Well, I'll say this one more time. Gary Taylor, cover healthcare facilities and managed care at TD Cowen. My pleasure to have Acadia Healthcare. Acadia is one of the largest behavioral healthcare providers in the U.S., with almost 250 facilities and nearly 11,000 beds in 39 states. The company provides behavioral healthcare, substance abuse services in a variety of settings, inpatient psychiatric hospitals, specialty treatment facilities, residential treatment centers, and comprehensive treatment centers. With us today, Chris Hunter, who's the Chief Executive Officer, and David Duckworth, who is the Chief Financial Officer. Gentlemen, I really appreciate you coming and being my last presentation of the day. As Chris said, the last and the best. Hopefully it'll be a great session.
I know the call, the fourth quarter call was maybe last week. I'm losing track of time. I think, was it last week? Yeah.
Yeah.
It was last week. Investor Day was in December, so not too long ago. Maybe Chris, just a couple moments of, I mean, you've been at the company now for a year, a little over a year, or?
Just under a year.
Okay. Sort of keeping track of time, pretty well. I know you get asked this a lot, and you've kind of presented, but maybe just give us one minute on came into the company, here's what we see as opportunities, here's where we're, you know, laying out a plan to execute on those and kind of what you're most excited and confident about, you know, heading into, you know, the next couple of years here.
Yeah. Thanks for having us, Gary. I think, you know, there's a number of things that I feel really good about with the company. I mean, I think it's unusual to have four lines of business where you're seeing record demand for every single line. So, I think we feel really good about the demand tailwinds, unfortunately for society, but certainly, you know, great for our business, with so much focus and interest on behavioral health right now. I think we also feel like we have really strong visibility into multiple pathways for growth, and I think it's not just adding beds to our existing 250 facilities, but it's also these joint ventures that we've been able to do where we have 19, and it gives us great visibility into the future, in terms of bed addition growth.
I mean, we did 570 bed additions last year. We'll do 670 this year. That really ramps into 2024 and 2025 to 1,150 that we're projecting for those out years. We just think a lot of that is from our JV growth, but we're also doing de novos as well. With a really strong balance sheet, with only 2.1x leverage, we think we have an opportunity to do some selective M&A as well. I think when you put all that together, as someone that really came from more of the payer side of healthcare, more recent to the provider side, I've been really surprised by the lack of technology that exists within behavioral health in particular.
That was a big part of our first-ever Investor Day that we did back in December, where we committed to investing heavily in technology, not just in EMR, but also some remote monitoring technology and other things that we think will really, you know, help catapult our company and hopefully bring the industry along as well. I mean, just some real efficiencies that we see, but also just better patient care and, you know, better ways to recruit and attract a really good team. I think there are so many people that are really interested in what we're doing that as we better communicate our story externally, we'll be able to even do a better job on improvement and retention. All that makes us pretty optimistic about 2023.
There's a lot of bed growth, you know, built into, you know, the forecast the next couple years. How are you prioritizing? I guess we always kind of thought de novo beds or add-on beds are great and lowest cost and lowest risk existing, you know, facility, and you're building those where you know you can fill them. JV is pretty good too because you're gonna have a partner that's gonna send, you know, business, you know, your way.
Yeah.
versus maybe just building a, you know, a brand-new facility. It seems like you have a lot of opportunities on all fronts. How are you sort of, you know, gating and prioritizing, you know, which of those you're, you know, pursuing.
Yeah.
-even as you're doing, like some of all of them?
Yeah. I mean, it's a conversation that we have internally all the time. I mean, we're fortunate that we do have multiple growth levers that we certainly talk about on all of our calls. You know, as we step back and did the analysis, we're seeing about 100 markets in the U.S. that we see as under-bedded. We have our priority list of, you know, what are the top 25 where we really want to go quickly and we kinda tier those over time. Sometimes it makes sense for us to move into a market even more quickly by choosing [inaudible] as a quick way to get into a market. We have many of those going on at any given time. Sometimes there just isn't a health system that exists, and it's a market that has a real need.
