Acadia Healthcare Company, Inc. ($ACHC)

Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the facilities and managed care analyst here at Barclays, and I'm pleased to welcome on stage with me here today, Todd Young, the CFO of Acadia Healthcare. Todd, welcome.

Thank you. Thank you for hosting the conference and the coverage you provide us.

Of course. Todd, you've been in the CFO seat for less than a year. And just as you were settling into the role and diagnosing the issues of the company, there's some leadership changes of the CEO role. Debbie returns, she is one of the most experienced operators in this industry. So what are the biggest changes you've noticed since her return? And what does Debbie emphasize culturally to help turn around the organization?

Yes, less than a year, just over 4 months, in fact. So obviously, a lot of change since I joined. But Debbie coming back has been invigorating to the operators, right? As you noted, she's got the longest tenure of leadership in behavioral health in the industry, 30-plus years at UHS, running behavioral, 3 years as Acadia CEO and now back again for us. And right now, we've added by the end of this year, 3,000 new beds across facilities across the country. Our opportunity in front of us is to fill those beds and to really execute and run the company from an operating perspective really well. And she's got a demonstrated track record of doing that. It's clear on the expectations from investors, but also internally with the operators, excited to have her leadership back and really focused on taking care of patients really well.

Great. You've highlighted a $200 million embedded EBITDA opportunity from facilities opened over the last 3 years. Looking back, it's still not entirely clear why some of those facilities underperformed relative to initial expectations. So can you help us understand what specifically went off course during the ramp, whether operational execution, payer dynamics or otherwise? And what you learned that's now shaping how you approach new facility openings today?

Yes. That's the opportunity for sure, is this $200 million of embedded EBITDA inside the, as I said, the 3,000 beds we've brought on. I wasn't here for a lot of that time frame to know. But as we've looked back at what has happened, there's been a confluence of events, and it's not always the same at each facility. But certainly, there's been some licensure delays that affected how quickly we could admit Medicaid patients into our facilities. And again, in the acute space, Medicaid is a big driver of it with involuntarily committed patients that come into the facility. So that's been an area of focus is, all right, how do we make sure we're doing all of the preopening activities appropriately. And then once we open, how do we accelerate timing of patient adds, joint commission surveys, all of those sort of items that have to be executed in order then to get the Medicare tie-in number to then get approval from Medicaid to start serving the patient base that we're really looking to help in the acute facilities. And so we have made some changes to kind of not have as many facilities open all at the same time as there is a lot of resources needed to open the facility, be just think about staffing up and hiring a lot of people. If you're doing that all with 3 new facilities in the same month, it's different than if you spread those out over the couple. Now downside of that, we have some facilities that are ready to go that we're delaying opening in order to optimize it overall. But fundamentally, I think those are some of the changes we've looked at. The other area in many of these cases for these facilities, we've been doing them with JV partners. So for example, Geisinger Health in Pennsylvania, Henry Ford in Michigan. We just opened our new facility outside of Boston with Tufts here 3 weeks ago. And we're really focused on those JV relationships. There are strong players in the market that have wanted us to partner with them to treat behavioral health patients. We want to make sure we're getting the most from those JV partner relationships, be it engagement with payers, engagement with local state regulators on approvals. But also once we are open, helping them with their patient base. That's a big reason they partnered with us was to help treat the patients that come into their network in their emergency rooms and having that option. And so we've been looking at, all right, how well do we do with our best JV partners and where are the ones where there could be a lot of improvement by improving those relationships. And Debbie is very focused on the people aspect, a big believer that the driver of success comes from your people and your leaders. And so she's been taking -- her first thing she's done is take a look at that across the enterprise.

Great. And looking ahead, can you help us frame the time horizon over which you expect to capture that $200 million opportunity? And what are the key leading indicators we should be watching to gain confidence in that pace and durability of the profitability ramp?

We've not given a specific date. We have said it'd be inside 5 years. Clearly, the opportunity is continuing to add occupancy and grow up to that 70-plus, 75% level that Acadia was running at in the late 20 teens and early 2020s. And that's where you see the losses we currently have from start-ups and new in phase. But fundamentally, you're right, we're talking about 3,000 beds. $50,000 of EBITDA annually per bed gets you to the $150 million. You don't have $50 million from start-up losses and you get to the $200 million improvement versus Our guidance we have this year. So we do feel like this is about execution on our end that the dynamics out there in the marketplace that are always happening and around are less going to be impactful than our own execution and making sure we're running our facilities well to treat the patients that we know are there.

