Acadia Healthcare Company, Inc.

Good morning, and welcome to the Acadia HealthCare third quarter 2023 earnings conference call. All participants will be in a listen-only mode. 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 touchtone phone. To withdraw your question, please press star, then two. On today's call, we ask that you please limit yourself to one question and one follow-up. 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 third quarter 2023 conference call. I'm Gretchen Homrick, Vice President of Investor Relations for Acadia. Here with me today are Chris Hunter, Acadia's Chief Executive Officer, and Heather Dixon, our Chief Financial Officer. I'll first provide you with our safe harbor before turning the call over to Chris. To the extent any non-GAAP financial measure is discussed in today's call, you will 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 third quarter news release, and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter, for opening remarks.

Thank you, Gretchen, and good morning, everyone. Thank you for being with us for Acadia's third quarter 2023 conference call. Before we discuss the results, I want to note an important recent addition to Acadia's leadership. Last week, we announced that Dr. Patrice Harris has been appointed to the company's board of directors. Dr. Harris is a board certified in psychiatry and has diverse experience as a private practicing physician, public health director, and patient advocate. She served as president of the American Medical Association from 2019 to 2020, where she was the first African American woman to be elected to this prestigious position. She also served as chair of the AMA's Opioid Task Force and on AMA workgroups devoted to health information technology, sustainable growth rate, and private contracting. She continues to work in private practice and is Chief Executive Officer of eMed Digital Healthcare, a digital healthcare company she co-founded. Dr. Harris brings deep clinical expertise in areas that are core to Acadia's mission, and we look forward to her valuable insights as we continue to execute our growth strategy. Now, turning to the results. For the third quarter, we delivered strong financial and operating performance as we continued to see growing demand for our behavioral health services across our four distinct lines of business. With solid execution, on our core business combined with sustained execution of our strategy, we are consistently able to meet this demand as well as deliver on our key performance objectives. Top and bottom line growth this quarter was impressive. We reported year-over-year revenue growth of 12.5%, adjusted EBITDA growth of 13.4%, and adjusted EPS growth of 13.8%, excluding income from the Provider Relief Fund recognized in the third quarters of 2023 and 2022. Notably, our same facility revenue increased 13% compared with the third quarter last year, with the increase driven by both volume and rate improvements. Similar to what we've experienced throughout 2023, These third quarter results reflect the collective impact of the ongoing focus on our core business and our progress against our growth strategy. In addition to our core financial metrics, we were pleased to see further sequential improvement in our labor trends, with 2023 wage inflation decreasing from 7.5 percent in the first quarter to 6.3 percent in the second quarter, to 5.7 percent in the third quarter, an improvement of 180 basis points so far this year. Additionally, recent investments to focus on employee engagement have supported our ability to attract and retain employees in a competitive market. Our most recent employee survey showed notable improvement in engagement. In addition, attrition rates across a number of our clinical positions have declined, We expect further improvement in this trend as we remain focused on employee engagement and continue to share best practices across our 253 facilities. Our team has done an outstanding job in effectively managing our operations as we experienced higher volumes in our current facilities and added more capacity through the continued delivery of our five defined growth pathways. In support of our first pathway, facility expansions, we have added 204 beds to existing facilities through the first nine months of the year. We are on track to meet our objective to add a total of approximately 300 beds to existing facilities in 2023. For our second pathway, we remain focused on developing wholly owned de novo facilities. in underserved markets for behavioral health care services. To this end, we're making good progress on opening a newly renovated 101-bed adult hospital and outpatient facility, which is part of the Montrose Behavioral Health Hospital in Chicago, Illinois, as well as an 80-bed inpatient hospital, Coachella Valley Behavioral Health in Indio, California. Both are expected to open by the end of this year. Our CTC service line continues to expand its industry-leading position with 155 locations across 32 states and a flexible suite of solutions from traditional OTPs to mobile vans and telehealth solutions. We opened two new CTC locations in the third quarter, making a total of four CTCs open so far this year. We're on track to open six CTCs in 2023, and are focused on accelerating our growth in the future. Importantly, the need for our services has never been greater. More than 9 million Americans are suffering from opioid use disorder. And just last year, the country witnessed approximately 110,000 overdose deaths, tragically a record high. Regarding our third growth pathway, we are especially proud of the expanded scale of care we can deliver to communities across the country through relationships with renowned joint venture partners. Early in the third quarter, we opened a 96-bed hospital with our joint venture partner Bronson Healthcare in Battle Creek, Michigan, and another 96-bed hospital with our partner Geisinger in Musick, Pennsylvania. This is the first of two hospitals we will be opening with Geisinger in the state. We anticipate breaking ground in early 2024 on the second hospital in Danville, Pennsylvania. We are also pleased to highlight that this week we broke ground on our previously announced behavioral health hospital with joint venture partner ECU Health, Eastern North Carolina's premier health system. This new hospital will expand our acute service line into the North Carolina market and will serve as a destination academic site, training students and residents from the ECU's Brody School of Medicine. We look forward