Acadia Healthcare Company, Inc.

Good morning and welcome to the Acadia Health Care's third quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Gretchen Homrick. Please go ahead.

Good morning and welcome to Acadia's Third Quarter 2021 Conference Call. I'm Gretchen Homrick, Director of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to Chief Executive Officer Debbie Osteen. To the extent any non-GAAP financial measure is discussed in today's call, you will find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by viewing yesterday's news release under the Investors link. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements among others regarding Acadia's expected quarterly and annual financial performance for 2021 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's third quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. At this time, for opening remarks, I would like to turn the conference call over to Chief Executive Officer Debbie Osteen.

Good morning, and thank you for being with us today for our third quarter 2021 conference call. I'm here today with Chief Financial Officer David Duckworth and other members of our executive management team. David and I will provide some remarks about our financial and operating results for the third quarter of 2021 and our guidance for 2021. Following our comments, we will open the line for your questions. We continue to see favorable momentum in our business in 2021. as Acadia delivered a solid financial and operating performance. Demand for our behavioral health services has remained strong, especially within our acute and specialty service lines. For the third quarter of 2021, our same facility revenue increased 7.9% compared with the third quarter of 2020. including a 5.6% increase in revenue per patient day and a 2.2% increase in patient days. We are pleased to see these solid volume trends, especially under challenging conditions we experienced in certain markets in the third quarter, which include Hurricane Ida and the surge of the Delta variant of COVID-19. We are extremely proud of our exceptional team of dedicated employees and clinicians across our operations who continue to support our patients with the highest level of care under extraordinary conditions. Above all, the safety of our patients is our top priority, and we remain focused on providing consistent care for those seeking treatment for mental health and substance use issues. Our financial results for the third quarter were adversely affected by disruptions from Hurricane Ida in Louisiana. We had an acute facility sustain damage from the hurricane, and the majority of patients had to be evacuated. As the damage to the facility is repaired, we are gradually opening units. With three units currently open, the census has started to ramp up. We expect the remaining two units to reopen over the course of the fourth quarter. Additionally, we had another facility located in Louisiana that experienced a brief temporary impact to their admissions. In total, the hurricane had a negative 0.3% impact on our revenue growth rate, and a one cent impact on adjusted EPS. In addition, our facilities in certain markets saw an elevated level of COVID-19 cases during the third quarter. We continued to see the vast majority of our facilities managed through the COVID wave using the protocols that we have had in place since 2020, with minimal disruption to patient volumes or operations. We are pleased that in all cases, COVID-related factors have proven to be temporary. Despite these challenges, we continue to manage our operations safely and efficiently while providing essential behavioral health treatment and maintaining our same high standards of patient care. The past 18 months have been for many the most difficult of their lives as we continue to deal with a global pandemic. The stress and anxiety related to the pandemic had a profound effect on many individuals, especially those already struggling with mental health issues and substance use disorders. We've been fortunate to see the extraordinary efforts of Acadia's mental health clinicians physicians, nurses, and staff who have continued to help the patients who come to us for help and not allow COVID to disrupt the critical care our patients needed. At the same time, on a positive note, we are pleased to see issues surrounding mental health gaining more attention in the national spotlight. Many top professional athletes, corporate leaders, and other social influencers have come forward to share their own personal struggles and reduce the stigma around mental illness. As a result, we are seeing higher demand and societal acceptance of behavioral health increases with a greater push for access to treatment and expanded coverage options for those who seek treatment. Acadia is well-positioned to meet the needs of those seeking behavioral treatment through our diversified service lines and proven operating model. On our previous investor calls, we have shared Acadia's growth strategy that is centered around four distinct pathways that we believe will provide additional opportunities for Acadia to reach more patients in new and existing markets. Throughout 2021, we have made significant progress in executing on this strategy. We have continued to make the right investments in initiatives across our service lines to support sustained long-term growth. During the third quarter, we added 104 beds to our operations, bringing our total to 282 bed additions to existing facilities this year. We believe facility expansions offer the highest return on investment for Acadia, and we expect to meet our goal of adding approximately 300 beds to facilities by the end of the year. We also opened two new comprehensive treatment centers in the third quarter, located in Tennessee and Florida. CTCs are designed to address the growing and critical need for addiction treatment, especially for patients dealing with opioid use disorder. Through the end of the third quarter, we have opened five CTCs and expect to open six additional CTCs in underserved markets by the end of 2021. Throughout the country, health systems are looking to integrate care and expand treatment options to meet the growing demand. By partnering with hospitals and health systems across the country through joint ventures, we are able to integrate physical and mental health services to develop innovative quality programs. We are proud of our 13 joint venture partnerships across the country. Acadia has a strong track record of successfully operating the seven joint venture facilities that have opened over the past few years. We are also excited about the opportunities to expand our reach into more communities and broke ground on new facilities with two JV partners, Geisinger and Lutheran Health Network of Indiana during the third quarter. We also continue to identify attractive acquisition opportunities that fit our profile and extend our market reach. providing another important pathway to growth. We believe that the fragmented behavioral healthcare industry offers additional prospects for future acquisitions, and we are well positioned with sufficient capital to pursue these opportunities. Our success to date in 2021 confirms the strength of our operating model and our ability to execute our strategy. Looking ahead, we will continue to expand our network and serve more patients through our four distinct pathways for growth. We recently announced two key additions to our management team who will each play an important role in the execution of our growth strategy. David Keys, has been named Chief Development Officer, bringing nearly two decades of experience in the healthcare services market and will focus on mergers and acquisitions and de novo development. Osei Mevs has been named Vice President of Government Relations and will oversee our government relations and public policy functions and strategies. His extensive experience in government relations and public policy and deep understanding of the healthcare industry will support our efforts to further educate policy makers and expand governmental support and funding. We welcome David and Osei to Acadia and we look forward to working together in our shared mission to raise awareness about mental health and extend our market reach to more patients and families in the communities we serve. We are encouraged by the favorable trends in our business and believe we are well positioned to capitalize on the expected growth in demand for behavioral health services. As with many other health care providers and other industries across the country, we are currently dealing with a tight labor market. However, We believe the diversity of our markets and service lines and our proactive focus helps us manage through this environment. Generally, the challenge that we have faced are temporary and market specific. We remain focused on ensuring that we have the level of staff to meet the demand in our markets across our 40 states. As always, our primary mission is to meet this demand and support the patients and communities we serve. We will continue to focus on providing the highest quality of patient care while extending our market reach and advancing our position as a leading behavioral health care provider. Now, I will turn the call over to David Duckworth to discuss our financial results in more detail.

