Hello. Good morning, everyone. I'm John Ransom. Happy to have the Acadia management team. This is Heather's maiden journey and Chris's second year, I believe.
Second, yeah.
Second year. So they're new to the greatness, the 45th Annual Institutional Investors Conference. So given that we have just some journalists in the room, I'd like Chris, maybe you to start out. You're coming up on your second anniversary, and what surprised you? What's been a little more challenging than you thought? And what's going to be different about how you spend your time over the next 12 months, maybe compared to how you spent your time over the previous 24?
Yeah. So first of all, John, thanks for having us. A few things I would say at the outset, a few things that have surprised me in almost two years. I think the first is just the intensity by which behavioral health disease burden just continues to intensify. So this most recent CDC data that came out with a population that's only grown by 0.5% last year, those Americans with serious mental illness grew by 1.3 million to 15 million Americans. So that's a 9% growth rate. And those with substance use disorder and serious mental illness grew by 15% just in the past year. So I think that there was a school of thought that maybe out of COVID, things would normalize. And just the intensity of the disease burden that we're seeing across the board just continues to get worse. So that's one.
I think the second thing is just the level of opportunity for integrating behavioral health with physical health. I mean, I knew this having been on the payer side for a long time, but we know that someone that has a chronic condition, you throw in one behavioral health diagnosis, the physical spend goes up 2-4x. And so we are really fortunate at Acadia to have 21 different JV relationships. But I think that's an area of a little bit of surprise for me, just the magnitude of the opportunity there. And then maybe one other thing was just I was surprised and continue to be surprised just by how little investment there has been in technology in the behavioral health side of healthcare. There's a lot of reasons for that.
I think it goes back to the 2009 HITECH Act, where the behavioral health facilities were kind of left by the wayside and didn't get that meaningful use investment. But pretty much everywhere you go, it's not just EHRs. It's investment in patient monitoring, staff safety, analytics, kind of across the even communications, just not what I've seen in other parts of healthcare. So the company's, I think, doing extremely well. We've got a lot of opportunity. In terms of things that I'm going to be spending my time on in the next year, I mean, I think there are several. I would say clearly the continued rollout on technology for the reasons that I just mentioned, that's been a real focus area for us. We've also been very focused on leveraging technology to improve the strength of our quality outcomes.
And that's led to having some very direct conversations with payers. I would say historically, our relationships with our payers have been a little bit more transactional. And I think that's changing to becoming more strategic. I mean, they clearly want. They're very focused on the clinical health outcomes for their patients, and their members are patients. And we're looking for everything that we can do to be a good partner on that front. And so I think those are the major things. Maybe two others. I think outpatient is an area where we have real opportunity. Obviously, our CTC business continues to do extremely well. But I think we also have an opportunity on PHP/IOP. And so that's an area where we'll be spending a little bit more time in the coming year. And then I think the last thing is maybe just variation.
We're a company that has grown by acquisition. There's a lot of variation across the company in terms of the way we do things, from training to IT resources to digital marketing. I think there continues to be real opportunity for us to normalize that. Those are some of the things that I'll probably be doing a little bit differently this year.
Heather, same question. You've been under the hood for a while now, so what's your answer to that question?
I would echo some of the things that Chris has said. But a couple of the things that really jumped out at me are, one, the strength of the team. Chris has built an incredible team. And when you put those resources together to just think about taking this wonderful asset and putting it together and really driving it forward, it's a great opportunity in front of us. So that's the first thing that came to me. I think second, from my lens, which is obviously different looking at the financials, if you look at double-digit top-line growth, double-digit bottom-line growth, a really strong balance sheet, low leverage, just the opportunity there when you combine that with demand in the market and bed shortage, just all of that coming together is, from my seat, a great place to be in.
Just the opportunity to deploy capital in numerous ways versus just one or two levers that you could use is just really powerful.
So one thing that I wouldn't say surprised me on the downside, but just surprised me, I would have thought the company would have done maybe more smaller acquisitions through the year, 1, 2 psych hospitals, CTC acquisitions. Has that just not been a priority, or is just this a dearth of opportunity there?
Well, I think we're in a very opportunistic position where we have so many different ways to deploy capital. I mean, I would say we continue to want to do more M&A, but.
