Good afternoon, and thank you for joining us. My name is Lisa Gill, and I head up Healthcare Services here at J.P. Morgan. It is with great pleasure that we have Acadia Healthcare with us today. Presenting will be CEO Chris Hunter, and then joining me for the Q&A afterwards will be Heather Dixon, who is CFO. So with that, let me turn it over to Chris.
Okay. All right, thank you so much, Lisa, and thank you all for joining us and being here for this presentation today. We're going to spend the bulk of the time just discussing how we continue to advance our strategy at Acadia, but I want to start by introducing the company to those that might be a little bit newer to our organization.
I also want to share an overview of just how quickly the behavioral health sector overall is evolving and why that's such an important driver of our overall growth and ambitions and opportunity. So just starting with our national footprint on this slide, Acadia remains the largest standalone behavioral health company in the country with both national scale and regional densities and you can see this with this map of 260 facilities that we have.
We have programs, services, and facilities that span 40 states i t was 39 states through 930, but we added a new joint venture partner with Intermountain, which was our first entry into the state of Colorado s o now we're in 40 states and Puerto Rico, and we have four complementary service areas so, the green dots that you see here represent our 52 acute facilities, and these are facilities where we treat high acuity patients.
In our inpatient facilities with conditions such as bipolar disorder, schizophrenia, and other psychoses. The orange dots that you see represent our 35 specialty facilities where we primarily treat substance use disorders, but also eating disorder patients via a residential care model. The blue dots represent 164 of our opioid use disorder outpatient clinics w e call these our comprehensive treatment centers or CTCs for short. And then finally, the purple dots represent our nine child and adolescent residential treatment facilities or RTCs.
So across these four service lines, we are serving more than 80,000 patients daily, and the breadth of our service line remains a distinct factor and differentiating factor for us as many of our patients do have comorbidities that cut across service lines as well as acuity levels. Combined with our clinical quality and operational track records, we really believe this gives us a unique platform to lead the industry during a time of unprecedented demand and crisis.
So just a few comments here on the broader industry perspective i mean, the behavioral health industry continues to have a large unmet need and relatively low industry maturity to this day. Last year, the Surgeon General of the U.S., Vivek Murthy.
Called behavioral health "the defining public health crisis of our time," and we really believe that that is not hyperbole. As you can see from the data here on the left, there remains just a significant unmet need in this industry. Demand for over 75,000 additional beds required to meet optimal levels, suicide rates that are at record levels and continue to climb, and ultimately 30 million Americans that have mental illness and yet receive absolutely no care today.
So at the same time, this is an industry that remains highly fragmented and has generally suffered from underinvestment for a long period of time i f you look at the lower right of this slide, you can see the reference to the 2009 HITECH Act, which was $25 billion and really brought meaningful use to the Med-surg facilities for a number of reasons that I still don't fully understand t he behavioral health sector was completely carved out of that, and I think that's part of the reason that you see such a disparity between med-surg facilities and behavioral health facilities today.
Really, by any definition, the behavioral health crisis has done nothing but intensify over the last few years and certainly coming out of COVID. So looking across the board here, just the deaths by suicide are at an all-time high, so is behavioral health disease burden.
You can see here whether it's any mental illness, the red arrows show a worsening or intensification of a trend, and in every single one of these, whether it's any mental illness, whether it's serious mental illness, whether it's substance use disorder or opioid overdose deaths, you can just continue to see the intensification of the challenges that we are helping patients navigate every day.
More broadly, from a diversification standpoint, the company continues to have really strong diversification across three dimensions: our service lines by payer and certainly by geography as well. Acute remains our largest service line by revenue, but each of our four service lines has significant scale: acute, specialty, RTC, and CTC. From a payer standpoint, we treat patients today with both government and commercial insurance, with over half of our revenue from Medicaid.
Commercial is next at a little over a fourth, a little over 25%, and Medicare around 14%. We also have geographic diversification across our now 40 states and Puerto Rico as well. Our strategy, we did our first ever investor day in December of 2022, so just over two years ago, and our strategy has continued to be very consistent since o ur strategic vision continues to be to lead the industry as the indispensable behavioral health provider for high acuity and complex need patient populations.