Thanks, Debbie, and good morning. Revenue for the third quarter was $587.6 million, compared with $548 million for the third quarter of 2020. Acadia's adjusted EBITDA for the third quarter of 2021 increased to $141.9 million, compared with $116 million for the same period last year. Results for the third quarter of last year included a reversal of $18.1 million of income related to the Provider Relief Fund established by the CARES Act. For the third quarter of 2021, adjusted income attributable to Acadia stockholders per diluted share was 72 cents. For the current and prior year periods presented in our earnings release, adjusted income excludes transaction-related expenses, debt extinguishment costs, loss on impairment, and the income tax effect of these adjustments to income. Strengthening our financial position and reducing our debt have been top priorities for Acadia in 2021. Our balance sheet remains strong with ample liquidity and capital to support our growth strategy. In the third quarter, we repaid $25 million on our senior secured revolving credit facility reducing the outstanding revolver balance to $100 million as of September 30th, 2021. The company had $500 million available under its $600 million revolving credit facility as of September 30th. Our net leverage ratio was approximately 2.2 times at the end of the third quarter, and our cash balance was $196.3 million. During the third quarter, we continued repayment of amounts received under the CARES Act and repaid $10 million of Medicare advance payments after having paid $7 million in the second quarter. We will continue to repay the remaining balance on a monthly basis through September of 2022. Also in the third quarter of 2021, the company repaid half of the approximately $39 million of 2020 payroll tax deferrals with the remaining portion to be paid in 2022. Now turning to our guidance based on our third quarter results and fourth quarter expectations, we have narrowed our 2021 financial guidance to the following ranges, which are within our previously announced ranges. Revenue now in a range of $2,295,000,000 to $2,000,000,000 $315 million. Adjusted EBITDA now in a range of $537 million to $547 million. Adjusted earnings per diluted share now in a range of $2.51 to $2.59, which reflects a revised estimate of stock compensation for the fourth quarter of 2021 in a range of $11 to $13 million, operating cash flows now in a range of $290 million to $325 million, and total capital expenditures in a range of $210 million to $230 million, which includes approximately $45 million for maintenance capital expenditures. As a reminder, this guidance does not include discontinued operations or the impact of any future acquisitions, divestitures, or transaction-related expenses. I will now turn it back to Debbie for some additional comments.

