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

Okay. We're going to get going with our next panel and actually, our final health care services panel. And we saved the best for last here. So we're very pleased to have Acadia Healthcare. I'm Scott Fidel. I'm the health care services analyst with Stephens. Acadia is one of the largest operators of behavioral health care facilities and services across the U.S. The company operates across a number of different pathways and has been driving a strategy that's had some impressive growth to it. Here from the company, we've got Chris Hunter, to my left there, Chris is the CEO; Heather Dixon, who's the Chief Financial Officer; and then in the audience as well, we have Gretchen Hommrich, who heads up Investor Relations. So first of all, just thanks for coming here. It's great to have you guys here.

Yes. Thanks for having us, Scott.

Great. Well, Chris, I thought maybe just to sort of set the table here, maybe I will kick it over to you if you want to just make some initial comments in terms of now as we're sort of getting to the end of the year.

Talk about what you view as the key achievements for Acadia this year in terms of where you think you've delivered the best against your objectives. And then any areas where you feel like there's more opportunity even and then we'll sort of flip it over to talk a little bit about next year as well.

Yes. No, again, thanks for having us. I think 2023 has been a tremendous year for Acadia. I mean I would start out by just calling out our team's ability to deliver very strong financial and operational growth that's very much in line with the expectations that we laid out a year ago at our first ever Investor Day that we did in December of last year in Carnegie Hall. I would say labor has also been very favorable. I mean our base wage inflation has continued to come down from kind of a high watermark in the 8% range in Q4 of last year to 5.7% this last quarter. And I think there are a number of strategies we've put in place to help with that. I would say our growth strategy overall, really proud of the path that we're on to add 670 beds. We did the Investor Day last year and talked about 570 beds in 2022, moving to 670 this year and then really ramping to 1,150 beds, both in 2024 and 2025. And a primary driver of that is the JVs that we've done. And so our JVs would be another thing I'd be really proud of this year. We've announced our 19th and 20th joint ventures as a company. And these are marquee names that we continue to work with. Bronson in Michigan and Geisinger in Pennsylvania were 2 that we stood up this past year. But then looking ahead to next year, we're going to be opening large facilities with Henry Ford in Michigan. And also, we've got one -- we've got several planned, but one with Intermountain in Colorado as well. So just really feel good about the growth that we've seen, very much on track for the 670 beds this year. JVs are going well. We feel very good about the M&A pipeline we're seeing. We did announce an M&A deal, a specialty facility in Salt Lake City, Utah with 76 beds that we expect to be able to expand. We'll close that by the end of the year. And we've even added a new Board member as a company. Dr. Patrice Harris, who just joined us last month. She is a psychiatrist by training and is the past President of the American Medical Association. So just tremendous clinical expertise. I think, really strong policy acumen and really brings a lot to our Board. And then the final thing I would say, Scott, is just the Desert Hills litigation in New Mexico that we were able to put behind us via settlement that we announced last month. I think that is something that has been challenging for the company, and we're really pleased to have that put behind us now and moving on and executing on the business and the continued growth that we see ahead of us.

That's great. I appreciate that. And sort of I guess we sort of look out to 2024 and think about strategic objectives, I mean, clearly, the company has laid out a multiyear pretty detailed growth strategy. So I'm assuming that sort of we know a lot of what the key objectives are already strategically in terms of executing across particularly those 5 growth pathways that you've laid out. But would appreciate your observations at this point in terms of, first, is that largely what the strategic sort of game plan will be the next year? Or are there any particular elements that you would want to call out as being particular priorities for 2024 at this point?

