 more this year. We have a number of -- on the acute side, we have a number of specialty and CTC de novos that we're planning as well. So just when you look at all of those, just multiple pathways for growth and David, I'll let you take that.

And we have always had a business that generates strong operating cash flows. And our outlook for this year is $450 million to $500 million of operating cash flows and that's combined with a very strong balance sheet, reflecting about 2x leverage. We actually think even as our investments in expansion CapEx, primarily those joint ventures is creating a step-up in our expansion CapEx. This year will be $350 million to $400 million for expansion CapEx and growing some as the bed additions grows over the next 2 years. That even with that stuff will be funded with operating cash flows and actually think there will be some discretionary cash flows even beyond that to fund other investments we're making as a company. So the balance sheet will remain in a strong position, give us a lot of capacity as we think about other investments that we have across those growth pathways should we see expansions or joint ventures, de novos accelerate or if we have an M&A opportunity that's presented just think we have a lot of flexibility and capacity with the cash flow projection that we have in place, combined with the strong balance sheet we have.

That's awesome. Maybe, Chris, I know I gave you a question list and this is lower in the list, but I'll push it up. A lot of discussion on redeterminations. You gave some views on your last earnings call. Maybe any update on a month and so later on how you're thinking about redeterminations and how investors should try to quantify your exposure to it?

Yes. We obviously get this question a lot. We're still very early in the redetermination process. And just to remind everyone, again, there were 5 states that started in April that began to remove Medicaid members from the roles. And that escalated in May to 14 of those initial 5 in May, we have 4 states -- 4 of those 5 states. Moved into May, 14 states with 13 of those were states that we had facilities. And then we're now into June, it's escalated to another 23 states of which about half of those, we actually have facilities. So we're still very much in a window we're just a fraction of our patients have actually entered that Medicaid redetermination potential. I would say, overall, our experience at a high level has been -- there's a lot of variability with states but I would say it's tracking very much in line with what we expected, maybe a little bit favorable in the very early days so far. I think one thing that we have seen is that there is high variability by state. So there are a number of states that are just going to over the course of a year just in a linear fashion, continue to proportionately remove people from the roles. There are other states that we've seen that want to front-end load that. They want to get people off the rolls as quickly as possible. So they're going to make that happen much more aggressively. There are -- there's one state in particular that's backloading and is waiting into the very end of the process but I think for the most part, we see this more linear step up. We also see a lot of variation with respect to the amount of data that is shared with us and the more estate is coming to us in advance and can proactively tell it like these are the people that are going to be removed from the roles, we can cross-reference that against our enrollment. It gives us an opportunity to proactively reach out to those members many of which have no idea. As much as we have worked on this since last year, we've put QR codes in place. We put kiosks in our facilities. We talked to our patients about the fact that redetermination is coming. Many of them still are just not aware that they're at risk of losing coverage. So it provides a real opportunity for us to help our members really work through this. And so the more estate can give us that opportunity to get in front of these patients and to help them find another source of reimbursement the better off for their continuity of care and the quality of the outcomes that we'll be able to provide. Back to our strategy being higher acuity cases, we really feel like it's in the best interest of the state to tell us and to work with us more proactively. So our government relations arm is working with so many states to try to make that happen even more aggressively but overall, it is very early. We feel like the mix of our population, whether it's our RTC patients, which are more youth and adolescent we feel like there's a very low likelihood that they're going to be removed from Medicaid roles. We feel very good about our specialty business that those members are in states that frequently have some sort of fallback coverage. And then with our CTCs, roughly half of our CTC patients are residing in states that have some form of uninsured or underinsured funding as well. So we're doing everything we can to help these patients work through a tough time. It's very early. I think the acuity of our patient mix is working in our favor, work so far but still very early days and most of these states are going to continue to disenroll members into 2024. So we really think that there is probably a little bit more weighting in '24 than there is '23.

Chris. Mechanically, when you cross reference patients that are given to you on the list, what exactly do you or how do you try to find or help them navigate finding new coverage?

Yes. Frequently, we're just looking at -- has something changed in their work history, somebody that maybe was unemployed and was on Medicaid that has gotten a job would be eligible for commercial insurance and aren't even aware of that. So we're helping them through that. There are some that there would be an exchange plan that would be in their market beneficial for them and they sometimes just don't have the knowledge of the ability to navigate through the system and we help them with that as well. So I think there's it's a unique opportunity for us to come alongside a patient that is trying to work through that process but that is -- those are some of the things that we have found in the early days that we've been able to do, helping them get out ahead of it and obviously, the more lead time that we have, the more continuity there is in care and the better health outcomes they're able to sustain.

And then, David, maybe last question on redeterminations. You've embedded some of this into your guidance, right? Is that the right way to think about it?

We have and we maybe started the year not knowing exactly when the process would begin, but thinking it would be April and May. And so we've built in not a specific number that we've shared, but just a range that was embedded into our guidance. As a company, we've thought about this all along as more of a just a volume item for us to navigate what impact it might have there. Just knowing that the payer mix shift wasn't as significant to Acadia but yes, some small amount is built into our guidance from April through the end of the year.