Thank you, David. As we announced earlier this month, I plan to retire as CEO of Acadia while remaining on the Board of Directors. I look forward to continuing my involvement with Acadia and supporting Acadia's growth in the coming years. I am extremely proud of what we have accomplished since I joined Acadia. The past three years have provided me with a unique opportunity to leverage my experience in behavioral health to lead Acadia through a critical period. Most importantly, I am proud of the team at Acadia and all our employees who demonstrate their commitment every day by helping the many people who need quality behavioral health care. With the help of the national recruiting firm, the board of directors and I are actively working to identify the right person to lead Acadia in 2022 and beyond. This person will be joining a company that has a very talented and experienced leadership team. The company has a strong balance sheet and robust pipelines that allow us to pursue many growth opportunities. Acadia is well positioned to continue executing our growth strategy and solidifying our position as the largest stand-alone behavioral health care company in the U.S. With that, Jason, we are ready to open the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. Please limit yourself to one question and one follow-up. Our first question comes from Brian Tanquelute from Jefferies. Please go ahead.

Hey, good morning. Debbie, congrats on the upcoming retirement, and thank you for all the help over the years, and also congrats on a good quarter. I guess my first question, you know, everyone's been wondering about labor, and you hit on it a little bit in your prepared remarks, but Just wondering if there's anything you can share with us in terms of like maybe some metrics internally on labor for you guys and maybe your thoughts and what differentiates Acadia from some of your peers or competitors in terms of the bigger challenges it seems that they're seeing.

Well, I think as we look at our markets and certainly we look at our service lines, we do differ. We're not, you know, we're a unique company. And I think that that does help us with managing labor. I also will say that we've really had a very focused and very robust efforts around recruitment. And it's not started because of what's happened during COVID, but it's really been very consistent since I've been here. I think that as we look at how we approach labor, it's individualized by market. We certainly have challenges, but I think that what we've tried to do is have a very proactive approach in staying competitive, but also we have a corporate recruiting team that supports our facilities, and I think that they have been successful in filling openings, and I think that as we've added to those resources, and I think that together with the local efforts, And that's around both recruiting and retention. And then if you look at what our corporate recruiting team has been able to achieve, I think that has put us in a situation where we've been able to navigate. You know, the third quarter with the COVID resurgence was certainly a difficult environment. But what I've seen across the company is the ability to hire staff and to meet our demands. And I think that we are in different geographies than some of our competitors. We also, I think, have a hands-on, very centralized approach as we deal even with COVID and trying to make sure, as nurses might need to be off if they are positive, that we are supporting them and helping them problem-solve. So I do think, you know, as you look at our metrics, I think that, you know, they – we have – You know, our salaries, wages, and benefits as a percent, you know, was 51.1%, which is actually down a little bit. But I think if you just look at, you know, our results, I think that the proof of what we've been able to do and what we've been able to navigate is clear. And it's because of a lot of efforts. We look at this by market. And our pay strategies, our efforts, everything is tailored to those markets. And also then, as I mentioned earlier, supported by this centralized team that's helping facilities navigate this.

Gotcha. And then my follow-up question, just really quickly, I know you hired a new development person, which is, you know, good to see. So just curious if you can share with us, excuse me, any color on what the M&A environment looks like, you know, what are the assets or what types of assets are in the market and what the directive is for this new development person?

Well, I think that as we brought on David Keyes, we believe that there is still a lot of opportunity, that it is still a very fragmented market. And we see a number of smaller multi-facility systems, also a number of single facility operators that I think presents future opportunities. And I think that his focus is going to be on looking at those opportunities, finding what fits our framework here and what would be strategic for us and also then meet the financial framework. And then at the same time, David will be helping with our de novo bills, which we still think has a lot of opportunity. We think there's still a number of underserved markets. So he's going to help advance that and support those efforts. And we think that, as I think providers have gone through, certainly in the behavioral health part of the industry, that they may want to seek alternatives to staying as owners. And so we are going to be poised to take advantage of that with, I think, our platforms. And we are looking for opportunities that present an ability for us to improve operations but also then to have bed additions. And that's how we've grown in the past through, you know, the various acquisitions that Acadia has done. So he's going to be very busy, and, you know, he's already been, I think, well-received by the team here, and we look forward to what he can do for Acadia in the future.

