Acadia Healthcare Company, Inc.

Good morning, and welcome to Acadia Healthcare's first quarter 2023 earnings conference call. All participants will be in a listen-only mode for the duration of the call. And should you need any 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. To ask a question, you may press star, then one on your telephone keypad. And to withdraw your question, please press star, then two. Please also note that this event is being recorded today. I would now like to turn the conference over to Gretchen Homrick. Please go ahead.

Good morning and welcome to Acadia's first quarter 2023 conference call. I'm Gretchen Homrick, Vice President of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to our Chief Executive Officer, Chris Hunter. To the extent any non-GAAP financial measure is discussed in today's call, You'll also 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 2023 and beyond. 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 first quarter news release, and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time for opening remarks, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter. Thank you.

Thank you, Gretchen. Good morning, everyone, and thank you for being with us today for our first quarter 2023 conference call. I'm here today with our 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 performance for the first quarter of 2023, and following our comments, we'll open the line for your questions. Today, I'm pleased to share that our first quarter results mark a strong start to 2023 as we continue to execute our strategy with favorable results. We reported year-over-year revenue growth of 14.2 percent, adjusted EBITDA growth of 11.6 percent, and adjusted EPS growth of 11.9 percent, driven by robust demand for our behavioral healthcare services. Stepping back, our ability at Acadia to address complex behavioral health needs in our country has never been more urgent. According to the National Alliance on Mental Illness, suicide is now the second leading cause of death among Americans age 15 to 24. Nearly 20% of high school students report serious thoughts of suicide. And a recent study by the Institute of Mental Health estimated that one in five American adults is living with some type of mental illness. These are discouraging statistics. And that is why we remain so proud of the role Acadia is playing to help lead the way in not only how we deliver outstanding care for those in need, but also how we work to reduce the stigma around mental illness. Earlier this month, the New York Times detailed the growing need for access to quality behavioral health care services and highlighted our Acadia Maple Heights Behavioral Health Facility in Indiana is one that is helping to make standalone behavioral health treatment more accessible. Today, Acadia is uniquely positioned to help support, shape, and deliver care across the full behavioral health spectrum. Each day, our 23,000 employees across our network of 250 facilities and diversified service lines work tirelessly to care for patients and advance behavioral health care across the country. Working more effectively together as we expand our care strategy to meet the growing demand has helped to deliver continued strong results in the first quarter. To start, our same facility revenue increased 13.3 percent compared with the first quarter of 2022. As we shared in February and demonstrated in our results released last night, we saw record patient volumes during the first quarter. The 6.5% year-over-year patient day growth for the first quarter was above the high end of our outlook range. We are also very pleased with our revenue per day growth of 6.4%, which was driven by favorable rate increases across our service lines, markets, and payers. Like other healthcare providers, we're continuing to manage through a tight labor market. Our team has done an excellent job navigating this environment while maintaining our high standards of patient care. We were pleased with our labor metrics for the first quarter of 2023 and believe the labor environment continues to show signs of improvement, positioning the company for further stability and an easing of wage growth over the remainder of the year. For the first quarter, our labor costs were in line with our expectations and our base wage inflation of 7.5% and premium pay showed sequential improvement as compared with the fourth quarter of 2022. Even as we saw a record census that required increased staffing to support our patients, we were able to manage our labor costs with incremental improvement. As we have previously shared with you, our growth strategy is centered around our five distinct pathways, and we continue to make the necessary investments to support our growth objectives. I will briefly update you on our continued work related to these five pathways during the first quarter. Our first pathway, facility expansions, remains our primary and most efficient driver of growth. We added 106 beds to our existing facilities during the first quarter well on our way to our expected total bed additions of approximately 300 in 2023. Importantly, As we indicated on the fourth quarter call, we continue to expect that many of the bed additions in 2023 will open in the first half of the year and are expected to contribute to an accelerating volume growth outlook for the company. Our second growth pathway is to develop wholly-owned de novo facilities in underserved markets for behavioral health care services. We look forward to increasing the pace of our de novos from opening one per year to two per year in 2023, And we are on track to meet that goal with the opening of a 101-bed adult hospital in Chicago and a new 80-bed facility in Indio, California. During the first quarter, we commenced construction on a new 100-bed acute care behavioral health hospital, Agave Ridge Behavioral Hospital, that will serve the residents of Mesa, Arizona, and surrounding communities. Opening additional de novo acute and specialty facilities remains a high priority for Acadia as we focus on supporting more communities. Expanding our network of comprehensive treatment centers, or CTCs, is another important priority for Acadia. We will continue to expand our network of 151 CTCs in 32 states with the goal of adding at least six CTCs in 2023. Our third attractive growth pathway is through forming strategic partnerships with leading health systems across the country. Acadia has joint venture partnerships for 19 facilities in various stages of development, with nine facilities in operation and 10 facilities expected to open over the next several years. We expect to open two facilities with our JV partners, Geisinger Health in Pennsylvania and Bronson Healthcare in Michigan in the third quarter. We remain encouraged by the growing interest from potential JV partners and continue to strengthen our JV pipeline, and we expect additional announcements later in 2023. With respect to our fourth growth pathway, we continue to look for selective acquisitions that complement our growth objectives and meet the criteria of our capital allocation strategy. We're fortunate to have a strong balance sheet that provides the flexibility to pursue M&A opportunities as well as make the necessary investments to support our other strategic growth pathways. For our fifth and final growth pathway, we continue to identify additional ways to support the patients who come to Acadia for treatment by extending our continuum of care. For example, we strengthened our mid-level acuity programming with nine additional PHP IOPs to assist our patients after residential treatment and provided greater access to virtual care offerings. We have also improved our cross-referral program through enhanced systems that allow nurses and clinicians to more easily identify cross-referral opportunities across our Acadia network and identify the appropriate level of patient care. Through each of these distinct pathways, we are well positioned to maintain our strong growth trajectory and meet our development targets for calendar 2023, which are summarized as follows. Adding approximately 670 beds through approximately 300 bed additions to existing facilities, opening two inpatient de novo facilities, opening two facilities with JV partners, and opening at least six CTC locations. Looking ahead, we are focused on expanding access and availability of our services across new and existing markets. We will also look for ways to improve upon the delivery of care we provide and strengthen our capabilities with the right technology investments and differentiated services that continue to drive favorable clinical outcomes. As a leader in our industry, we also recognize our corporate responsibility to promote sustainability throughout our operations. Earlier this month, we published our inaugural sustainability report, which outlines our focus and ongoing progress towards environmental, social, and governance initiatives across Acadia. Our report, which is posted to our corporate website, highlights our dedication to quality service and care for patients, our drive to foster employee empowerment, engagement, and excellence, and our focus on environmental responsibility. Across our network of 250 facilities, we have a shared mission to provide high-quality behavioral health care services, and we look forward to the opportunities ahead for Acadia in 2023 and beyond. At this time, I will now turn the call over to David Duckworth to discuss our financial results for the quarter and 2023 guidance.

