Acadia Healthcare Company, Inc. (ACHC) Q2 2025 Earnings Report, Transcript and Summary

Good day, and welcome to Acadia Healthcare's Second Quarter of 2025 Earnings Call. [Operator Instructions] Also, please be aware that today's call is being recorded. I'd now like to turn the call over to Patrick Feeley, Head of Investor Relations. Please go ahead.

Thank you, and good morning. Yesterday after the market closed, we issued our press release announcing our second quarter 2025 financial results. This press release can be found in the Investor Relations section of acadiahealthcare.com website. Here with me today to discuss the results are Chris Hunter, Chief Executive Officer; and Heather Dixon, Chief Financial Officer. To the extent any non-GAAP financial measure is discussed on today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. 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 2025 and beyond. 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 second 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 Chris.

Thank you, Patrick, and good morning, everyone. Thank you for being with us for Acadia's Second Quarter 2025 Conference Call. We're pleased with our progress to date in 2025 as we continue to execute our strategy in line with our growth objectives. We reported solid top line growth with total revenue of $869.2 million, up 9.2% over the second quarter last year, while adjusted EBITDA was $201.8 million, a 7.5% increase over the same period a year ago. I would like to speak for a moment about the recently passed One Big Beautiful Bill Act. We believe the provisions of the bill are manageable over the coming years particularly due to the carve-outs from work requirements and the extended time line for implementing changes to the supplemental payment provisions of the Medicaid program. For the full year 2025, we expect gross revenue of approximately $230 million from existing state Medicaid supplemental programs. More than half of this revenue comes from states that may begin reducing these payments starting in fiscal 2028 if proposed changes to the programs are implemented. If these changes occur, we also anticipate that a portion of the revenue loss would be offset by a reduction in the provider taxes we pay in those states. Regarding the Medicaid work requirements included in the legislation, we do not expect a material impact on our operations as these begin to be phased in next year. This is largely due to exemptions for the populations we serve, including individuals with chronic substance use disorders and those with serious and complex medical conditions. At Acadia, we remain committed to delivering essential care to underserved and vulnerable populations. We will continue to prioritize partnerships with payers and state agencies that recognize the long-term cost savings of integrating mental and physical health care and the importance of addressing behavioral health needs nationwide. On that note, we're pleased to share that the state of Tennessee has approved a new Directed Payment Program, underscoring the critical role behavioral health services play in supporting community well-being. This approval marks a meaningful step in the broader national movement to invest in behavioral health programs that are vital to expanding access, improving outcomes and meeting the growing demand for behavioral health services across the country. Turning to development activity. For the second quarter, we added 101 beds to existing facilities, bringing the total to 191 beds added to existing facilities for the first half of 2025. Including the 288 beds from newly constructed facilities, we have added a total of 479 beds to date in 2025. Our new facility construction projects have also progressed nicely. We are extremely proud to be a preferred partner to many premier names in health care who want to integrate behavioral health into their system with a shared purpose of improving both mental and physical outcomes for more patients. Over the past two months, we have completed construction of three new facilities in conjunction with our joint venture partners. This includes our second facility with Geisinger located in their headquarters city of Danville, Pennsylvania, which opened earlier this month. Two other joint venture facilities have completed construction and are scheduled to open later this year. Acadia also added four new comprehensive treatment centers, or CTCs, for opioid use disorder, extending our market reach to 174 CTCs across 33 states. We have now added 11 CTCs to date in 2025. Moving to volumes. In the second quarter, same-facility patient days increased by 1.8%, which was slightly below our expectations. We saw strong performance in our specialty and CTC lines of business, with same facility growth in the mid-single digits for each, consistent with our expectations. As we have discussed previously, our same-facility results continue to be impacted by a handful of underperforming facilities. While performance at the majority of these facilities was generally in line with our expectations, we did observe a deterioration in performance at one facility, which continues to face particularly strong local market pressures which we are closely monitoring. More broadly, volumes in our acute care business came in slightly below expectations. While demand across the majority of our business remains robust, health care is inherently local, and we experienced pockets of weakness in volumes in certain acute care markets with higher Medicaid exposure. We believe this pressure on Medicaid