A number of the de novos are underway, both on the CTC side and also on the specialty side. And then we're growing PHP/IOP. But I would say our M&A pipeline looks really good. We did do some tuck-in CTCs in late 2022. There's a number of opportunities on that side of the business, but also other service lines that I think you'll see continued M&A in the coming year.
Great.
So one for Heather. I don't know if it's a knock, but it's kind of a reality. You are delivering strong top-line, but it's pretty expensive. Are we just in a phase where everything's more expensive, and this is just a new reality? I know one of your competitors, not the direct competitor, but they spent 20 minutes talking about modular construction and trying to drive down the capital cost. So what's being done to try to make the growth as capital-efficient as possible?
I would say a couple of things. First, we did see construction costs go up, I think us and everyone else in the world, whether it was private or commercial, from 2020 to 2022. We are seeing those begin to level off. And that has been something that we've watched that's been a bit of a tailwind as we think about how we try to mitigate any of the elevating costs because they will continue to go up, but just at a lower pace. There are a couple of things that we've done. Prefab is definitely one of the things that we have begun to implement in the facilities over the last couple of years. And that does save some of the costs. Also, importantly, save some of the construction time, which I think is just as relevant from our perspective to get the hospitals built, open, ramped, and running.
The other thing that we look at is across the board, how we manage the construction projects. We have quite a portfolio. And so we have, at any point in time, a significant number of projects running. So that gives us a little bit of leverage and a good way to balance looking at the costs across the portfolio. Whenever we think about efficient use of space, we can look at the best way to deploy capital, how to be efficient with the space, how to build the facilities in the most efficient way. So this is what we do. We build behavioral facilities, and that gives us a different lens to think about, I think, the best way to set up the facilities, make sure we're getting the best use out of them, and frankly, to get them up and running very quickly.
That, to me, is probably the most significant ways that we can control those costs.
So Chris, you talked earlier about your JVs, which I think are fascinating. From where I sit, the advantages are pretty obvious in terms of getting a strong local brand name, getting a capital partner. But we also know that not-for-profit hospitals maybe aren't always the quickest to make decisions. And then construction projects, there are a million reasons why those can get delayed. So when you're doing your planning and your negotiation, how do you keep a two-year project from becoming a four-year project because the budget committee didn't meet this month? And I know how these not-for-profits work. They operate at the speed of government. So how have you been able to operate at the speed of a for-profit when you've got a partner that doesn't have the same incentives to move that quickly?
Yeah. Well, I think so much of it is finding the right partners. I mean, I think we're really fortunate that we have 21 JVs that we've done across the country, half of which are operational and the other half that are coming up. But I mean, the 3 that we're going to be opening this year alone are Intermountain in Colorado, Ascension in Austin, Texas, and then Henry Ford in Michigan. And so those are all really good examples of situations where we're just having very regular meetings. I think we have a very good timeline that we have actually looked at ways to accelerate based on some of the learnings of the first JVs that we did. And so I think we have a really good template now in place. And I think it's just having the right governance structure, holding our partners accountable.
I mean, they want to get these facilities up just as quickly as we do, but it does take prudent management and working through the regulations and occasional hiccups that come up.
So is this.
Usually, they have a psych unit. They've got patients, but it might be on the 8th floor, and they just want to move it. Is it usually an on-campus type situation? In my understanding, usually what an 80% ownership and have control. But what's the range of sort of how these things? What's a good kind of case study that would show how these typically go?
Yeah, I think that's right. I mean, you're referencing that we would put up 80% of the capital, and they would put up the premier health system partner would put up 20%. I think that's fairly typical. But these are conversations that we're having constantly. And I think we're so referenceable now in that we have 21. I think the way that we work through those is probably a little bit different than we have in years past. I want to make sure that I hit your question, though. Say more, John.
Well, just to pick an example, a case study that says, "Okay, we've done this one. Here's how it started. Here's.
Oh.
This hospital had 20 patients, an old psych unit. We built an 80-bed hospital now. It took us 3 years. It cost us much money." This is kind of how you should think about how these go.