Awesome, Debbie. Thank you.

Congrats again.

Thank you.

Our next question comes from A.J. Rice from Credits. Please go ahead.

Hi, everybody. Let me also offer my best wishes. Debbie, you had a great run there. Thank you. Maybe just first to ask, the revenue per patient day number was strong, and I know the second quarter may have been a weird comparison versus last year, but I'm thinking the third quarter was probably more normalized a year ago. Can you just comment on what you're seeing with respect to any change in managed care? Do you think this was more of a mixed thing in terms of why it was so strong? But what about the sustainability of it?

Well, I'll take part of it, and then I'll let David talk a little bit. But I do think that we did see strong payer rate increases, and we've been focused on that, frankly, for the last year and a half. We also had a strong payer mix. And we also had a positive service mix. So as we think about that, when we look at our specialty volumes and the strength that we've seen, and really, frankly, the strong demand there, we generally have a higher mix of commercial payers for our specialty facilities. And so when our volumes are strong and acute, which they have been in these larger specialty facilities, I think that that strengthens the revenue per day. We do think that that is a sustainable going forward. We think the demand for our services, both in acute and specialty, are really stronger than ever. They were strong before COVID, but now even stronger. So I think as we look at it, we see the rate increases coming in at the higher end of where our projections have been. But we also are working very hard to make sure We have specialized services, and I think our payers have recognized that, and also our outcomes, and I think they've been willing to offer higher payer increases than normally we've seen over, I guess, earlier in maybe two years ago. Do you want to add, David?

Yeah, as Debbie mentioned, we do believe that that revenue per day is sustainable going forward. That is reflected in our outlook for the fourth quarter and our updated guidance. We do believe that the service mix will continue to contribute to that revenue per day growth. So while we've seen a rate increase from payers that has been at or above the high end of our expected range, There's also a component of service mix that we believe will continue. We did see last third quarter of last year, acute and specialty recover very strongly from the second quarter. But the service mix this third quarter compared to last year is even stronger with acute and specialty really performing well. And we think, especially with investments being made weighted more towards the acute service line, that dynamic will continue.

Interesting. Let me just ask you as my follow-up about what you're seeing as you work with acute care hospitals. I know they're an important referral source for you, but they also often have site units that compete with you. Was there anything about the surge that they were trying to free up space potentially in their site units that may have helped you? or in the referral pattern of patients showing up in the ER. And I wondered also whether the dynamics around COVID have changed in any way your discussions with them about joint ventures and whether there's more enthusiasm or it's taking longer. What would you say about that?

Well, I'll take the first part of that. I don't think we've noticed any real change in the referral patterns from our you know, the med-surg hospitals, we have had very steady referrals from the ERs. And that really started, you know, a year ago in June after, you know, the height of the, you know, pandemic and the stay-at-home. And I think in June, we started to see them referring again. We've been very focused here in the company on responsiveness. because we know it's important to the ERs that their patients get to the right place and that they get care and they get it in a timely way. So I think that that's been, you know, helpful to our ER referrals. I think that, you know, certainly they've been very stable and steady. If I think about the joint ventures and just the impact of COVID and certainly this latest, you know, resurgence, We've had, I think, a very active pipeline of partnerships, and I do think that they have not actually slowed, but they've actually accelerated. And I said before I was a little surprised by that, but I do think that they see that, you know, they want to focus on other service areas within the med-surg system And, you know, we do have a strong track record. So I think, you know, they are reaching out. Most of the time it's a competitive process, and we're pleased that they're, you know, choosing Acadia. We hope actually to be making a few announcements coming up in the fourth quarter. And, you know, these are going to be strong partnerships that, again, we're proud of. So I do think those are going to continue, and if nothing else, probably accelerate. as we go forward.

Okay, great. Congratulations again on the retirement.

Thank you, AJ.

Our next question comes from Pito Chickering from Deutsche Bank. Please go ahead.