And to achieve that, we have three major priorities t he first is to continue to grow our facility footprint and number of beds to keep pace with growing demand across the country. The second is to expand the continuum of care from the most utmost complex inpatient cases as well as the outpatient care for those with opioid use disorder and other substance use disorders as well.
And then finally, to further strengthen our core capabilities, including through selective technology investments, which have been such an emphasis for our company in the last two years, to continue to enhance our quality and operational effectiveness really across all areas.
So as we've discussed many times since I joined the company in April of 2022, a core part of our strategy at Acadia has been winning on quality and really making the associated investments to make that a reality.
So first and foremost, this is because we really believe that quality drives clinical outcomes, superior clinical outcomes and patient experience, but quality also drives operational effectiveness, and we think that's also very important as we look at our growth aspirations. We are really proud of the quality of our clinicians and other frontline staff deliver every day in the leadership role that they're taking there.
Quality really is the product of everything that we do, and we have significantly invested in people, process, and technology t he talent that we have brought in, we established a Chief Quality Officer for the first time w e've invested extensively in quality dashboards and have monthly quality sessions t he culture of our company around quality has been a real emphasis.
And then on the technology side, our Chief Information Officer works very closely with our Chief Quality Officer and our executive team to roll out EMRs for the first time w hile they're very commonplace in med-surg facilities, we have been leading the way on the behavioral health front too, starting with our acute and RTC facilities.
Another example of our focus on quality is the implementation of remote patient monitoring devices that we have in our facilities as well, which are incredibly important when in an inpatient setting someone, a patient presents that is a danger to themself or others h aving that constant care and the technology to monitor their safety is particularly important.
A final example that I would cite is on the analytics side. We really believe that some of the early analytics that we're doing really position us to be an even better partner for payers in the coming months and years ahead.
You can see on the right side of this slide some of the example KPIs that we are tracking and that we continue to impact from incident rates, patient incident rates, to satisfaction, staff retention, employee engagement, where we've had significant focus, to national quality measures and ultimately clinical outcomes, which really is where we want to differentiate the business.
We're seeing our strategy of winning on quality is working, and our uniquely broad and diversified behavioral health ecosystem overall, when you combine that with the innovations that we've made, have really yielded some distinctive quality scores and external recognition j ust a few that I would point out: CARF, which is the Commission on Accreditation of Rehabilitation Facilities, really the regulatory body for our CTC business.
They have assessed our opioid clinics as having 99% scores across each of our 13 distinct quality measures, which we're incredibly proud of. To cite another example, in our acute psychiatric business, we score approximately two times better than CMS benchmarks on the use of restraints and seclusions, which are two of the most fundamental quality measures of psychiatric hospitals.
Because they're reflective of high-quality care in an inpatient setting s o we're really proud of the continued progress that we're making on this front. I would say also, as we look at our CTC business, we called out earlier that we have 164 of these clinics across the country. We are really offering here much more than just dosing facilities w e're combining medication management with individual and group therapy as well as other specific support services that help these patients on their road to becoming illicit opioid-free.
For example, we continue to make strides in the way that we're managing these clinics to offer the highest quality but also superior patient outcomes s o, two years ago, we recognized that one of the pain points for our patients was wait times that were incredibly high a nd so through a series of studies and various analyses that we put in place, we've made significant process improvements to the point that we have no wait list for our services at any of our facilities today.
And patients can receive the care that they need with wait times in our clinics once they actually come in to dose at under five minutes, which we think continues to be industry leading. So we continue to invest in virtual counseling options, which when it makes sense is really satisfying for our patients. But we've also been creative in investing in mobile vans, which enable us to reach a broader patient population and I think is illustrative of some of the continued innovation that we're bringing to the market.
Another thing that I would point out and that I referenced in the panel that we did yesterday on behavioral health is that we are extremely proud of the partnerships that we have with 21 different health systems across the country. So this is a key part of our strategy for growth, and these health systems generally seek us out. Sometimes they'll come to us directly. Sometimes they'll do an RFP process, but they're looking for a partner that provides high-quality psychiatric care.
