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

Hey, everyone. I'm Joseph Overman, I'm on the health care managed care and facilities team here at UBS. Today, we have Acadia Healthcare with us. We have Chris Hunter, Chief Executive Officer; and Todd Young, Chief Financial Officer.

Just a good place to start off today would be the 8-K that you all filed after the close yesterday, which announced that the company has agreed to settle previously disclosed shareholder litigation for $179 million. Can you just walk us through some of the key considerations there? And why would you all agree to settle that case?

Yes. Thank you, Joseph, and thanks for having us. On the 8-K, I think the first thing that I would mention is just that the company has consistently denied any wrongdoing and the announced settlement that we put out this morning will not include any admission of fall or liabilities. So pending the expected court outcomes, the settlement just brings us one step closer to finally putting this behind us. This is going on for many years. This is a case that goes all the way back to 2018 time frame and centered on allegations that the company had made misleading statements about its business and financial performance between April of 2014 and the end of 2018. So $179 million settlement. We expect to finalize this at the end of November here. The payment is going to be funded through a combination of approximately $30 million in anticipated insurance proceeds, the remainder from cash on hand and existing line of credit. We also believe that we continue to be very well capitalized with a strong balance sheet. Our net leverage will increase modestly from 3.4x to approximately 3.65x, which we view as manageable just given our cash flow profile and just our ongoing efforts to unlock value across the business. So we believe that it's in the best interest of the company and shareholders to move on here and that's really the reason that we want to reinforce that settling does not mean we accept the allegations.

Okay. Got it. At this point, we're now 10 months into the year, into 2025. How has the year been so far for you all? How have the results compared and differed from your expectations coming into 2025?

Yes. I would start and maybe just turn it over to Todd. I think I'd start by saying through the third quarter, our results have come in modestly below expectations, and we've taken steps to reflect that in our guidance that we provided last week. I do want to cover what I think we have done in 2025 that really sets the company up for significant growth in 2026, and I think positions us to really unlock the free cash flow generating power of the business. So we brought on 1,700 beds over the course of the last few years. So calendar 2024 and then year-to-date 2025, 632 of those beds will drop into the same-store calculation in the first quarter of next year. We've done work on optimizing our portfolio. We've had to close down a few underperforming facilities. We've been very outspoken on our commitment to capital deployment and taking our CapEx down by $300 million next year, while still being able to generate significant beds. We have invested heavily in quality and safety initiatives that really have set the company up well as we have seen an environment across the entire industry that is becoming more scrutinous and that we're seeing more surveys of facilities. And we're the company that is expanding access to care and building all these beds. So we're really proud of the progress that we've made on that front. Todd, what would you add just on the -- considerations.

I mean that's -- fundamentally, as we look across the next 3 to 5 years. The earnings power of the company has been built with this additional beds being added on and our ability to execute. Now unfortunately, we've had to close a few facilities that were underperforming and that happens when you have nearly 280 facilities in the total portfolio. But all of those things, I think, have been done with great rigor and insights. And now we're looking to really increase that free cash flow generation of the business, reduce leverage and give ourselves a better platform moving forward. But again, overall, the company has weathered some storms and is getting through that. And I think that's what sets us up to really drive growth going forward is the ability to continue to drive volumes into our new facilities and work with our really high-quality JV partners to provide great care to patients. The end of the day, that's what will create the value. And the team is really focused on that and build these quality initiatives to really handle the additional regulatory scrutiny that's being put on the industry at the moment.

Okay. And then what is the latest you all are seeing on the volume trends? I know you all have been dealing with some pressure, primarily, it sounds like for managed care companies. Can you just talk about how these headwinds have developed and what the impact has been for Acadia?

