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

Hello. Good morning, everyone. I'm John Ransom. I'm happy to have the Acadia management team. This is Heather's maiden journey, and Chris' second year, I believe.

Second. Yes.

Second year. So they're new to the greatness, the 45th Annual Raymond James Investor Conference. So given that we have just some journalists in the room, I'd like, Chris, maybe you to start out, you're coming up on your second anniversary. And what surprised you? What's been a little more challenging than you thought? And what's going to be different about how you spend your time over the next 12 months maybe compared to how you spend your time over the previous 24?

Yes. So first of all, John, thanks for having us. A few things I would say at the outset. A few things that have surprised me in almost 2 years, I think the first is just the intensity by which behavioral health disease burden just continues to intensify. So this most recent CDC data that came out, with a population that's only grown by 0.5% last year, those Americans with serious mental illness grew by 1.3 million to 15 million Americans, that's a 9% growth rate. And those with substance use disorder and serious mental illness grew by 15% just in the past year. So I think that there was a school of thought that maybe out of COVID things would normalize. And just the intensity of the disease burden that we're seeing across the board just continues to get worse. So that's one. I think the second thing is just the level of opportunity for integrating behavioral health with physical health. I mean I knew this having been on the payer side for a long time, but we know that someone that has a chronic condition, you throw in one behavioral health diagnosis, the physical spend goes up 2x to 4x. And so we are really fortunate at Acadia to have 21 different JV relationships, but I think that's an area of a little bit of a surprise for me, just the magnitude of the opportunity there. And then maybe one other thing was just I was surprised and continue to be surprised, just by how little investment there has been in technology in the behavioral health side of healthcare. So a lot of reasons for that. I think it goes back to the 2009 HITECH Act, where the behavioral health facilities were kind of left by the wayside and didn't get that meaningful use investment. But pretty much everywhere you go, it's not just EHRs, it's investment in patient monitoring, staff safety analytics kind of across even communications, just not what I've seen in other parts of healthcare. So the company is, I think, doing extremely well. We've got a lot of opportunity in terms of things that I'm going to be spending my time on in the next year. I mean, I think there are several, I would say, clearly, the continued rollout on technology for the reasons that I just mentioned, that's been a real focus area for us. We've also been very focused on leveraging technology to improve the strength of our quality outcomes. And that's led to having some very direct conversations with payers. I would say historically, our relationships with our payers have been a little bit more transactional, and I think that's changing to becoming more strategic. I mean, they clearly want -- they're very focused on the clinical health outcomes for their patients and their members, our patients. And we're looking for everything that we can do to be a good partner on that front. And so I think those are the major things, maybe 2 others. I think outpatient is an area where we have real opportunity. Obviously, our CTC business continues to do extremely well. But I think we also have an opportunity on PHP IOP. And so that's an area where we'll be spending a little bit more time in the coming year. And then I think the last thing is maybe just variation. We're a company that has grown by acquisition, and there's a lot of variation across the company in terms of the way we do things from training to IT resources to digital marketing, and I think there continues to be a real opportunity for us to normalize that. So those are some of the things that I'll probably be doing a little bit differently this year.

Heather, same question, what -- you've been under the hood for a while now. So what's your answer to that question?

I would echo some of the things that Chris has said, but a couple of things that really jumped out of me are, one the strength of the team. Chris has built an incredible team. And when you put those resources together to just think about taking this wonderful asset and putting it together and really driving it forward, it's a great opportunity in front of us. So that's the first thing that came to me. I think second from my lens, which is obviously different looking about -- looking at the financials, if you look at double-digit top line growth, double-digit bottom line growth, a really strong balance sheet, low leverage, just the opportunity there when you combine that with demand in the market and bed shortage, just all of that coming together is from my seat, a great place to be in, and just the opportunity to deploy capital in numerous ways versus just 1 or 2 levers that you could use is just really powerful.

So one thing that I wouldn't say surprised me on the downside, but just surprised me. I would have thought the company would have done maybe more smaller acquisitions through the year, 1, 2 psych hospitals. The CTC acquisitions. Has that just not been a priority? Or is just a dearth of opportunity there?

