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

Okay. Well, thanks, everyone. I'm Steve Baxter, the health care services analyst here at Wells Fargo. We're very pleased to be joined by Acadia Healthcare is the largest pure-play company focused on behavioral health. In the company, we have Chris Hunter, CEO; Heather Dixon, CFO; and Gretchen Hommrich, Head of Investor Relations in the crowd. Thank you so much for being here today. Really appreciate it.

Thanks for having us, Steve.

Yes. Well, great. I think a good place to start kind of a big picture framing question would be, obviously, as we come out of COVID, there's been a tremendous uptake around need of behavioral health care solutions. The need from patients has never been greater than it is today. I guess as you think about what's changed in the business as you've kind of gone through COVID and come out of it, I guess, what are the key things that stick out? And I guess, what opportunities does it create for the company across 2 different service lines?

Well, I think you're exactly right. I mean we continue to see record demand for all 4 lines of business and we don't see that dissipating anytime soon. There's some really interesting data that we've seen. Behavioral health admissions in the ER are up 400% in the last decade. And we've even seen some data that 1 in 7 admissions right now is -- into an ER is explicitly for diagnosis around behavioral health. So I think fortunately, and everyone in this room, I'm sure, has an example of someone that has suffered from some disorder through the pandemic. But we're seeing the destigmatization around behavioral health. People are more prone to seek treatment. We're certainly seeing that. When you just look at our own experience as a company, where our volumes for same facilities have been in the 2% to 4% range, and that's really accelerated to 4% to 6% this year. So we're just seeing really strong volume, really strong demand and interest and just don't see that tapering.

And we think about how the company is responding to meet that demand. You're doing that across like several different pillars which you've discussed in the detail. I guess, first, like bed expansions, it's traditionally been part of the company's growth profile, and I think it's been at a relatively stable cadence over time. When you think about the bed development of the company, I guess how should we think about capacity within your existing assets, I guess if there's any way to frame what percentage of them are getting to the point where bed expansions are needed. And as it's been so clear that it feels like the demand for these services have grown. I guess how do you think about the right number of that expansion on an annual basis?

Sure. I'll jump in and take that one. So when we think about our opportunities to deploy capital, you're right, we do look across multiple deployment path. Bed expansions are our highest return. And so we do try to focus on those partially because of that and partially because we really have the operational excellence to be able to implement those pretty quickly. Would we think about the number of beds that we have in the pipeline, so to speak, there is a good and growing number of bed additions that are in that pipeline where we have the ability to go into the market in that bed. What I would tell you is it's not a constant number. It's continually growing because as we continue to open new facilities, fill those beds, get to higher levels of capacity as we open them, we also then focus on the additions to the beds there.

Yes, one thing I would also point out at our first ever Investor Day that we did last year, we did cite a number of 300 bed additions a year as a target. But to Heather's point, if you really look at the last 12 months through the first half of the year, it's been closer to 400. So we're always looking for ways to optimize. We're always going to our facilities, when they get to a 70% occupancy rate, we're challenging them to look to potentially expand. And I think that's one of the things from an M&A standpoint, that's always attractive to us. We just announced this turning point deal in Utah, and that was a 76-bed facility on the specialty front, but one of the things we really liked about that was there's opportunity for expansion of about another 48 beds. So when you look back historically at all the acquisitions Acadia has done through the years, some of the more successful have really been those that have planned for expansion from the outset. And I think that will continue to be part of our M&A focus going forward.

Got it. And when you look at a market and you're making a decision between bed adds and going wholly de novo, I guess what's the decision-making process there? Is it physical capacity? Or are there other considerations like getting closer to other referral sources that might be more of the thought process?