Yes. I think overall, as we talked about last week on our call, we have seen more pressure with managed payers with pre-authorizations looking at things after 3 days versus but an acute patient be in for 7 to 10 days. We've seen greater focus on those elements. And so while we're very pleased with the 3.3% same-store admission increase that we saw quarter-over-quarter it was offset by less revenue per patient day and again, some strengths on average length of stay coming down. Now generally, we've been adding a lot of acute beds. And then the acute patient is typically in a facility for 7 to 10 days. And thus, over time, our average length of stay as a company is going to drop because of just the percentage of acute beds relative to other beds. But it is something that we're working with, with the payers, especially on the managed Medicaid side. And we think those conversations are going well. We have seen their public earnings calls talking about their behavioral health spend, and we think they're being a little reactionary in certain areas that we'll work with our data. I mean, I think one of the things we talked about already is the increase in putting electronic medical records in the facilities, getting better quality data and outcomes that we can take to the payers. And when we do that, we get good responses from them. We're continuing to do that at every level.

Okay. And the recent guidance updated with the third quarter earnings call implies a deterioration in the fourth quarter versus the third quarter. We've gotten a lot of questions when investors asking, is this pressure that we should extrapolate into the future, into future quarters and 2026 potentially? Just sort of in your view, what's the right way to view these headwinds that you've called out for 2024 -- sorry, for fourth quarter 2025.

Yes. Joseph, let me take that one. We've been clear that the fourth quarter, particularly when we provided our guidance last week, reflects a number of different headwinds from volume softness, some of the rate pressures that we've seen, certainly elevated bad debt and denials and we called out an incremental $5 million PL/GL expense. So those collectively drove the step down in our guidance. But that said, we do not believe that the fourth quarter should be viewed as a new baseline for '26. And I think there are several factors that I would point out. And I think the first is from a start-up losses standpoint, we expect start-up losses to decline modestly in '26 as we shift to more of a focused growth strategy, Q4 represented the peak for start-up losses in '25, and we anticipate having a step down next year and then certainly into 2027 as well. The next thing I would call out is that we have taken decisive action on underperforming facilities, which should not only improve our margin mix but also reduce some drag on EBITDA next year as well. A third would be the ramping contributions that we're seeing from the recent bed additions. I just called out the 632 beds that are entering the same-store calc in Q1. That should really help us from a volume growth standpoint and also operating leverage. And then I'd say that we also have just been actively engaging with payers across the country. Just trying to have discussions directly about the caliber of investments that we've been making and how we can continue to be partners there. So I think just stepping back, we're still finalizing '26 in our budget there, and we're going to be providing formal guidance on our Q4 call in February. But we do remain very confident in our long-term strategy. And we just believe that the actions that we're taking here are going to continue to position us very well for '26 and the future.

Okay. The provider sector more broadly, has talked about some of this increase just scrutiny from payers over the past couple of years, although it does seem like Acadia might have been dealing with more than what some of the other providers have been seeing. Do you view this as something specific to behavioral health? Is it specific to the payers you contract with, the geographies that you operate in? What -- how do you view -- what's causing Acadia to maybe see trends that are different from some other providers?

Why don't I start and then see if Todd wants to add anything on this front. But I would say we are in a part of health care and behavioral health that has seen historic underinvestment relative to the rest of health care. We know that the HITECH Act that provided meaningful use dollars and certainly led to electronic medical records and other parts of health care, including the med-surg providers left the behavioral health companies out. And so we have been a company that has been very intentional about investing in quality infrastructure, that we believe is going to directly help payers manage cost and certainly improve outcomes. And that's something that -- we want to be a partner to the payers. We know that there are under significant cost pressures, particularly in Medicaid, and we really believe that given the acuity of the patients that we're serving and the exploding costs that we have seen documented in other parts of the system that these patients don't get strong care that we really can be a high-quality, evidence-based partner for these payers. And that's something that we want to leverage the investments that we've made and continue to talk about ways to be more of a partner. But Todd, what would you add?

Yes, I think that just -- there is pressure on federal and state programs depending on states taking different approaches. I'm sure folks have heard about those that are having cuts on reimbursement as we've had these negotiations. And so all of those things are things that we're using our data and our quality of our outcomes to help offset, but the demand for the services is up and you're seeing that with the payers' budgets being impacting them calling out behavioral health as an area. That again is an opportunity for us going forward as we've got more ability to help those patients in need. And that's what we have to do is keep converting it and demonstrating the payers that we are net improvement to their overall network of costs. I think we know the comorbidities that come with behavioral health diagnosis that it's 4 or 5x more costly to treat those patients if their mental health area is not treated. And so that's the facts and the data that we keep having as our teams interact and negotiate and talk with the payers frequently.