That makes sense. And then Chris, I'll shoot it back to you. So the other hot topic, obviously, has been labor. And understandably so, right? We've seen hospitals struggle with it. And you guys weathered it fairly well and better than everyone else. And then I think you guys made a decision to give rate increases in Q4 or in the back half of last year. So maybe if you can walk the audience through what exactly happened with labor? Where do you stand today? And how do you get the confidence that labor is manageable and that it won't go above what you have projected into your earnings expectations?

So I would say the overall labor market, as we look at it, is continuing to improve relative to 2022. We really feel like it spiked around the third quarter of '22 and so we're seeing some continued easing in our labor cost. We discussed that in the first quarter on the call. Our base wage inflation had came down from about 8% in Q4 to around 7.5% in Q1 and that was instrumental in our ability to record census and we obviously had to increase in staffing requirements to be able to serve those patients. We always talked about there being a path to improvement in the second half, particularly since we do merit increases twice in the first half of the year. And so there's an element there. I think the other thing I would -- that I would add on this overall is that I just think there are a number of strategies that we've continued to put in place as a company. We had a group first that were out at our Sierra Tucson facility, which is our flagship specialty facility. We've put some nursing programs in place and partnership programs with the University of Arizona, where those nursing students and even physicians can come over. I think that has been a way for us to really put our name out there in that market, but also to work through some of the potential challenges. We've been very aggressive on tuition reimbursement, particularly in the summer months, but throughout the year. I think we've done a very good job overall just partnership with nursing schools in a variety of different geographies and we've done our first-ever employee engagement survey late last year. We're just very focused on making sure that we're able to retain the right talent, but also that we're recruiting -- continuing to recruit talent in a tough market. We have a new CHRO Judith Simon, who just started a few weeks ago, comes to us from MetLife. She has just impeccable history. She's an engineer by training. She's a people person, but also has really significant metrics-driven approach to looking at all of these factors that we're focused on, on the labor front every day and so it is such a critical component of our ability to continue to grow and to get to the 14,000 beds that we talked about earlier and it's just something that we're laser-focused on as a company.

Got you. And then maybe shifting gears, David. At Investor Day, you outlined an IT initiative. It's a pretty comprehensive IT initiative, which appears to be necessary as well, right? Anything you can share with us in terms of progress as well as how much left -- how much work is left on the rollout.

Yes. We are extremely pleased with the progress we've made. At that point, we're looking forward to onboarding a new CIO for the company, Laura Groen, started in January and has done just a fantastic job with the rest of the team on those initiatives, all along, we have talked about a multiyear approach to these investments and making sure that we are delivering on the value that we expect to see from making these investments and we've started with EMRs and have prioritized our acute facilities, and we expect to complete those over the course of next year. And those are going very well so far. Some of the patient monitoring tools that we've put in place are also just providing a lot of value across a lot of different categories around employee engagement, patient safety, efficiencies at the facility. So it's early in the multiyear schedule that we put in place for these IT investments but we are very pleased with what we've seen so far. There's more to follow. Just you will hear us over time, talk more about the specific value we're seeing from these investments but we really think it's throughout both strengthening our quality in our clinical operations and our patient experience, but also our employee engagement. Our staff are excited where we're implementing the EMR. We're not only seeing efficiencies, but just staff that, in many cases, has been trained as they went through their education programs on EMR and they now have that tool as part of Acadia. So we're excited to see all the benefits from that and it's early, but we've made great progress this year.

Yes. The only thing I would add, because I think David summarized it really well, is that these are not investments that we're making that we hope have a payoff multiple years from now. We're seeing the benefit immediately across the board. Another example that David didn't mention was just when we have surveyors who come in periodically to monitor our facilities. Those facilities that have had an EMR installed have gotten incredibly positive feedback and we think that, that will continue as well as all the many things that he's discussed on the engagement front and just some of the efficiencies when you're in a paper-driven environment that we're going to take off, we are going to be able to come back and quantify that and to be able to demonstrate to investors the benefit that we're seeing from this investment but at the end of the day, this is so tied to our strategy of working with the higher acuity patients and being in a position that we can compete on having superior health outcomes. We posted some information yesterday about our CTCs where CARF, which is the regulatory agencies for comprehensive treatment centers, the quality ratings that we have been able to achieve as a business on the CTC side have been at the 99% level. And we think that our quality outcomes over time is the way that we want to compete and it's a very different conversation with the payer when you're able to show up with data and so that is obviously a big part of this investment as well. We think that will serve us well in many different payer relationships and even negotiations in the days ahead.

Chris, we're at the end of our time, but I wanted to pass it to you for any closing remarks or any thoughts you want to leave the audience with.

I just think that the company is just extremely well positioned for the future. I want to thank David for an incredible 12-year run. There aren't a lot of public company CFO's that go 10-plus years. And he's had an incredible impact on the company. He's been a great partner to me in working through a search process that was very comprehensive that we're thrilled that -- that Heather Dickson is going to be joining us on July 10. And David is going to be integrally involved in her onboarding, staying with us through the next earnings call, but also being very available and helping her acclimate to the business as well, but she's going to hit the ground running, and we're just very optimistic about the company's future. So I just appreciate the opportunity to be here today, Brian, and thank you.

Yes. Thank you, Chris and David, I echo the sentiment. Thank you for all the support over the years.

Thank you.

Congrats too.