Yes, it's a combination of things. And obviously, healthcare is local. So you have to look at the local market dynamics, but we believe there's 100 underbedded sizable MSAs in the U.S. And as we look at these trade-offs, I mean, if there is a market that we see as desirable and there's a logical health plan partner like there was in New Hampshire for the SolutionHealth JV that we just announced or with Nebraska Methodist, just near Omaha, which we saw as an attractive market and saw JV partners. Sometimes it makes more sense to partner. I think one of the benefits of having a partner is obviously that not only do they have really strong pay relationships, they generally have a brand in that market that can be helpful in bringing over employees and just broader reach. But I think they're also sometimes able to -- they see the struggles as a behavioral provider, they see their emergency rooms filling up. And they know that this is what we do for a living. And as a result, frequently, they'll actually bring beds over to us as part of the transaction, which can be really helpful. But there are certain markets where there isn't a partner, and it just makes sense to do a JV -- or for us not to do a JV, but to do it de novo and we'll do 2 of those this year and feel really good about our pipeline on the de novo front as well. Sometimes they're already -- there may already be a JV in place. So there may be some tie up, but we just see that as an area of really continued growth. We're constantly going back and forth, looking at what is the greatest ROIC whether it's a JV, a de novo, bed expansions, M&A, and we're always looking for optimization, and Heather has been very involved in that just in her short tenure with the company and really helping us refine our approach, which we've always put a lot of focus on, but I think it's getting even better.

Got it. And then, yes, the JV side of the business and kind of approaching things that way, it feels very strategic, very attractive. It feels like it creates a lot greater line of sight in what the ultimate performance of the asset is going to be. I guess can you talk a little bit about the JV pipeline. I guess just in general, like how much that's accelerated as a result of kind of COVID over the past couple of years and what you're seeing in ER, for example. And then as we think about sort of the competitive dynamics around JV partnerships, like obviously, you're a logical partner, I guess, who are you competing against when it comes to these processes? Are they competitive process? And kind of how does the decision-making process happen on behalf of the hospital?

Yes. So on JVs will continue to be a really important part of our continued growth. That was one of the reasons that we decided to do the Investor Day a year ago or in December of last year, because we really wanted to be clear on the visibility that we have in the bed expansion from 11,000 beds last year to 14,000 that we see through 2025 and JVs are a big part of that, the visibility that we have there as well. So I think it's one where we have done 20 JVs to date that represents 21 different facilities because we're doing 2 with Geisinger in Pennsylvania. The pipeline for these is really high. I mean we've done more JVs than anyone else in the industry. So I think we're to a point that's a little bit different than even a few years ago where we have really strong referenceability. When some -- when there is a health system that may be struggling with behavioral health, they may be losing money. They are clearly seeing the really high number of cases in their ER and they're coming to us proactively and saying, we know you've done this. Sometimes they'll come to us directly and we'll engage in discussions. I would say frequently, there is some sort of an RFP that's in place. And there are a lot of folks that do JVs across the behavioral health landscape. But I would say head-to-head, just given our track record and the high-profile names, we increasingly have a great deal of confidence in our ability to prevail. And I think that referenceability has really helped us. I think we really spend a great deal of time understanding the culture of the health system partner and how our commitment to clinical and to quality and the investments that we're making on the IT side might dovetail with them. And I just think the approach overall, when there has been an RFP, we've been able to win a disproportionate share, and we don't see that changing anytime soon, and the pipeline continues to look very good.

Okay. As we think about rate limiting factors either on the company side or potentially on the hospital side about the pace that they're willing to move out or the number of JVs that you potentially could have in a given year. I guess, how should we think about that? How does the decision-making process work around the timing and the cadence of these? And could you pull forward JV opportunities a little bit as we get maybe into 2024, 2025?

Sure, You want to take that one?

Sure. I'll start and you can add on. So when we think about the markets that we go into, we typically start with strategically where do we think we'll have the most success for a variety of reasons. We have a very long list of reasons, but they include things like our ability to build from the ability to acquire land, to obtain licenses, to staff the hospitals once they're up and running, the rate environment, all of those things we look at. And so as we enter the market, we already have a pretty good idea of what we'll be sort of setting forth into. So to your question of, could we accelerate, sure, depending on the markets that we're going into, there are opportunities for us to accelerate. In some cases, the partners have a real need to accelerate because they're trying to focus on what they're delivering, and they like our help to deliver the behavioral side of the equation. And so we do have that opportunity to look with them. Chris mentioned a couple of things about the pipeline. First, we do have increasing inbounds. We reach out strategically as well for those markets we'd like to be in. But we do have inbound RFPs are run, and we have people coming to us again because I think of our referenceability. But we also have conversations with existing JV partners to say, could we open an incremental hospital. As Chris mentioned, we already have one of those in place, but that is certainly back to your question, tied to their need to accelerate the ability to use our services.