Thank you very much. A few questions for you on retirement. on laborers or follow up here, can you give us any color on turnover, what you saw sort of during third quarter and fourth quarter and any color on what wage inflation will, you know, is running these days for your full-time employees? Uh, and as you open up new beds, you know, are you able to, you know, recruit quickly to fill it, to fill those beds?

Yeah, Pito, uh, we have seen stability in our turnover. Um, think as we look back over several years, we have not seen a significant change there. In terms of wage inflation, we continue to take a proactive approach around our wages and our pay. It is a market-specific analysis that we go through, a job-specific analysis that's really focused on the appropriate rate increases across different jobs. And the average that we have seen as a company tends to be around 3%, but it can vary depending on our strategies across our different markets. I think an element recently has, of course, been premium pay, and that's been actually pretty stable for us and pretty much in line with where it's been historically in terms of overtime and agency labor growth. still is around 2% of our total labor. So we have not seen a significant impact there. On your third question around recruiting, especially given our new beds, Debbie mentioned our approach to recruiting, our local efforts, as well as our centralized resources that we bring, the team that we have, and the different teams that we have across our enterprise continue to do a great job staffing our existing facilities. And then as we approach a new market, we are hiring the CEO in advance and planning for the resources that we need to be adding for any significant growth projects and new facilities. And we do have a strong track record there of recruiting the staff as we open and as we ramp up a new facility. So we have been able to staff and and provide the right staffing to support our volume as well as our volume growth.

Okay. As we look at the specialty business and the comprehensive treatment centers, just curious, what is the occupancy of the centers? What is your revenue per day for the centers, and are the margins different than your standard acute facilities?

Peter, we don't... really report at a service line level of detail because we do, you know, we run our services geographically and across our groups, and we do provide some information around revenue by service line that's included in our filings, but the more detailed metrics are just provided for our total U.S. operations. I'll say those specialty facilities have performed very well over the past 12 months especially. The margin and the revenue per day dynamics can differ even within specialty. It depends on the market, the program, the size of the facility, and many other factors. But they have performed very well over the course of the last year. And overall, the margins are similar. If you just look at the average across the service line, the margins are similar to what we see for our total facilities that we report. The occupancy, and we've talked about volumes for specialty being strong, the occupancy has been stable, tends to be in the 75 to 80% range on average. That's another metric that can really depend on the programs, the units within a facility, but that's the average that we see for our specialty facilities.

And I'll just say, Peto, that you know, we started to see really our larger specialty facilities, and, you know, as you know, we, you know, pull from really all areas of the United States. They're very specialized programs, and people do travel there, and I think that in the first quarter of this year, we saw that return, and that stayed consistent even throughout the last, you know, Delta variant wave. We have individuals that are

seeking care and they are still traveling and so that has supported some of our larger more specialized facilities okay uh just to sneak in one follow-up for aj's question if we take the long view here do you think that the supply demand of balance for behavioral beds you know is accelerating and should we should we be modeling the high end of managed care pricing uh for a couple years until either demand slows or supply increases thanks so much guys

Well, we certainly believe there are strong, sorry for the static there on the line. We certainly believe there are strong underlying factors that support our volume growth expectations. You mentioned the demand. We also think with the reduced stigma, there are more people pursuing treatment and there's better insurance coverage for that treatment. So there are some positive dynamics. And we do think that could be a factor in the rate increases that we're seeing. So in terms of what you model, you mentioned managed care. We do have a very diversified payer mix that factors into how we model rate growth. But we are seeing rate growth above, as we mentioned earlier, the high end of our expected range. So We do think that will continue going forward as we see positive volume dynamics as well as reimbursement dynamics.

Our next question comes from Andrew Mock from UBS. Please go ahead.

Thanks, and I'll echo congratulations on your retirement, Debbie. The revised guidance... implies remarkably steady results from Q2 to Q4, about $140 million per quarter of EBITDA. Can you talk to the underlying variability in the portfolio, either by service line or geography? Are results by market as consistent as they appear on a consolidated basis, or does the diversification mask that underlying variability?

The results are fairly consistent from one month and quarter to another. We do not see a significant amount of seasonality in the U.S. business. As we think about the third quarter to the fourth quarter, you may notice just with the EBITDA projection and the revenue projection, there is some seasonality around the end of the year holidays. that tends to be around our specialty business and to some degree our acute business. That's typically for a short period of time, and we talk about that for the fourth quarter and the beginning of the first quarter. But other than that, we do see consistency in the execution, and I've been really pleased to see just the trends and the sustainability of the trends around reimbursement, cost management, and our occupancy really be consistent throughout this year.