In those instances, we might just do a de novo. Other times, we may be more inclined that we wanna get into the market so quickly that we lean towards M&A and looking at targeted opportunities on the acute specialty or CTC side. You know, that happens as well. We're fortunate that we have these multiple growth levers. Every market is different, and we're having these conversations every day as to how we can most quickly and effectively deploy capital to move into those markets. There's just, there's always trade-offs. You know, overall, I would say, you know, we do like the joint venture model because historically, they have payer relationships. They've been in those markets for a long time.
They frequently have patients that they can bring over that they're deflecting from their facilities, and they also have employees that they can bring over as well. It's sometimes an opportunity for us to get a little bit of a turbo boost as opposed to doing it ourselves. We've been very, very successful in doing de novos, and we'll continue to do those as well. We broke ground on one on Monday in Mesa, Arizona, as an example.
Then David, as you're thinking about modeling some of the returns and margins from some of these new investments, because it occurs to me there's, you know, maybe, in the last, you know, five or 10 years, maybe a couple of things are different. You know, one is clearly sort of the labor environment. I don't think we ever historically said, "Oh, you know, we love the thought that you're going to build some new beds, but we wonder if you can staff them or what the cost of, you know, staff them, might be." Hopefully that's, you know, moderating. The other is just like construction costs too, with the, you know, inflation and what we used to think about, you know, the cost per bed to construct.
either of those two factors, materially changing how you're thinking about these new investments, what the returns be, what the ramps might look like or not?
Yeah. As we look at our pipeline across joint ventures and de novos, we do not only think about future opportunities, but we think about the deals that we already have in the pipeline that are in the design and construction, process, and can be impacted if there is a change in construction cost estimates or the local labor environment. Fortunately, it has not changed the way we think about that opportunity, because on the one hand, some markets have seen higher construction cost inflation that more recently has really leveled out over the last several months. Those same markets tend to also see reimbursement for our industry, really keeping up with, that inflation in both labor and construction costs.
Our design and construction team that we've built out over the last several years really does a nice job finding opportunities for us to leverage the design know-how that we already have built, apply what we learn on one project and the efficiencies from that to all of our future projects. There are some opportunities and strategies that we can employ to just really leverage and limit the construction cost inflation and speed up the projects. It's important for the company to get these facilities in the pipeline opened as quickly as we can. We're highly focused on that.
As we think about projects, fortunately in most cases where we have seen some construction cost escalation or labor increases, we've also looked at the opportunity in those markets, on both the volume side and the reimbursement, that we expect in those markets and still see very attractive projects. It's something that we constantly revisit.
Got it. You know, Chris, one of the opportunities that you talked about and sort of, you know, identified coming in was some of the cross-reference or referral opportunities between facilities and markets. Where does that I mean, early days, but are there markets that are doing that better or had been doing that well? Is there any way to sort of, you know, quantify and think about the, you know, tailwind or what that means, you know, in terms of revenue growth or occupancy or any metrics yet you might be able to share or what you're hoping for from that?
Yeah. I still think the opportunity here is significant. We are still in the process of kind of working through the quantification, which we'll definitely share with investors as we get a little bit further into this. Just to step back, I mean, we obviously are serving 75,000 patients a day. I would say under less than 1% of our referrals are within the Acadia ecosystem. We have 250 facilities, so it's just a significant opportunity. We have the CTC business treating those that have opioid use disorder that really has been operated historically almost as a standalone business without as much integration into the broader company. Yet someone that is admitted to one of our specialty facilities, 70% of them actually have an OUD diagnosis.
There is significant opportunity to refer patients back and forth. Obviously, those that are coming into our acute facilities have a much shorter length of stay, usually around 10 days, but that can also be a feeder into our specialty facilities. We have so many patients that have co-occurring conditions, we just haven't been intentional about looking for ways to help them, you know, step into, you know, another line of care. We candidly have not had the technology in our industry and certainly within our company to track those patients as well. You just put all those together, we just see significant value to unlock, just by being able to be a better referral source within Acadia.