Over the last few years, we've been able to establish partnerships now with 21, and these are some of the most prestigious names in healthcare. Really proud of the track record we have clinically, operationally, and financially as we put these technologies in place, and we've continued to invest innovatively in growing these partnerships in new markets that have really served us well w e're also particularly proud of the fact that we continue.
To now do multiple facilities with key partners. You can see on the right side in the middle, we did a facility with Geisinger in Moosic, Pennsylvania, that we opened in the Q3 of 2023, and we'll be opening a facility, a new facility with Geisinger this coming year, 2025, in their headquarters city of Danville, Pennsylvania as well.
You can also see in the bottom left, we've opened a facility with Ascension St. Thomas in Nashville, our home city, but we're underway to build a new facility with Ascension Seton, which will be located in Austin, Texas s o, particularly proud of the fact that we're able to now do multiple facilities with many of these partners just given the success that we've seen.
I mentioned earlier that clinical benchmarks suggest that in the face of this behavioral epidemic that we're seeing, the U.S. needs about 75,000 additional psychiatric beds. Over the last few years, we at Acadia have worked to significantly accelerate our pace of bed expansion, which you can really see on this slide t his is translated into 2024 being the largest capacity expansion year in the history of the company, 1,300 beds constructed by the end of 2024.
And 800 of those were licensed. We have another 500 that will get licensed very early this year b ut I can't overstate the tangible impact that these facilities have on the lives of our patients and communities i see it every time that I go to a ribbon cutting. So frequently, these communities have been looking for high-quality psychiatric care for decades, and they're really embracing the new construction that we're putting in place.
I'm not going to go through this in a lot of depth, but I do want to just bring to life our pride in the facilities that we have brought up. A few examples of facilities here that we opened in 2024 spanning both de novos and JVs. Overall, we completed six new psychiatric hospitals that included both de novos and JVs last year. And you can see these range from joint venture partners like our Intermountain JV, The facility name is West Pines t hat's the facility that was featured on the header slide.
As well as Henry Ford in West Bloomfield, Michigan, just outside of Detroit, which is 192 beds and the largest facility that we've ever built. Agave Ridge was an inpatient facility with 100 beds in Mesa, Arizona, that we built last year in the lower left. And then Coachella Valley in Indio, California, just outside of Palm Springs, has 80 beds. You can see that in the bottom right.
We also, right now as a company, have over 1,200 beds that are under construction. So you can see examples of some of these with Premier Partners that we have Tufts, 144 beds, ECU in Greenville, North Carolina, and then Geisinger with their Danville headquarters, 96 beds.
And then, just briefly, I don't know how many of you have actually been inside a psychiatric facility, but we frequently hear from those that come and tour our new facilities, just the high ceilings, the natural light, just very different look and feel than many would expect a nd I constantly hear people say that if they had someone in their family that needed psychiatric care, these are the types of facilities that they would want them to attend.
So just a couple of quick things that we're going to share that I think will be helpful for investors. Given the large number of beds that we've either recently constructed or are currently under construction, I want to give you all a sense for how these impact us from a financial standpoint. This view is specifically focused on this slide on newly constructed acute psychiatric facilities that include the joint venture facilities that we just showed you i t does not, and I really want to emphasize that, and we'll come back to it, does not take into account expansion projects or other types of facilities.
You can see on the right that while the profile of every one of these facilities is a little bit different, including construction and economic contribution, what I think we would characterize as our typical target profile of a new 100- 150 bed acute facility, the average all-in construction is generally in the range of $500,000-$550,000 per bed for a newly constructed facility. Typically takes about 18-24 months to build and ramp.
In the first year, the typical facility is going to run startup losses in the range of $4-$5 million. We expect to break even just after the end of the first year, kind of 12-13 months. What we would call maturity margins and occupancy are typically achieved between years three and five, depending on the size and location w e typically look for a facility to deliver between $8 million and $15 million of EBITDA when mature.
I'd also point out that none of this includes the potential for bed expansions where there's need w e plan our new facilities knowing that we're likely to expand beds in the future. Those expansions have historically offered really strong value at higher average returns given their cost profile and the demand visibility that we have into those t hat's a topic that I'll come back at the very end and hit briefly.
