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

Good morning, and welcome back to day 2 of the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Managed Care and Facilities analyst here at Barclays. And with me on stage joining me here today is Christopher Hunter, CEO; and Heather Dixon, CFO of Acadia Healthcare, welcome.

Thanks, Andrew.

[Indiscernible] top of mind for a lot of investors and that's huge health care. Just want to understand what's been the impact to your business so far? And what are your first impression for some of the plans to address these issues.

Yes, I'll take that. I mean, I would say we haven't seen, fortunately, a significant impact. There were some challenges that we had very early on with just checking benefit eligibility, and we were able to utilize a backup solution there pretty quickly. So we continue to monitor very closely, but really haven't seen an impact. I would say, overall, in terms of some of the flexibility and the provisions that HHS has put in place, I would certainly applaud those, I think, both on the provider and the payer side, we really continue to hear that those are making a difference. And just pleased that those are in place.

Right. With that out of our way, let's start on the core demand trends in behavioral, think CTC revenue was up close to 20% in 2023, a year where you actually pulled back on de novo openings. What does that tell you about the underlying demand in that business and the unmet need?

Yes. I would say overall that we just continue to see record demand for our CTC services. And if you kind of step back and just look at opioid use disorder, 9 million Americans that are suffering right now from OUD and only 10% of that $9 million are actually in treatment for medication-assisted therapy, which is methadone really the gold standard for treatment. So we have talked recently about this almost entering into a fourth wave of opioids where the first wave was more prescription pills and then it moved to heroin and then to Fentanyl which is 50x the potency of heroin. And now we're in this fourth wave, which you discussed around polysubstance, where someone in their urine that's presenting as a patient will have not only Fentanyl, but also frequently cocaine or methamphetamine in high percentage at the time. So just the complexity and the severity of these diagnoses continues to be more pronounced. And then the other thing that I would just point out is that there are estimates here recently that almost 8% of all hospital spend right now was attributable towards the direct care of patients with OUD. So this just increasingly is becoming a problem for the broader health care ecosystem overall.

Great. And if we look to the inpatient side of the business, you delivered 5% same-store admissions growth in '23. Can you speak to how Behavioral Health Care are trending to start the year and what the outlook there is?

Sure. Obviously, in first quarter, we've seen a little bit of a slower-than-expected return to normal volumes coming out of the holidays. In February and early March, we saw some improvements, we've seen to continue that in census trends, right? Because of a few factors and a strong comp in the last year, we're really expecting that this quarter's growth rate is going to come in just slightly below our recent volume trends, which we very much expected and certainly layered into our quarterly guidance. But we do continue to have confidence that we're going to be able to deliver on our same facility patient day growth in the mid-single digits for the full year as we begin in the back half of the year, to really ramp up a number of the bed additions and some of the JVs that we had put in place last year. And then I would just say, overall, with respect to inpatient trends, and those with just we continue to see record demand across the board. I mean, those were the serious mental illness last year increased 9%. This is for a U.S. population that's growing it 50 basis points a year, 9% growth in SMI from 14.1 million to 15.4 million Americans. And then when you layer in a [blood] diagnosis test through SMI, that's growing at 15%. So just the underlying demand overall, I think, speaks to just a lot of opportunity across the good.

Great. Maybe on that moderation point a little bit [Indiscernible] just within service lines specifically that's driving out, do you think this purely a seasonality factor?

Seasonality. Do you want to take that Heather?

Yes. I would say seasonality. I wouldn't point to any one particular service line. It's just as we are coming back from the holidays, so the impact of the ramp overall, nothing in particular.

Great. And when you think about the bed additions that you're talking to this year, any color on just the season and the quarterly cadence of when those are likely to occur?

Yes. I'll start, and you can jump in. So from a perspective for 2024, we have new beds coming online, phased towards the back half of the year certainly, and I'm sure Chris will go through in a minute what those are. But it will be phasing for the back half of the new openings. But also remember, we opened beds heavily weighted to the back half of the year in 2023. We'll see those start to contribute later in the year as well. Do you want to talk about it?