Well, I think it starts with the bed growth. And as we talk about on many of our calls and investor meetings, I mean we have so many attractive growth pathways from bed additions that have such a strong return on invested capital to these JVs that we've now done 20, to the de novos, both on the CTC side as well as the acute and specialty side that we're putting in place to continued M&A and also to the PHP/IOP opportunities that we see. So we just -- we continue to feel to be in a fortunate position where there is record demand for every one of our lines of business, and we feel like we've got a high bar in terms of how we consider deploying capital that we'll continue. We also feel like we've got great visibility into this bed growth. I mean one of the reasons we did the Investor Day last year was that we wanted to show investors the ramp that we're seeing from 11,000 total beds to 14,000 by 2025. So I think we're really well positioned on that. I think the other thing is just we are a company that has grown by acquisition. And now we have over 250 facilities. And when you grow quickly by acquisitions, sometimes there is deference to the individual facilities. I think there's a real opportunity for us to take -- to analyze the higher-performing facilities and leverage that across the entire company and the entire book of business. And we've done that in many different ways from employee engagement, which we've measured for the first time as a company, to the way that we're doing admissions, the way we're doing marketing, the way we're deploying IT resources or even financial resources. So I think there's been a lot of variation in the company historically as well. And then maybe just the last thing I would say. We are in an industry that, for several different reasons, has been underinvested in from a technology standpoint. I mean you look at all of the investment in technology across health care, that is not something that you see in behavioral health. And I'm not just talking about Acadia, I'm talking about the industry as a whole. If you went to a typical behavioral health acute facility, you would see paper records that many of you haven't seen in decades. And when the HITECH Act of 2009 took place, the behavioral health companies did not benefit from meaningful use. So we have decided, as the leader in this space, to really move our organization forward towards investing in electronic medical records, but also remote monitoring technology. We're using advanced analytics to enhance our quality outcomes. There's just a number of ways that we are leveraging technology and investing in the business to set ourselves up for the future. And so those are some of the things that I would point out that give me a lot of confidence in our ability to achieve our growth going forward.

All right. Great. Now I know you haven't provided 2024 guidance yet. But Heather, I did want to ask you just as we look at your latest updated EBITDA guidance, excluding the PRF grants of $665 million to $675 million. Just whether you would see that actually as a sound baseline for all of us modeling our expectations for 2024 or whether there's any puts and takes to that, that you would want to call out?

I think you're right. That is the right baseline to think about as you think about 2024. I know you guys had guidance from us around this time last year, maybe a little bit later with the Investor Day, and we laid out, as Chris has been talking about and you asked about, some really good pillars of how you could think longer term, and we remain focused on this and feel good about what we put out there. And we'll come back in the normal time frame of February with our guidance for 2024, but that's a good starting point.

Okay. Perfect. Did want to talk a little bit about Desert Hills now that you have finalized the settlement and are sort of -- are getting this behind you. And more, I guess, from more of just some of the modeling mechanics and sort of thinking about that settlement. First, you got $400 million of the settlement. You've talked about sort of 3 sources of funds to fund that between the insurance proceeds, the cash on hand and then utilizing the revolver. At this point, can you give us any more visibility into those 3 buckets in terms of how we should think about each of those building up to the total allocation?

Sure. I'll give you a little bit of a time line of how those funds will flow and maybe that will help position it. So the first is when we actually make the payments, we will make the full $400 million payment to the plaintiffs in those cases. The timing is a little uncertain because the first thing that needs to happen is the judge in those cases needs to approve the settlements. We have no reason to believe that he wouldn't. It's just part of the process. Once he approves those, we have 30 days to make the payment to the plaintiffs. So that full $400 million would go out from us. And then to your point of how would it flow and what would be the offset, there's 2 things to think about. One, at the time we make that payment, we would then apply for the reinsurance reimbursement that would be allocable to that. We've disclosed in the past that for that plan year we had $75 million of reinsurance coverage. Obviously, we've used some of that already related to other cases during that year, very specifically a couple that we previously settled related to Desert Hills. And that would be sort of a reduction of the total $75 million, but there's a portion of that, that is left and available to us. And then finally, as you think about the tax benefit related to the overall payment that we make, if you think our effective tax rate is roughly 25% at any given time, that will come back to us in the form of 25% of that net payment over the balance of, I would say, the next 12 months. And so that's a little bit on the funds flow. From an availability perspective, we have roughly $600 million, $620 million of availability between about $100 million of cash and the rest on the revolver as of September 30. And so we're obviously very comfortable making that initial $400 million outlay. And then maybe I would just point finally to the strength of the balance sheet. We're very fortunate to have the leverage where we currently have it at 2x. So we have some options available to us as we think about how we plan for next year.