to working together with these premier health systems to provide quality behavioral health care in their respective markets. With our clinical expertise and standing as the leading pure play provider of behavioral health care services, Acadia remains an attractive partner for health systems who want to expand behavioral healthcare treatment options in their respective communities. Working together, we have a shared commitment to provide access to quality care and support the critical need in the community. Today, Acadia's 20 joint venture partnerships represent a combined total of 21 hospitals, with 11 hospitals already in operation and 10 hospitals expected to open over the next several years. In addition, we recently broke ground on a second hospital with an existing JV partner, which we will announce in the next several months. This will be our second partnership with two hospitals in different markets, demonstrating the value of these collaborations to both our partners and to us. The pipeline for potential partners remains robust and joint ventures will continue to play an important role in Acadia's future growth. With respect to our fourth growth pathway, we are focusing on identifying acquisitions that support our growth objectives and meet the criteria of our capital allocation strategy. During the third quarter, we announced a definitive agreement to acquire Turning Point Centers, a specialty provider of substance use disorder, and primary mental health treatment services that cares for patients in the Salt Lake City, Utah metropolitan market. This acquisition will allow us to operate the 76 beds in their current facilities and over time add an additional 48 beds to the operations. We expect to close this transaction by the end of 2023. As you know, extending the continuum of care is our fifth and final growth pathway. One of the key focus areas of this pathway is expanding partial hospitalization programs, or PHP, and intensive outpatient programs, or IOP, that can provide four to six hours of care per day. We believe the impact of PHP IOP on the clinical outcomes of our patients can be significant for multiple reasons. First, the vast majority of our acute and specialty patients are indicated for PHP IOP as a step-down therapy, post-discharge, is they transition back to the community. Second, PHP IOP has a strong record of positively affecting post-discharge health outcomes. And lastly, we believe there's a clinical opportunity for a larger share of our patients to access and appropriately utilize PHP IOP. To support this goal, we will continue to expand our PHP IOP offerings across facilities, including three new programs in the third quarter and 26 programs through the first nine months of the year. Through each of these five growth pathways, we are well positioned to maintain our growth trajectory and meet our stated development targets for calendar 23 as follows. Adding 670 beds through approximately 300 bed additions to existing facilities, of which we've already added 204 beds year-to-date. Opening two inpatient de novo hospitals, Montrose Behavioral Health Hospital and Coachella Valley Behavioral Health, which we expect to complete by year-end. opening two hospitals with JV partners, which we completed early in the third quarter, and then opening six CTC locations, of which we have already opened four this year. Looking ahead to 2024, we have significant opportunities for further growth through our defined pathways and consistent with what we shared in our first ever Investor Day a year ago at Carnegie Hall in New York. With respect to our joint ventures, we look forward to continued progress into 2024 with projects that are already underway. We would like to preview a few highlights. First, together with our partner, Henry Ford Health, one of the nation's premier academic and integrated health systems, we will open a 192-bed joint venture inpatient behavioral health hospital serving the metro Detroit area. Second, together with one of the premier health systems in Colorado, Intermountain Health, we will open a 144-bed inpatient behavioral health hospital, which will serve Denver area residents. This hospital will expand our acute service line into Colorado. And as previously mentioned, we expect to announce a second hospital with an existing joint venture partner in the next several months, which has already begun construction. We expect these facilities to open in 2024. In addition to these JV facilities, we have several de novo facilities that will begin to care for patients in 2024 as well. As we previously announced, we plan to open a 100-bed acute behavioral health hospital in Mesa, Arizona, Agave Ridge Behavioral Health. Additionally, we recently acquired a building on 10 acres of land that will allow us to expand our specialty services in Florida. This convertible facility near Tampa expected to open its first 20 beds in the second quarter of 2024 and includes plans to expand this facility to 80 beds in the future. This specialty facility will treat patients recovering from substance use disorders. And finally, we'd like to highlight our new acute care behavioral health facility in Madison, Wisconsin. While Acadia has a presence in the state with our 14 CTCs and a specialty SUD residential treatment program, Our 120-bed acute care hospital represents an important new market entry for Acadia's acute de novo growth. As we continue to extend our market reach, safety and quality care remain our top priorities in every aspect of patient care. We're committed to implementing the right training and leadership development along with the right technology to ensure we're delivering the best possible outcomes for our patients. We have made significant technology investments this year to deliver strong clinical outcomes and further drive efficiencies in our business. Our recent investments in electronic medical records and patient monitoring technology are yielding early benefits and support our medical teams with respect to patient safety and compliance. We are extremely proud of the work that we are doing and our progress to date in 2023. Across the company, our dedicated employees and clinicians are addressing the nation's critical need for safe quality treatment for mental health and substance use issues. We are well-positioned to leverage our scale and expertise and continue to reach more patients and their families who desperately need our help. At this time, I will now turn the call over to Heather to discuss our financial results for the quarter and 2023 guidance.