One other chart that we put together for today that I think will be helpful for investors is that as facilities transition from launch to maturity, they follow a positive occupancy trend. What you can see here is the historical track record that we have of ramping up newly constructed facilities with at least four years of data and delivering on those occupancy expansions.
The dotted red line that you see, this is the average of what we've seen historically. While you can, of course, see some natural variation above and below, get the sense for the relative predictability of the occupancy ramp w e're really proud of this track record as a company.
I just mentioned that we plan our new facilities knowing that we're likely to expand beds in the future w e start thinking about expanding capacity once a new facility crosses that threshold of about 70% occupancy, which you can see here generally happens by year three, between year two and three, where we're historically around 75% by year three and then 85% occupancy by year four.
You can see here, this is just a listing going all the way back to 2020 of some of the specific facilities that we've constructed in the past few years, as well as those that are upcoming a nd obviously, the takeaway here is just the significant ramp that we're seeing in 2023, 2024, and into 2025 with future cohorts just shows the degree of acceleration.
That we have underway. I don't have time to go into this in a lot of detail, but we select the locations for each of these facilities through a fairly sophisticated analytical process where we're looking at a number of factors, including what is the unmet need or demand for beds in that market? What does the competitive landscape look like? What is the reimbursement environment? What does the labor environment look like? What are the regulatory considerations? There's a diverse mix of factors.
That we model in that help us prioritize the markets that are most attractive t hese are reflected in these markets that we've chosen. This final slide that I'm going to cover just shows that we had gone back to providing a little bit more detail on bed expansions, which were such an important part of our growth. These are bed expansions, again, of existing facilities once they meet that 75% threshold.
And as I mentioned earlier, we build new facilities with the expectation that we're likely going to need to expand capacity down the road as demand grows a nd note that 85% of our facilities have undergone bed expansions historically.
These capacity expansions really do tend to be very attractive uses of capital given their cost profile, as well as the visibility that we already have in the underlying demand in that market. And so this slide shows the impact of bed expansions i t represents every expansion we've done of at least 19 beds through 2020, 1,600 beds added in total. And what it shows you is that on average, these expansions contributed to a 33% increase in revenue, a 51% increase in EBITDA, and an over 300 basis point expansion in margins for those facilities.
So I would say the overall takeaway is that the large number of facilities that we're currently building not only add accretive capacity directly, but they also typically unlock expansion opportunity for us to continue to grow into the future.
I would just close by saying we're really excited about the extensive progress that we've made in 2024. We are addressing just such a critical societal need right now with this new construction and record beds, as well as the significant advancements that we continue to make in quality and IT that set us up for important growth into 2025 with a lot of momentum, but certainly beyond. So thank you.
Thanks, Chris, and thanks for all the detail. I couldn't agree with you more i mean, behavioral health is just such an important area when we think about healthcare. Maybe we can talk about some of the progress you've made in 2024. We'll get to the volumes in a minute, but the last time.
I think you talked about labor costs was still very much in focus in 2024 w e actually heard from one of the hospital companies last night that talked that they're seeing an increase in labor costs again, but clearly, you're adding beds, including joint ventures that you talked about. We just heard you talk about the quality has been a major focus since joining the company, so maybe we can touch on all three of those things, so what you're seeing on the labor cost side, adding beds and quality.
Yeah, sure. Maybe starting with labor cost, what we saw as we think about base wage inflation, we're tracking right now below the 5% level t he high watermark was in the Q4 of 2022 when we saw labor really escalate to over 8%. So we've put a number of strategies in place. We've really focused on employee engagement.
Have held our operators accountable, and have just been really focused on training in the local market. And also, I think telling a really good story about the commitments that we've made around quality and IT, that has really helped us. And we've been able to successfully maintain that sub-5% range on the labor front. So feel really good about that. I think on the bed additions, we just talked about this extensively in these slides. I mean, adding 1,300 beds, many of which were back-end Q4 loaded.
Really proud of our team and pulling that off i mean, that was a Herculean effort to get all those beds constructed by the end of last year, and it really just sets us up well as we move into 2025 and continue to have a lot of opportunity to add additional beds there.