Thanks, Chris, and good morning. Our first quarter financial performance marked a great start to 2023 with 14.2% year-over-year revenue growth. Revenue for the first quarter of 2023 was $704.3 million compared with $616.7 million for the first quarter of 2022, reflecting the robust demand for our services with favorable volume trends. For the first quarter, adjusted EBITDA increased 11.6% to $151.3 million compared with $135.5 million for the first quarter of 2022. Adjusted income attributable to Acadia stockholders per diluted share was 75 cents, up 11.9% for the first quarter of 2023 compared with 67 cents, the first quarter of 2022. Adjustments to income for the first quarter of 2023 include transaction-related expenses and the related income tax effect. Maintaining a strong financial position will continue to be a top priority for 2023, providing us the flexibility and capital to support our growth strategy and future investments. As of March 31st, 2023, we had $63.8 million in cash and cash equivalents and $485 million available under our $600 million revolving credit facility with a net leverage ratio of approximately 2.2. We remain focused on disciplined cost management across our operations. and we will continue to pursue a disciplined capital allocation strategy that supports organic growth as well as opportunistic acquisitions. Now turning to our guidance, as noted in our press release, we are affirming our previously stated guidance for 2023, which includes revenue in a range of $2.82 to $2.88 billion, adjusted EBITDA, in a range of $635 to $675 million, and adjusted earnings per diluted share in a range of $3.10 to $3.40. As a reminder, the company's guidance does not include the impact of future acquisitions, divestitures, transaction-related expenses, or the recognition of any additional provider relief fund income. With that, Joe, we are ready to open the call for questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. And if at any time your question has been addressed and you would like to withdraw your question, please press star then 2. We ask that you please limit yourself to one question and one follow up for today's call. At this time, we will take our first question, which will come from Whit Mayo with SVB Securities. Please go ahead with your question.

Hey, thanks. Maybe just to start with the topic around labor, just anything additional that you can unpack that you learned within the quarter that gives you some confidence that we've hit the high water market? And really more specifically, my question is, when you marry together sort of the labor and the demand and volume agenda and the strategy you have with, you know, this hypothesis that I had that there's probably a deliberate strategy to let labor creep in an effort to perhaps secure volume with referral sources, you know, in an effort to play the long game. It might just be helpful to kind of marry those two together. Thanks.

