Acadia Healthcare Company, Inc. (ACHC) Earnings Call Transcript
May 9, 2023
Earnings Call Speaker Segments
Introducing Acadia Healthcare. Acadia is the largest pure-play provider of behavioral health services in the U.S. Presenting today, we have Chris Hunter, CEO; and David Duckworth, CFO. We also have Gretchen Hommrich from Investor Relations in the audience as well. So with that, I think we'll just jump right into Q&A.
So I guess one of the questions I've been asking all the companies has been about utilization in Q1. Your business is a little bit unique in that your volumes have been strong kind of throughout the pandemic. But we'd love to just kind of hear how you think about utilization. And then you have a number of different business lines. Anything kind of performing well above average or anything still performing below average from utilization perspective?
Yes. Thank you, Kevin, and thanks for having us. I would say we continue to see record demand in all 4 of our lines of business, and so obviously, on the acute side, our specialty business, our comprehensive treatment center business and our residential treatment center business as well. So we -- obviously, coming out of the pandemic, just still significant challenges societally that we're dealing with. And our strategy really is one of dealing with some of the most severe and challenging cases. And we just continue to see the acuity ramp up over time, which from a business standpoint, there have been real tailwinds there. I would say that our acute business and our CTC business are -- I mean, all businesses -- all 4 lines of business are performing well, but I would say those are performing particularly well in terms of the demand side that we're seeing from a utilization standpoint. And we continue to feel very optimistic on the M&A side about the opportunities that we'll see in all the 4 lines of business as well. So we're fortunate to have a diversified business. And we just see this demand continuing over time as we continue to invest to help our patients.
Yes. So I mean is that demand -- it seems to be like acute -- I don't know, probably chicken and the egg, but you got acute where you're adding most of the capacity. Is that because the demand is there? Or is -- would you be growing other businesses just as well if you were -- if you had capacity?
Well, I think there's a real opportunity for us. I mean a lot of the acute growth has been through our JVs. And we did an Investor Day last year, which was the first time we've done an Investor Day in our 11-plus years at that time as a public company. One of the things that we wanted to do was to showcase our visibility into our bed growth over the coming years. And so we did 570 bed additions last year. We'll do 670 this year, and then it will ramp to 1,150 beds for '24 and '25. And so the visibility that we have there, half of that bed growth is driven by these JV partnerships. We have actually signed 18 JVs. We have -- that's for 19 different facilities. And these are definitive agreements where we're partnering with just premier health systems, whether it's Henry Ford or Geisinger or Tufts. And we're working with them in a given location to service population in that MSA. I think more -- and so that is a great opportunity for us with somebody that has a brand name that is well known that can bring not only volume but also has patients that they can bring over that has these payer relationships. There are just so many advantages to doing that. But there are circumstances where also want to grow in an MSA that we see as attractive, where there isn't a health system that would be logical and we'll do de novos in that instance as well. And so we're constantly trying to allocate capital in a way that will help us move towards growth. But I think the best answer to your question is just we have high visibility on the acute side. And the acute growth has been -- the demand has been particularly pronounced. And these opportunities with JV partners when they want to do an RFP or they recognize it's a challenge for them to service these behavioral patients, this is all we do. This is our core business. We don't have MedSurg facilities. So we feel like we're uniquely positioned, and that has led to these 18 agreements in these 19 facilities.
So when you think about that dynamic of de novo versus joint venture, is it really just a matter of -- you say there isn't a JV partner, is it? There must be someone who could JV but hasn't come around to the concept of doing it. I mean how do you go about sourcing a JV partner? What are you looking for in a JV partner to create that relationship?