Okay. Great. And just a couple of additional follow-up questions. One, just in terms of -- obviously, the company has a robust growth strategy ahead, certainly, capital needs to be allocated for that. Does the Desert Hills settlement have any impact on how you think about that sort of growth capital that you'll be looking to invest? Or should we think about you having plenty of capital availability to continue with the strategy you've laid out?

Yes, I would say, as Heather just referenced, I mean even at 2.5x leverage, we have a very strong balance sheet. We have a very robust pipeline for M&A, and we obviously have some very strong growth initiatives and a pipeline with JVs and de novos as well. So we do not see that impacting our ability to deploy capital and we feel really good about the opportunities ahead for us in '23 and '24.

Yes. And I would just pick up on that 2.5x. So we're currently at 2. When we make that initial $400 million payment, before the reinsurance and before any tax benefit coming back, even if that maximum amount of $400 million, assuming no future growth, we would still be at 2.5x, which is a really strong position. So we feel really good about that.

Okay. Perfect. And that's actually the exact leverage ratio I have modeled on a pro forma basis. So good to hear that. And then, Chris, I did just want to ask you as well as your sort of -- the dust settles on this and you sort of look forward, any sort of -- how do you try to prevent this sort of situation from happening in terms of -- because obviously, the company is growing substantially. So there's a lot of new facilities. There's -- the footprint is expanding. I guess, from sort of an operational perspective or from a compliance perspective, any insights into how the model may sort of be updated? Obviously, it's difficult. You can't be in every facility every time. But in terms of the protocols that you have in place, just curious around that.

No, it's a very fair question, Scott. So I would say a few things on that front. First of all, the Desert Hills situation, this is a facility that Acadia had acquired in 2012 and that we shut down in 2019, and this was related to foster care. We've never had any program similar to that and certainly nothing since. So I would say this is -- that was a one-off situation, very different than the -- this was not -- had nothing to do with an Acadia patient. None of these acts that took place were in our facility. This was a foster father who would pled guilty to acts that had nothing to do with Acadia. We were brought into it through this not-for-profit with Family Works that has been well documented. In terms of your question in terms of what are we doing as a company, I would say -- I would take everyone back to our Investor Day a year ago, where we talked about competing as a company over time on the strength of our clinical health outcomes. And I think we are very much on track to be able to continue to demonstrate very strong quality across the company. We hired our first dedicated Chief Quality Officer earlier this year, Nav Kang, and he has done a tremendous job. We have a separate Chief Compliance Officer, Bill Priest, who joined us a year ago, who's also doing a tremendous job. So the company's commitment from that standpoint, that was previously one position. I would say what we are doing on the quality front, the investments that we're making in remote monitoring technology in our acute facilities, the quality improvement that we've seen, where we have invested, where we have installed that technology, which is now installed in almost all of our acute facilities has been statistically very significant in terms of bringing Level 1 and Level 2 incidents down as an example. I think we, across the board, the EMRs that we have put in place, I think, are also leading to very strong quality outcomes. And I think it's not just better safety for our patients. Having some of these technologies in place have also led to really strong employee satisfaction and employee retention, where they know that we are investing not only in our patients, but in them in terms of the way that we're running these facilities. And we see, at least in the near term, it's been a differentiator where we've had the EMR and this remote monitoring technology in place that we've been able to attract, in many instances, clinicians over. So I would just say, maybe the last thing with Nav as the new Chief Quality Officer, we've been very intentional as a company about predictive analytics and putting heat maps in place where we are proactively looking at how we can identify potential trouble spots, problems. I mean we're in a tough business dealing with high acuity patients and our ability to pinpoint areas of opportunity and deploy resources to help our operators in advance is something that we've added this last year. We have these heat maps in place. It's now part of our monthly operating reviews. And I just use that as an example of the company's overall commitment to quality that I think as we would love for the industry to move to value-based care more quickly, that clearly requires data. That's one of the reasons that we're making these investments in the EMR. And while we're still in a fee-for-service world, we firmly believe that things will move to value-based care at some point, and we feel very strongly positioned to be able to capitalize that as we continue to focus on quality and setting ourselves up to compete on the strength of our clinical health outcomes in the future.