Okay. Acadia has added 1,700 new bed additions in 2024 and through the first 3 quarters of '25. Can you walk us through just the typical ramp-up for new bed additions? How should investors be thinking about the embedded earnings potential from these new bank additions as we head into 2026?

No. It's really exciting. We're excited to be able to treat and help more patients across the U.S. and we start with our JV partners. Those facilities that we've brought on in 3 new JV facilities next year that drives most of that a 400 to 600 bed increase or with partners like Tufts, like Orlando Medical. And those are the opportunities to take a new facility and ramp faster than one that doesn't have a partner. If we start with the slowest ramp is probably new -- brand-new facility in a new area where we don't have a JV partner, just given you have to get all the staffing, we don't have the local relationships at the same level. The fastest ones that ramp are bed additions, we'll have a facility that's 100 beds, we'll expand it to 130 beds. That usually goes much quicker just given the nature of that sort of expansion. And so overall, we've shown at previous conference last year, cohorts going back to 2020 and how fast they ramp. But generally speaking, we're looking to ramp these as quick as possible. And that is the big embedded opportunities we take the average EBITDA from the new facilities and get it up to a corporate average, there's a lot of embedding earnings growth available that will demonstrate over the next couple of years.

Okay. Acadia has closed down a handful of underperforming facilities recently. You've talked about it on the earnings calls. Can you just walk us through the process for how you make those decisions? Is this something that is part of an ongoing process that would be expected to continue going forward? Is this more of you've worked your way through most of your reviews, and it's smaller going forward? How do you view the closing of facilities.

Yes. Joseph, I'll take that one. I'd start by saying that we do have 278 facilities across 4 different lines of business and it's always a difficult decision to close a facility. We're taking a very disciplined and deliberate approach to the way that we think about optimization and we go through a number of criteria. I mean it starts with does the facility continue to have the potential into the foreseeable future to contribute meaningfully to patient outcomes and to clinical outcomes and operational efficiency. Is there a path to alignment with our long-term strategy? Is there a path to delivering sustainable EBITDA and earnings growth? In '25, we did announce the closure of 5 facilities that after going through a facility-by-facility process in review, we decided to make -- to take action there. We've also ring-fenced a small group of facilities that are on a watch list, but we're continuing to watch closely. But other than that, we do not see any other actions that we'll need to take. I mean, again, we have 278 facilities. We're always in the process of reviewing our portfolio and holding our operators accountable. But we're really looking forward to moving into '26 and having taken these actions, I think will help us kind of put our business forward.

Okay. Acadia has also announced the pause of several new facility developments in the past couple of quarters. Were any of these JV facilities? Or are they all company-owned de novos? And are these more of temporary short-term pauses as you wait for the environment to change? And if there is a rebound in demand or a rebound in dynamics could you restart these projects quickly? Or is that more of indefinitely on pause and revisit in the future?

Yes. Todd just referenced the significant importance of joint ventures to our strategy into our growth and we're very proud of that. I mean, again, just in calendar 2025, being able to open really important facilities with Henry Ford in Detroit, Geisinger in Pennsylvania, Ascension in Austin, Texas, and then looking ahead to next year with Tufts in Boston, Orlando Health in Florida. Here in Florida, we are looking to continue to execute on these JV commitments that we've made. So many of these decisions have really been more focused on de novos, where we've decided to scale back from a given market. There certainly, to answer your question, could be circumstances that we would restart and review these projects in the future. But we also have a very high bar for the deployment of capital, and we look at every single opportunity to deploy capital individually. And we have a committee that goes through that, and this would be no exception there. So we've made these decisions, and we're moving forward.

Acadia operates across multiple different segments. You have your acute, your residential, specialty and the comprehensive treatment center segment. It sounds like the closures have been spread across various types of facilities. Has your view on the long-term attractiveness of any of these specific segments changed over the past couple of years?