Yes, it's a series of things. I mean it's a number of criteria. I mean I think it starts with us stepping back and saying, what is the demand in a given MSA? What's the competitive landscape? How many other facilities are there, behavioral health, it's still just a highly fragmented industry. What are the referral sources? What are the payer relationships that competitive environment is just such an important overlay as well. So we're looking at all these different criteria. Sometimes there just isn't a health system of size or the referral volumes from behavioral capacity isn't flowing through that facility for whatever reason. And in those instances, we will plant a flag and buy land and build our own facility. We'd like to be able to partner with the JV where it makes sense and certainly where the economics make sense. Obviously, these partnerships, there's a lot of give and take in terms of are they contributing land? Contributing a building. There's a number of assets that sometimes they will come to us with. So there's no cookie-cutter approach, but we try to be creative and work through that with them and just continue to see so much potential there. As we look at our pipeline which continues to be robust, both on the JV side and the de novo side. But David, anything you would add just in terms of the criteria?
The only thing I would add, we do take a granular view of each market. And in some cases, our joint venture opportunities can open up a market that we believe we would even be able to access through de novo, where a state may have a CON or a moratorium on bed additions. Yet, we have a provider in that market that is looking for us to come in and build a new facility with them through a joint venture, bringing in an additional level of expertise and even increase their behavioral offering in that market. And we've seen that several of our JVs that we've opened and that are in the pipeline ready to be open are markets that we just don't think we would have accessed on our own.
And so when you think about the JV pipeline, is this one of those things that just keeps building every JV you have as a recommendation for the next one? Or are there some obvious candidates you've kind of gone through the obvious candidates at this point?
Yes. Well, I would say that the team has just a tremendous track record and the referenceability that we have just through -- our first 1 opened in 2015, and it's performing very well and has expanded a number of times and has a great relationship with the partner there in Massachusetts and a number of our joint ventures since then have seen just a similar value that we brought to that market through the partner. And we do think that, that adds to our opportunity as we think about what might be possible in other markets. And we are proactively reaching out to a number of partners in markets that -- we've screened all the MSAs in the country and evaluated de novos, M&A or joint ventures, and that has led to some proactive opportunities that we see on the joint venture side. There's also a number of inbounds that we receive from systems that are looking for expertise for their behavioral offering, looking to build a new facility with a partner. And we have those discussions and evaluate it from our perspective and have our own criteria that we follow as we evaluate that but still see just a very strong pipeline of both proactive deals as well as inbound.
I mean, underpinning this whole thing is the demand for your services, and you've been growing your volumes very strongly over the last several years. When you step back and think about what is driving demand and how long demand growth can continue at these levels, what do you think the biggest drivers are right now?
Well, we look at, of course, unfortunately, a lot of metrics around the levels of depression among adults, the drug overdose metrics increasing. It seems like every update that's provided is an increase for the country's drug overdoses. The mental health crisis among children and adolescents. And we have a view that those are long-term demand drivers. And that's not a short-term issue that we will work through over a short period of time. And so as we think about how that informs our growth strategy, we're looking at markets that are underbedded and don't have the right service offering either from a service line perspective or just the demographics of the types of patients that are being treated in those markets are not being treated in those markets. And so that's really where our growth strategy starts is just looking at demand and then overlaying that with what's already in place across different markets. And then even if a market already has beds and might not be significantly underbedded. We're looking at M&A in those markets where we don't already have a footprint as a company. And is there an M&A opportunity that might be attractive, even if the service offering might be more built out than those markets that are underbedded.
That M&A -- you have talked about your 5 growth pillars. The M&A growth pillar is one that has -- seems to -- it's depending on transactions, obviously, but it seems to be kind of the smallest part of the growth, arguably. What is the M&A pipeline look like? You guys talk about doing things. It seems like there's a few things of decent size, but how would you characterize that pipeline?