Great. So occupancy sounds like a key item to measure. Can you give us a sense of where the occupancy is of those new facilities today and...

Yes, they're behind, right? And that's what we've tried to lay out some cohort curves to show where they fall relative to history, relative to expectations, and those have been behind. And that's where the opportunity is certainly there to increase profitability by improving those levels. We've not given specifics by facility, but no doubt, our focus is on all of our inpatient facilities is driving occupancy because, again, that's where our revenue comes from, is treating patients and giving great care and helping families at tough times in the life.

Great. You saw some improvement in same-store volume growth in the fourth quarter and your 2026 guidance assumes roughly 4% growth before factoring in the New York Medicaid headwind. Can you walk us through what's driving that improvement, whether it's underlying demand, operational execution or strength in specific service lines?

It really is about the execution. And so there's 2 components when we think about bed growth, right? We've got what we call expansion beds where we add beds to existing facilities. So once a facility gets into the 75% to 80% occupied, it becomes challenging because you may have an adolescent patient, but you don't have an adolescent bed. You have an adult bed. And so you get to some occupancy where you just can't get to 100% as a result. And so in those cases, we try to add beds to an existing facility. Then you can leverage the CEO who's already there, the cafeteria, you've already got admissions teams and you just get a better contribution margin from that. And typically, it's lower cost to add beds to an existing facility than building a new facility from the start. So that's a big chunk of growth we see inside that historic business is that opportunity. And then the ramping cohorts we've talked about, these beds open between '23 and '25. Again, as those continue to improve and frankly, lose less money in '26 than they did in '25 that's what drives the volume. So between both sides is how you get to the 4% growth before we take into account the impact of our specialty business from New York Medicaid.

Great. And as you look across the portfolio more broadly, how would you characterize current demand trends for inpatient psychiatric, specialty and opioid use treatment?

Certainly, we see the demand there. Unfortunately, it still is there and continues to grow on the inpatient acute beds. We don't think that's a driver of our challenges is lack of demand. On the specialty business, again, we've seen other than these impacts and our specialty numbers are noisy as I'm sure most of the investors are aware because we closed a number of specialty facilities last year. And so you see negative growth in specialty that's really a function of the closures versus how the underlying base is growing. I think we grew specialty in Q4 at just under 4% once you factor the closures in. And then unfortunately, the state of New York made a decision not to pay for their patients to be treated in our facilities in Pennsylvania, and that's creating a drag in 2026. We've called out $25 million to $30 million EBITDA hit from that. That being said, we're focused on backfilling those facilities and hopefully driving that to be a conservative estimate as we get more patients in. It is a unique situation. Typically, we are enrolled in a state's Medicaid program. New York would not allow us in as a for-profit hospital, but we just were admitted to New Jersey's Medicaid program. And so that's one of the places we are looking in addition to greater Pennsylvania to fill these beds with patients we can help. And then CTC, again, that's an opioid replacement business. It's a very good business. It's got, unfortunately, again, still demand for that treatment. A lot of patients are not getting treated, and we think there is an ability to continue to find those patients and get them help. We run a really efficient operation, patients are all offered counseling. Many of them take it up on that. But on a day-to-day basis, they usually are not getting counseling. And so they're in and out of our facility in less than 5 minutes to get their treatment and then get on to their job that day. So that's a really good operating model just given for most patients, it's a daily need to come in. And so being efficient with their time is a big driver of how we get growth and continued build of patients in that business.

Great. Let's move on to some of the payer dynamics and reimbursement environment. Acadia has seen increased scrutiny from payers around length of stay and an increase in denials. Can you walk us through the components of your 2026 pricing outlook? Maybe break it down for us in terms of contractual rate increases and how much is offset by payer behavior?