Got it. And just a follow-up here on CapEx. It looks like your full-year CapEx number was reduced by $85 million from what you had targeted at the beginning of the year. What's driving the cut to CapEx there? Is there any postponement in capital investment projects? Thanks.

Yeah, Andrew, when we established our initial guidance for the year, we did make some assumptions around the joint ventures that were in our pipeline and the timing of those breaking ground and stepping up the CapEx that we see on a quarterly basis. And we factored in, I'll say, a somewhat conservative estimate around CapEx potentially stepping up over the second half of 2021. The current projection for that would have that step up occurring right at the end of this year. We did mention that we recently broke ground on two joint ventures. And Debbie mentioned there's other announcements that we're very excited about as we think about how the pipeline will play out and then feed into the construction timeline for those various projects. So there was somewhat of a delay. and a change in timing of when we see that step up happening. And our revised guidance reflects that that will now happen around the end of the year, beginning of next year. And we'll provide more data around that in our next quarter's reporting.

And I'll just say they're not projects that we decided not to pursue or that did not work as expected. David has already explained it. It's really more around just Getting to the point of breaking ground and some of that has to do with just pace of construction, which I think everyone's aware there are at least some issues out there right now for construction. But we have a great team in design and construction that's really pushing and managing that and trying to move as fast as we can because we do have the demand. And we want to get the beds online that are being expanded as well as our partners want us to, you know, they're very anxious to have hospitals in place where they can refer patients.

Great. Thanks for all the calling.

The next question comes from Kevin Fishbeck from Bank of America. Please go ahead.

Taking the question. So I guess you guys have really been underscoring, you know, how focused you are on being able to meet the demand in your communities, which suggests that, you know, you'd be willing to eat into margins to be able to afford the labor if necessary, although, you know, year-to-date prints suggest that you haven't needed to. So I guess maybe to try and approach Ryan's question from a different angle, are you seeing, you know, less wage inflation and fewer supply shortages maybe among, like, the therapist, mental health tech, and substance abuse counselor populations compared to the nurse population? Do you think that could be part of the driver of some of your lower exposure to labor cost inflation?

I do think our service lines, you know, and just the need and the expertise that we're looking for in those various service lines, you know, I guess if you compare us to others, I think that is a factor that I don't think it's an easy, you know, environment out there really for any of the workers, but It does, I think, change our recruiting focus and who we're really trying to bring on, therapists being one. As we look at just what we need for our facilities across each of the four service lines, I think that we found that we've been able to get those workers and we've been able to recruit. And obviously, retention is the other part of that. I don't think that, I think we are certainly looking for some of the same people that other companies are and other startups are, but on the other hand, we've been successful through all of what we do locally as well as centrally to fill those positions across the various service lines.

Okay, that's helpful. And then I guess just a quick follow-up. You mentioned in your prepared remarks that a few of the markets did see the COVID pressures. Could you call out which markets those were?

You know, it really varied. We started seeing, I think, more pressure towards the end of August, towards the middle of September. And, you know, it was in different parts of the country, frankly. You know, we had some pressures in the south, you know, initially. And I think if you could just follow the COVID data for the country, I think certainly our facilities, you know, experienced some of that. We've taken a very focused approach around trying to make sure that when someone presents, to our hospital that we are able to take care of them. They come for a mental health reason and through testing and other protocols that we have, if they do test positive for COVID, then we are able in almost all cases to isolate them. And I think that the team has really had a real focus on let's make sure we treat that essential mental health condition, but also provide a safe environment. And that's what we really have done. So for the most part, many of our markets have seen a decline as we've gone into the end of September into October for the, you know, the Delta variant. We still have a few that have, you know, positive patients. They're being managed, I think, in an outstanding way by the staff. But we also, I think, here have taken an approach of a hands-on. So our corporate medical director, our chief compliance and nursing officer, as well as the operators, you know, daily help manage that. And I think that's made a difference because we've been able to, you know, I don't think our facilities feel the leadership that they're out there on their own. And we're trying to help them. So we did have some facilities and I, you know, in several markets that had COVID patients and we had staff that, you know, were tested and positive and they came back to work after they recovered. But overall, we've been able to manage that and still have the results that we did in the third quarter.