Thanks, Chris, and good morning, everyone. Our third quarter financial performance reflects the continued favorable growth in our business in 2023. We achieved solid top-line growth with $750.3 million in revenue for the quarter, up 12.5% over the third quarter of last year. The company recorded income related to the Provider Relief Fund established by the CARES Act of $4.4 million during the third quarter of 2023 and $7.7 million during the third quarter of 2022. Excluding income from the PRF for both periods, adjusted EBITDA for the third quarter of 2023 increased 13.4% to $175.9 million, compared with $155.1 million for the third quarter of 2022. Adjusted income attributable to Acadia stockholders per diluted share was 91 cents, up 13.8% for the third quarter of 2023, compared with 80 cents per diluted share for the third quarter of 2022. Adjustments to income for the third quarter of 23 include the impact of the cost of legal settlements, transaction-related expenses, and the related income tax effects of all items. During the third quarter, we evaluated our professional liability reserves, including an acceleration of our periodic actuarial review. While we perform this review process each year and adjust our reserves accordingly, the timing is usually during fourth quarter. Given the heightened activity and level of discussions regarding litigation reserves, we believed it was prudent to accelerate that review to the third quarter. As a result, we recorded an adjustment to increase professional and general liability reserves by $5.2 million. After seeing increases in the last two years in the form of reserve adjustments, we are not anticipating a meaningful increase in this line item moving forward. Acadia has maintained a strong financial position, which provides us the flexibility to deploy capital to support our organic growth strategy, as well as fund potential acquisitions and future investments. As of September 30th, 2023, we had $99.6 million in cash and cash equivalents and $520 million available under our $600 million revolving credit facility. with a net leverage ratio of approximately two times. Before turning to our guidance, let me briefly touch on the settlement agreements we described in the 8K filed earlier this week relating to three lawsuits involving the company's former Desert Hills facility. As noted in that 8K, soon after the settlements are approved by the court, Acadia will pay an aggregate $400 million in exchange for a full release and discharge of all related claims. We believe these settlement agreements are a positive step forward and remove uncertainty and future expense associated with the three cases. We currently intend to pay the settlement funds from a combination of insurance, cash on hand, and existing credit lines, and expect the entire settlement amount, less any portion covered by insurance, to be tax deductible. We look forward to turning all of our attention to the continued execution and delivery of the best possible care for our patients, families, and communities we serve. And as you can see from the updates to our guidance, our growth in this respect is strong and is expected to remain so. In fact, as noted in our press release, we have increased our full year expectations for revenue, which are now expected to be in the range of $2.9 to $2.92 billion. We also, excluding income from the PRF, adjusted EBITDA is now expected to be in the range of $655 to $675 million, and adjusted earnings per diluted share are now expected to be in the range of $3.33 to $3.43. Please refer to our press release for all other metrics. As a reminder, the company's guidance does not include the impact of any future acquisitions, divestitures, transaction-related expenses, or the recognition of additional provider relief fund income. With that, operator, we're 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 one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw a question, please press star, then two. As a reminder, we ask that you please limit yourself to one question and one follow-up on today's call. At this time, we will take our first question, which will come from Whit Mayo with Lyric Partners. Please go ahead.

Thanks. Hey, Heather, can I just follow up on the professional liability the MedMal reserves? Sounds like this was just accelerating the annual process that you guys undertake in the fourth quarter, but can you confirm whether or not there's been any changes in the number of claims, the frequency of the claims, the size of the claims, anything that actuarially would have driven the $5 million increase, which I think is similar to what we saw last year. So I'm just not sure What drove this other than perhaps just strengthening of the reserve? So just any additional context could be helpful.

Sure. Hi, Whit. I can tell you that we follow the same process that we typically follow, and it covers claims across all of our facilities for all years. There is no change to sort of the volume of claims or the way that we've evaluated these. I'm sure you'll remember that we took a similar charge in the fourth quarter of last year, and that was actually larger than the reserve that we just recorded. It was $5.9 million last year that we took in the fourth quarter, and we took 5.2, or 5.3 in this quarter.