I think we're just also incredibly lucky to have such strong joint venture partners i think that's a huge differentiator for the company. When you look at the Geisinger of the world, Intermountain, Henry Ford, Tufts, just such strong partners, and I think that integration between physical health and behavioral health.
The research we'll be able to do together, the way we'll be able to show up collectively with payers really enables us to differentiate. And then I just think on the quality side, this is something that we had a slide that we talked extensively about w e made the commitment in 2022 to really emphasize quality w e've been executing on that ever since for the last two years. And you just look at the track record that we have over the last two years w e've brought in the Chief Quality Officer. We've brought the EMR up in over half of our acute facilities.
We've put remote patient monitoring in place for every one of our acute facilities. We've put staff safety devices in place at all of our facilities. We've put patient safety in place w e've licensed The Joint Commission's software for tracking and ensuring we're in regulatory compliance when we're surveyed. All of that was put in place last year as well.
I just think that the quality dashboards, the culture that we have now in terms of the regular quality meetings that we do on a monthly basis have really accelerated through 2024 w e're really proud of that. This is something, again, that I would point out has been an emphasis for two years now, but we're really just now beginning to see the fruits of that.
Maybe we can talk about volume i know you presented yesterday on a panel, and you talked about volumes yesterday. But can you talk more about what you saw in the Q4 and if there's any variability in the volumes that you're seeing?
Sure. Yesterday, we did disclose in an 8-K that our same day, same facility patient days grew 3.2% in the Q4, which was certainly within the expected range that we provided on our Q3 earnings call.
As we noted on that call, we saw volume stabilize at about 3% in the month of October a nd then what we saw, that stability persisted throughout the quarter s o, each month of the quarter, our same facility patient day growths remained between 3 and 4% in each of October, November, and December a nd I would say at this point, our acute care volumes, they trended modestly better than our specialty volumes. That's not to say that or suggest that this is fully behind us in the acute line of business.
But it has trended a little bit better than specialty i think that would be in line with our expectations for several reasons w e've talked before about demand for specialty beds is a B to C decision i t's much more discretionary.
Patients are usually making an active choice if and when they seek care on the specialty side, which frequently is not over the holiday season. Second, the length of stay for the typical specialty patient is significantly longer u sually, that's a length of stay of 30 plus days t hen finally, the supply-demand imbalance, it's a little bit more significant for acute psychiatric beds where there tend to be fewer options in a given market. We talked about the 75,000 acute bed shortage earlier i mean, that is on the inpatient side.
Maybe just one other thing I'd say. There are a handful of facilities that make up the majority of the drag that we've seen year over year. And it's always the case. Anytime we have a facility that's facing headwinds within the portfolio, we're always working to address those issues pretty regularly.
If we feel that a facility is not viable in its current form, whether it's the type of programming that they're offering, the target markets, the geography, or it just doesn't overall fit with our strategic goals, we certainly have the flexibility to exit or to repurpose that facility as well a nd so we have certainly been very focused on portfolio optimization in the past t hat will continue. We're continuing to work our progress with these facilities b ut I would just say overall, we're really encouraged that the volume growth has stabilized in the Q4.
Let's turn to Heather and talk about capital deployment for a minute. You're currently expanding capacity, as Chris has talked about, at a significant rate. How? do you think about the balance between your growth investments and free cash flow generation?
Sure. So if you look at our recent, most recent couple of years, of course, we're spending the significant majority of our free cash flow on CapEx a nd that's to fuel the expanding capacity that Chris has been talking about as a necessity in the industry. As an example, we guided to about $650 million or $700 million of CapEx for 2024.
And only around $100 million of that was related to recurring normal maintenance and IT investments and things like that t he rest was growth CapEx s o, a significant majority there. Operating cash flows will continue to ramp as those beds fill up and as those new facilities come online. But we have the ability now to pace a bit better the opening of those facilities in the construction as we get to the back half of 2025 and then again looking into 2026.
We have the flexibility to moderate the pace that we open those facilities and then ultimately possibly the number of facilities that we would open. Just as an example, and Chris just mentioned in 2024, we completed construction on about 1,300 beds, which is significant. And it's a feat that we're quite proud of for 2024.