It's an initiative that we've had in place since late last year. We're just continuing to focus heavily on it and, you know, we'll have more details to come on what that can actually mean financially, but we think it's very relevant.
Chris, your payer perspective, I think is interesting to me. I guess, my thought, and you can correct me in public if I, if I'm wrong, which will be embarrassing, but I'll take it. I kinda think about, you know, for, you know, for the inpatient psych, you know, state Medicaid [inaudible ]. The Medicaid MCO sort of piggyback off that rate. Medicare [ inaudible ] on the, on a per diem, and the MA plans generally sort of piggyback, you know, around those rates.
Is this happening yet, or is there an opportunity whereas MA plans gain more share, as certainly the Medicaid MCOs have gained a lot of share, that you can do, you know, market sort of contracting where it's, you're including all your facility types and there's some leverage from the fact that you're delivering to them that's network.
Yeah.
effect as opposed to just sort of one-off. Is any of that happening today or?
It's not happening yet.
Okay.
It's a great question. When I put my payer hat on, I think it inevitably will.
Yeah.
That doesn't necessarily mean that everything has to move to the value-based constructs. I mean, I think that that is an opportunity in our industry. It's obviously hard when there aren't a prevalence of EMRs and you're not capturing data. I just think history will show, and has shown, that over time, we as a company, as we're thinking about our investor day and how we wanna compete and how we wanna deploy resources with all this demand, we're really focused on the highest acuity conditions. We just think that there's so much opportunity across the market. We're just spending, we're gonna continue to spend a lot of time on that. I think on the, on the technology front, we will get to a point where we can truly compete on the strength of our health outcomes.
We have to sit down with payers and be in a position where we can bring them our data and show them that our outcomes are better than another provider. I think that's where the market is going to move. Maybe not immediately, but it's one of the major reasons we're making these technology investments now, because we wanna be able to position ourselves to be there. I think it'll start early. I don't think we're going to full capitation or we're taking down the models where if we deliver certain efficiencies on readmissions, as an example, they'll give us a kicker. I just think that is indicative. Not every payer is interested in moving that direction yet, but I think it's indicative of what's to come.
When you couple, you know, the density that we have across our four lines of business in various markets, I think it makes us, you know, really an attractive partner in those geographies. I think these contracts will change over time.
Is there an opportunity, I mean, you've talked a little bit about this, but sort of expanding your service offering a little bit, adding more on the outpatient side, comprehensive outpatient, you know, programs. A lot of your population is more acutely ill than when we think about like, you know, LifeStance or Refresh or a lot of the virtual, you know, behavioral companies which have gained. It's a different population at a far lower acuity level of, you know, mental illness. Does it ever make sense to put any of that together with, you know, the business you're in? Or do you think long term or no?
Yeah. I mean, I think there's opportunity there. You know, strategically, I like the position we're in, dealing with the highest acuity patients and having an opportunity to go a little further down market to lower acuity than being lower acuity trying to come up market. I just think that's very challenging for others. That said, we really like the outpatient business. You know, back to your payer comment, I think payers would like to see us playing a role in working with the lower acuity population. I think there's ways to do that through partnership, though, in the near term and trying to kind of cross-refer patients as opposed to us having to solve that through M&A.
Yeah.
There are a number of conversations that we're already having on that front, where we're looking at, you know, various ways for us to work better with some of these lower acuity outpatient companies that many of which have, you know, seen a significant investment in capital over the last few years, and they have, you know, Their expansion of their capabilities is much more impressive than it was even a few years ago. A lot of opportunity for us to work with them. Those conversations are happening. Just don't think it needs to be an M&A transaction to get there.
Got it. I just want to talk about balance sheet and cash flow a little bit. You mentioned the, you know, leverage, being far lower than it has been for most of the company's history. David looking younger and younger every day, you know, because of that. When you think about this growth that you're funding, the de novo growth, the same market growth, the JVs, et cetera, is the intention that, you know, the bulk of that's funded with free cash flow? And if leverage moves up over time, is that primarily because you do acquisitions?