Okay. My other question, maybe just, Chris, an update. The volumes look pretty strong, broad-based. if you could maybe unpack some of the service lines, whether or not there's one individual one that stands out more than the others, and now that you've had some time to sort of unpack Medicaid and redeterminations, is there anything noticeable to call out, anything that you've learned? Any color would be helpful, thanks.

Yeah, no, thank you, Whit. I'd say all of our service lines are really seeing strong performance. You know, when you look at acute care, and specialty, you know, they're both up as well as CTC. RTC is also up, not as much, but I would say primarily the volume growth is driven by acute specialty and CTC. And then I would say on the redeterminations front, you know, all of the advanced preparation that traces back to really a year ago at this time We feel like it's really paid off for us, and we are not seeing a significant impact on patient volume or payer mix. And just to remind you that when you look at our lines of business, our acute service line continues to outperform and just has seen no noticeable impact from redetermination. Specialty is a little bit different in that it's protected due to these unique county-level backstop funding mechanism that we have for patients in Pennsylvania, which is the state that we have most of our specialty Medicaid volume. And then regarding our RTC business, our experience there just continues to support that our patients are protected because roughly 80% of Medicaid patients are wards of the state and as a result, they are protected. So, for us, redetermination is really primarily applicable to our CTC service line, and I would say our patients there are continuing with their treatment, either through the reinstatement of Medicaid, switching to another payer, accessing state-based exchanges, and sometimes moving to self-pay as well. So, more broadly across the country. Now that Oregon, which has been the final state, actually started redetermination on October 1, all states have officially launched redetermination. And we'd say that You know, we estimate approximately just under half, about 40% of our patients have now completed redetermination. And, you know, we anticipate this process will obviously continue to move into 24. So I just think, in summary, we continue to be cautiously optimistic that the impacts will continue to be very manageable. It continues to be a major focus for the company. We're tracking it very, very closely. Process continues to vary a little bit by state. CMS came in last year in the summer and encouraged a number of states to pause the pace that they were moving various patients off the rolls. But overall, we believe that the impact is going to be modest, particularly in 23, and our experience to date aligns with this view. Excellent.

And our next question will come from AJ Rice with UBS. Please go ahead.

Thanks. Hi, everybody. I know earlier in the year there was some concern expressed about, you know, whether the payment rates when you gave your original guidance that you were seeing sort of across the board would maybe moderate in the back half of the year, but it seems like that's held in there pretty well. I wondered if I could get you for the first question here, just to give us some thoughts about what you're seeing in terms of rate updates, and maybe as you look into 24 across your major payer classes.

Sure. Sure. Hi, AJ. I'll take that question. So, you know, first I'll say you're right. We are pleased with what we're seeing from a rate perspective. You'll recall, of course, that we sort of increased our guidance mid-year based, you know, partly on the strength that we were seeing in our rate negotiations. And we were anticipating mid-single-digit growth rates for the second half of the year. And I can tell you that we are seeing that. We are seeing that come through. We've seen it in the third quarter, as you can see, sort of in the strong results that we had. And then we're expecting to continue to see those strong rates come through for Q4. I can tell you that that has been pretty consistent across the markets and across the payers, Medicaid and commercial. and we see the average rate increases in those ranges. Of course, there are some above and some below, but it's just across all service lines, including CTC. We would expect that to continue into Q1 as we enter 2024, but then, you know, we would think that that's going to moderate back to normal, more normalized growth levels for 2024. Sorry, I cut you off there, AJ.

No, no, that's fine. I wanted to hear the last part, too, so that's good. My other question would be related to the pace of joint ventures. You've obviously announced a lot of deals with major health systems, and it seems to continue to be there. I think there was a perception maybe that some of this was a reaction to these health system challenges in the pandemic and the need to partner up with someone for some of the post-acute services, but I wonder if... the discussion that you're seeing now suggests that maybe this is going to persist for longer. Maybe give us a little bit of flavor for what are the discussions with some of these newer JVs that you're seeing? What's driving the continued discussion to partner with someone like you to help them on behavioral?

Yeah, thanks, AJ. This is Chris. I'll start and see if Heather wants to add anything, but I think it starts with the fact that we have really impressive referenceability. We have 20 joint ventures that we've now signed, and we had a groundbreaking earlier this week, and just in talking to that partner, I think we continue to see that they're getting calls unsolicited from others that are interested in some sort of partnership. I think there's a recognition that there are so many behavioral health patients that present in an emergency room, that they would like to get dedicated care and they recognize increasingly that they don't have that expertise. And so they frequently are looking for a partner that can help them deliver care. And frequently they just do not have the related beds. So I think this is a theme that we've seen, you know, really began before the pandemic, but I think has accelerated. And I think as we've continued to align ourselves with such marquee partners, That referenceability has continued to persist, and I think our pipeline continues to look very good. Obviously, we continue to do significant work on identifying the target geographies that we feel are under-bedded. And that starts there. But where there is a partner that presents themselves in that market or that we proactively approach, joint ventures can be, you know, a really attractive growth pathway for us and one that will continue to be a significant part of our growth. And as I laid out in my opening remarks in 2024, you know, it really gives us the visibility into 2024 bed growth that we laid out in our investor day.