Great. And actually, that last point is a perfect lead into the next topic, which if it was a few years back, I could be hosting a managed care panel with all of us up here. Both Chris and Heather are both accomplished managed care executives in prior career roles, so I actually wanted to sort of take that perspective here. And I'm sure both of you came into these roles with substantial sort of thoughts around how behavioral -- key behavioral providers could work better with payers and how payers could work better with managed care providers. So would love your insights around that in terms of where you see some of the key opportunities for Acadia in terms of further advancing how you negotiate and collaborate with payers. And then from the investor perspective, how we can think about that manifesting ultimately on the P&L.

Why don't you start?

Yes. So I'm happy to start. You're right, I did come from a managed care background. I also came from a provider background. So I have a little bit of both sides of the table to think about. And where I would start is maybe where Chris left off and the ability to demonstrate the outcomes that you're driving. When I was sitting on either side of the table, whether negotiating contracts as a payer or negotiating contracts as a provider, that topic always came up, and it came up right at the beginning of the conversation. Because if you're having a conversation about rates or price, or if you're having a discussion about working together to deliver value-based care, the first thing you have to be able to do is demonstrate the outcomes that you're driving. That's just a fundamental baseline. And as I think about what we are doing here to invest in the ability to do that, it's going to set us up very well as we go forward. I think, first of all, having a baseline; second, being able to demonstrate progress from the baseline; and then third, understanding how the behavioral modifications really impact the whole physical health and understanding how those levers work will become imperative as we have conversations with payers. I think that what you're hearing when you look out in the market and as people are discussing the need to move to value-based care, either from the physical health side or now, as the conversations are starting, from a behavioral side, they're recognizing the need to package it together because they go together and they really do drive each other. And that's where I think we'll start. And I think that's where very well positioned to start there.

Yes. I think Heather did a great job of answering that. I mean just a couple of quick points that I would make. Going back again to last year, when we laid out our strategy at our Investor Day, we talked about becoming the indispensable behavioral health provider for high acuity and complex need patient populations. And when we have looked at the data in the last year since we put that strategy statement together, all of the evidence would suggest that patient populations have become even more acute than they were a year ago. And so increasingly, when I put on my payer hat that I wore for years, where I was always so focused on clinical health outcomes, we know that when somebody has an underlying chronic condition, if you layer on a behavioral health condition, the physical health spend goes up 2 to 4x. So there is a significant opportunity to continue to manage patients that have a behavioral health disorder differently. And we just think that we would like to be the partner of choice for payer organizations in the future, recognizing that we're still living in a fee-for-service world today. But we think the investments that we're making will position us to continue to reinforce our ability to deal with these high acuity patients over time.

That's great. And just one follow-up here. That clearly gives us insights into the types of value that you see Acadia being able to deliver to payers. When thinking about the payers themselves, is there any areas where you feel like -- where you'd like to see maybe a little more urgency or action in terms of engagement from their side in terms -- just curious on sort of that pace of engagement. Is it coming along at the level that you would like to see? Or is there elements -- see you smiling there, Chris. So just how would you sort of characterize that type of rate and pace of payer engagement?

Well, I'm sure at your conference and in others, there's just so much discussion around value-based care and for many different reasons that I have discussed earlier, particularly going all the way back to the HITECH Act in 2009 and the underinvestment in technology, there just really has not been as much focus on value-based care in behavioral health. I think that's going to change. It's really hard for us to say how and when that will happen. But I think a continued part of our strategy is to be ready when payers are ready to make that evolution. And I think there's a number of ways to structure contracts whether in the early days, which is what you saw in primary care years ago, where it starts out maybe as some shared savings models or some upside-only contracts where we're not being asked as a provider in behavioral health to take downside risk yet. But I just think that, that -- those days are coming, and we are going to be held accountable to delivering on the strength of our clinical health outcomes over time. And we want to be an organization that is seen as a collaborative partner with payers that is ready to make that evolution. And it's hard for us to press the pace but we just want to be strategically ready when that day comes.

All right. Fair enough. Why don't we pivot over to growth, I'm sure a topic everyone is interested in. And again, the company does have a broad-based plan for future growth and has laid out attractive long-term targets, 9% to 11% revenue growth, 10% to 12% annual EBITDA growth. I thought one interesting way to approach this would be around trying to sort of delve into the different ROIs associated with the different growth pathways. And then from a capital intensity perspective as well. I think however you want to answer the question, I thought that could be -- it's an interesting sort of area to get some more insights around.