Yeah. I mean, Intermountain is a good one, 144-bed facility. And we are building a brand new hospital. We've also just announced one with Ascension in Austin, where we're adding 100 beds to a facility that Acadia already owns in Austin, Texas. And Ascension Seton is our partner. There's going to be all sorts of interplay with the Dell Medical School at UT Austin, also an opportunity for them to train psychiatrists, nurses as well. So I think it really can range depending on what the need of the partner is to building an entirely new facility, which is probably more common. But also this one that we're doing with Ascension, I think, is representative of sometimes there are just needs that the partner has that we have to adapt to.
Great. I understand my microphone's better now. I'm getting a little feedback. So I know that was a big concern of the team over here. So one of our competitors has, I'm hearing less of this, but there was certainly some concern about the CTC business and the sustainability of it, the expense, some new alternatives, maybe some new laws that take place. So I know you've been asked this frequently, but for the people in the room who have not heard this question or heard you talk, I'm going to serve up this big, fat pitch for you to take a swing at.
Yeah. So I think just to start with some macro trends, I mean, there's over 9 million people in the United States that are suffering from opioid use disorder. There were 110,000 fentanyl-related overdose deaths last year in the United States alone. So this is a real problem. Only 10% of those that are in treatment are actually being treated for the gold standard with methadone. And so we continue to believe that there's significant opportunity. We also said in our prepared remarks during our last quarterly earnings call that there are many that believe that we're entering the fourth wave of opioid addiction, where the first wave was just.
That sounds bad.
Yeah. The first wave was prescription drugs. The second wave was heroin. The third wave has been fentanyl, which is 50 times more potent than heroin. And then this fourth wave relates to polysubstances. So this is fentanyl laced with methamphetamine or cocaine. And there was a study that just came out recently that said 92% of the fentanyl, of those that had tested positive for fentanyl through urine samples, 60+% of those had an additional substance, usually, which was methamphetamine. So I just give you all that to say these cases are becoming these drugs are becoming more potent, and these cases are becoming even more severe. And we're just continuing to see record demand across the board. I think what differentiates Acadia is the strong quality scores that we have. CARF is the accrediting regulatory body. It measures 13-14 different metrics.
I mean, we continuously grade out at 98%+ from our CARF scores. We also have seen more recently that our ability within six months to treat our patients and get to them to a point where they're illicit opioid-free 80% of the time is best in class. So we just are continuing to operate from we're dealing with and addressing this demand. We're doing it in a high-quality way. And the clinical outcomes that we're able to achieve, we think, are very strong. And I think that also lends itself to just a lot of strength in that business. Heather, anything you would add just overall on OUD and CTC in general?
I would echo everything that you said, of course. I think there is opportunity out there. I think the growth trajectory, sadly, is significant and increasing. I think our opportunity to treat the most acute of those patients is unique. I think the methods that we use with medication-assisted therapy and Methadone treatment, as the severity continues to increase, will become more necessary. And I think the alternatives for treatment will probably narrow as the acuity gets broader and more acute, and our opportunity to meet those needs is significant.
So Chris, I had an occasion to look at your management team, and I'd forgot that you have both a Chief Strategy Officer and a Chief Transformational Officer. I mean, outside looking in, it doesn't look like anything's really changed in terms of the strategy that you laid out that the analysts say. But those two people that work for you, what are their kind of day-to-day goals? And how should we think about that investment from a shareholder perspective?
Yeah, I'd say a couple of things. I mean, number one, I do think that our Chief Strategy Officer did a phenomenal job of helping us sharpen our strategy. We had never done an investor day despite 12 years as a public company and did our first investor day in December of 2022. I think our focus on the acuity of the populations that we're serving, but also helping us look across the continuum at all the different ways that we can deploy capital. Our Chief Strategy Officer is very involved in working with Heather and I in not only charting out the geographies that are interesting, but helping us determine what is the best way for us to deploy capital. What's the highest returns? Does it make sense to do a JV versus a de novo versus doing an M&A transaction in a given market?
He's been extremely focused on bed additions as well. On the transformation side, we have so much variation in this business. We're a company that has grown by acquisition. There's been deference to the local market operators. And yet our transformation team, I think, has done a phenomenal job in a short period of helping us smooth out that variation from everything, the way that we do clinical training, the way that we provide consistent evidence-based protocols across the company, the way that we staff our facilities in a way that is consistent. These are some things that have really improved the operations of the business and will continue to do so.