Okay. Well, this is Chris. I'll start. Thanks for the question. You know, I would say just to start, we're really pleased with, the improvement overall in our base wage inflation from 8% in Q4 to 7.5% in Q1. And I think to your point, I mean, the two are closely linked in terms of our ability to increase our staffing requirements has led to the record census that we've seen in the quarter and that we continue to see. You know, I would say an additional data point is that our wage inflation on a total basis, so when we're combining our premium pay, it was 7.1%, which is actually below 7.5% on our premium pay relative to last year, where the metric was eight. So overall, I mean, I think that the pay adjustments that we put in place in the back half of 2022 got us to a point where we're at market and I think really set us up for the rest of the year. I do think that we have also seen some real improvement in recruiting and retention trends, which has also enabled our labor costs to be a little bit more stable. We've had a real focus on improving our net new hires, and we had another strong quarter around net new hires overall, and really all classes, but particularly all classes of employees, but particularly RNs and BHAs. And so we think that that improvement in net new hires is also going to benefit us with reducing premium labor over time and also any of the temporary staffing challenges we had. The only other thing that I would just say on recruiting and retention, we've just put a number of strategies in place to that we think are really helping us on the labor front. I mean one has been developing several partnerships with nursing schools where we're trying to attract nursing students into behavioral health while in school. offering internships and rotations. That's been beneficial. We've also put some strategies in place around centralizing support of our end recruiting to all of our facilities. We've heard some real demand for tuition reimbursement, and so we've invested particularly in clinical roles and degree programs to help our employees advance their careers. And we've also had some real variation in the way that we've done clinical training that we've shored up. And I think the final thing we've mentioned in the past around employee engagement. We did our first ever employee engagement survey in the fall of last year, and we've put action plans in place across the board to improve engagement in all of our facilities. And our CEOs are now measured on their action plans and their annual incentives. And we think that that also is improving our engagement, helping us with our net new hires, and I think setting us up for the future. But David, anything you want to add?

No, I don't think so. I mean, we were pleased to be, you know, seeing record census throughout the quarter and at the same time, you know, have the success that we had in recruiting and retention to properly staff for that growth and at the same time see some improvement in our premium pay and base wage inflation. So it's really nice to see the positive labor trends, especially during a period of time where our demand and census has been as strong as it's been.

Yeah. Maybe my second question, just any fresh thoughts around Medicaid redeterminations, and it may just be also helpful just to remind us, looking at Medicaid, how much is managed Medicaid as a percent of that revenue, and also looking at all of the Medicaid revenue, how much of that is RTC versus the ZTC business? Thanks.

Okay. Great. This is Chris again. I'll start with, you know, I would say redetermination overall is still in very early stages. And I think most know that it launched in April, so we only have five states right now that have started the process. And Acadia has facilities in four of those five states, Arkansas, Arizona, New Hampshire, and South Dakota. There are other states that are almost all expected to begin the process between now and mid-summer. So, as an example, we have five today that will ramp to 14 states in May and will continue to escalate from there. So, we've done some pretty extensive analysis on redetermination overall. I mean, there's some pretty good third-party research that we've reviewed. And estimates show that for the overall Medicaid population, there's about 15 million individuals or 17% of total enrollees that are expected to lose coverage and no longer meet their eligibility requirements. But within that 75%, which is about 13% of total enrollees, are expected to still be able to get commercial insurance through either an employer plan or by moving to one of the health insurance exchanges. So the remaining 25%, which is about 4% of total enrollees, are expected to become uninsured. And so within this 4%, when we look at our book of business to your question, we really believe our volume is further risk mitigated because of the coverage continuity that's available for our patient population, and then just some of the actions that we're taking. So just a couple quick thoughts on that. On our RTC service line, the majority of our children and adolescents that are treated in RTC, we do expect to maintain their Medicaid coverage. So we do not expect the RTC service line to see a significant impact. On our specialty business, in most cases, our Medicaid volume there is in a state that has fallback coverage for substance use treatment that is available. And so because that's available from other governmental agencies within those states, we don't expect a specialty will see a significant impact on redetermination either. And then finally, we have over 50% of our CTC patients that are actually in states that have some form of either uninsured or underinsured funding for opioid use disorder that we think also benefits us. That's kind of the overall protections that we're seeing. And then just really quickly, tactically, there are a number of strategies that we've continued to put in place to further limit the impact. I mean, it starts with patient education. We have been working with our patients for many months now, going back to last year. We have QR codes in our facilities. We have digital materials. We're talking to them about the risks around COVID. Medicaid redetermination and what that means for them as individual patients. We've set up a dedicated hotline that we found that is getting a lot of uptake and we're helping navigate these patients through some of the challenges they're coming up with when they do arise and we're trying to help them be proactive. And we're obviously training our staff and doing everything that we can to make sure that we have resources that are on the ground in addition to the hotline. So when you put all that together, we feel like five states have started in April, 14 more are coming, and we're just gonna continue to closely monitor and provide updates throughout the year. David, anything you want to add on the mix?