I would say it has not changed. We continue to view all of our core service lines, acute specialty, RTC, CTC, all is strategically important and tying into our long-term growth framework. And so -- that said, we have taken a more focused approach to portfolio management over the past year than we have in the past. And that's clearly reflected in the 5 facility closures that I just talked about, 4 of those were specialty facilities and 1 was acute. So in that specialty segment, I would say the closures were driven by shifting market dynamics primarily, particularly in areas like eating disorders where we just overall did not see the ongoing and continued demand, but really a recognition that certain programs just didn't meet our hurdles with respect to outcomes that we're able to generate and long-term strategic fit. On the acute side, the single closure that we had in 2025 was tied more to persistent underperformance and just a lack of a clear path to improvement there. So overall, on the CTC front, we disclosed last week, really strong growth quarter-over-quarter in that business. We've added 14 new CTCs year-to-date. We continue to see meaningful opportunity for accretive growth there, both on the organic and the inorganic side. And so overall, I would just say that we've made targeted adjustments, but our broader strategy remains unchanged. We're very focused on growth in markets and service lines with strong fundamentals, and we just continue to remain confident overall in the attractiveness of each of these segments.

Moving on to the expense environment. The labor environment has been cooling off a little bit in 2025 after a few very tough years post pandemic. In the 3Q earnings call, you all mentioned some incremental headwinds from employee health care costs. Just looking broadly, are the total salaries and benefits still trending as you've been expecting them to? And what type of wage inflation are you expecting as we head into 2026?

Yes. I think a fair question on the labor front. I would say overall that we're seeing very encouraging signs of stabilization in the labor market, particularly relative to what we were seeing as a contrast at the end base wage inflation has ticked down slightly in Q3, and we've now had 6 consecutive quarters of improved employee retention, which for us, reflects the success of some of the really significant employee engagement and workforce development initiatives that our HR team has put in place with a lot of success. From a cost perspective, same-facility salaries, wages and benefits or SWB per patient day did increase in Q3, but that was primarily driven by lower patient day volume which reduced the denominator and created a little bit of upward pressure on per day metrics. So we also saw some modest headwinds from internal medical expense, as you called out, particularly employee health care costs, but these were also manageable. So as we look ahead to calendar 2026, we expect the labor market to remain generally stable, and we're going to provide more guidance on that when we come back in February time frame. But in the meantime, the investments that we've continued to make on the technology front in centralized recruitment in our quality infrastructure, all of those have continued to support staffing efficiency and overall retention at better levels than we've seen in the last few years. And we really believe that's going to position us to convert these rising referral volumes that we've seen into admissions even more effectively.

Professional and general liability expense was a headwind for you all in the third quarter. Coming into 2025, that was already an area that was expected to be a source of some pressure. Can you give any additional detail on that line item? And was the step-up in 3Q more of a onetime true-up to catch up? Or is it closer to a run rate for future accrual of that line item?

Yes. So we're still waiting on our actuarial report for the year on this. But based off what we've seen across the industry is this is an industry-wide issue, it's not a Acadia specific one and then also our own internal case experience. We made the decision that we needed to add additional expectation of a higher expense for that here in Q4. Now that does reflect an expectation that we've probably been a little under accrued throughout the first 3 quarters of the year, much like you saw in Q4 of last year when we had an incremental $14 million. So this doesn't necessarily reflect a full run rate, but we also don't know what the final answer will be. We've given prudence in our guidance here on our expectations, we'll learn more and then were reflected in 2026. But certainly, one of the things is we went and renew this insurance with our carriers, the investments we've made in quality, the investments we've made in patient safety, all of that is really being recognized by those carriers and helping us get better rates than we would have otherwise had. Now again, that's always a tough situation when it's better than you'd otherwise had, but it's still worse than where you were. But again, we do know that these investments we're making and the results we're able to demonstrate is being recognized even though we are in this tough environment when it comes to these risks and insurance costs related to them.