Overall, we're working closely with all of the payers trying to make sure our patients get treated appropriately. Length of stay has been stable. I will call out there's a math exercise going in. We lose specialty patients that are north of 25 days. We have acute beds that are usually 8 to 11 days and length of stay is going to contract on an Acadia-wide basis just from that math. So I don't want folks as they see that changing over the course of this year to think it's a payer issue. For us, we're actively working with the payers. Yes, there's been increase in audits from the payers. And we've got to make sure we're doing our job of advocating for our patients, documenting their treatment well and then we're confident we'll get that reimbursement. We did see bad debts and denials increasing over the course of 2025. We reflected that in our Q4 guidance. And we've generally assumed that what we saw there in Q4 is stable over the course of '26. So certainly opportunities for us to get better, but also risk that it continues to get there. But we feel like we've reflected it appropriately as we move through '26, but the team is certainly focused on those key elements of advocating for our patients and documenting their treatment well.

Great. And do you think this elevated level of scrutiny. Is that a temporary phenomenon? Or do you think there's a more structural shift in how these plans are managing utilization given the broader cost inflation?

I think we've -- I've heard different things. Obviously, coming into the industry 4 months ago from being on the product side, I've been learning this. Debbie certainly views this as part of the cycles of behavioral health. She's seen all the cycles and views this as something that goes through, but that we have to just be there, execute well, understanding that there is a health economic benefit to the overall system by taking care of patients in behavioral health. They usually have other comorbidities and that cost just increases when you have those 2 things combined. And so we're really focused on outcomes. We've been pleased with the outcomes and the improvements we see in our patients. We've started to publish that on our website and are using that outcome data, both with the payer side, but also with referral sources that they can trust us that we're getting really good outcomes for their patients, which is positive for their network benefits. And that's something we continue to focus on is how do we use and measuring these positive outcomes and how do we use that to show the value we're bringing to the patients, to the payers, to the referral sources.

Great. Let's move on to some of the policy items impacting this year. You already mentioned that the New York policy change restricting out-of-state Medicaid care is expected to be a $25 million to $30 million EBITDA headwind. You've already taken steps to rightsize the footprint there. But can you walk us through the plan to backfill those facilities and the time line over which you would expect margins to normalize?

Yes. I think we're looking to do that over the course of the year. We're moving with a sense of urgency, as you can imagine. As I mentioned, New Jersey approval is a positive. We're looking to expand. As you can imagine, the reason the EBITDA impact was so big is these were really highly occupied facilities that were run really efficiently. And so we had a really strong network of referral sources that we're continuing to keep these in a great spot. When you have that, right, there's less need to go out and find more because you're running at such a high level of occupancy. We're now rebuilding that muscle, getting out there, looking for those other referral sources and trying to find those that we can help. We're also hopeful that perhaps New York will reassess this policy is access to care is important for their population base, and we were doing that at a very efficient price point relative to the cost of care in New York State. But our focus is on really finding new patients to backfill those beds. And hopefully, we get a lot of that accomplished over the course of this year.

Great. And is this item common in your portfolio where you're treating patients in one state that may have coverage in another state?

It is. But as I mentioned earlier, we're enrolled in those state Medicaid programs. And so when they cross state lines, it is not uncommon. And it's really in the specialty facility. I mean we have specialty facilities that attract patients nationwide. Sierra Tucson is generally considered one of the best in the country, if not the best. And so we get patients from across the U.S. to travel to Arizona to be treated. We have other facilities in many places where we do have other patients from other states. So New York is unique in how they treat the for-profit sector. And so we don't view this as something that could have a negative impact on our business from another state.

Great. And another policy item weighing on this year's guidance is the California staffing requirement. It's only a $4 million EBITDA headwind in your 2026 guidance. But can you walk us through the nature of that specifically, how much is driven by the incremental labor costs and compliance costs versus any impact from reduced occupancy or capacity?

Yes. So the state of California has mandated certain staffing ratios from a skill matrix standpoint. And originally, it was going to go into effect at the end of January. Now it's been pushed back to June. We've been actively working to be compliant with this so that we don't have to not treat patients. And so right now, we feel very good about our ability to hire the higher skilled nurses to fill. We don't have a change in number of employees because our ratios were fine under all standpoints. But we do now need to basically eliminate a lower role to hire a nursing role. That comes with it an incremental cost of the salary difference, but it doesn't really change the benefits, the total number of FTEs. So that's why we've got a $4 million headwind. We're getting this implemented kind of end of Q1 into Q2 so that we don't have to affect occupancy. So there'll be a small, incremental costs in '27, but it's probably closer to $2 million than thinking about this as a June, a 6-, 7-month impact in '25 that turns into $7 million next year. Our view is we won't have to shut down any beds as a result of this. And thus, it's really just this cost difference between the nurse we need to hire and the tech that we no longer will have to employ.