As we think about our cash flow, the company has always generated strong cash flows. That gives us a lot of discretion as to the investments that we make across our growth pathways. Our outlook for 2023 is cash flows of $450 million-$500 million. We believe even as our investments in new facilities and joint ventures are stepping up, as we outlined with bed additions going from 600 to over 1,000 a year in 2024 and 2025, we will fund those entirely with operating cash flows, as we've done in the past. In the past, we've even had some discretion to make debt repayments and have some other optionality as we've gone through a year.
We do think of those investments, even at a higher level, as being funded with our operating cash flows, which preserves the balance sheet for M&A transactions. Chris mentioned we are at 2.1x leverage today and have thought about a target of 3x- 3.5x as the ideal leverage for the company. I'll say with rates being higher, with the capacity that we have for acquisitions, even at the 3x level, you know, we think that might be the right place to be in the near term. That gives us a lot of capacity and preserves a very strong balance sheet for the company in a period where rates have been higher. We do think about M&A as the source of that balance sheet capacity that we have, but we'll stay very disciplined.
We've always had a real strategic view and a long-term view as to what value does an M&A opportunity create for the company. We look at that in a discipline way, factoring in where valuations might be within our industry, and we'll continue to do that.
Just in terms of the acquisition environment, it would seem like COVID awfully disrupted seven years for a lot of healthcare operators and labor costs being an issue and staffing. Inherently, I would think maybe there's more stuff flowing across your desk to look at. Is that fair? Do you think the next couple of years are a period of elevated acquisition activity? If so, do we still think about that primarily being in inpatient psych or-
Yeah.
not?
I would say our pipeline is as strong as it's ever been. Back to the MSA analysis that we do, where we're really focused in on those geographies where we wanna grow. That's really helped us narrow the universe of assets that we're interested in. I would say it would be primarily acute and specialty, although we did an acquisition of four CTCs in the Atlanta, Georgia area late last year, which was an opportunity. We had 1 site that was already in Atlanta. We added these four. We've got some scale there now. There will be those types of opportunities here and there. I think this is still a very fragmented industry. There's a lot of mom and pops. There's single facilities that I think, you know, we're a very attractive strategic partner.
I think, you know, we're gonna continue to look at scale opportunities. I think it really helps for us to have done the work to know the geographies where we wanna play and to have that level of focus. We're not sitting back just waiting for bankers to bring us books to consider various assets. We can be proactive on that front too. We're gonna look at scale opportunities in acute and specialty. We'll look at some CapEx as well, and we'll continue to be very careful on the deployment of capital. I think that there will be more opportunity in the next couple of years. I wouldn't say that, you know, doesn't always mean there will be willing buyers and sellers. I mean, you've gotta always, you know, find a, find a path.
I do think that, particularly with the higher interest rates, it's challenging some of the smaller players.
Gotcha. I wanted to talk about reimbursement a little bit heading into 2023. I think, what probably surprised me most about how 2022 played out wasn't that you were seeing more, labor pressure because everybody was, but, you know, the strength of your, you know, revenue per day or, you know, however you wanna define the metric, just on the reimbursement, you know, really, covering that, through the year. You know, you've got visibility on what commercial you have. You have visibility on what Medicare you have. As you talked about on the call, most of your states are July fiscal year, so you have really good visibility on Medicaid the first half of the year.
The second half is where the uncertainty is or where we don't have great visibility yet. Any dynamic changing there, though? I mean, we look at the state, you know, budget situations. Most states are flush. Obviously, they've been very supportive and, you know, rate for behavioral, it almost seems very difficult for anyone to, like, pick out behavioral as a place that they wanna try to save money. To me, my instinct is it's still very supportive, but is there anything you're thinking about now, conversations you're having that make you feel better or worse about, you know, second half of 2023?