So to say it another way, some pretty strong overlap with what would have been kind of traditional business development on the one hand and maybe providing some help to the COO on the other hand. So that's kind of interesting. So I probably care more about this topic than is financially relevant at the moment. But you came from Humana, obviously. You understand the payer side. Psych, behavioral health, is just traditionally a difficult area to apply. We were just talking to a navigator about some areas don't lend themselves to traditional quality measures and outcomes measures. So on the psychiatric hospital side of your business, where you're really in the short-stay crisis stabilization, other than getting the patient stabilized in a plan of care and out, what are the payers really looking for over and above that?
How have you benchmarked yourself against your competitors in that business, which I think is kind of a difficult business to apply sort of simplistic quality outcomes measures to?
Yeah. Well, I would say that we're still in the early stages of doing that. I mean, I think, as I said before, this evolution of more transactional tactical relationship to one that's more strategic, I mean, we really need to follow what's important to the payers. And I think increasingly, what's important to them are quality scores, but particularly readmissions. And so that's kind of where we start. We have seen some value-based programs here and there. Only a few payers have been interested in that. But just having been on the payer side a long time, I'm just increasingly convinced that it's a question of not if, but when we're going to be compensated for the strength of our clinical health outcomes.
It's why we've been making these investments in technology, why we've been making these investments in quality, and not just EMRs, but patient monitoring and staff safety as well, because all these things together are going to lead to superior outcomes over time. I think it's really on the payer to help us with what's important to them. It's a little bit different payer by payer, but the most frequent is a readmissions metric.
You guys don't talk a ton about your, I think the market's current term of art is your SUD facilities or what you bought years ago from Bain, the traditional residential substance abuse business, longer lengths of stay. Maybe just hit some high points of that business. Again, my understanding is that business has a pretty high failure rate. People have to go through multiple times before they're successful. How have you tackled that not and just talk a little bit more about that business, which, again, I don't think the market has a really deep understanding of.
Sure. So I'll start. That business definitely is different when you think about the way that from how we take patients in all the way through to the discharge plans. But it is, I think, important in the continuum of care. I think when you think of the specialty business, they have longer lengths of stay. They're typically coming for a specific diagnosis, a specific illness, and oftentimes comorbidities. What I would say about our specialty business that is a little bit different from others is the acuity level, even in those facilities, the acuity level of the disease state or the fact that they have multiple diagnosis codes. That's what we specialize in in our specialty facilities, which is similar across all of our lines of business. We serve the most acute of the acute patients. We serve those in our RTCs.
We serve those certainly at our CTC clinics. And it's the same with the specialty business. There is a little bit of a different nuance with the specialty facilities in terms of the payer mix. Those tend to skew more commercial as opposed to the other lines of business, governmental payers. But certainly, the acuity level is something that's constant throughout.
I think one other thing that I would just say is that there's a real cross-referral potential with our specialty business and other lines of business. Something that we've tried to be more intentional about in the last two years is that we know that someone that presents in one of our specialty facilities, a new patient, 70% of the time has an underlying Opioid Use Disorder as well. And so we have not been as focused on making sure that there's continuity of care when they return back to their home after their treatment in the specialty facility. And we've seen some early success there. But I think that that's another area where having this full continuum of care, which I think is differentiated for Acadia, can really unlock some value for the patients and certainly deliver better outcomes as well.
So, you kind of led me right where I wanted to go, which is always. We didn't even try this. It just happens. The patient acquisition model for your three businesses is different. So, the psych hospital business, that's a BD effort calling on local hospitals. But I don't quite understand as well your patient acquisition model on your specialty as well as the patient acquisition model for your methadone business. So maybe talk about how those differ and how much attention you've been able to pay to customer acquisition costs and helping to continue to move those in the right direction.
Yeah. You want to start or do you want me to?
Sure. I can start. So you're right. That's where I started the last question.
You say that again. I was right. I don't hear that enough.
Definitely not. One shot.
I enjoyed that.
That's all you get. If you think about how patients come to us in the acute facilities and also in the residential treatment center, the children's acute or adolescents acute facilities, those are typically involuntary admissions. You're right. It's a business development.
Say that again.