Well, I think we're in a very opportunistic position where we have so many different ways to deploy capital. I mean, I would say we continue to want to do more M&A, but [Audio Gap] number of de novos are way [indiscernible] both on the CTC side and also on the specialty side. And so I think we're growing PHP and IOP. But I would say our M&A pipeline looks really good. We did do some tuck-in CTCs in late 2022. There's a number of opportunities on that side of the business, but also other service lines that I think you'll see continued M&A in the coming year.

Great. Then, this is one for Heather. I don't know if it's a knock, but it's kind of a reality. You are delivering strong top line, but it's pretty expensive. What are we -- are we just in a phase where everything is more expensive than this is just the new reality? Or I know one of your competitors, not direct competitor, they talked about -- they spent 20 minutes on the modular construction and trying to drive down the capital cost. So what's being done to try to make the growth as capital efficient as possible?

I would say a couple of things. First, we did see construction costs go up. I think us and everyone else in the world, whether it was private or commercial from '20 to '22. We are seeing those begin to level off, and that has been something that we've watched. That's been a bit of a tailwind as we think about how we try to mitigate any of the elevating costs because that will continue to go up but just at a lower pace. There are a couple of things that we've done. Prefab is definitely one of the things that we have begun to implement in the facilities over the last couple of years, and that does save some of the costs. Also importantly, save some of the construction time, which I think is just as relevant from our perspective to get the hospitals built open, ramped and running. The other thing that we look at is across the board, how we manage the construction projects. We have quite a portfolio. And so we have, at any point in time, a significant number of projects running, that gives us a little bit of leverage and a good way to balance looking at the cost across portfolio. Whenever we think about efficient use of space, we can look at the best way to deploy capital, how to be efficient with the space, how to build the facilities in the most efficient way. So this is what we do. We build behavioral facilities, and that gives us a different lens to think about the most, I think, the best way to set up the facilities, make sure we're getting the best use out of them, and frankly, they get them up and running very quickly. That, to me, is probably the most significant way that we can control those costs.

So Chris, you talked earlier about your JVs, which I think are fascinating. From where I sit, the advantages are pretty obvious in terms of getting a strong local brand name, getting a capital partner. But we also know that not for-profit hospitals maybe aren't always the quickest to make decisions. And then construction projects, there are a million reasons why those can get delayed. So how do you -- when you're doing your planning and your negotiation, how do you keep a 2-year project from becoming a 4-year project because the budget committee didn't meet this month. And just -- I know how these not for-profits work, they operate the [indiscernible] government. So how have you been able to operate the speed of a for-profit when you've got a partner that doesn't have the same incentives to move that quickly?

Yes. Well, I think so much of it is finding the right partners. I mean I think we're really fortunate that we have 21 JVs that we've done across the country, half of which are operational and the other half that are coming up, but being the 3 that we're going to be opening this year alone are Intermountain in Colorado, Ascension in Austin, Texas, and then Henry Ford in Michigan. And so those are all really good examples of situations where we're just having very regular meetings. I think we have a very good time line that we have actually looked at ways to accelerate based on some of the learnings of the first JVs that we did. And so I think we have a really good template now in place. And I think it's just having the right governance structure, holding our partners accountable. I mean they want to get these facilities up just as quickly as we do, but it does take prudent management and working through the regulations and occasional hiccups that come up.

So is this -- usually they have a site unit, they've got patients, but it might be on the 8th floor, and they just want to move -- is it usually an on-campus type situation. And my understanding is usually when an 80% ownership have control, just what's the range of sort of how these things -- what's a good kind of case study that would show how these typically go?

Yes, I think that's right. I mean 80%, you're referencing that we would put up 80% of the capital and they would put up -- the partner -- the premier health system partner would put up 20%. I think that's fairly typical. But these are conversations that we're having constantly. And I think we're so referenceable now in that we have 21. I think the way that we work through those is probably a little bit different than we have in years past. I want to make sure that I hit your question though, like can you say more, John.

Well, just like take an example of a case study that says, okay, we've done this one. Here's how we started. This hospital has 20 patients [indiscernible] hospital site. We've opened a [indiscernible]. It took us 3 years, it cost us much money, this is kind of how -- this is how you should think about how this goes.