So I'll start, and I'll talk about specifically those pillars that we did outline whenever we had Investor Day last year, and then I'll kind of talk a little bit about just the continuing operations and some of the things that we're doing. So from a growth perspective, if you think sort of in order of operations, how those manifest themselves and where the higher returns are, I think we've been pretty consistent that bed additions, so existing -- adding beds to existing facilities, so you think a new wing on a hospital, for example, those continue to be our highest return. Whenever we think about capital allocation, they're highest return because you obviously already have sort of the fixed costs in situ, you have the relationships with the market. You know that you're at or near -- sort of nearing capacity. And so those, to me, sort of rise right to the top of the list. They're also pretty quick to get implemented comparatively speaking across the board, and they typically ramp very quickly. So moving down that list, we have opportunities for de novos both on the acute and specialty side as well as CTC perspective. Those are certainly our next highest. I would say CTC, probably from an overall return perspective, a little bit more attractive, they take a little bit longer to ramp because you are building a customer list, if you will, or a patient list, but certainly very attractive on the return perspective. And then finally, I would talk about the JVs. Those take a little bit longer to get in place, but they have some very -- got obviously great returns associated with them, but some very strategic alternatives for us as we look at markets to enter. So when we think about where we want to play, we have actually a pretty good list and a matrix of criteria that we look at. And we look at that to determine what markets do we want to play in, but also how do we enter those markets. So if we think about some of the criteria on the first list, where do we want to go from a market perspective, we look at the rate environment, the labor environment, demand, competition, regulatory environment, sort of all of the things that you would think that you look at and put those together to determine, okay, here's where we want to be. And then we look to the growth pathways and say, how should we get there? So for example, if we already have a very successful facility or set of facilities in a market, and we have the ability to just add on to those facilities, then a bed addition makes a lot of sense. It's quick. It's high return. We already have a presence in the market. If we have a market where we have all of the different pathways and different pieces of our business, except for one, for example, what we did with our acquisition that we announced in Q2 -- with our Q2 call that we just did in Q3, that was an example of where we had a market, we knew it was attractive, we wanted to enter that market specifically in one line. So we'd have the complement of all lines of business. We went out and we looked in the market, we found what we wanted to acquire, and we approached that very strategically. And then at the other end of that spectrum is a market maybe where there's a certificate of need, and we need to think about how do we approach the market either through a partner or through M&A even. Or where we don't have a presence, and it's really beneficial to partner with a big name so that we can come in and really enter the market in a position of strength. That's how we think about how we go to market, how do we do it from an approach perspective to partner versus de novo versus bed additions. And then maybe finally, I'm sure Chris has a lot to say about M&A, but before we go to that, I'll just talk about the overall underlying business. We've talked about investments that we're making. We've talked about some of the things we're doing from a technology perspective that we're really working on consistently applying our approach to running those businesses. We have 250-plus facilities across the country, and there's a lot of opportunity to bring some rigor and some overall vision, sort of a top-down vision to how we approach running those facilities to really bring some of those synergies to life, be more efficient and sort of drive growth in those facilities just organically.

Yes. I think that's great. I think the only thing I would maybe add on the M&A side is that we do believe that this will be a period in the upcoming year where we will see more activity on the M&A front. I think there's a lot of things that are driving that. I think it's still a very fragmented industry. I think it is harder for these smaller facilities to make the level of investments in quality, in IT, in EMRs, in just the enhancements that you need to run an efficient operation. I mean redetermination would be another example where we've been able to invest heavily in putting a dedicated hotline in place and having kiosks and QR codes. Just not all companies can do that. So I think in a rising interest rate environment with smaller companies that have significant variable debt, I do think that there will be a recognition that people would like to be part of a larger platform. I mean, we're well known as having a strong balance sheet. And we've seen a lot of unsolicited interest here. We have a strong M&A team that is constantly looking at the geographies that Heather just laid out. And I think it just positions us well moving forward. So we are super focused on M&A, but we're also in the beneficial position of being able to see really strong results from these bed additions, from the JV partners that we have in place and de novos as well. So it's just constantly a balancing act, and we're looking for the optimal way to deploy capital for our shareholders at all times.