And we still have around 1,200 beds under construction. So as those begin to complete, we have the ability to moderate, and we expect that our CapEx will moderate, probably continue at roughly the same pace for the first half of 2025, and then begin to come into moderation in the second half and even come down and then come down again in 2026. We can still grow faster e ven if we moderate that pace of growth, we will see the benefits of the beds we've added.
Then we continue to build beds at sort of an accelerated pace to what we have done in prior years, even if we moderate somewhat to have a focus on free cash flow. To be clear, I'm not suggesting that we are shifting our strategy. Certainly, Chris just talked about the strategy of advancing growth. We're not shifting away from that. We're just saying that we have an opportunity here to moderate the pace and smooth out the bed growth a little bit so that we can unlock some free cash flow and be more opportunistic with capital allocation.
I know you're not providing 2025 guidance at this time, but I'm sure the audience would be very interested to know if we should be thinking about any headwinds, tailwinds going into next year.
Sure. yeah I'll talk about a few things y ou're right. We're not ready to give guidance yet t he books aren't even closed yet for 2024. But I can give you probably three different categories that I would look at as swing factors for 2025. Chris just talked about volumes t hat's certainly the first swing factor that I would point to.
We had a disclosure yesterday of our growth rates in Q4 of 2024. Those are still very strong comparatively in the industry, but below where we would have expected those to be prior to the Q4. So there's still some opportunity there. We continue to work through all of the different pieces related to volume Chris talked about some of those, and we'll continue to work through those in 2025.
So I'll stop short i won't give guidance on the volumes w e'll do that in about a month, six weeks b ut that's just one thing that we would point to i t's just a little too early coming off of the holiday trends right now for us to give specifics. The second thing I would point to is supplemental payments and supplemental pricing i know that's been quite a topic of conversation.
I'm sure most of you are familiar that states have used supplemental payments as an opportunity to augment reimbursement levels a nd I think that's just recognizing the higher inflation over the last few years. And it's also recognizing just the historic underinvestment in the behavioral industry, which Chris alluded to as well. The timing of those can be quite lumpy s o as we think about 2025 versus 2024 versus 2026, there could be some swing factor in supplemental payments as well as part of the pricing.
Tennessee is certainly the one that everyone has their eyes on right now, and we're still waiting for clarity on that supplemental payment program that we would hope to have relatively soon. And then I would just sum it up by saying I would expect overall a net benefit to supplemental payments for 2025 versus 2024, but the timing is still uncertain, and the dollar amount in totality is still uncertain.
And then maybe finally, I'll just point out startup losses w e've had a few conversations regarding the startup costs related to the beds. If you recall the slide that Chris presented that showed the names of the hospitals and the trajectory going back a few years and then looking at just mentally the lineup of those facilities, you can see that there is quite a preponderance in the step-up in the number of facilities and beds between 2023, 2024, and 2025.
So you will effectively have roughly double the amount of startup costs in 2025 as what we saw in 2024. And that is largely due to the significant step-up in the number of beds combined with the timing of the opening of those beds as we think about the startup costs falling largely into 2025 for both cohorts. And then maybe just to step back a little bit and talk about 2025 and beyond or 2026 and beyond.
I think we'll have some tailwinds that come through EBITDA tailwinds will certainly come through from a bed ramping perspective a nd then as those startup costs decline, that'll lead to better cash flow for both of those reasons as well. And then, as I mentioned, our capital spending is peaking in 2025, and then we'll start to decline in the back half and then again in 2026. And then in the future, we'll look at the inflection point that we see as those beds we've added start to really contribute to EBITDA growth.
In the last 30 seconds here, Chris, what do you hope investors will appreciate about Acadia 12 months from now that maybe they don't appreciate today?
I think we're just incredibly well-positioned given the significant investment that we've made in quality in IT, but then building this capacity that's just meeting such significant need in the country that these facilities are going to come up in the right markets at the right time, and it really positions us to, I think, unlock earnings power for the company in the back half of 2025 and into 2026.
Perfect. Well, thank you very much.
Thank you. Thanks, everybody.