Yes. I mean Intermountain is a good one. We're a 144-bed facility, and we are building a brand-new hospital. We've also just announced one with Ascension in Austin, where we're adding 100 beds to a facility that Acadia already owns in Austin, Texas and we're -- Ascension Seton is our partner, there's going to be all sorts of interplay with their met with the Dell Medical School at UT Austin also an opportunity for them to train psychiatrists, nurses as well. So I think it can -- it really can range depending on what the need of the partner is to building an entirely new facility, which is probably more common but also this one that we're doing with Ascension, I think is representative of sometimes they're just needs that the partner has that we have to adapt to.

Great. I understand, my microphone's better now, getting a feedback. So I know that was a big concern of the team over here. So one of our competitors has I think this -- I'm hearing less of this, but there was certainly some concern about the CTC business and the sustainability of it, the expense, some new alternatives, some -- maybe some new laws that take place. So I know you've been asked this frequently, but for the people who have not heard this question or heard you talk -- serve up this big bet [indiscernible]?

Yes. So I think just to start with some macro trends. I mean, there's over 9 million people in the United States that are suffering from opioid use disorder. There were 110,000 fentanyl-related overdose deaths last year in the United States alone. So this is a real problem. Only 10% of those that are in treatment are actually being treated for the gold standard with methadone. And so we continue to believe that there is significant opportunity. We also said in our prepared remarks, during our last quarterly earnings call, that there are many that believe that we're entering the fourth wave of opioid addiction, where the first wave was just...

That sounds bad.

Yes. The first wave was prescription drugs. The second wave was heroin. The third wave has been fentanyl, which is 50x more potent than heroin. And then this fourth wave relates to polysubstances. So this is fentanyl waste with methamphetamine or cocaine. And there was a study that just came out recently that said 92% of the fentanyl -- of those that had tested positive for fentanyl through urine samples, 60-plus percent of those had an additional substance usually which was methamphetamine. So I'll just give you all that to say these cases are becoming -- these drugs are becoming more potent and these cases are becoming even more severe. And we're just continuing to see record demand across the board. I think what differentiates Acadia is strong quality scores that we have. CARF is the accrediting regulatory body, what measures 13, 14 different metrics. I mean, we continuously grade out at 98-plus percent from our CARF scores. We also have seen more recently that our ability within 6 months to treat our patients and get to them to a point where they're listed opioid-free, 80% of the time is best-in-class. So we just are continuing to operate from -- we're dealing with and addressing this demand. We're doing it in a high-quality way, and the clinical outcomes that we're able to achieve, we think, are very strong. And I think that also lends itself to just a lot of strength in that business. Heather, anything you would add just overall on OUD and CTC in general?

I would echo everything that you said. Of course, I think there is opportunity out there. I think the growth trajectory sadly is significant and increasing. I think our opportunity to treat the most acute of those patients is unique. I think the methods that we use with medication-assisted therapy and methadone treatment as the severity continues to increase, will become more necessary. And I think the alternatives for treatment will probably narrow as the acuity gets broader and more acute and our opportunity to meet those needs is significant.

So Chris, I had an occasion to look at your management team, and I forgot that you have both the Chief Strategy Officer and Chief Transformational Officer. I mean, outside looking in, it doesn't look like anything's really changed in terms of the strategy that you laid out at the Analyst Day. But what -- those 2 people that work for you, what are their kind of day-to-day goals? And how should we think about that investment from a shareholder perspective?

Yes, I'd say a couple of things. I mean, number one, I do think that our Chief Strategy Officer did a phenomenal job of helping us sharpen our strategy, and we had never done an Investor Day despite 12 years as a public company, and did our first Investor Day in December of '22. I think our focus on the acuity of the populations that we're serving, but also helping us look across the continuum at all the different ways that we can deploy capital. Our Chief Strategy Officer is very involved in working with Heather and I, in not only shorting out the geographies that are interesting, but helping us determine what is the best way for us to deploy capital? What's the highest returns? Does it make sense to do a JV versus a de novo versus doing an M&A transaction in a given market, been extremely focused on bed additions as well. On the transformation side, we have so much variation in this business. We're a company that has grown by acquisition. There's been deference to the local market operators. And yet our transformation team, I think, has done a phenomenal job in a short period of helping us smooth out that variation from everything the way that we do clinical training, the way that we provide consistent evidence-based protocols across the company, the way that we staff our facilities in a way that is consistent. These are some things that have really improved the operations of the business, and we'll continue to do so.