And then as we look at de novos and JVs, just help us think about the financial profile of those. Like obviously, you have start-up losses whenever you're getting into a new facility one way or another. How long is the progression take to get to sort of target contribution margins? And is there any difference between JVs and de novos?

I would tell you that from a start-up cost perspective, we typically start to incur those start-up costs on de novos for sure, 6 months in advance, and it's really no different for the JVs when we think about how we enter the market. We will go into the market generally 6 months in advance and we'll start hiring the key personnel. So the CEO for the hospital, quickly followed by a Chief Nursing Officer, a CFO to make sure that everything is in place from day 1 when we open the doors and we're ready to receive patients. In many instances, for JV partners, that could be a very quick ramp because the JV partner has a need, and they already have a pipeline of patients in some instances that they will transfer from their behavioral unit to ours. And so there could be a slight difference there in terms of the timing of ramp. But typically, we see -- we start to see really good profiles from our perspective of what we would expect within the first year, but then sort of ramping in within, I would say, a 2-ish year range, to where we would expect them to be.

And I would just add really quick. I was at the groundbreaking and then the ultimate opening of our facility with Geisinger in Moosic, Pennsylvania, which is really close to Scranton, earlier this summer. And I would say that there have been a number of lessons that we've been able to benefit from as you've looked across the 20 JVs that we've done. 10 of those are actually live and operational and 10 more have not yet been opened. But I think of the 10 that we have done, to Heather's point, our ability to find that CEO early to generally get a Chief Nursing Officer in place to begin to staff that really puts us in a position that we can hit the ground running and start taking in patients much more quickly. I would say that, that process hasn't been as seamless and consistent as it should have been in the -- historically. And our partners clearly want us to start seeing these patients immediately, there are surveys that we have to go through. But I mean this Geisinger facility is a really good example of the one where we work really closely with them. And we have all the staffing in place when we opened the facility to be able to hit the ground running. And that has not consistently been the case. So we feel really good about applying some of those insights and lessons learned moving forward.

And on the M&A side, just talk a little bit about what the pipeline looks like there, what are the most attractive areas for you to deploy capital. And Obviously, I think the growth in behavioral services broadly is evident to the market as a whole. I guess what are you seeing in terms of competition for the deals that you're interested in?

Yes. We are increasingly trying to not wait for opportunities to cross the transom where there's -- I mean, we love bankers bringing us opportunities. But to Heather's point, I mean, it's on us to look at these 100 underbedded markets to have our own proprietary view as to which are most attractive and to where we might have deficiency. So this turning point acquisition that we did in Utah is a really good example. There was not a banker involved in that process. This is a market where we already had 3 service lines in place. We already had an acute facility. We had CTC facilities and we had an RTC. We really wanted to have at least one market where we had all 4 service lines together. So we proactively approach the turning point team and we're able to get that done. And I think that's increasingly representative of our ability to be very proactive on the M&A front. So I think our pipeline is as strong as it ever has been. It's a little bit more nuanced towards looking at these underbedded markets, running through the criteria where we have a top 20, top 25 list, where the criteria are always dynamic, but we're looking at the competitive environment. We're looking at the payer mix. We're looking at the wage rate inflation in that given market. There's 20-plus different criteria that we all look together at and then from there, we prioritize and do proactive outreach. And I think the approach overall has continued to serve us well. We're really bullish on M&A. Our balance sheet is very strong. I think we are the desired partner of choice. And I would say, there are several lines of business. CTC is certainly one where we're seeing a number of opportunities come to us. I mean they see us as the acquirer of choice and they know that M&A is a part of our strategy and that we're financially strong, certainty a close is obviously very important. So we're seeing not only the proactive part but also the inbounds coming to us directly from some of these players. And in a fragmented industry, there just are a lot of individual opportunities.

Okay. And then another big area of focus at the moment, obviously, your business and your payer mix has a pretty heavy orientation to Medicaid. We're tracking it quite closely from perspective of the Medicaid managed care companies and also providers, from your perspective, I guess, how would you assess the early progress on Medicaid redeterminations? To us, it looks like procedural disenrollments are a little high, creates a little bit of a continuity of care concern. How are you seeing it for the patients you take care of?