Yeah, I'll just respond to a couple of your other questions around the residential business and the managed Medicaid. We do see for our Medicaid, we of course combine managed Medicaid into what we report as Medicaid. But in our acute markets, around 90% of the Medicaid revenue we see is with a managed Medicaid payer. And then as we think about, you know, Chris mentioned some of our protections in place within Medicaid for our RTC business as well as our specialty and CTC business. As we look at the RTC business, which is 11% of our revenue, that's 90% of Medicaid business. And we do have some commercial pay within that service line as well. but it's good from our perspective that there's appropriate continuation of coverage for that business and those child and adolescents, and that is a heavy mix of our RTC business. Specialty also has Medicaid. In total, that service line is 22% of our business, and within that, Medicaid is almost a 30% portion of our revenue there. So, you know, we do see not only for residential and specialty, but for the CTC business as we move into the redetermination process that really gets going, you know, started in just very select markets in April, but will get going over the second half of the year. We hope with the actions we're taking as well as some of these protections in place, across our service lines that the volume risk that we had previously identified will really be mitigated.

No, thanks for the comprehensive thoughts. Thanks, guys.

Thanks, Whit. And our next question will come from Andrew Monk with UBS. Please go ahead with your question.

Hi, good morning. First, just wanted to clarify the labor trends. You mentioned base wage inflation and premium pay trending better sequentially, but it wasn't entirely clear to me what the offsets are that are flowing through the SWB line that resulted in SWB per patient day remaining elevated up 9% year over year. So can you help us understand that better and how startup losses maybe specifically are impacting that line? Thanks.

Yeah, Andrew, we do look at that SWB per patient day, understand that's what investors and analysts have access to as we report just directly from our financial statements. And it is a useful metric that can be used as a measure of our wage increases, but of course also incorporates our volume and its a view into our consolidated level results, not just our facility results, and incorporates benefits expense as well. So the 9.5% this quarter was in line with our expectations, is higher than our wage inflation that was 7.5%, and the startups were a part of that. We opened a number of new facilities in the second half of 2022, and they are making good progress in their startup. But the level of SWB relative to revenue that we saw in those facilities was much higher than what we saw in the first quarter of 2022. And so those startups, in our view, account for several percentage points within the SWB per patient day, actually about 0.5%. The other piece of that would be investments that we have made in our corporate office and in our benefits program, which the benefits investment would have taken effect at the beginning of the year. And then the corporate office is also part of that. We've made a number of enhancements and additions to our corporate office, some of which, of course, we reported and described over the course of 2022. But that's what's sort of causing that higher level of SWB per patient day relative to base wage inflation. The timing of our merit increase is, of course, part of that where we do expect for this year a higher level of wage inflation and SWB per patient day in the beginning part of the year and continue to have an expectation that that moderates over the course of the year.

Great. Thanks for the call. As a follow-up, I'm just curious to hear whether you're seeing any impact from the recent deregulation of buprenorphine as it relates to demand for methadone and your CDC business line. Thanks.

Yeah, Andrew, we're familiar with the legislation that's been a topic among investors and was passed by legislators in March around what's referred to as the X waiver, which allows physicians to write prescriptions of buprenorphine, also known as Suboxone, And as we look back, physicians have had this flexibility to write these prescriptions over the course of the public health emergency. So over the last three years, physicians have had that ability to write these prescriptions. Of course, we are supportive of any initiative that improves access for people that need treatment. And we do use buprenorphine in our CTC locations For us, we look back at the three years where physicians had that ability and really didn't see an increase in physicians really increasing their treatment of the OUD patient. And for our business, as we think about it specifically, we have 90% of our business where methadone is the medication that's used to treat our patients. And we would attribute that to just the clinical effectiveness of methadone combined with the comprehensive view that we take into the treatment around counseling and other services that we provide. But methadone does have an ability relative to buprenorphine to treat a higher level of addiction. and a more complex OUD patient, which we believe we're seeing more of in the industry because of things like fentanyl and other advances that have made addiction stronger. So we do not see a significant impact given how we're positioned and the treatment that we have of the higher acuity, you know, more complex patients. and then 90% that we have within the methadone business. But we will maintain the Suboxone treatment, and there are patients where that is appropriate. But just given the limited growth in that over the last several years, we do not think that that X waiver will materially impact our business. And we'll just add, we are seeing, we talk a lot about our inpatient business and the record census that we're seeing, We are also seeing record census levels in our CTC business right now, which is a credit to the tremendous job our leadership team is doing, our operators across our 32 states, and the strong demand that we're seeing within that service line.