So I would just say it another way, some pretty strong overlap with what would have been kind of traditional business development on the one hand and maybe operating [indiscernible] to the COO on the other hand. So that's kind of interesting. So I'll probably care more about this topic than it is financially relevant at the moment. But you came from Humana. Obviously, you understand the payer side. What psych is -- behavioral health is traditionally a difficult area to apply. We were just talking to a navigator about some areas don't lend themselves to traditional quality measures and outcomes measures. So on the psychiatric hospital side of your business, where you're really in the short-stay crisis stabilization other than getting the patients stabilize in a plan of care and outlook, what are the payers really looking for over and above that? And how have you benchmarked yourself against your competitors in that business, which I think is kind of a difficult business to apply sort of simplistic quality outcomes as you see?

Yes. Well, I would say that we're still in the early stages of doing that. I mean, I think as I said before, this evolution of more transactional, tactical relationship to one that's more strategic. I mean, we really need to follow what's important to the payers. And I think increasingly, what's important to them are quality scores but particularly readmissions. And so that's kind of where we start. We have seen some value-based program here and there. Only a few payers have been interested in that. But just having been on the payer side a long time, I'm just increasingly convinced that it's a question of not if but when we're going to be compensated for the strength of our clinical health outcomes. It's why we've been making these investments in technology and why we've been making these investments in quality. And not just EMRs, but patient monitoring and staff safety as well, because all these things together are going to lead to superior outcomes over time. So I think it's really on the payer to help us with what's important to them. It's a little bit different payer by payer. But the most frequent is a readmission metric.

You guys don't talk a ton about your I think market's current term of art as your said facilities or your -- what you bought years ago from Bain, this traditional residential substance abuse business, longer lengths of stay, but maybe just hit some high points of that business. And again, my understanding is that business has a pretty hot failure rate. People have to go through, you have multiple times before they're successful. So how have you tackled that not -- and just talk a little bit more about that business, which again, I don't think the market has a really deep understanding of...

Sure I'll start. So that business definitely is different when you think about the way that -- outlook from how we take patients in all the way through to the discharge plans. But it is, I think, important in the continuum of care. I think when you think of the specialty business, they have longer lengths of stay. They're typically coming for a specific diagnosis, a specific illness and oftentimes comorbidities. What I would say about our specialty business that is a little bit different from others is the acuity level even in those facilities. The acuity level of the disease state or the fact that they have multiple diagnosis codes. That's what we specialize in our specialty facilities, which is similar across all of our lines of business. We serve the most acute of the acute patients, we serve those in our RTCs. We serve those certainly at our CTC clinics and it's the same with the specialty business. There is a little bit of a different nuance with the specialty facilities in terms of the payer mix. Those tend to skew more commercial as opposed to the other lines of business, governmental payers, but certainly, the acuity level is something that's constant throughout.

I think one other thing that I would just say is that there's a real cross referral potential with our specialty business and other lines of business, something that we've tried to be more intentional about in the last 2 years is that we know that someone that presents in one of our specialty facilities and new patient, 70% of the time has an underlying opioid use disorder as well. And so we have not been as focused on making sure that there's continuity of care when they return back to their home after their treatment in the specialty facility, and we've seen some early success there, but I think that that's another area where having this full continuum of care, which I think is differentiated for Acadia can really unlock some value for the patients and certainly deliver better outcomes as well.

So you kind of led me right where I wanted to go, which is always [indiscernible]. The patient acquisition model for your 3 businesses is different. So the psych hospital business, that's a BD effort, calling on local hospitals. But I don't quite understand as well the -- your patient acquisition model on your specialty as well as the patient acquisition model for your methadone business. So maybe talk about how those differ and how much attention you've been able to pay to customer acquisition costs and helping to continue to move this in the right direction?

Yes. Do you want to start or do you want me to?

Sure. I can start. So you're right. That's why I started the last question.

Would you said that again...

So if you think about how patients come to us in the acute facilities and also in the residential treatment center, the children's acute or adolescent acute facilities, those are typically involuntary admissions and those -- you're right, it's a business development.

Say that again.