Yes, just in terms of the visibility that we have into the year [Indiscernible] saying we're really excited about 3 JVs that we'll be standing up and opening this year with just [3 JV partners] and they have varying size. But they [Indiscernible] Austin, Texas we're adding 100 beds to an existing facility and partnering with University of Texas, Dell Med School to really large facility that we're opening with Henry Ford just outside of Detroit that has just over 200 beds to facility that we're going to be opening within Intermountain Health just outside of Denver and Westminster, Colorado, it is a 144-bed facilities. So as Heather said, these would be a little bit more weighted to the back half of the year in terms of when those openings will take place. But we also have good visibility to a number of the de novos that we're opening. We have one in Mesa, Arizona that we're opening and one in Wisconsin and Madison, and then another one that's close by in Tampa as well. And I think you couple all of that, the de novo growth, the JV growth with also the visibility that we have in [Indiscernible] where historically at our Investor Day, we've always talked about roughly 300 beds that we've added a year to our existing facilities. We anticipate taking that up to 400 that's a really strong return on invested capital and something that we're really looking forward to this year as well. So just coming into the year with high visibility into our bed addition growth.

Great. Moving on, one of the nuances of Acadia that there's no corresponding patient day associated with the CTC business as a result, I think, both revenue per patient day and cost per patient day have to be overstated. Can you share your thoughts on underlying rate increases and cost per FTE in your business?

Sure. So you're right. The CTC service line is one of the things that can contribute to the revenue or the cost per patient day without adding patient days. Outpatient is another piece of our business that I would put in that same category. On a like-for-like basis [or things being equal], you wouldn't see an outsized impact. During Q4, we did have some large growth in our CTC business, but outpaced the growth rates in the other parts of the business. So you would have seen a bit of an impact from that. We're really pleased with the fourth quarter across the board, rate and wage that maybe if I just break those down individually from a rate perspective, we saw a really good performance, and we're pleased with where we ended the year. We're also projecting for 2024, mid-single-digit growth for those rates looking forward. If you think about how those rates are contributing -- contributing across the board, I would say equally, we don't have any one particular business line where we expect to outsize rate growth. But to your point, if we have outsized total growth, it could impact per patient day amount. If you think about wage inflation, it's a very similar thought process. If you had outsized growth in any particular area, specifically CTC or -- sorry, outpatient, you could have that impact. But if things are consistently growing, which we would expect them to be, you wouldn't see an outsized impact. We did see last year, I think as you know, as we talked about before, the base wage inflation, which is typically how we look at it, just to factor out some of those impacts that come into [Indiscernible] per patient day. We saw that base wage inflation come down over 300 basis points just during 2023. So we're very pleased with that progress. If you think about the difference between that base wage inflation progress and what you see in the SWB per patient day, there are some other things that impact it, namely, it would be the corporate costs and some of the other investments that aren't in sort of you're seeing facility numbers or in your facility totals, but we are still expecting for 2024, our base wage inflation to moderate. We finished the year to have been a really good place. We believe that, that's going to be our normalized rate inflation going forward.

Great. And rates have been tactically strong for a number of years now. What do you think is driving the durability of those rate increases? And how you think those rates will develop as we look ahead to fiscal year '25?

Yes. I would say it's probably too early to think about 2025. I'll give just...

[indiscernible].

From an American perspective, we think we will be mid-single-digit rate base for 2024. I'll just point out one key differentiation as we think about the guidance that we're setting compared to the guidance that we set last year. When we put guidance out for 2023, we actually did that pretty early in December in 2022. As for 2024, we just released our guidance a few weeks ago.

Just we did our first ever Investor Day in early December of 2022.

That's right. There was a reason for that. We have a few months more visibility into 2024 as we're putting out guidance for 2024. So as we think about what we know and what the cadence of sort of a rate -- our rates have been -- we're very pleased with where we ended 2023. We have a little bit more visibility into 2024 as we look forward, and we're still expecting those mid-single digits. Do you want to say...