Great. Thanks for all the calling.

Thanks. And our next question will come from Kevin Fishbeck with Bank of America. Please go ahead with your question.

Great, thanks. Appreciate the comment about redetermination. So maybe you can just put a little bit finer point to it. So you're talking about volume offsets and headwinds being mitigated. I mean, do you guys have a net impact that you're thinking about either from a revenue or an EBITDA perspective over the next couple of years from that?

Yeah, I mean, Kevin, I think it's too early for us to say exactly what the impact could be right now. Of course, we do the math internally and provide a variety of estimates. And we mentioned some third-party data earlier just to hopefully help investors do any kind of sizing and sensitivity that you'd like to do. But we think it's too early for us as a company to put out a number. I will say we think there's a limited impact this year just given that it's a Fortunately, a lot of the states are thoughtful around working with providers and phasing that in, which we think helps patients and helps us be orderly. And then 2024, there's, you know, estimated to be more of a full-year impact. You know, I think as we think about it today, relative to the increased confidence that we have that more patients will continue to have access to coverage, within our service lines and just the strong demand that we're seeing and our ability to admit patients that have appropriate coverage and work with our referral sources as we do that. We think there's not a significant volume headwind at this point going into next year. But we're paying very close attention to it, and we'll have to, you know, provide an update as we see more and experience more over the second half of this year.

Okay. I mean, that's fair, I guess. I mean, you guys, obviously, so your guidance includes whatever impact, if it's a third of the impact, you're growing this way this year through that in the back half of the year. And I guess maybe you can, in theory there's an offset, right, that commercial rates are higher than Medicaid rates. Can you just remind us, like, what the rate differential is? I know it's quite wide and acute. I think it's a little bit narrower for psych. If you lose some Medicaid to pick up on commercial, that feels like another mitigant, I guess, from an economic perspective that you didn't highlight before, just trying to understand how important that might be.

Yeah, we've thought, you know, about that payer mix shift and how that might impact the company and provide an offset. And Our difference between our Medicaid and commercial rates can vary by market. And so while there could be that benefit that we see in certain markets, overall, our Medicaid rates and commercial rates don't have the differential that you may see in a lot of other parts of health care. So I don't think that payer mix shifts. will provide a significant benefit, although we could see a benefit from that in certain markets. And I'll be clear, you mentioned the impact in 2023. We do think, and obviously we're affirming our guidance, we do think that what we had built in to our initial guidance for the second half of the year, which is just some kind of high-level moderate impact was already reflected in our guidance. We still think that our 2023 guidance holds as we think about our ability to navigate through this over the second half of the year.

All right. Great. Thanks.

And our next question will come from AJ Rice with Credit Suisse. Please go ahead with your question.

Thanks. Hi, everybody. Just wanted to maybe go back to the CTC business and flesh that out a little more. I think you're expecting to open this year. I know one of the topics at the investor day was that as some of this opioid money comes in, states are looking for ways to support this population. And, uh, in a couple of cases had turned to you for partnerships. I wonder if there's any update, any discussions along those lines. And then alternatively, there's been some discussion about, you know, the relative profitability of that business. I know, I know you don't break out profitability by a lot of business, but, uh, and whether, uh, the amount of earnings in the CTC business might attract attention down the road, uh, from the, uh, Medicaid payers. Can you comment on your discussions around that, and maybe to the extent you're willing to say it, talk a little bit about the relative profitability of that business compared to your overall mix?

Yeah, AJ, this is Chris. Why don't I start? I mean, I would say overall, David alluded to the fact that we've really attracted a very strong leadership team on CTC, and so we now have 151 locations in 32 states overall, and I think just really set up well to grow that business. I think one stat that we saw recently is that now 7% of all hospital spend in the U.S. is actually directed towards the care of patients with OUD. So we just see this continuing to become a strong, a real problem for the broader industry. You're right that we are focused on opening at least these six CTCs in 2023. We're going to accelerate that to 14 in 2024. And we do think we're going to see some benefit from the opioid settlement dollars that are really just beginning to flow in. Again, it's $54 billion, the total expected funding. It's going to be dispersed over an 18-year schedule. And We're just beginning to see that happen now. So only 2 to 3 billion of the 54 has actually been dispersed to states to date. Most are kind of setting up bodies to oversee the disbursement of the funds at the individual county levels and You know, some are a little bit more aggressive and progressive than others. I mean, we see Rhode Island, North Carolina, and Ohio as an example, probably being a little bit further along than some of the other states. But I think our team is doing a really good job of tracking the settlement opportunities. We're awarded our very first opioid settlement in February, which was $200,000 for some wraparound services in North Carolina. So our team is just very focused on tracking this. We're partnering in many instances with community sponsors like the Jason Foundation. on a grant to support youth outreach related to OUD. And we're doing everything that we can to continue to make sure that we're well positioned with these individual counties within the states that are going to disperse the dollars.

