Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Facilities & 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's one of the most experienced operators in this industry. What are the biggest changes you've noticed since her return, and what has Debbie emphasized culturally to help turn around the organization?
Yeah, less than a year, just over 4 months, in fact. Obviously, a lot of change since I joined. 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+ Years at UHS running behavioral, 3 years as the Acadia CEO, and now back again for us. 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.
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 three years. Looking back, it's still not entirely clear why some of those facilities underperformed relative to initial expectations. 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?
Yeah, 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 timeframe 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. Certainly there's been some licensure delays that affected how quickly we could admit Medicaid patients into our facilities. Again, in the acute space, Medicaid is a big driver of it with involuntarily committed patients that come into the facility. That's been an area of focus is, all right, how do we make sure we're doing all of the pre-opening activities appropriately?
Once we open, how do we accelerate timing of patient adds, Joint Commission, or, you know, less going to be impactful than our own, you know, execution and making sure we're running our facilities well to treat the patients that we know are there.
Great. Occupancy sounds like a key, you know, item to measure. Can you give us a sense of where the occupancy is of those new facilities today and, you know?
Yeah, they're behind, right? That's where, you know, 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. 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, you know, our focus is on all of our inpatient facilities is driving occupancy. You know, again, that's where our revenue comes from is treating patients and giving great care and helping families at tough times in their 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. There's two components when we think about bed growth, right? We've got what we call expansion beds, where we add beds to existing facilities. Once a facility gets into the 75%-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. You get to some occupancy where you just can't get to, you know, 100%, as a result. In those cases, we try to add beds to an existing facility. You can leverage the CEO who's already there, the cafeteria you've already got, you know, admissions teams, and you just get a better contribution margins from that.
Typically, it's lower cost to add beds to an existing facility than building a new facility from the start. You know, that's a big chunk of growth we see inside that historic business is that opportunity. Then the ramping cohorts we've talked about, these beds opened between 2023 and 2025. Again, as those continue to improve and frankly, lose less money in 2026 than they did in 2025, that's what drives the volume. Between both sides is how you get to the 4% growth before we take the impact on our specialty business from New York Medicaid.
Great. 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 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 investors are aware, because we closed a number of specialty facilities last year. You see, you know, negative growth in specialty that's really a function of the closures versus, you know, how the underlying base is growing. I think we grew specialty in Q4 of just under 4% once you factor the closures in. Unfortunately, you know, the state of New York made a decision not to pay for their patients to be treated in our facilities in Pennsylvania.
That's, you know, creating a drag in 2026. We called out, you know, $25 million-$30 million EBITDA hit from that. That being said, you know, we're focused on backfilling those facilities and, you know, 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. You know, that's one of the places we are looking in addition to, you know, greater Pennsylvania to fill these beds with patients we can help. CTC, you know, again, that's an opioid replacement business. It's a very, you know, 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. You know, 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. They're in and out of our facility in less than five minutes to get their treatment and then get on to their job that day. You know, that's a really good operating model, just given for most patients, it's a daily need to come in.
Being efficient with their time is a big driver of how we get, you know, 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? You know, maybe break it down for us in terms of contractual rate increases and, you know, how much is offset by payer behavior.
Yeah. Overall, you know, we're, you know, working closely with all of the payers, trying to make sure our patients get treated appropriately. You know, length of stay has been stable. I will call out there's a math exercise going on. We lose specialty patients that are, you know, north of 25 days. We have acute beds that are usually 8 to 11 days. You know, length of stay is going to contract on an Acadia-wide basis just from that math. 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, you know, we're actively working with the payers. Yes, there's been an increase in audits from the payers.
We've got to make sure we're doing our job of advocating for our patients, documenting their treatment well, and then, you know, 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. We've generally assumed that what we saw there in Q4 is stable over the course of 2026. You know, certainly opportunities for us to get better, but also risk that, you know, it continues to get there. We feel like we've reflected it appropriately as we move through 2026. You know, the team is certainly focused on those key elements of advocating for our patients and documenting their treatment well.
Great. Do you think this, you know, elevated level of scrutiny, is that, you know, a temporary phenomenon, or do you think this is a more structural shift in how these plans are managing utilization given the broader, cost inflation?
I think I've heard different things, you know, obviously coming into the industry, you know, four 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, you know, 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 two things combined. 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 websites and are using that outcome data both with the payer side, but also with referral sources that they can trust us that, you know, we're getting really good outcomes for their patients, which is positive for their network benefits. That's something we continue to focus on is, you know, how do we use in 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 know, you already mentioned it, the New York policy change restricting out-of-state Medicaid care is expected to be a $25 million-$30 million EBITDA headwind. You've already taken steps to right-size the footprint there. Can you walk us through the plan to backfill those facilities and the timeline over, you know, which you would expect margins to normalize?
Yeah. I think we're, you know, 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. 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 as, you know, access to care is important for their population base. You know, we were doing that at a very efficient price point relative to the cost of care in New York State. You know, 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. Is this, you know, 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. It's really in the specialty facility. I mean, we have specialty facilities that attract patients nationwide. Sierra Tucson, you know, generally considered one of the best in the country, if not the best. You know, we get patients from across the U.S. that travel to Arizona to be treated. We have other facilities in many places where we do have other patients from other states. New York is unique in how they treat the for-profit sector, and we don't view this as something that could have a negative impact on our business from another state.
Great. Another policy item weighing on this year's guidance is the California staffing requirement. You know, it's only a $4 million EBITDA headwind in your 2026 guidance. Can you walk us through the nature of that specifically? You know, how much is driven by the incremental labor costs and compliance costs versus any impact from reduced occupancy or capacity?
Yeah. The state of California has mandated certain staffing ratios from a skill matrix standpoint. Originally, it was gonna go into effect at the end of January. Now it's been pushed back to June. You know, we've been actively working to be compliant with this so that we don't have to not treat patients. 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. We do now need to, you know, 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.
That's why we've got, you know, a $4 million headwind. We're getting this implemented, you know, kind of end of Q1 into Q2 so that we don't have to affect occupancy. There'll be a small incremental cost in 2027, but it's probably closer to $2 million than thinking about this as a June, you know, a 6-7 month impact in 2025 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 risk and how you monitor claims experience and update those expectations as the year progresses?
Sure. You know, 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, you know, we had claims increase 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. 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 minus 10, all right, 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. In 2022, you know, self-insurance was at $3 million 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. You know, 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, 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. You know, last year, our balance sheet reserve got up to $155 million versus only being $78 million at the end of 2024. We feel like we've gotten a handle on it, understanding that, you know, claims activity will continue to be something we focus on as a 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, you know, 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. As we do that and focus on it should reduce the number of incidents, understanding that in our, you know, 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? 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, you know, reducing debt. You know, 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. You know, we've said that, you know, 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. You know, if that happened this year, I think we'd be pleased to get that behind us. We, you know, we've not assumed that in the number. That would be one thing that's outside of our current expectations.
really it is just, you know, executing, operating the facilities well. you know, 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. 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?
Yeah. Well, we obviously have a huge outpatient business with our CTC business, but you're right. We've been building inpatient acute beds and then adding, you know, outpatient as part of that continuum of care. 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, you know, 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.