I'll work on that. Those are coming to us out of necessity. And there is certainly a significance in proximity for those. If you are looking for, if a hospital is looking for a place to refer a patient, the proximity really matters, geographically speaking. Same with the RTCs. From the specialty perspective, that might be less relevant if someone's traveling for a longer period of time. It's an away-from-home stay. They're looking more for the specialty line. So for example, an eating disorder versus a SUD disorder, those are going to be looking for the right clinic. Those come through, I would say, more traditional sources where patients are seeking the right place to go. And so they are looking. Sometimes it's through Google searches. It's through references, referrals that they're looking for us. The CTC business is a little bit of a hybrid.
That is definitely building a customer list type of growth model. So you open a facility. The geography really matters in the CTC business because of the frequency that the patients visit our facilities. But that is also a direct marketing type of environment similar to what you would see in retail where you open the business and then you build the customer list. And then that grows either through word of mouth or just proximity.
Do you guys have the local alumni networks in the specialty? That seems to be some of the competitors like to lean on that as well as a referral.
Yes. I would say it's not just local, though. I think there are people that will revisit a facility and will continue to come back after they've had success there. And so they'll keep in touch. But it doesn't necessarily. It'd be local to the facility, but not necessarily local geographically.
Yeah. The only nuance I would add is in our CTC business, from a patient acquisition standpoint, having no wait list is incredibly important. And being able to take the wait time under five minutes is also incredibly important. We had pretty significant variation in that business a year ago where the wait times could be over 10 minutes in certain facilities. We've taken that down under five minutes, which is incredibly important to new patients. And then word of mouth with those patients, obviously, is particularly in that local area, a real referral source.
The only thing I would add that sort of cuts across the business is you think about the opportunity to serve these patients. You don't often get multiple chances. So if they're making the phone call, whether it's a hospital referring a patient for an acute need or whether it's a patient with some sort of a specialty disorder or whether it's a CTC patient who's looking to get into treatment, it takes a lot of courage, takes a lot of opportunity to make that phone call. You need to answer the phone. You need to have the admissions process to get the patient seen then. And I think that's a key differentiator in the business.
This is not the most important question, but I've been kind of intrigued looking at the industry. I'm seeing a little bit of movement toward behavioral-focused ERs. Is that something that's on your radar, or would you view that as competing with your referral sources? What do you think about that business?
We've seen a few examples. I don't know that I would call that a trend yet, but I would just point to the fact that these premier health systems, the 21 that we currently have, they're reaching out to us because they see that we are delivering superior service in behavioral health. We know this extremely well, and we have capital to deploy. And so these models have worked. But I mean, clearly, that's something that we'll watch over time. But just we really haven't seen that in any market of note so far.
I think BayCare is going to build one. I saw it in the Business Journal. I was like, and then a couple of other examples of that.
Do you know what geography?
Yeah. I'll find that out. I'll send it to you. I mean, it's literally on the drawing board. It hasn't even been. It's probably 2 years out. But I thought that was interesting. And then finally, you inherited a tech deficit. You're rectifying that. December of 2022, we're 15 months into your analyst day. How much of what you spend is just table stakes, and you really don't expect a return, but you have to do it? And how much of what you're spending on tech do you expect to get a return? And if so, what does that return look like?
Well, I'll let Heather quantify the return. But these are investments that are positioning the company for the long term. We didn't do them just to get an immediate return. We're trying to set ourselves up to compete on the strength of our clinical health outcomes. And when you don't even have you don't have an EMR. You don't have data. Being able to have payer conversations to be able to make a case for rate adjustments where it makes case is just a very difficult conversation. So I think there have been so many fringe benefits of putting these in place. I mean, we know our employee engagement is much higher. When we put an EHR in a facility, we're able to attract more employees, more clinicians in. That's a real differentiator. People don't go to nursing school today. They're not trained on paper.
But that's what you see across the board still in Behavioral Health. So having an EHR is really a differentiator. I would say surveys that we have with regulators, when they come in and we have an EHR in place, those go more quickly. And we're able to work through those more expeditiously, which also has all sorts of benefits. So we will also get operating leverage from these over time. But even in the near term, these investments have really paid off for the company. Anything you would add, Heather?
Less? Okay. I was right. You're supposed to conclude with I was right. Thanks, everybody.