I'll work on that. Those are coming to us out of necessity, and there is certainly a significance in proximity for those, if you are looking for hospitals, looking for a place to refer patients, the proximity really matters geographically speaking, same with the RTCs. From the specialty perspective that might be less relevant if someone is traveling for a longer period of time. It's in a way from [indiscernible], they're looking more for the specialty line. So for example, an eating disorder versus a [indiscernible] disorder, those are going to be looking for the right clinic. Those come through, I would say, more traditional sources where patients are seeking the right place to go. And so they are looking, sometimes it's through Google searches, it through references, referrals, but they're looking for us. The CTC business is a little bit of a hybrid. That is definitely building a customer list type of growth model. So you opened a facility, the geography really matters in the CTC business because of the frequency that patients visit our facilities. But that is also a direct marketing type of environment similar to what you would see in retail, where you open the business and then you build the customer list and then that grows either through word of mouth or just proximity.

Did you guys have the local alumna networks and the specialty. That seems to be some of the competitors like to lean on that as well as a referral.

Yes, I would say it's not just local though. I think there are people that will revisit a facility and will continue to come back after they have success there. And so they'll keep in touch, but it doesn't necessarily -- it would be local to the facility, but not certainly local geographically.

Yes. The only nuance I would add is in our CTC business from a patient acquisition standpoint, having no waitlist is incredibly important and being able to take the wait time under 5 minutes is also incredibly important. We had pretty significant variation in that business a year ago, where the wait times could be over 10 minutes in certain facilities. We've taken that down under 5 minutes, which is incredibly important to new patients. And then word of mouth with those patients, obviously, is particularly in that local area, a real referral source.

The only thing I would add that sort of [indiscernible] across the business is, you think about the opportunity to serve these patients, you don't often get multiple chances. So if they're making the phone call, whether it's a hospital referring a patient for an acute need, or whether it's a patient with some sort of a specialty disorder or whether it's a CTC patient who's looking to get into treatment, they take a lot of courage. It takes a lot of opportunity to make that phone call. You need to answer the phone, you need to have the admissions process to get the patient seen then, and I think that's a key differentiator in the business.

This is not the most important question, but I've been kind of intrigued looking at the industry, I'm seeing a little bit of movement toward behavioral focused ERs. Is that something that's on your radar? Or would you view that as competing with your referral sources? And what do you think about that business?

We've seen a few examples like I don't know that I would call that a trend yet, but I would just point to the fact that these premier health systems, the 21 that we currently have, they're reaching out to us because they see that we are delivering superior service in behavioral health. We know this extremely well, and we have capital to deploy. And so these models have worked. But I mean, clearly, that's something that we'll watch over time. But just it hasn't -- we really haven't seen that in any market of note so far.

I think BayCare is going to build on something like the business journals and then a couple of other examples of that.

Do you know what geography?

Yes. I'll find that article. Send it to you. I mean it's like literally on the drawing board. They haven't even -- is probably 2 years out, but I thought that was interesting. Yes. And then finally, you made a -- you inherited a tech deficit, you're rectifying that December '22 or 15 months into your Analyst Day. What -- how much of what you spend is just table stakes, and you really don't expect a return, which you have to do it? And how much of what you're spending on tech do you expect to get a return? And if so, what does that return look like?

Well, I'll let Heather quantify the return. But these are investments that are positioning the company for the long term. We didn't do them just to get an immediate return. We're trying to set ourselves up to compete on the strength of our clinical health outcomes. And when you don't have an EMR, you don't have data, being able to have payer conversations to be able to make a case for rate adjustments where it makes a case. It's just a very difficult conversation. So I think there have been so many fringe benefits of putting these in place. I mean, we know our employee engagement is much higher. We're able to -- when we put an EHR in a facility, we're able to attract more employees, more clinicians in. That's a real differentiator. People don't go to a nursing school today. They're not trained on paper. But that's what you see across the board still in behavioral health. So having an EHR is really a differentiator. I would say surveys that we have with regulators, when they come in and we have an EHR in place, those go more quickly, and we're able to work through those more expeditiously, which also has all sorts of benefits. So we will also get operating leverage from these over time. But just even in the near term, like these investments have really paid off for the company. Anything you would add, Heather?

Less? I was right. [indiscernible].

Thank you.