Yes. So redetermination is something that we have been tracking extremely closely, really for a year. And this is one where we made a number of investments late last year that are paying -- that are really paying off. I would say all in, our redetermination efforts, we feel really pleased with where we are. I'd say they're running right at where we thought we would be, maybe a little bit better even. I would say our CTC line of business, where we have 70,000-plus patients has been particularly focused on that. And they've put a number of things in place that we've leveraged across the entire company, put kiosks in a number of our facilities to begin awareness with patients that were at risk of losing coverage starting late last year, we put a 1-800 call center in place so that whenever there were challenges, there was a mechanism to come alongside these patients and help them with continuity of coverage. . I think it's also just a cumbersome process for somebody that is addicted to opioids, is very sick, it's a chronic condition to have to deal with the enrollment can just be very cumbersome. And so being equipped to help them make that happen is something that I know is super appreciated, and it's a great way for us to build that relationship with the patient. But I think having the call center in place, having boots on the ground, reeducating some of these patients that during the public health emergency, they didn't have to reapply for Medicaid like they did previously. So just reminding that sometimes they've got a job through the COVID pandemic, and they're eligible for commercial insurance. So helping them navigate that has been helpful. I mean I would say that our ability to -- when someone loses coverage, to resecure coverage, we've been able to do that a little bit more quickly. But I would say we're also still in the very early innings on redetermination, less than 1/4 of our patient population has actually been through redetermination. Every state has at least launched it. Oregon is the one laggard where they haven't technically begun moving patients off the rolls yet. But it's something that we're just watching extremely closely. The impact on '23 has not been material, but we see this ramping into '24, but just continue to think that we're really well positioned based on the early data.

Okay. And you mentioned the CTC business. Another big area of focus is obviously the opioid settlement that we've seen in that big pool of funding that potentially could flow into treatment modalities. I guess as I look back, like it does look like a lot of the treatment modalities are currently covered today, either by Medicaid or other payers. So when we think about the opioid funding, I guess how do you expect that it ultimately will be utilized? And how long do you think it could take for that to become more meaningful? I don't think there's too much of an impact now. Like when do you think we could get to the point that it could have a more material impact on what the company is seeing financially or patient-wise?

Yes. I think the material lift is really into '24 and '25. I mean, remember, they're $54 billion in funding from the pharma manufacturers. But that is frequently spread over 15 years. In some cases, there were a few manufacturers that settled at 10 years, but these dollars are going to be dispersed over the next decade. I do think what's very different than the tobacco settlements, which is probably the best proxy is that there weren't restrictions on how the tobacco settlement funding was used. And there were a lot of dollars that actually never went to smoking cessation programs that you would have expected. In this case, they are required, these states that are receiving the opioid money, the $54 billion are required to put 70% of that towards programs that actually are treatment oriented for those with opioid use disorder. So we see that as a real positive. There's a number of states, I think 15 to date, that have actually come out and committed to being very transparent on how they're spending the funds. We have such a really strong track record on the quality side, where CARF is the accrediting agency on the quality side for MAT providers. I mean our quality scores were 98-plus percent in the last survey that they did, and we've done a white paper on this that's available. But we think our ability to speak to quality, to speak to what has worked with our programs is really going to help us with these grants that are coming out. I think it's very difficult when only $3 billion of the $54 billion has trickled down to states right now, but then states are frequently passing it down to the counties. These county commissions, I mean, it's a windfall of dollars, and they're frequently at a loss as to how to spend the capital. So I think we've done a really good job in the early grants that we've been able to win our fair share. We put a team in place. We've built up a team that we'll certainly go after these future grant disbursements. But in terms of your question, I still think that this is really more of a '24 and '25 phenomenon in terms of really driving our business, but we see it clearly is a really nice tailwind.

Yes, one thing that we've heard is that it's a little harder to get an upscale in more rural areas to operate these programs efficiently. Can you talk about like what that opportunity could look like, obviously, some of the programs around opioid, you suggest that some of the greatest need could be in places like that? Like how do you think the funds could help make treatment in rural areas potentially more sustainable and expand the market?