I would say it's extremely strong. The dynamic relative to when we were at your conference a year ago, in a rising interest rate environment with a very fragmented industry with a lot of mom-and-pop individual facility providers, it's just very difficult for them to compete on the labor front. It's difficult for them to make investments in technology and patient safety and quality need to be able to appropriately and safely service your patients. So when you put all that together, I think it has become -- it has just been very challenging for them. And we are a company that has a very strong balance sheet. We obviously divested our U.K. operations several years ago. I mean our leverage levels are in the low 2s right now. And we just really feel like this is an environment coming up that is going to play to our strengths. We still need to be prudent. We are beneficial in that we have so many different growth levers and ways that we can deploy capital, whether it's the JVs or the de novos or adding CTC clinics as well and our PHP IOP step-down programs also. But we have a high hurdle for M&A, but we think that there are some really attractive opportunities that are coming our way, really across all lines of business. And if I were to characterize our M&A pipeline relative to a year ago, I would say it's stronger across the board, and we just continue to see upside there. Obviously, when we did our Investor Day and we went through the various components of growth, we did not make assumptions around M&A, but that doesn't mean that historically for the company, it's been a very important driver of growth. And we think that in the coming few years, it will continue to be.
So what -- just to clarify, you're saying rising interest rates is making the valuations more reasonable in your view?
Well, I think just the interest expense, the challenges for smaller facilities to compete when they certainly weren't budgeting the -- particularly with those -- many who have variable debt, where they've seen a significant ramp and I think that, that is tempering valuation expectations relative to what we saw a year ago. I think there aren't as many scale players right now that are testing the market. But for what we see for proprietary transactions, when we're talking to more of the single-site facilities, I would say valuation expectations have clearly come down and are more reasonable relative to a year ago.
And then can you talk about labor because labor seems to be something that almost every provider has seen issues with. You guys seem to have been doing a much better job of sourcing labor throughout the pandemic. So how have you been able to do that? And what are you seeing from a wage growth perspective?
Yes. I mean, I think we've been very intentional on the labor front about making sure that we're supporting our HR resources in the field. We want to make sure that if we're deflecting patients because we're not appropriately able to staff facilities, that we're getting those facilities the help that they need to recruit and retain talent. I think we're doing a number of other things that are going to continue to help us over time that we probably haven't seen as much benefit yet. We really have not been as focused as an organization on employee engagement. And I think that has such implications on retention and recruitment. So putting those in place and actually having expectations of leaders to reduce the variability that we see with 250 facilities among engagement scores, I think there's an opportunity for us to have greater career progression. We have 4 different lines of business. There should be more rotational opportunity around the company whereas I think, historically, people have thought about I'm an employee of X facility and not necessarily seeing the career opportunity within Acadia. So I think we've done a very good job on that front. You hosted us yesterday at our Seven Hills facility that is nearby here in Henderson, Nevada. And one of the things that I think that team has done a really nice job of is partnering with UNLV on the clinical front for some nursing programs. And they're bringing interns in, and there's more of a pipeline there that I think has served us really well. And we'll continue to see -- our flagship specialty facility, Sierra Tucson, that we visited as a team earlier this year, they have a great partnership with the University of Arizona. So I think these partnerships as well are helping get our name out there in the community and are also going to help us bolster things on the labor front. But anything else you would add?
Yes. We also think we're in a good position as we move through this year. Certainly, the last few years have been a more challenging labor environment. We've said all along throughout the last few years, what we see in 1 market can be very different across the country. And -- but as we look at the market overall, we think there's just a much stronger environment right now. We're seeing even more isolated challenges than what we worked through over the last couple of years. I think as a company, we're in a strong position to benefit from that. Just what we've done from an employee engagement perspective, some of our proactive pay adjustments, we think, put us in a good position just to see moderation in our labor cost but also to see the labor that we need to continue to support our strong volume outlook for the year.
You mentioned that to the extent that labor is a pressure on volumes, like -- is that something that has been an issue? Like would you say that volumes would be 1% or 2% higher if labor was more abundant? Or has that not really been a huge gating factor?
It has not been a huge gating factor even though there are some facilities that do come to us -- and we have a weekly check-in, if not more often than weekly as needed. We're requiring all of our operators to really surface if labor is a challenge, if there's an immediate need that we as a corporate office and our just tremendous operations team can bring an even more focused approach on the recruiting side. But as we look at what we've seen overall, we have not seen volumes really impact -- be impacted by labor other than for an isolated market and for a temporary period of time.