All right. Great. Well, thanks. That was a lot of good detail there. I wanted to maybe just pivot over to just talk about core supply-demand fundamentals in the behavioral industry and sort of where we sit right now. Maybe starting on the demand side. Clearly, very significant long-term structural and secular drivers of behavioral demand that are sort of undebatable. Clearly, post-pandemic, that demand dynamic was even more turbocharged. Obviously, we've moved beyond the pandemic. Still plenty of things to get stressed out, though, right, in terms of every time we turn on the TV or look at a newspaper right now. But I would be curious in terms of whether you have seen any, I guess, even at marginal shifts around those demand dynamics as we've all sort of had our pandemic hats on, right? And as things are now -- we're separating a little bit of space away from that, any nuances on the demand side?

Yes. I would say we just continue to see record demand for all lines of business which, from a societal standpoint, is troubling. But I think because of the way that we have focused on our patients that have such high acuity, I think we do a really good job of servicing their needs. I would step back and say a couple of things that we shared in our Investor Day last year that I think are still relevant. One, the Surgeon General has come out and said that mental health is the defining public health crisis of our time. I think we've seen nothing but increased acuity coming out of the pandemic. 1/4 of adults in the U.S. suffer from some sort of behavioral health challenge every year. And the suicide rate in the United States is up by 35% since the turn of the century. So we're just continuing to see trends that only amplify those numbers. I think the other thing, just as it relates to our business on the CTC side, only 10% of people that -- of the 9 million Americans that suffer from an opioid use disorder, only 10% are actually in treatment right now. So we think that there is significant opportunity for us to help more people. And obviously, we saw 110,000 overdose deaths in this country tragically alone last year. I think the other thing is on the substance use disorder side, there's over 40 million Americans that suffer from substance use disorder addiction. And only roughly 7% of those are in treatment. So there is a significant opportunity overall. And one of the things that we pinpointed at the Investor Day last year is that as a country, we just don't have enough beds to meet the need. And we estimated that there's pretty good data that says the demand in the U.S. is for 75,000 additional beds that are required to meet this need. And as Heather pointed out, I mean, we think we see over 100 under-bedded MSAs across the U.S., and we've put significant work into those where we see the greatest need for us to deploy our services and the greatest opportunity. So overall, Scott, I just think the demand dynamic continues to grow, and we really have not seen that taper off coming out of COVID.

All right. Great. Maybe we'll pivot over to the supply side and sort of from the staffing side. And while there's been essentially almost unlimited demand it feels like, clearly, the industry has been challenged structurally around supply, and that's been an element that preceded the pandemic and then clearly what was exacerbated by the pandemic. Would certainly love an update in terms of how you're seeing the supply sort of environment evolve at this point from a clinical perspective and sort of overall staffing perspective. And then maybe, Heather, that would be good opportunity then we could sort of drill a little bit into sort of how that's influencing some of the wage trends.

Yes. And as I said at the outset, I mean, we've seen base wage inflation continue to come down. We've been very intentional as a company to work very closely with our operators in the 39 states where we're doing business to make sure that we are addressing staffing challenges. Back to your question on the demand side, we clearly are seeing record demand for our services. The #1 impediment to our ability to grow is our ability to staff these facilities to meet and keep up with that demand. And so we have needed to put a number of strategies in place this last year. We talked about the variation that we see across the company, the fact that we had not previously done basic employee engagement surveys, I think that has really helped us. We've been very focused on putting some training programs that are very consistent for clinicians that are coming into our organization across the country in place as opposed to deferring to the facilities to do this themselves. Our Chief Nursing Officer, Michelle Spurlock, has done a fantastic job of putting together a very focused training program that we have led all of our new clinicians through in the last several months that has seen a material impact on reducing our turnover and clearly, our ability to attract people into the company as well. And then the last thing I would just point out is the technology investments that we're making. We continue to hear that clinicians that have gone through training, nurses that have gone to nursing school, they're not trained on paper, they're trained on electronic medical records and it's a real dissatisfier to come to the behavioral health industry and to work in paper. And so our ability to offer a technology-enabled environment that not only includes an EMR, but also remote monitoring technology and some of the analytics we've put in place is something that also has proven to be a differentiator in enabling us to attract talent in. So we're very focused on looking at net new hires. We're very focused on clinicians. We're watching turnover closely. We're focused on employee engagement every day. But overall, those are some of the strategies we put in place to help us on the supply side.