Great. Let's move on to some of the expense trends. PLGL specifically has been a recent pressure point. I think it would be helpful to touch on that given the accruals that have increased in recent years. And your guidance assumes those expenses step down in 2026. Can you walk us through some of the key quality and patient safety investments the company has made to reduce incident risks and how you monitor claims experience and update those expectations as the year progresses?

Sure. Last year, we had a $61 million increase in our PLGL expense to $115 million. That was driven by looking at a number of factors. The first, we had claims increased by 186% over the previous year. That's a dramatic increase after what had been pretty stable claims numbers on that. Then as we looked at what was the cost to settle claims, that had also increased. And so we needed to increase the reserves on the balance sheet for historic claims that were sitting already in our books. That was about $18 million to get those claims up to what we view as a sufficient level to deal with what likely settlements are. We don't expect that to repeat in 2026, which is why you saw the PLGL guidance come down by about $10 million at the midpoint. You say $18 million minus $10 million, that seems to be a little off, Todd, but we've also assumed that we have higher insurance expense. The insurance environment has changed dramatically over the last few years. So in 2022, self-insurance was at the $3 million level and we didn't have to pay on claims above $3 million. Now it's at $15 million and for sexual assault claims, it's even higher on that. So that's been a big change as well as the cost of that insurance going up. As we look forward, we are assuming that claims activity in this year is the same as last year, but that 186% increase continues. We did not assume a reversion to the mean. The other change we've done is every month, I sit with the legal team and we look at how many claims came in, what are settlement costs and how are those comparing to the actuarial expectations that were set with that actuarial report in December to ideally allow us to adjust faster so that we don't have any surprises with respect to this. So last year, our balance sheet reserve got up to $155 million versus only being $78 million at the end of 2024. So we feel like we've gotten a handle on it, understanding that claims activity will continue to be something we focus on as the driver. From your question on investments, yes, we've made a lot of investments in safety and quality technology as well as training. At the end of the day, we're in a people business and people are what drive this. You need good process, you need good technology and you need well-trained people to take care of our patients. The safety of our patients is, first and foremost, the thing we have to deliver every day. And as we do that and focus on it, it should reduce the number of incidents understanding that in our line of treatment, there will always be incidents happening, unfortunately, in facilities.

Great. Let's finish up here with capital deployment. CapEx is expected to decline by more than $300 million in 2026, and you're guiding to positive free cash flow. First, is that a clean cash flow number? Are you making any adjustments to operating cash flow there? And then second, how should we think about the priorities to deploy discretionary cash over the next 12 months across debt paydown, M&A, share repurchase and reinvestment?

I'll start with the last one, which is reducing debt. We're pleased to be guiding to free cash flow positive here in 2026. That is a clean number. That's operating cash flow less CapEx, including all items that we're adjusting out for adjusted EBITDA purposes. We've said that legal and transactional costs, we expect to be about $100 million this year. That's out of adjusted EBITDA, but it is embedded in the operating cash flow assumptions. We have not assumed a settlement on the current DOJ investigation going on. So if that happened this year, I think we'd be pleased to get that behind us, but we've not assumed that in the number. So that would be one thing that's outside of our current expectations. But really, it is just executing, operating the facilities well and then we're focused on filling the facilities that we've built and reducing debt versus thinking about additional CapEx to grow bed volumes. We've got a lot of embedded growth available to us as we execute and take care of more patients across our entire network.

Great. And as you saw yesterday, one of your peers made an acquisition fairly large in the outpatient behavioral space. Most of your investments over the past few years have seemingly went towards new facilities, JVs, inpatient, things of that nature. How do you think about the outpatient behavioral opportunity that presents?

Yes. We obviously have a huge outpatient business with our CTC business, but with -- you're right, we've been building inpatient acute beds and then adding outpatient as part of that continuum of care. And that's really where our focus is with the outpatient is stepping down patients into outpatients as part of a continuum of care treatment plan versus a pure outpatient business.

Great. With that, we're out of time. Todd, thank you so much for joining us here today, and please enjoy the rest of the conference.

Thank you.