Okay, thanks. That's helpful. And congrats again, Debbie. Oh, thank you.

The next question comes from Whit Mayo from SBV Lyric. Please go ahead.

Hey, thanks. Just a couple quick ones here. David, how are the startup costs tracking versus your plan this year? And maybe just remind us how to think about what the expectations are given the de novo activity in 22.

We are tracking to incur about $10 million for the year. We've already had around $7.5 million through nine months of the year. We do have a couple of facilities going through the startup process now. So that's the expectation for this year. As we look ahead, we do expect next year to have four new inpatient facilities coming online, three joint ventures, and a de novo facility. and a number of CTC de novos. We talked about this year having CTC de novo opportunities, and we think next year will look very similar. And so we did build that in as we thought about what the long-term growth rate would look like. And the next year, number of new facilities that we have would sort of, depending on timing, put us around that $10 million level. But we need to go through our budgeting process for next year and really look at the timing of when those facilities will open, because that will determine with a little more precision what next year's investment and the startup losses will look like. But we think it'll be somewhat similar to the 10 million, depending on timing of opening.

No, that's helpful. And maybe one non-labor related question. Debbie, there were a number of initiatives that you put into place 24 months ago focused on supplies and procurement and the like. Just maybe an update, I think, with the target of $20 million and how you're tracking, anything that surprised you, good or bad, and or do you feel like there are any non-labor-related opportunities going forward based off of the conversations you're having with your field?

Well, I think the team did an outstanding job last year because that was when we were really trying to realize, you know, the 20 million performance improvements expense and reducing that. And so by the end of the year, we really, I think, were where we wanted to be. This year, I think we've continued to identify opportunities. And we have a team here. Their sole focus is on how they can get better contract terms. We have a much improved compliance with our GPO out in the field. I think that we have meetings every quarter on this very thing to look at where we are, but also to say what other opportunities, as you're mentioning, do we have here? And I do think there are more opportunities. And I think that we are always looking for ways to do things more efficiently, but also we have a team that's looking at our contracts, ways that we can save from previous you know, configurations in our contracts as well as, as I said, the field taking advantage of those, you know, contracts that we have in place. We pulled in and made that a lot more central. And I think that the field has responded in a very favorable way. to just some of the initiatives. And I do think that as we see some inflation, you know, around some of the areas like food and other things, that that's helped us this year because we have those initiatives and we were already in process of implementing those. So that's given us, I think, a benefit to some of the inflation that we would have seen if we did not have those initiatives.

Great. I appreciate the thoughts.

Thanks, Whit.

Thank you, Whit.

The next question comes from Frank Morgan from RBC Capital Markets. Please go ahead.

Good morning. I'm going to go back to labor one last time. Within your segments, are there any particular areas where it's been more difficult to recruit? If you think across the service lines and then within each of those service lines, the different staff levels, was any one specific area called out as being more difficult or more challenging. And then my second question is just, you know, beyond the return of the sequester next year, are there any other, whether it's state programs, special unique programs that you've been able to take advantage of that will be lapsing next year? Thanks.

Well, Frank, I think as I think about our recruiting efforts, you know, we certainly have a focus on our end and our mental health techs who work in our hospitals. I think that back to what we've been talking about during this call and I think there's certainly a focus across the industry. Those are positions that I think we want to make sure we are able to fill and we're doing that through the recruiting, but then also We have a lot of retention focus around RNs and mental health techs as well as therapists. But it's going to vary by facility. So if you think about our programs, we have such a diversity that, you know, we're just trying to make sure that we have all the pieces in place to meet demand. And that could vary by facility, frankly, whether it be a therapist, or obviously RNs, we have ratios that we maintain. So I wouldn't name one, but I do think that we have a concentrated focus and a lot of visibility with the local leadership. I'm just making sure that nothing will prevent us from treating demand.

And on your second question, Frank, the sequestration as it's structured now, would be the only reimbursement item that we would highlight. There are no other items that we've called out throughout 2021 that we think would be one time in nature. The sequestration, just to put that into perspective, Medicare is about 16% of our revenue, and that does apply to the portion that is traditional Medicare, which is about 60 to 70% of our total Medicare.