And with respect to just the margin for that business, we've always said as we look at our service line margins, The factors that we really see driving our margin across our service line is really more market-specific and facility-specific as we think about the strength of a local operation, their occupancy and number of patients that are treated, and maturity of many of our locations, especially those locations that have been in place for a really long time with a strong presence in the community. and a significant population of patients that are treated. So saying that, we've always said those are the factors that can impact our margins. And across our service line, the average for the company continues to be in the upper 20% range, and we see that for each of our service lines. We can see many of our CTC locations be above that 28% or so same facility margin. And those facilities usually demonstrate the factors that I mentioned around the presence that they have and the number of patients that they treat. And so I'm glad to clarify, I guess there's always been and recently has been some questions around our margins for that business. And while we can see some facilities with strong margins across our service lines, the average continues to be very close to the company average.

Okay, and if I could just slip in one other follow-up. I think in your guidance for this year, and maybe you talked around this a little in one of the earlier questions, but you have assumed a moderation in the update. I think mainly, as you describe it, the Medicaid states that sort of do mid-year updates and there are resets in their rates, you had assumed more return to normal. Is that what you're actually seeing as you get a little closer to discussing what that July 1 rate update on Medicaid might look like? Any further thoughts on whether that assumption was a little conservative, or is that what you're actually seeing?

Yeah, AJ, I'll take that. I mean, clearly, as we've said, we've got very good visibility in the first half of the year kind of trending in mid-single digits on a weighted average basis, but because 75% of all of our Medicaid revenue, at least in our acute service line, has new contracting years that start in the second half of the year, we just really don't have a significant update relative to April for the commentary that we gave last quarter. I would just say that we continue to engage very deliberately in all of our rate strategies throughout Q1. I think we continue to feel like we're getting better visibility in the second half of the year, but so many of these negotiations are still yet to be had. I would say our outlook maybe does reflect a little bit of conservatism because we continue to have a very positive view on our ability to achieve these rates, but I think we're still just in the early stage activities in many of these states. We're doing all the work that we usually do in anticipation of these discussions that we have with various payers and continue to be confident in our ability to execute on those.

Okay, great. Thanks a lot.

Yep.

And our next question will come from John Ransom with Raymond James. Please go ahead with your questions.

Hey there. Just a couple of outlook detail questions. As you move through the year, when do you, what's your forecast for kind of the exit rate of labor inflation and 4Q? And also, just in your model, when do you see labor to revenue improving year over year? Thanks.

Yeah, John, we, um, we, because over the second half of 2023, we would reach the anniversary date of many of our pay adjustments that we made in 2022. We do believe at the end of the year, we would see that our year over year wage inflation at that point would just reflect, uh, any adjustments we have made in 2023. which would largely be comprised of merit increases for our employees this year. So as we have talked about before, the target for that would be less than 5%. You know, could be in a range of, you know, 3% to 5%, but that's where we would expect to exit the year. And we continue to have in our minds, more positive indicators that the market's improving and that we should see that wage inflation improvement over the course of the year. As we look at our year-over-year benefit, I do think we'll see higher wage inflation on a year-over-year basis and growth in SWB as a percentage of revenue on a year-over-year basis. That reflects not only the fact that our wages are growing more so than our non-labor costs, but also just some of the investments we've made in our benefit programs and at the corporate level. So we may see the gap narrow a little bit, the year-over-year growth in SWB as a percentage of revenue, But as we look at that, the stability that we've seen and the ability to manage our non-labor costs supports margin growth as we look at the second half of the year. And so while wages may still be higher, even though the gap narrows, we do look at the second half of the year and project margin growth despite wages being up even more. even in the second half of this year as wages moderate.

Yeah, and just as a follow-up, corporate overhead, how do we think about – it did jump a little bit in first quarter sequential. How do we think about – are we done with the big investments in corporate overhead, or is that going to continue to grow at an outside space?