It's kind of interesting because it feels like the -- like most companies talked about labor becoming an issue like a year to 18 months ago, for you guys, it feels more like 6 to 9 months ago, it's been hitting you a little more recently. So is there a reason why it's been little bit of a lag? And when do we kind of anniversary the wage pressure?
Yes. It's hard to say. I mean every market is different. Certainly, we did see, I think, a little more wage inflation in our fourth quarter as other companies started to see some moderation in their wage inflation. I think where we are now, though, seems to be aligned with what a lot of providers are seeing, which is a more positive environment, improvement in hiring metrics and lower open positions and just a moderation in wage inflation as we go through 2023. But it does seem like we saw it a little bit later than certain other companies last year, even though right now we seem to be in a similar position.
Okay. And you guys talk about your 5 pillars to growth: Facility expansion, de novos, JVs, M&A and then extending the care continuum. Is there a way to like dimensionalize. When you talk about 10% plus growth, like is there a way to kind of say x percent comes from any of these buckets? Or which one -- which bucket do you think is the biggest driver to that long-term growth trajectory?
Yes. I mean when you lay out, I mean, I just kind of went through the quick math on the bed additions that we put in our Investor Day. So 570 last year, 670 bed additions this year and then ramping to 1,150 for each of the next 2 years. 50% of that is acute beds and primarily driven by JVs. And then you've got about 1/4th that we're doing about 300 bed additions. These are our existing facilities where we generally own the land, and we're adding capacity on our acute or specialty facilities. And then our CTC business as well. So those are kind of the de novos that we're doing related to those. So those are the major buckets. But any perspective?
Yes. In -- and what we're really focused on, and we talked about this, I think, in a more detailed way at our Investor Day in December. But as we look at our service offerings that we currently have across our markets, we see an opportunity, and we highlighted this fifth growth pathway around outpatient programming because we do typically meet a lot of our patients at the higher level of acuity. And as we work with payers and as a company as we want to just keep that patient in treatment and as part of Acadia, we do see an increased opportunity to invest where we don't already have the right care continuum in the market, whether that's outpatient programs or whether that's a market that might have an acute facility but not a specialty facility. Just building out our continuum of care is another part of our volume outlook. As a company, we tend to talk a lot about bed additions and patient days, which is a metric for our inpatient business. But our outpatient volumes and our CTC volumes are also expected to grow at mid-single digits, just like the rest of our business. So we're -- and we're seeing strong performance on our outpatient and CTC volumes, even though as a company we tend to talk more about inpatient.
And can you talk about the rate environment? Because one of the things that was maybe unique for you guys in 2022 versus most other providers was that your rates were actually quite strong. Most companies were -- had this lag between when you set rates and then cost spike, but you kind of locked in long-term lower inflationary rates. You guys have been able to update and get better rates kind of throughout the pandemic. So a little bit of how contracts work for you? Is this an annual rate-setting dynamic? And how have you been able to get stronger rates. Is that something that we should expect to persist?
Yes. We do have -- most of our contracts do have an annual process that we go through with our payers. We have a lot of different payers as we think about each of our facilities contract at a local level, and we support those efforts with corporate managed care resources and that team does a tremendous job. But we are engaging with our payers based on the network that we provide in their market based on the quality and the value that we bring to their patients and their members. But also based on the inflation that we're seeing, the history of rate increases that may support a stronger bump for us as a company in that market. And we do have targets that we put in place for each of our markets and services and payers. And the team has been successful. And I would say as we think about inflation being incorporated into our rate increases, a lot of our increases that we have seen over the last 2 years reflect just some of the history and the value and the sort of negotiations with our payers that doesn't fully reflect the inflation we've seen. We think the inflation we've seen over the last couple of years, especially the higher wages that we've talked about seeing in the first quarter and the fourth quarter, we think that provides an ongoing opportunity to sort of stay in the mid-single digits on a weighted average basis, even though we do have targets that vary depending on that payer in that market. As a company, Kevin, we were more conservative, I'll say, with the outlook for the year that we talked about both in December at our Investor Day and in February when we reported our fourth quarter. We do think we have now increased visibility into our rates continuing to be mid-single digits. We talked about having more of a -- more than 3% outlook for the second part of the year. That is just us being cautious. A lot of our Medicaid rates -- 75% of our Medicaid rates renew in the second half of the year just with state fiscal years and the timing of those contracts. So little bit of a conservative view incorporated into our guidance. But with inflation and all the other factors that we engage with on our payers, we do have a mid-single-digit outlook.