Okay. Thanks a lot.

Thank you.

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

Great. Thanks. I guess last night, you know, CMS analyzed the hospital outpatient update, and it included a bunch of things on behavioral health and allowing patients providers to set up these partial hospitalization programs and things like that. Is that something that you guys would directly participate in or is that something that would potentially be, you know, increasing competition for the services that you provide? Kevin, this is Chris.

Thanks for the question. You know, I would say on the PHP IOP front, there is not as much opportunity for us, you know, with Medicare specifically. I think the rate increases would certainly, you know, apply to us, but we see them as relatively negligible and not a material impact on the business and pretty much in line with what we had expected.

Okay. And then, you know, the revenue growth is pretty impressive and obviously, you know, EBITDA grew faster and I appreciate the $5 million charge in the quarter, but I would have thought that with rates growing faster than wages in the quarter and then really strong volume growth, there might be more leverage to the margin in the quarter. Is there anything that you would spike out there or anything that you would highlight there as to why there might not have been more leverage in the quarter on the EBITDA side?

I would really point to the point that you just made in regards to that PLGL reserve adjustment. We did see, you know, favorable rate increases, and we did see sort of labor rates moderating. So you're right on both of those fronts. It's just really that reserve increase that we took in Q3 this year instead of our normal Q4 cadence. But all other things aside, we're progressing well on the other fronts that you mentioned.

Okay, great. Thanks.

And our next question will come from Ben Hendrix with RBC. Please go ahead.

Thank you. I wanted to get a little bit more detail on the labor front. The periodic labor screen that we run has also suggested you've made good progress filling open clinical positions over the last few months. And I wanted to get your comments on where you're seeing the strongest hiring activity across the business lines and if there are still areas or geographies where you're seeing capacity constraints. And then finally, what you're expecting for wage inflation next year. Thanks.

Well, I'll start maybe with wage inflation and what we're expecting for next year. I mean, as you know, we've gone from 7.5% to 6.3% to 5.7% ultimately in Q3, and that's starting from Q4 last year at 8.2%. So we've made some significant progress there. We're really happy with that progress, and we definitely expect to see continued progress. We continue to think that we have a path to see further reductions on the actions that we're taking on our part. And Chris can talk about some of your specific hiring questions that you're alluding to in a minute. But those are the actions we're taking, and we feel really good about those things that we're doing. But we remain a little bit cautious in regards to the macroeconomic environment and things that are outside of our control. I mean, overall, as we just talked about, labor inflation we think will move in tandem with the overall inflation rates. and that will ultimately continue to support our reimbursement rate trends. And so we expect that labor inflation will moderate, and it will come more in line with other market trends. But it's a little too early to really put out a number for the guide. We'll come back in February next year with something more solid there. But, you know, we expect to continue to make progress.

Yeah, and a couple things that I would add. I would say that we have – been very successful in increasing our net new hires and seeing a decline in the open roles that you were referencing. A number of strategies that we've put in place there and a number of actions that I think have really helped drive a reduction in turnover. I referenced in the prepared remarks employee engagement. We did our first employee engagement survey, first in the history of the company last year, and we recently did a pulse check to just check on the progress that we're making. And we saw a pretty significant improvement over the baseline in only a short period of time. So we feel really good about the progress that we're making there. I think the other factor that has really helped us with clinical positions, particularly the impact of turnover for RNs and LPNs, has been being much more intentional about training and onboarding new employees. I think historically, as a company that has grown by acquisition, we've been very deferential to the facilities to put their own training programs in place. And by systematizing the way that we do training, we've seen a pretty meaningful reduction in the turnover of clinical employees because we're managing their expectations better up front. And I think while we saw this with both RNs and LPNs. LPNs were where we saw the most impressive improvement overall. So, you know, we continue to just focus significantly on 90-day turnover across the board, across all lines of business. and continue to work very closely with our operators as well as our HR team. And just the final part of your question in terms of yes, there certainly are some geographies where we continue to see more challenges than others. There are some that are obviously more advantageous, but I think we are doing a much better job as a company in the last year of having that very close working relationship within our HR department being much more closely aligned with our operators. Thanks for the question.

Thank you.

And our next question will come from Brian Tankill with Jefferies. Please go ahead.