Yeah, John, let me take that one. This is Chris. You know, I would say we've made a number of investments – that are going to help us advance the business and really deliver on all the commitments that we have laid out at the investor day that we did back in December. You know, I think there's a number of areas where historically we've under-invested a little bit and we need to position ourselves to continue to grow and meet the commitments that we've laid out. I think there are several key areas. I mean, from IT, which we've discussed at length, you know, HR and recruiting, marketing, you know, even managed care and strategy that we needed to make some investments that I think we'll begin to see some benefit, you know, over time. You know, I would say that we are already beginning to see some benefits from some of these investments. I mean, just in the short term, we're already seeing it with the higher level of expected volume growth, you know, in the range of 4% to 6% compared to the historical average of 3% to 4%. And then I just think we're going to see benefit over time from kind of three different categories. I think first is just enhancing our overall facility performance. We're seeing volumes that are already being supported by optimized marketing and some really good work that our team has done there and also on the managed care front. I think secondly, and I'll come back to this, I think driving further efficiencies and optimization is is clearly going to provide value overall. And then I think overall, just strengthening the company's foundation for the long-term execution of all these growth pathways that I covered in the opening, I think is important. I think the last thing I would say, though, is that I've been here for a little bit over a year. One of the things that you know, we clearly recognize as a leadership team is that we still have pretty significant variation across the company, across our 250 facilities. So our company really has grown by M&A, particularly in the early years. And when you look at that variation, it's not limited to any one area. It can include admissions and marketing and even certain HR processes. So we have a really good business transformation team that is helping us look at that. And I think over time here, we're putting together a number of initiatives as we speak that we think are going to help us optimize our performance and you know, continue to drive really strong volumes but also achieve better efficiencies and specific cost savings in certain functions in the back half of the year. So a lot of these investments that we are making now we think will continue to benefit us beginning in the second half of the year and into next year, and we haven't quite evaluated the financial impact. We'll clearly be coming back to share that, but we do expect value over time, and we recognize the need for continued operating leverage.

All right, thank you.

Yep. And our next question will come from Brian Tank with Jefferies. Please go ahead with your question.

Hey, good morning, guys. Chris, maybe just to follow up on those comments you made to John's last question. I know during Investor Day, you talked about some of the IT initiatives that you feel are necessary for business. Anything you can share with us in terms of early, just with the EHR rollout and where you stand on that?

Yeah, sure. A few things that I would say just on the IT front. Again, we're early days here. We have done a pilot where we have onboarded half a dozen hospitals around implementing an EHR. We're still in the early phases of evaluating it, but I would say we're already beginning to see benefit. The engagement survey that I referenced earlier For those facilities that actually have the new EMR, we're seeing that those employees are scoring significantly higher pretty much on every indices when there's an EMR versus not having one. And I think overall there's going to be five kind of categories of benefit from these IT investments. I mean, we're already seeing benefit on the safety and compliance side. We had a survey just a few weeks ago where we got extremely high marks, and the surveyor specifically referenced the EMR that was in place as well as some of the remote monitoring software that we've put in place. So we're already seeing some of the benefit there with respect to reducing our compliance risk and just overall driving a more standardized compliance program and just overall patient safety. I think there's going to be benefits, secondly, just around overall patient experience. We're already seeing on the employee satisfaction front. I've spoken in the past about nurses that are trained today on EMRs, and when they come to a behavioral health company, they don't expect to work in paper. That can be a real job dissatisfier, and that can hurt us on the recruitment and the retention front. So having this technology in place we think is going to have real benefit in the near term. And then ultimately data and analytics. I mean, we want to get to a point where we compete on the strength of our clinical health outcomes, which we think we will be able to do once we have the data that we can sit down with payers and have. But we need to implement the EMR to be in a position to do that. And then finally, just efficiencies that I was just referring to. I mean, we think that there are real opportunities just given the amount of paper that we and others in behavioral health have. I mean, extensive paper, paper storage, but just reducing paper overall. And there's a number of just improvements in back office functions as well. So we continue to be just very optimistic about these investments that we're making. We don't think we're going to have to wait several years to see the benefit. We're really seeing the benefit now in several different categories, and, you know, we'll continue to provide updates as we go.

Got it. And then, David, I guess my question for you, my follow-up would be, as I think about the rest of the year, I know obviously you don't give quarterly guidance here, but anything you would call out from a modeling perspective as we think about the cadence for the year? And maybe you a focus on labor as well. I know you gave, for example, a merit increase to some employees on April 1st. So how should we be thinking about just the progression of some of these moving parts in your P&P?