Yes, that's -- we've had some experience even in the early days, dealing with some rural counties, particularly in the Southeast. And one of the things they seem to be very interested in are the mobile vans that we've had as a -- that we really started as more of an innovative pilot a year ago, and those have really taken off where we can take the vans out into the field, dispense methadone remotely, but that van is still tethered to one of our bricks-and-mortar facilities. So significant interest in the early days and expansion through mobile vans. But there are -- there's always interest as well. And given our scale and the fact that we have acute facilities, is there a way to stand up facilities that are closer to where Acadia already has business. There have been all sorts of early grants around wraparound services as well. But overall, on the rural side, I think there are other things that we'll be able to do with respect to bricks-and-mortar, but the most flexible solution will continue to be the mobile vans.

Okay. And then to kind of bring back to the Medicaid side of things, one thing that the company has had a lot of success in the past couple of years has been able to drive higher reimbursement rates from Medicaid, they recognize the structural like labor pressure that the industry has been facing across entire provider base. I think you mentioned that one of the factors that contributed to your confidence on the back half of the year and the guidance raise was better visibility and to rate updates for the back half of the year. I'd love to just hear kind of the perspective of the Medicaid program and their ability to not only one like clearly put good rate increases in for [indiscernible]. How do you think about the sustainability of higher Medicaid and reimbursement over like a multiyear horizon?

Sure. You're right. That was one of the driving factors whenever we raised guidance at midyear. We were able to foresee some continued sort of rate increases in the mid-single-digit range, which was an improvement over what we had originally anticipated. We continue to feel really good about how that looks for the back half of the year. What I would tell you, as we think about the rates or maybe we think about them in a couple of ways. So first, we think about the quality that we're bringing and the conversations that we have with in those rate negotiations, regardless of payer, frankly, whether it's Medicaid or commercial payers alike. We have a conversation about the strength that we bring to the table. We are investing in things that allow us to demonstrate the quality of the care that we're driving in the facilities. And we actually take a really focused approach with those conversations with the payers, the strength and our internal team's ability to have those conversations and really drawing on the expertise we have, the ability to demonstrate it. And then, frankly, our scale as the only national or the largest and only national behavioral health-only provider, it really gives us the ability to have some great conversations with them. So from our perspective, we continue to feel good about the balance of this year. The rate increases that we are seeing are in line with the expectations we set forth. Too early to think about 2024 and what we might call for the market then, but we're in the conversations now to think about what next year looks like.

Okay. And anything to call out differently? I mean it sounds like the Medicaid was the biggest driver there, but commercial rates, like obviously is a different push and pull when it comes to that, like what should we keep in mind when it comes to commercial rates for the back half of the year and into next year?

I would tell you that in our experience, the rate conversations are typically in tandem to whatever we see good rate increases in the market, the commercial rates will typically be relatively in line with those Medicaid rates as well. We haven't seen significant disparity. You do have the differences across markets and you'll have variations of the average, of course. But we really think about those as running in tandem. Certainly, Medicaid rates will follow inflationary rates, and we still see some elevated costs, and we expect those to continue to be reimbursed to us, and we see the same with the commercial payers. I would tell you, maybe with the commercial payers and Medicaid as well, but the commercial payers are becoming increasingly focused on our ability to demonstrate quality results. And I think that will set us up nicely for when the industry itself is ready to move into some value-based care arrangements. And we are in the forefront of that. It's helping us already in these rate negotiations, as we've been talking about, but I think it's really going to help us accelerate and lead the path whenever the market is ready to talk about that.

And then on the second quarter call, you mentioned that wage pressure moderated a bit in the second quarter. And I think the expectation is that would potentially continue to moderate further. What's the latest that you're seeing in the labor markets as it relates to your businesses?

We continue to see improvement as we had anticipated. We reiterated sort of with our midyear guidance that we expect for base wage inflation to continue to come down on a year-over-year perspective. We continue to believe that we will end the year sort of leaving it at sort of a sub 5% rate. Part of that is due to some of the comps that we have. There were some significant comps that were overcoming. The part of it is just what we're seeing in the overall macro environment. It's something that we'll continue to watch, of course, because there's continued instability in the macro environment from a labor perspective, but it is something that we continue to see sort of the benefits of it, we feel like it will continue to come down.