Thank you. Maybe just one quick follow-up. You used the term retention quite a bit. Is that anything more than just basically paying higher wages to people that are there or is there anything else going on? Thanks.

You know, I think wages are important and certainly, you know, that's a focus to make sure you're competitive. But I do think that as we think about why people stay at an organization, You know, we've given a lot of thought to that, and we do have some very active programs around onboarding our staff, making sure they're trained when they come in, and that they want to stay with us. And I think that flexibility, particularly for RNs and career advancement for the mental health techs, I think are two elements that are not wage-related but are important to them. And I also think that, you know, Part of this is making individuals feel like they're valued. And so, yes, wages are important, but as we talk about retention, we don't think just about the salary. We think about the other pieces of why individuals stay with us and then obviously why they leave. You know, people work for people, so making sure that the leadership is trained, that we have the right CNO, all of those elements, I think, play in to retention at our facilities.

Thank you.

Our next question comes from Sarah James from Barclays. Please go ahead.

Thank you. Just trying to put some of the pieces together here. You talked about managed care rates being above the high end of expected range, while wages holding steady at three and agency labor steady at two. So it almost sounds like you're talking about a positive arbitrage, like a margin expansion opportunity. Am I putting those pieces together correctly?

Sarah, we talked about... We're getting an echo. Sarah, if you can mute your line. Okay, I think that went away. We talked about rate increases overall being above the high end of our range, and we would put that 2% to 4%. Of course, the revenue per day that we're seeing reflects other factors, not just the pricing increases from the payers around service mix and payer mix. Our average wage inflation we think is comparable to our rate increases. And we mentioned an average of 3%, but of course have seen premium pay and other dynamics similar to premium pay be a little bit higher this quarter. So we may be a little higher than that 3% average, even though the base would be in line with that 3% average. So we would say the pricing increases, which is one component of our revenue per day growth, would be fairly similar this quarter to the wage inflation that we're seeing.

And then on labor churn, is there any way that you can quantify what that looks like for you guys today versus COVID churn level?

As we look back at that metric, and we've talked about seeing stability there, comparing periods prior to the pandemic and throughout the pandemic, other than in certain markets, if there is a temporary challenge where some of our labor metrics trend differently from the historical for a brief period of time, We have not really seen any significant changes, you know, as we look back before pandemic, throughout the pandemic, or what we're seeing this month.

And I think, Sarah, just thinking about it, the fact that we see pretty stable turnover, we think is, you know, we certainly want to bring turnover down. But with everything, you know, in the environment and just all of the pressure on everyone as they take care of mental health patients with COVID and without. We think that stability and turnover is something that I give a lot of credit to the operators and those, frankly, at local levels. We don't see a big difference in our turnover rates. And we do look at that because that's an important factor. tracking factor for other things within a facility, but it's been stable despite all of the environment that we've been in now for the 18 months.

Yeah, that's certainly impressive in this environment. Thank you very much. Thank you, Sarah.

Our next question comes from Matthew Borsh from BMO. Please go ahead.

Good morning. Thank you for taking my question. You actually have Ben Rossi filling in for Matt here. Regarding patient acuity, on the same facility basis, you reported a slight increase sequentially in average length of stay. Just curious if that is a reflection of the type of acuity caseload you saw this quarter and whether you anticipate this increasing trend will continue going into 4Q as seasonality takes full effect. Thanks.

Ben, I think that as we look at our length of stay there, it's pretty stable. really across our service lines, and it was up a little bit, but I think a lot of that is really more mix of services and programs that we have across our service lines. Our acute length of stay has actually been very stable around nine days, so we haven't seen a big change there. I think if you looked, and we looked across the company, I'm sure there are instances where facilities are seeing you know, a higher, a slightly higher acuity, but it's not been prevalent and it's really not been an impact on the length of stay that we have. It's really more around those mixes of services and also then within that, just the programs that we have across the company.

Okay, thank you. That's very helpful.

There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Debbie Osteen for any closing remarks.

Thanks again for being with us today and for your interest in Acadia Healthcare. I would like to conclude by thanking all of our employees and our clinicians for their dedication and focus on providing the highest quality care to our patients and their families. They've done this under extraordinary circumstances, and we appreciate all of these efforts. If you have additional questions today, please do not hesitate to contact us directly. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.