All right. Great. And then, Heather, maybe if we want to put some numbers around that from the wage side. Maybe walk us through the sequencing of wage inflation over the course of 2023 and then some initial framework for thinking about 2024 as well.

Sure. So if you recall, which I'm sure you do, last year Q4 was sort of high watermark from a base wage inflation perspective, it was just above 8%. We have seen that come down at, I would say, a relatively consistent and nice pace over the course of 2023. We most recently in Q3, were at 5.7% base wage inflation. So that, for us, shows the trend that we were expecting to see and certainly makes us feel very good about these investments that we're making and the focus that we have on the labor perspective. We would expect for those investments to continue to benefit. We continue to feel like the progress we're making is sustainable and don't expect that we would have sort of a reason to think it would go the other way. All of the things that we're doing that we can control, we feel really good about. The only potential headwind that I would see is as you look at the sort of overall macroeconomic environment. These things that we're doing will help us offset anything that could happen, but we just don't know what could happen as we think about 2024. So we will continue to focus. We'll continue the efforts. We feel really good about where we are, but it will continue to be something that we watch for 2024.

Okay. And I wanted to talk a bit about volumes in terms of even sort of within the framework of the 2023 guidance. Can you just sort of remind us about seasonality in the fourth quarter when looking across the service lines and anything that you think is important to call out there? And if there is anything, to the extent you can comment that has appeared to be deviating if at all or not relative to normal seasonality in the fourth quarter.

Sure. So as you know, we typically do predict that we'll have a decline in volumes in the fourth quarter. And if you think about our business lines, whether it's an acute facility, a residential facility where you have adolescents that stay for longer periods of time, or the specialty facilities where people come up to 30 days sometimes, and those facilities are even longer, we expect that anyone who can bring a loved one home over the holiday period starting with Thanksgiving will, and they'll try to bring them home. So that's just something that we anticipate in the business we're in. I think when you combine that with the Q3 that we just posted, it was a very, very strong quarter. You'll see that, that Q4 is certainly showing up that sequential volume decline, and that's just part of our normal seasonality. I would say that from our perspective, as you look back over the last few years, we had some outliers in there for obvious reasons in the years. And so you wouldn't have seen it as pronounced as what possibly you're seeing us message to you this year. But it's really just a combination of the very strong Q3 and normal seasonality, and there's nothing else that we're trying to message with that.

Okay. Great. I know we're moving along briskly here, so I do want to stop and see if there's any questions in the room. Question back there?

The $40 million you talked about, 7% of those being treated, is there any kind of statistic that shows once stopped being treated that eventually are homeless?

Yes, that's a great question. Just on the substance use disorder, the $40 million and the 7%, if there's a statistic on those that become homeless. I would think it's a pretty high percentage, but I have not seen any data on that. I'm sure that's something that we could work with Gretchen and pull together and get back to you on, though. But I'm -- nothing I'm aware off the top of my head.

Chris, so you guys have obviously got a number of big milestones here with the settlement. And you've been here now a couple of years. You come from a put-together organization from one that was, like you said, fragmented, a lot of different pieces pulling together. So now that you're kind of where we are now, is it just kind of basic block and tackling? Is this kind of something where you like to take more of a step into the direction that maybe you already had in mind beyond kind of just that regular blocking and tackling when we're past the settlement?

Yes, it's a good question. I would say, I think we've done a tremendous job attracting an extremely strong management team, not just at the executive level, but through the company. And we just continue to -- some of the investments that we're making, the clarity of the strategy that we laid out for the first time at our Investor Day, we're able to attract some very strong talent into the company. So I think as we look out into the future, there is a needed focus on execution because it is a ramp to go from 570 beds last year to 670 this year to 1,150 each of the next 2 years. So we're very focused on being able to do that in a consistent way. But we're also seeing, because we now have 20 joint ventures, we're highly referenceable, and there's a continued pipeline of others that would really like to work with us. And so we're trying to work through that trade-off, obviously, of do we want to do a joint venture in a given market, do we want to do a de novo, should we do M&A? And so I think our attention really focuses on now how do we optimize capital and how do we -- of these under-bedded markets that Heather referenced that are attractive to us, how do we best deploy capital and execute on our strategy of dealing with the highest acuity position -- high-acuity patients. But I think with the team that we've put in place, the strength of our balance sheet and just the demand tailwinds that we're seeing, we just feel very confident in our future.