Hey, good morning and congrats on the quarter. Heather, maybe just a clarification on some of the comments you've already made. So, if I'm looking at SWB maybe on a per patient day basis, should we think that as a something as a KPI that will moderate in terms of growth rate going forward, or maybe just track the rate growth number?

Yeah, if you think about SWB on a per patient day basis, you know, we have typically tracked that, and we have seen, you know, we saw in previous years how that was sort of growing, and it had some other contributions that aren't in the normal sort of day-to-day operations. that contribute to it. And that includes, it includes obviously same facility wage inflation, but it also has some of the corporate function, costs, benefits that are included in there, and then startup losses and then closures. So it has all those different effects. So we started to call out sort of the base wage trends that we're seeing because there was a discrepancy between those two because some of the investments that we were making If you look at what's happening with SWB per patient day, it's starting to come back in line with where we're seeing the other sort of the base wage inflation. SWB as a percentage of revenue actually came down about 60 basis points during the quarter. It came down to 6.3 from 7.5 and that of course continues the decline from the prior year. But you can see that's coming more in line with what you're seeing from a base wage perspective as well. And then on a same facility basis, it degrees by 60 basis points.

I'm sorry, go ahead. No, go ahead.

Carry on.

Chris, I guess my second question, as I think about your plan to open about 1,000 beds next year and 1,000 beds in 2025, are you seeing any changes in terms of the construction costs or the speed to start as we see just the macro stuff on construction kind of having an impact on maybe commercial construction as it relates to you guys as well. Thanks.

Yeah, no, thank you. That's a fair question, and I think we've done, you know, a really good job overall, you know, working through this. I mean, we saw, you know, a spike in construction costs earlier last year, and it's something that we're constantly having to work through. I think this is one where, particularly with joint venture partners, it's helpful, you know, having a partner, you in the local market. So I think we've got a number of strategies in place that we even talked about at our investor day with some of the prefabricated construction, some of the things that we're trying to do to get ahead of supply chain constraints. for materials that are more difficult to procure. So I would say that overall, we've gotten increasingly better at managing it. It's certainly better than it was a year ago, but we're continuing to work through it consistently and continue to be very optimistic with all of the continued growth into 2024 that I talked about in my prepared remarks, both on the JV side as well as the de novo side for all of our business lines.

Awesome. Thank you.

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

Hey, good morning. Just thinking about next year, I know you're not giving guidance, but how should we think about corporate overhead and next year over this year, kind of a full year comparison. And also, do you have a crystal ball on labor inflation? Do you think it's hit a plateau or do you think there's some room for it on a patient day basis to continue to decelerate? Thanks.

Hi, John. It's Heather. I'll take that. I do not have a crystal ball. I wish I did. I can tell you sort of just to go back on a couple of things that we said. We're really pleased with what we're seeing happening from quarter to quarter and that continued steady decline in the base wage rates. And then also the base wage rates coming in line with what we're seeing on an SWB per patient day. So those coming in line together and as we start to lap some higher rates in the prior years, we feel good about where we are. I mean, we continue to think that we'll see declines and we'll see some improvement until we get to a more normalized rate of inflation. I think our question is, what's a normalized rate of inflation? That inflation is going to continue to move with overall inflation. And the thing that we feel good about, John, is that we can anticipate the rate improvements will also typically follow that. So we feel like all of those things are going to move in tandem, and we've seen our ability to grow rates at a stronger pace than what we're seeing in our labor inflation, so that we can continue to sort of build some operating leverage there. Kind of coming back to your corporate cost question, what I can tell you is that, you know, we're seeing those corporate costs level off. As you know, they sort of built in the prior year and sort of throughout earlier portions of this year. But we are seeing those come down slightly, and we're seeing those start to build leverage as a percentage of revenue. I would anticipate that leverage certainly to continue in 2024. It's a little early for us to have sort of a good guide for 2024 for the full year, as you mentioned, but I can tell you that we certainly expect to see that continue in light of leverage that will come there. As you know, we made some significant investments in the corporate costs in the past 12 months, and we're seeing those pay off. And we're seeing those pay off in really good ways throughout the business, but also we're seeing corporate costs level off.