Yeah, as you think about the quarterly earnings spread, I think the street generally has it right and understands the company's seasonality. The second and third quarter usually look pretty similar. Of course, the first quarter is when we see the greatest impact of seasonality. So we're optimistic on moving into the second and third quarter. And we see a little bit more seasonality in the fourth quarter around the holidays, but it's typically, you know, four or five million lower than the second and third quarter. So I think hopefully that's a helpful guide in terms of how the year typically plays out with our seasonality. From a labor cost perspective, you know, we've talked about the moderating wage inflation, but that some of the benefits and the corporate office investments will, of course, be reflected in those numbers over the course of the year. And so, you know, hopefully that's helpful from a labor perspective, but we think the underlying core labor trends are really improving. And in the second half of the year, we'll see some of that year-over-year growth really moderate So, we believe we're in a good position from both a labor perspective and to deliver on our guidance for the year, Brian.

Awesome. Thank you. Our next question will come from Pito Chickering with Deutsche Bank. Please go ahead with your question.

Good morning, guys, and I appreciate being allowed to ask a question here. So, I didn't get to ask about the ex-waivers, and there's proposed legislative changes. that allow 38 take-home methadone being prescribed by physicians. So I guess the question is, you know, with the number of changes to the law, or potential changes to the law around treating patients for methadone, you know, for medication-assisted treatment patients, I guess why are methadone clinics the best site of care from the perspective of patient burden and cost of care?

Yeah, Pito, you know, there have been a number of bills introduced to address And of course, the situation in the industry is less than 10% of those OUD patients actually get treatment. And so that's what I know everyone, including us in the industry, as the industry leader, wants to improve access and drive that percentage higher. And there is a bill that's out there that I know you've referenced around just some attempt to improve that access by more flexibility in how methadone is dispensed, whether that's unsupervised 30-day doses or whether that's pharmacies being permitted to dispense methadone. We and others have been vocal about the initiatives already in place to improve access that we think will be a positive. And our view continues to be that this is a highly complex patient population. There is a risk of diversion associated with any other setting of care. And it takes a highly trained clinician that works very closely on a daily basis and weekly counseling sessions. And you really have to have the full treatment of that patient that has a complex disease. And so that's why not only do we believe methadone will stay in the CTC OTP setting, but also why we believe there will continue to be just an importance of counseling and other wraparound services that we provide to our patients. We have not heard, there's a bill out there, the Modernizing Opioid Treatment Access Act. We've not heard that it's expected to really gain a lot of support. It's been out there in other forums over the last couple of years. So we, you know, our expectation is that that bill would not pass in its current form. And we believe we have the right model in terms of treating that highly complex patient that honestly has a stronger addiction now than even in the services we were providing several years ago.

Peter, this is Chris. Maybe just one thing I would add. I just think the potency of fentanyl, which is 50 times relative to heroin, we see that when someone comes in that has an advanced diagnoses of OUD, they really need significant treatment in the early weeks and days and months in terms of regulating that medication. Suboxone and buprenorphine is just not the same clinical efficacy as what our clinicians see with methadone, which really continues to be the gold standard for medication and improving these OUD patients over time. So we just continue to think that that is the better model, particularly given the counseling and the significant in-person treatment that's required for these patients that are extremely sick, and we think that will continue into the future.

Great. Thanks so much, guys.

Yeah. We have time for one more question here, and that will come from Gary Taylor with Cohen. Please go ahead with your question.

Hey, good morning. Most of my thematic questions answered, so I just want to shoot you a technical one, financial one. Cash flow from ops, a little lighter than our model and downstream, year for year a little lighter than typical 1Q seasonality. It looks like the biggest part of that was just accrued SWB dropped about $30 million sequentially, which looked a little unseasonal as well. So just wondered if there was any particular explanation for that or if how 1Q has any implications for how you see cash from ops developing this year.

Yeah, Gary, thanks for your question. No, it does not impact how we see the year playing out. The $44 million of operating cash flows was actually in line with our expectations. We do expect in the first quarter we will have seasonal items related to working capital, not only some of the accrued compensation items and timing of our payroll, but also as you just think about accounts receivable building up during a period of significant revenue growth. Our team continues to do an incredible job with our cash collections with AR days of 44. But you're going to see just with the lag and the revenue growth that that does drive some accounts receivable buildup. So it's just timing of working capital. And we're expecting a strong year from here from an operating cash flow perspective.

Okay, thank you.

Thanks, Gary.

And that concludes our question and answer session. I'd like to turn the conference back over to Chris Hunter for any closing remarks.

Okay, before we end the call, I just want to again thank our committed facility leaders, clinicians, and 23,000 dedicated employees across the country who just continue to work tirelessly to meet the needs of our patients in a safe and effective manner. I want to thank you all for being with us this morning and for your interest in Acadia. And if you have any additional questions today, please don't hesitate to contact us directly. Have a great day, everyone.

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