Given that, initially, that existing facility provides kind of like the highest return of capital, can you maybe speak to capacity do that in the context of that 1,150?

Sure. You want to take that?

Yes. I would tell you that while we don't disclose what that overall capacity is, it is perpetual is probably the best way to put it. So we think about de novo builds and certainly any M&As or JVs that we put into place in the JV facilities as creating the opportunity to continue to do bed additions as we come to capacity and we see more opportunity with demand in the markets. So we have direct line of sight now to where we can go in to those facilities that exist today and continue to deliver on the 300 beds that Chris has mentioned from a bed addition perspective and that we laid out in Investor Day. And to even potentially increase that because it just is a really good source for us to sort of allocate capital. But we also know that as we're putting new facilities in place, we're creating that additional potential for extra capacity as well.

Any other questions out there? All right. I think I'll just finish it up with just -- because we're almost out of time here. I can't not ask about our favorite -- everyone's favorite topic, Medicaid redeterminations, right? So just maybe an update, sort of halfway now through the fourth quarter, how redeterminations seem to be sort of playing out relative to your expectations for the business. And as we try to sort of think and anticipate sort of impacts on payer mix trends over the balance of 4Q and then looking out to next year, any observations or insights you can give us around that?

Yes, I'll start, and I'll let Heather speak to the payer mix trends in '24. But I would say, our experience with redetermination is very much in line, maybe a little bit better, than what we had anticipated earlier in this year. I would also go back to just the extensive preparation that we put around redetermination across the company. And as we look at our acute business, we're continuing to see record volumes. We have not seen any material challenges there with redetermination. Our specialty business, our Medicaid concentration is really in the state of Pennsylvania, where there is some backstop funding that is available for patients that lose coverage in that state. Our RTC business, which Heather just referenced, adolescents that are 80-plus percent of the time wards of the state, so they're not going to lose coverage. So really, for us, this comes down to our CTC business, where, again, we're seeing record census there with 67,000 patients. That's where we've seen the most disruption. Oregon was the last state to begin to move their patients off the rolls in early October. But I would say, overall, when our patients are losing coverage, generally for administrative reasons, there's a number of different reasons that, that happens, we're just very well positioned to help them. And an overwhelming majority of the time, 70-plus percent of the time, we've been able to enable them to secure coverage within a 30-day period and frequently to get retro payment where they're eligible for that if they've lost coverage. So we've done that in a number of different ways. In our CTCs, we put a dedicated call center in place. We have a hotline to help our members around the clock. We have put kiosks in place that are tied to the state Medicaid websites where we can help our members or our patients reenroll very quickly. And we've been doing QR codes on posters and just talking about redetermination and what it is going all the way back to a year ago. So we have put some, I think, very robust strategies in place that we have consistently layered throughout the company that have led to very favorable results for our patients in terms of continuity of coverage. We look forward to continuing to work with the states. Obviously, CMS stepped in. In the middle of the summer, there were some concerns about the speed at which some patients in various states were losing coverage, and we've just continued to manage through that and continue to see very favorable trends. So obviously, we will have probably 1/2 of our patients that still have to go through some form of redetermination into next year. But based on everything we're seeing today, we believe we'll be able to manage through that as we have to date. But Heather, what would you add?

I would just say that we have had really good success as people have come to us for help, and we've been able to take the power of the scale that we have and make some of these investments to really help the patients that are coming through and help them get redetermined onto the rolls or get them into maybe it's an exchange plan or commercial plans as well, but to really focus on providing that assistance. Focusing our CTC business is a really good opportunity to connect with them because we see them typically on a daily basis. So a really good chance that we can engage with them on a regular basis and help them.

All right. Great. Well, we're out of time. Chris, Heather, Gretchen, I really want to thank you for participating in our conference this year.

Yes. Thank you, Scott.

Thank you.