Yeah, and John, this is Craig. I would just add that, you know, I think there is direct correlation between the investments that we've made and the performance of the business, whether it's on the marketing side and, you know, the record admissions that we're seeing, whether it's the quality investments that we've made that have consistently shown improved quality, you know, even investments in our managed care team and others. So I think this is one where we're obviously continue to be very focused on on corporate costs and getting operating leverage into heather's point you know we've seen a sequential decline quarter over quarter since the beginning of the year expect that to continue and just a quick follow-up um the project uh to digitize your medical records uh where does that stand and are you seeing any payoff uh from some of the early efforts there yeah no thanks for for uh the question on that john i think Overall, we feel great about the continued progress that we're seeing. There's several elements of the IT investment. So, you know, one is the remote monitoring technology that we think has, we've put that in nearly all of our acute facilities year to date. So, we're in 45 facilities. And we've seen really promising improvements. initial improvements in patient incidents there, and we expect that to continue. On the EMR front, we have implemented an EMR now, and we're expecting to end the year at about half of our acute facilities, and continuing to now deploy, look at our specialty facilities as well, and CTC as well from that standpoint. I think the benefits just show up in a number of different ways. I mean, we've gotten... really strong praise from our surveyors who have come into these most recent JVs that we've opened that speak to the strength of the EMR that we have in place and the patient monitoring and how unique and differentiated they see relative to the other surveys that we're doing. We hear that consistently. Again, I think the material improvements that we continue to see on the quality front in only a short period of time also speaks to the benefit we're seeing with patient safety and compliance, which we think is really important. I would say staff engagement. We've seen better employee engagement at facilities that have an EMR relative to those that don't. It's easier to recruit clinicians that have been trained on EMRs that don't want to work in a paper environment, which is consistently the norm in behavioral health. And it helps us on the retention front as well. And then, obviously, we're beginning to see the benefits that you would expect, just an improved back office functionality, reduced paper and, you know, efficiencies there that we think will continue to be much more pronounced in the coming months. And, you know, we're tracking all of that and expect to be in a position to share probably more detail on that. It will take a little bit more time later next year, certainly by our investor day.

Thanks so much.

Thank you. And our next question will come from Sarah James with Cantor Fitzgerald. Please go ahead.

Thank you. I wanted to go back to your comments on the redetermination impact being modest because it seems a little bit of a contrast to what the payers are saying, which is they're getting like 20% to 25% returning to insurance with a 60- to 90-day period. gap in care. So I'm wondering if your patients being returned to some form of insurance is like a geographic mix and given your exposure in Florida, or if you're actually able to take an active role and help them resubmit for coverage and close that gap in care.

Yeah, no, thank you for the question, Sarah. I mean, it's difficult to to know the comparison with respect to others and their geographies. But again, as I started, we have extensively prepared for redetermination, particularly with our CTC business where it's most pronounced. And I just think we've been able to do an excellent job of proactively working with these patients. I mean, we put kiosks in place in the individual facilities. We've had QR codes up in place to tell them that redetermination is coming. Many of them come into our clinics on a daily basis with a letter where they've lost their Medicaid coverage and they're looking for help. We have a dedicated support line that helps people. Sometimes we'll have Many in our facilities I've seen will sit down with a patient that's lost coverage and take them through actually reapplying in person. Other times it takes a little bit longer, but we've had a high success rate of being able to assist our patients, particularly our CTC patients, but also our other lines of business to retain their coverage. And, you know, I think in the... many instances as well where we're able to help them get retro coverage where they've lost coverage for a period of time as well. So I would say a very high majority of our patients who have lost coverage have been able to favorably resolve within 30 days. And we've just continued to have a really strong track record and continue to expect that to be the case into 2024 as well.

That's great. And then on the opioid settlement money, you've previously talked about, you know, views of it coming down to the county level in 24 and 25. Can you give us an idea of timeline once it gets to the county level? How long does it take to get through a grant process? And when could we actually see that having an impact on build out decisions?

Yeah, it's a very fair question and one that we would love to have a more detailed answer to. Every state, as you would expect, is a little bit different. So while there have been $50 billion in opioid settlement dollars in total, only about $3 billion have been distributed to the states. And then once it gets to the states, only a small portion is beginning to trickle down to the individual counties. So we're doing everything that we can to partner with these individual counties, with communities, to help showcase some of the things that we've seen, some of the strategies to specifically deal with opioid addiction. We partnered with the University of North Carolina to do an independent study on that that is available for every single county across the country. And we've been able to help show outcomes with respect to harm reduction, treatment efforts that are in place, all the many things that we've done. We have such strong quality metrics that have been recognized by CARF, which is the accrediting body for the CTC that we are able to also talk about and share. But overall, we're doing our best to partner with these counties when they're ready. I just think realistically they are putting together task force at the county level. They're trying to determine what services they want. If it's a rural county, do they want access to mobile vans? Do they want to expand peer recovery specialist programs? Do they want housing support? Do they want to just emphasize the distribution of Naloxone? I mean, it can really vary county by county, but I think we're there and ready to be a good partner, and we have built a very strong team that is laser-focused on grants and responding to grants, that I think we continue to have significant confidence that as these dollars do begin to flow into 24 and certainly into 25, where we probably think that there will be a greater prevalence of that funding, that we're very well positioned to capitalize on it and to assist these states.