Yeah. Gary, I think that the team that we have, our local leadership, our corporate managed care team, others that are involved across all of our payers, have really done a nice job maintaining, what's been for the company long-standing and very good payer relationships. We have seen mid-single digit increases and think of that as being broadly experienced across our service lines and across our different payers, which include Medicaid, commercial, and Medicare payers. As we provided our outlook last year or last week for 2023, we did talk some about the visibility that we have for the first part of the year, but some caution that we're preserving in the second half of the year. You know, as we engage in those markets with our payers, we are still expecting to see mid-single-digit increases.
We're very mindful of just all the factors that sometimes play into that discussion at the state level. Believe with the value of being placed on mental health and addiction treatment at the state level with the states that we're in really investing in mental health, focusing on what's provided and do they have the right network and treatment options within their state across our service lines. We think we're in a good position to see that continue.
Okay. I wanna go to the labor question. I think from the fourth quarter call is the one thing the Street, I guess, didn't like or didn't like what they thought they heard. I guess maybe, I'll let you correct me if I didn't hear it correctly, but what I thought I heard you saying all through 2022 was 2022 is gonna land somewhere in the 5%-7% range. The second half is gonna be higher than that. You told us, 3Q was about 7% on the underlying wage, and the fourth quarter was 8%. You thought that continues to the first half, and by the time you get to the second half, it would be lower.
To me, I guess, you know, the new information was you explicitly said 7% and 8% versus you had said, the second half of the year would be towards the higher end of the 5%- 7%. I didn't fall out of my chair 'cause I thought I heard something dramatically new, but there was a lot of reaction to it. I guess the question is, one, did I have those numbers right? Are you saying or signaling that you have seen more labor pressure or you're worried about more labor pressure in the first half or for 2023 or not?
I think you summarized it very well and accurately. From our perspective, we did see 7% in our Q3 increase to 8%, but that was intentional decisions that we made in certain markets to bring on new employees at the right level and in certain markets to make pay adjustments to ensure that as we see significant volume opportunity, that we remain competitive, and have the right employees and improve some and continue some positive momentum we have right now around recruiting and retention. We are seeing positive signs regarding the labor environment for our industry. That includes reduction in contract labor, monthly improvement now for several months around our retention in our hiring activity and job postings. Then we're looking at external data being positive.
While we did see that 1% step up, it is not a view from our perspective that the environment we're in is becoming more challenging. In fact, we're seeing some positive signs as we move into 2023, and that's reflected for us in the back half of the year. It's mainly in the back half of the year because of the timing of our employee merit increases, which happen in the first half of the year and really have the effect of keeping that year-over-year growth elevated because we want to move forward with those increases. That's the right thing to do for our employees and for the company and the volume growth that we see.
Second half of the year, we're seeing some very positive signs as to moderation that will happen over that period.
You know, the primary reason it moderates in the second half of 2023 is really just comping where you were, you know, saw those planned merit increases. Comping that, not feeling like you have to go back to that same level again.
That's exactly right. It's comping and seeing the benefit of taking action over the last year to be in a good position to be able to, once the overall environment improves, we'll be in a good position to see the benefit of that.
Some have, you know, pressed and said, "Well, you raised the revenue a little bit, but you kept the EBITDA the same. So, 2023 has to be landing somewhere worse than you once thought in terms of labor or something else." Can you address that if you think that's the right conclusion or-?
We've heard the read-through into, you know, how we adjusted our revenue and EBITDA guidance. That's not our thinking there. Other than flowing through that 1% into the year, we did not change our labor outlook for the year. Our guidance for the year, in our view, is very positive. Our EBITDA guidance reflects 10% growth at the midpoint and well above 13% growth even at the high end. We did narrow the guidance from December to February, which in our view was just a tightening that reflects the increased visibility and confidence that we have into delivering on a successful 2023. Our revenue guidance does reflect strong volume growth for the year, but the EBITDA guidance staying at the midpoint did not reflect any change in our view of our cost.
Okay, great. We're out of time. Gentlemen, thank you very much.
Thank you, Gary. Thank you all.