I would just add a couple of things. I mean I think the relationships that we have -- the company has built over many years with payers continue to be strong. I think we have obviously made a number of investments in our quality programs, not only putting an EMR in place, but in our acute facilities, but also investing heavily in remote patient monitoring technology as well as patient safety. And I think these are all things that are very interesting and relevant to favorites having conversations. And I think the conversation increasingly turns to their desire focus on quality measures in the future. And I think our ability to align with that I think sets us up well for the long term to make sure that we are increasingly aligned with what they want to measure and that we have the technology in place to be able to make that happen. So I said at our Investor Day and say it again that we increasingly want to compete on the strength of our clinical health outcomes. And I think these investments are really enabling us to do that and enabling us to continue to have really robust conversations that are productive with our payer partners.

Great. And going back to CTCs for a minute, maybe you can talk about the economics here. On average, it looks like your CTCs are generating about $3.3 million of revenue per facility. One, curious how much variation you see around that? And then two, on the margin side, what's the typical time line to break that what the mature margin profile looks like for de novo facility.

So you're right. If you strictly look at the math for revenue and number of facilities, that's about the right number. What I would say is there is definitely variation across the facilities for a couple of reasons. The first is the footprint of the facility, there could be significant variation in the number of patients in those facilities. The second would be just geographically based in the patient demand and sort of what we're seeing coming through and probably a little bit to an extent rate at those facilities as well. But then I think most importantly, comparing to the second part of your question is where they are in the life cycle. So as we open a new facility, we will have a period where we are ramping the census, and we're growing census in the patient count. And that's a perfectly normal part of the cadence of opening a facility. I would say that, that usually takes about a year, 1.5 years for us to get to a breakeven point at those facilities. And then anywhere from 2 to 3 years to get to where we're at our target margins on the facilities. And then maybe the last thing I would say is, after you are at a target mature margin, there is, at times, the opportunity to continue to add census to the facilities by adding some incremental labor because these facilities are very, very few cost patterns that impact them. It's so different than an inpatient facility. You have the workforce, it's probably the main cost of the facility. And so as you add census, you can add workforce and so on. So that is a long-winded way of saying, yes, there's a lot of variation across those clinics, but that's a good base level to think about.

Great. And then, Chris, when you laid out your long-term growth targets a few years ago, market that [indiscernible] location was a big component of the [Indiscernible] growth opportunity. Can you give us an update on that initiative and maybe some color on where the new bed adds for 2024 are with respect to existing and new markets?

Yes. And I think Heather has done a really good job since she came in last year, helping us to refine the process. But for us, it really starts with because we have so many attractive ways to deploy capital. We really are with looking at the geography. And there are a number of underlying components in terms of what's the competitive environment look like? What is the bed need in a given market, what's the construction environment, what is the rate and payer environment? What's the labor environment look like, what are occupancy rates. And I think we go from there putting 20-plus factors into a model and continuing to refine the geographic desirability of various markets. And from there, we really worked through -- does it make sense potentially to partner with the premier health system, and we have 21 joint ventures across the country. Sometimes there isn't a health system in place or sometimes it just makes sense to do a de novo or occasionally we want to get into the market more quickly and M&A can also make sense. So there's always a number of factors that we're looking at on any given day. But I think the process that we've had, we now have in place is a very analytical process to look at the desirability of these geographies and then to tailor our investments accordingly really enables us to flex and I think that is a real difference in prior years.

Great. And Heather Acadia recently increased its borrowing and borrowing capacity. I think that brings your leverage up closer to 3x. Is this a temporary step-up in leverage? Or are you willing to operate at maybe slightly higher leverage ratios given the growth opportunity ahead of you?

Yes. I would say a couple of things. First, we exited 2023 with our leverage just under 2, and then of course, the borrowing that you're referring to in January took us back up to around 2.5x. I think that's excluding the leases, I think there's a bit depending on how you calculate it. But if you think about that level, it's -- for me it's just a really good position of strength for us. We have a really strong balance sheet. There is room in there, I think, for us to invest should we need to. But I would think of that as a stable base.

When you're going back to the rate side for a minute, curious how conversations with state and local partners are evolving, maybe over the last 18 months with respect to the opioid funding. Any updates there? And anything you can give us that -- provide some context for the evolution of these payments?