Thank you.

And our next question will come from Gary Taylor with Cowan. Please go ahead.

Hi, good morning. Just a couple questions. Chris, I just wanted to confirm, I think the latest number we've seen for new bed ads next year is 1,150. And given your commentary about all the development, I just wanted to get a sense of was that just illustrative and confirming all the stuff that's coming in for 24? Or is there a reason to think the bed growth could be even higher than that number you showed us before? And then related to that, just Heather, I know last quarter you talked about generally 15 to 20 million a year of pre-opening costs that burden the P&L. But with bed growth maybe going up 70% or so next year, Should we think about a commensurate, you know, sort of increase in that pre-opening burden?

Yeah, thanks, Gary. Why don't I go ahead and start? So just as you're probably referencing this slide that we felt like was a very important one to lay out in Investor Day that showed the 1,150 bed additions in 24 and 25. And so just, you know, I... discussed earlier the three hospitals that we'll be building in 2024. We've got six facilities coming online. So those three JV partners, the Henry Ford, the Intermountain, and the other JV partner that we haven't disclosed, we expect those to contribute about 440 beds. We also have several de novo hospitals in reference to the one at Agave Ridge in Arizona, Madison, Wisconsin, and then this one in Tampa So we're expecting those to contribute about 400 beds. And then obviously, we have discussed in the past the bed addition to the expansions to existing facilities, which have been in the 300 range. So that gets you right to the 1,150. I would say that we are very actively looking at whether we can even expand beyond the 300. I think that is one of the most effective and highest returns in terms of capital deployment, because we do own those facilities, we can control the construction process a little bit more, and we've historically focused on around 300 a year, but we think that can be higher in the coming years, and so that's something that we're spending time on as well. But hopefully that helps break that down, and Heather, do you want to take the other question?

Sure, sure thing. I'll speak a little bit about the startup costs. At the end of Q3, we're trending at around $16 million, which includes the ramp of the two JVs that Chris mentioned. And as we expect to open two more de novos by the end of the year, that sort of pace will continue. We'll see a similar level of about $6.5 million is what we think we're going to continue to see in Q4, and that's consistent with Q3. So that number of how we trend has already ramped up a little bit in the back half of 2023. We would expect that that pace would continue for 2024. So maybe to more directly answer your question, Gary, we think it will be relatively consistent with where we are currently as we have already started to ramp some of that construction and bed openings, but it won't be the same as what we started the year with last year. It's a little higher for 24 than 23, but consistent with where we are right now.

Thank you. No problem.

And our last question will come from Peter Chickering with Deutsche Bank. Please go ahead.

Hey, good morning, guys. Thanks for fitting me in. Two quick questions here. One more follow-up on Medicaid redeterminations. As you look at your DSOs pick up slightly sequentially as redetermination has a bigger impact, can you just let us know the process for how you learn if a CDC patient has been redetermined? I believe you bill CDC weekly, so I assume that you know within one or two weeks if that person has been redetermined so that there's minimal risk of feeling gravity so you can't collect it.

Yeah, thank you, Pito. I would say it continues to really vary state by state. So there are some states that have proactively worked with us and will actually, in the beginning of the period where they're moving various patients and citizens off of Medicaid, they will share with us proactively when that's going to happen and who is on the rolls. And that enables us to cross-reference against our patients and to be much more proactive in reaching out. Other times that process doesn't happen and our patients, even though we have been proactively talking to them about this for some time, will come into us with a hard copy letter that they've received where they've lost their coverage and we have to work with them. So we've done everything we can to point out the states that have been particularly transparent and shared with others how that really is in the patient's best interest, but it really varies state by state.

Okay, fair enough. And then a quick modeling question. If you look at OPEX for the third quarter and take out $5.3 million for professional fees per patient day, can we assume a similar number for that for fourth quarter, just adjusting for that professional liability?

I think that's right. Our other operating expenses have been pretty consistent, right around 13% of revenue. If you take out the impact of the $5.3 million reserve adjustment, we are at 13.2 for Q3. So we're right in line with Q3 prior year, which is 13.3%. And then sequentially, Q2 of 2023 was 13.1. So to answer your question, yes, you can expect that that will come right back in line.

Great. Thank you so much.

No problem.

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

Thank you. So before we end the call, I just want to again thank our committed facility leaders, clinicians, and approximately 23,000 dedicated employees across the country who just continue to work tirelessly to meet the needs of patients in a safe and effective manner. We have such a strong foundation and a proven strategy for driving growth and delivering greater value to both the patients we serve and our shareholders. We greatly thank you all for being with us this morning and for your interest in Acadia. And if you all have additional questions today, please don't hesitate to contact us directly. Have a great day.

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

You may now disconnect your lines.