And so I guess there was some concern because you guys had strong rates and your competitor didn't always have strong rates every quarter. So there's nothing in there about like extra FMAP or government funding that kind of boosted rates in a kind of onetime way that creates a tough comp at some point going forward?
No, no. We did not receive any nonrecurring premium dollars. And even FMAP from our perspective was probably helpful to states in terms of funding their higher Medicaid enrollment. Now as the FMAP is phasing out this year and the redetermination is also happening, we think the FMAP is more tied to just that redetermination process. In other words, we think state budgets will still be in a good position. We're certainly seeing that across the different states that we track and don't see that either any revenue we received over the last 3 years or just the condition that our payers are in, that our states are in creates any incremental challenge.
All right. And then I guess, one of the other things that people get kind of conservative when it comes to rate is just potentially redeterminations. How do you think that might impact payer mix or demand for the services?
Yes, we are -- redeterminations did start for 5 states in April. We're in 4 of those states. And another 14 states started here in May. And we have been planning for this. We have been working at a corporate level and at a facility level on our plans for navigating patients through this process because all of our Medicaid patients, 50% of our business will go through this process. And we do expect and research indicates overall for the Medicaid population that many of those patients will continue to qualify for Medicaid but still have to go through the process of going back through the eligibility. And so we're working very closely with our patients. Every state is different in terms of the plan, the timing, the level of information that we get about our patients and when they're going through the process. But so far, our team at the local level and some resources that we've expanded at the corporate level have done a tremendous job navigating that with our patients. And I'll say as we think about our different service lines, we've thought about this a lot over the last year as we've planned for it. But from our perspective, it has been very unlikely that the patients that we treat will lose access to mental health and addiction treatment services. And I think we're starting to see that. With our RTC business where we largely provide services to children and adolescents, we think the vast majority of those patients will stay on the Medicaid rolls. And for our specialty business and our CTC business, treating -- CTC treating the opioid use disorder, there are a lot of state pools and other coverage available. Even though many of the patients that lose Medicaid we think will qualify for commercial or for an exchange plan, we think a lot of those other patients will still be covered at a state level with other funding that's available. But it's in the early innings, and we'll continue to monitor the situation.
And I would just add, I mean, we're doing everything that we can to come alongside our patients and to help them navigate through this. Some states are incredibly transparent about who's going to be moved off the rolls, and that's really advantageous for us because we can match that up against our patient volumes. In other states, they're not as -- always as forthright, but it's an opportunity for us to talk to our patients. We've been -- we've had a number of strategies across the entire company in place since late last year. And we even have a hotline for assisting people that maybe lose their coverage for a point in time where we help them advocate to get the coverage back.
And maybe just the last question to ask about the company. Since it looks like we're heading into a recession, how do you think about your ability to grow through a recession. Is there anything we should be thinking about either from a demand perspective or a payer mix perspective or a cost perspective? How do you think about growth?
We think our volume is resilient. We've seen that through the pandemic. We've seen that with past recessions in our industry the demand stays strong for our services. And our coverage does not include a lot of self-pay and does not include a lot of coverage streams that we think are susceptible. The governmental pay, the coverage through commercial plans, we think, helps us in a recession. So from a volume perspective, we think the demand would continue to be there as we've seen in the industry in the past. And we think our payer mix and our diversification we have as a company positions us as well as they can.
All right. Great. That's all I have time for. Thank you very much.
Thank you.
Thank you.
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