Okay. You all have talked about $22 million of EBITDA upside from pending supplemental payment programs that could be included in 4Q results if these programs are ultimately approved by the end of the year. Do you have any updates on the status of these programs? And is this $22 million number, just the amount that you expect to recognize in 4Q? Is this close to an annualized run rate? Is it close to a single quarter of benefit? How should we think about how much of business catch up versus forward-looking earnings?

Sure. No. And these are kind of 4 states generally that make up this possible $22 million yet this year. It looks like the government is going to reopen based off the last, I guess, 24 or 36 hours, that's a positive as we need CMS to work with the states and approve these programs. It could come -- yet this year, it could come right in early comes in early '26, and it will be almost all retroactive and then we'll get this benefit from having these programs in place for our base business in '26 as well. So we would expect run rate basis once these are going to have at least $22 million of annual EBITDA improvements from the programs. But where it hits yes, '25, early '26, but it's a net positive for our economics and our cash flow going into 2026.

The current administration has made some major cuts to the Substance Abuse and Mental Health Services Administration, including laying off about half of the workforce and terminating some grants to state health departments that were intended for addiction and overdose prevention funding. Are you seeing any impact from these administrative changes or any other administrative changes that are impacting your business?

Well, I think from a public health standpoint, we continue to track all of this, and we're absolutely tracking some of the cuts to SAMHSA, for example. But these programs overall we believe, to provide a really critical role in the community for a number of different programs, including the distribution of NARCAN, which is incredibly important in our CTC business peer recovery programs that we see in many of our lines of business and early intervention services. So reductions in funding there could ultimately have real impact on our service lines. But as it directly impacts Acadia, we're currently seeing very limited exposure directly to our business. We don't have direct funding sources that are tied to SAMHSA an example, and our core business is it reliant on these grant programs, but we continue to monitor the situation very closely, and we continue to advocate on behalf of the industry for high-caliber behavioral health care.

Have there been any updates on opioid settlement dollars? I know when we spoke with you in the past, it sounded like many states were still sort of early figuring out the RFP process? How far along has that gotten enough there been any RFP wins or anything that's worth calling out for Acadia?

Yes. There really have not been many major developments that we would call out which is a little bit surprising. We do believe that when there are RFPs that we have been particularly innovative and particularly given the strong quality outcomes that we have with the CARF measures that are extremely high relative to the competition that is out there that we're going to continue to be very well positioned. We were very innovative with the mobile vans that we've been able to roll out in a number of rural communities as an example. And when these states do begin putting these RFP frameworks in place, we feel like we're going to be extremely well positioned to capitalize on them. But the dollars that are flowing to the states and then ultimately to the counties that then put the RFPs in place. We just are not seeing that many come about right now. But as they do come about, we're tracking them. We'll certainly be applying and we've been able to win our fair share to date. So we see that as something that will really help us serve even more patients that have opioid use disorder and to really leverage the strength and breadth of our CTC business.

On a similar topic, the rural health transformation fund another large pool of funding potentially that's out there? Have you all been involved in looking at those applications? It looks like all 50 states have submitted them to CMS. It's still very early. We're still trying to figure out where that money will go. You mentioned mobile clinics that helps rural communities. Do you have any sort of insight into what that would look like?

Yes, it's a great question. I mean that's something that we've been tracking very closely, and that is something that in a number of our participating states, we think that there could be opportunity. We've obviously made the decision to move forward in putting electronic health records into all of our acute facilities some time ago and are well along our way in making that happen. But this could be an accelerant certainly for us, but for the broader industry. And for that, we really applaud this fund that's been put in place, and they're going to do everything possible to capitalize on those opportunities.

Okay. Great. Do you all have any closing remarks, any sort of key takeaways that you want investors to have about Acadia going forward?

I'd start. I mean -- I'd say I'm only 2 weeks into the new role, but very excited about the passion the team has. Their focus on patients and taking care of those patients really well. And then this underlying earnings growth we will have from filling up the beds with the capital we've already put in the ground. It is a great opportunity to drive future cash flows and really show off the free cash flow generation of the business. So I'm impressed with the team, impressed with the quality of the outcomes we're delivering and excited for what's ahead.

Okay. Great. Thanks for the time, Chris and Todd.

Thank you, Joseph.