Yes. I would say the headline is that it continues to be slow, probably a little slower than we would like. But just a reminder that there were $56 billion in total opioid settlement dollars. And our estimate is that only about $4 billion of those have actually been distributed down to the individual states and then they flow from the states down to the individual counties. So I think it's a dynamic situation. There are a few states that are leading, and I think we've done a good job of coming in and positioning ourselves with those states. It's interesting, there are only 16 states that have actually signed up right now to publicly report how they will be using this settlement dollars. And so -- but based on what we can track, we're certainly engaged with a number of the early movers. And I think one of the things that gives me confidence that when this does settle out, I mean the strong emphasis that we've had in that line of business around our clinical health outcomes, particularly on the quality side, I think is going to position us well. So CARF -- CARF, the accrediting agency for MAT facilities. There's 13, I believe, different metrics that they use. I mean, all quality metrics are over 98%. And I think when you couple that with some of the real improved -- the operational improvements that we've made in the last year around reducing wait times for our facilities to under 5 minutes, which is a real patient endpoint. These patients want to get in, they want to get their dosing and they want to leave relatively quickly. And then I think also just the patient satisfaction, part of which is tied to wait time, but part of which is tied to a few other things that we've been very intentional on, we've improved our patient satisfaction by 20% as the last year alone. So when you look at really strong clinical outcomes, making it easy for patients and then obviously, you look on the horizon if the settlement dollars are going to continue to flow through -- when these RFPs begin coming out, I just really like the position that we're in. And I think we have a very strong team that will address this. But as of right now, I think this is really more of a 2025 and beyond situation where we're really going to see those disbursements for [certain states] and then ultimately to the individual counties within those states.

Understood. That's helpful. Can you share what some of those early states are where you're seeing the most progress on those conversations?

There's a few, I mean, North Carolina and Tennessee are 2 that I would call out that I think have been particularly progressive, but it's still very early days, and we're tracking all of the states currently. So I'm sure there will be a lot more to come here, and we'll have more to talk about a little further in the year.

Great. Maybe shifting to the specialty business, the non-CTC specialty, it doesn't get as much attention as the CTC business, but it's actually the larger of the 2. Anything you would note on trends or developments within that line?

I mean our specialty business right now, we finished last year, it's 21% of revenue, and we have 35 facilities. So I would say, just with respect to trends, I mean, I referenced earlier that some of the data that's more recently come out that Americans that have co-occurring serious mental illness and an underlying SUD diagnosis that grew by 15% in a single year, over 1 million Americans last year alone. So this continues to be a real challenge, and I think an opportunity for that line of business. I think we've also been much more intentional as a company in the last year of making sure that there's greater cross referral potential for the benefit of these patients and emphasis. We know when someone presents as a specialty patient in one of our facilities, that's 70% of the time they have an underlying OUD diagnosis as well. And so just during that there was a handoff and that when they finish their treatment in a specialty facility that we can continue to serve them where it would make sense, just continuing to focus on clinical outcomes. I think that continues to be just a real opportunity. But this is one where the specialty service line is one that continues to be a point of emphasis in all of the demand characteristics as with our other line of business continue to be very steady.

Great. Maybe in the last minute here, I can touch on M&A and M&A pipeline. Where do you see the greatest growth opportunities to deploy capital here?

Yes, one of the benefits of Acadia is that we just have so many attractive ways to deploy capital. M&A is certainly one of them, and we'd like to be able to do more M&A. We actually acquired 2 small CTCs in the State of North Carolina within the last few weeks and really pleased to be able to do that. I think it's [Indiscernible] fragmented industry across service lines that I think they're particularly [Indiscernible] that we have been able to make new redetermination across our lines of business in a rising interest rate environment for smaller players. It's been a challenging operating environment, but I think we're increasingly seen as an acquirer of choice, and we have a very robust pipeline across all of our lines of business. And I think you will continue to see that M&A will be a focus for us in '24 and beyond.

Partner of choice and acquirer of choice [Indiscernible] but ended on that note, thank you, everyone, for attending, and please get to rest of the conference.

Thanks, Andrew.