Yes. I would also just add that we needed to make some investments late last year in markets where we were not as competitive on the wage front. And we feel like we've made those. I think we've also been very intentional about doing things to retain existing employees. The company had never done an employee engagement survey as an example. We have 23,000 employees. We did the first employee engagement survey last October. We put a number of strategies in place. We just did a pulse survey to check in midyear, and we've seen a highly significant improvement in our employee engagement. And that's something that we're going to continue to focus on. So we need to be able to continue to attract as an industry, more people into behavioral health, and Acadia is no different, but we also need to do a better job of retaining our existing employees. And I think some of this -- many things that we've been focused on, focusing on the partnerships with nursing schools, the tuition reimbursement programs that we've put in place, some of the learnings for facilities that have really high engagement, some of the things that they're doing with employees and broadening that across the company, it was really beginning to pay off.

And the company has also discussed a number of investments it's making on the technology front, and you cited both things, I think, like EMR and then also like patient monitoring technology. I guess talk a little bit about like why is now the right time to make those investments? And what's that going to enable in the future? Obviously, the patient monitoring seems pretty straightforward about how it benefits the company. But on the EMR side, what value is that going to add? And obviously, over time, like value-based care seems like it's more of the potential, I guess, how is that going to shake out? And what do payers, I guess, need to see from you on that side of things to make those relationships more fruitful over time?

Yes. I mean, Heather and I both have background on the payer side. And I would say the primary reason that -- there were 2 primary reasons that we did the Investor Day last year. One was to show the visibility that we have into our bed expansion growth over the next several years. But I think another was to demonstrate and to commit to why we felt we needed to make some of these investments. This is an industry having been in health care for a long time that the prevalence of paper that you see in behavioral health just does not exist in other parts of health care. It is not unusual to walk into any behavioral health facility and to see a patient's file that is stacked up this high with paper. Which is just a throwback to many years ago. So we felt like this is where the market is moving. Heather said it earlier, that payers aren't demanding to see our quality metrics today, but having been on the payer side of the table for a long time and knowing the relentless focus on clinical health outcomes, we know that data is coming sooner versus later. As a result, we have to make these investments and being able to demonstrate that we have the data and that our outcomes are superior and putting incentives in place to ensure that our facilities are consistently driving strong health outcomes. So the patient remote monitoring, as you pointed out, is a very strong ROI. It's better patient safety for the patients. Employees really like the peace of mind. But when you look at the quality improvement that we see, it's double-digit improvement in only 9 months since we put some of these remote monitoring solutions in. On the EMR front, I mean, we're clearly seeing benefit in the early days. We've been commended with surveyors that have come in that have seen the EMR in place and just how easy it is to retrieve charts and for them to do their jobs, we clearly see our clinicians, in particular, many younger clinicians that have been trained in the EMR that go into a behavioral facility, whether it's Acadia or elsewhere, and they're working in paper, that is a big job to satisfy and frequently they will leave. So it's helping us attract talent in. And then we know that there will be efficiencies as we replace paper as well that we're committing to as a company as well. So all those things together, we just think it's the right thing to do. We're getting a little bit ahead of where the industry is, but we know this day is coming where we're going to have to compete on the strength of our clinical health outcomes, and we're going to be ready.

Great. And then last question is as we think about either regulatory or legislative things that you're focused on, either in D.C. or at the state level, what are the key things that you're advocating for? And what are the key things we should be watching over the next couple of years?

Yes, I'd say a couple of things. One is parity and that parity between physical health and behavioral health, there's really been some positive movement here in the last 6 months, led by the Biden Administration that we're very supportive of. I mean, parity has been out there for a long time, but I think that's something that we're highly supportive of working with the National Association for Behavioral Health, NABH, on, and then I would say, secondly, is funding on the EMR front, really for the industry, but we will benefit from that as well. We're going to do it regardless. But when you look at the $19 plus billion that was put into meaningful use in 2009 for some reason, all the behavioral health companies were left by the wayside. So there has not been committed congressional dollars for EMRs, which is in the industry's best interest. So we've been very focused on that front as well. And there are a number of other things that we're focused on. But overall, health parity and EMRs are top of mind right now.

Okay. Fantastic. We'll leave it there. Thank you for your time today.

Thank you.

Thank you.