volumes is consistent with what peers experienced during the second quarter. Medicaid volumes at our acute care hospitals were down slightly on a year-over-year basis in the second quarter, while commercial and Medicare volumes increased by 9% and 8%, respectively. Before turning the call over to Heather, I want to talk about our quality initiatives. As we extend our market reach in 2025, patient safety and quality patient care are central to our mission, and we continue to focus on quality across our operations, leveraging technology and utilizing data to reduce medication errors, improve care coordination, support quality and ensure the consistent delivery of evidence-based care and support strong clinical outcomes. We believe Acadia has led the industry in adopting the latest technology and evidence-based practices. Our facilities are licensed, accredited and regularly inspected to uphold high regulatory and quality standards, including rigorous requirements for employee training and patient safety. We have remote 24/7 patient monitoring devices in Acadia's acute facilities, which enhance patient safety and provide critical documentation of patient care and outcomes and ensure more consistent care protocols across our facilities. Our hospital staff and clinicians are also provided with wearable safety devices that enable expedited responses and mitigation of adverse events. We have implemented robust analytics through an integrated quality dashboard that provides real-time visibility into over 50 distinct safety, patient experience and regulatory compliance-related key performance indicators, providing facility leadership with real-time insight into operational effectiveness across our hospitals. Our operators use this data on a daily, weekly and monthly cadence to drive our continuous quality improvement efforts at the bedside and throughout our facilities. Our ability to harness this data and accurately measure outcomes is an important advantage in negotiating with payers who are focused on value-based care. We will continue to invest in technology to strengthen our core capabilities and support a strong culture of accountability for quality. Our Corporate Quality and Safety Committee conducts quarterly performance reviews that help us maintain consistency in clinical practice across our operations. And our Corporate Compliance Committee conducts quarterly reviews to ensure compliance with our internal code of conduct. Importantly, our quality initiatives investments in the latest technology tools and evidence-based protocols support the work of our employees and clinicians. Working together with our facility operators has helped us attract skilled practitioners and maintain talent in a competitive labor market. We are experiencing more favorable labor trends in 2025, supported by our initiatives centered around more centralized facility level recruitment, retention and employee engagement and a strong focus on extensive training in our local markets. We commend our approximately 25,000 dedicated employees for an outstanding job in providing quality, compassionate care for the patients and families who seek our care. Lastly, I'd like to take a moment to recognize Heather Dixon, who will be stepping down from her role as Chief Financial Officer later this month. Over the last two years, Heather has been instrumental in strengthening our financial foundation and advancing our growth strategy. Her leadership, insights and unwavering commitment have left a lasting impact on our organization. On behalf of the Board of Directors, the executive leadership team and all of us at Acadia, we extend our sincere gratitude to Heather and wish her continued success in her next chapter. As we begin the search for her permanent successor, I'm pleased to announce that Tim Sides, currently Senior Vice President of Operations Finance, will assume the role of interim CFO. Tim brings extensive experience and deep operational expertise, and we are confident in his ability to ensure a seamless transition and continued financial stewardship. With that, I would now like to turn the call over to Heather to discuss our financial results for the quarter.

Thanks, Chris, and good morning, everyone. We reported $869.2 million in revenue for the quarter, representing a 9.2% increase over the second quarter of last year. Adjusted EBITDA for the second quarter of 2025 was $201.8 million, reflecting an adjusted EBITDA margin of 23.2%. Same-facility revenue grew 9.5% year-over-year, including a 7.5% increase in revenue per patient day and 1.8% growth in patient days. On a same-facility basis, adjusted EBITDA was $256 million, and adjusted EBITDA margin was 30.1% in the second quarter of this year. During the second quarter, the Tennessee Supplemental Payment Program was approved. As a result, we recognized a favorable pretax benefit of $51.8 million in the quarter, of which $28.5 million related to the fiscal year 2024 and $11 million related to the first quarter of 2025, with $12.3 million related to the second quarter of 2025. This compares to $8.6 million in net supplemental payments from the state recognized in the second quarter of 2024. Also included in our second quarter results were start-up losses of $14.2 million related to recently opened facilities compared to $4.6 million in the second quarter of 2024. Looking at the balance sheet. Maintaining a strong financial position remains a top priority, providing us with sufficient capital to make strategic investments in our business. As of June 30, we had $131.4 million in cash and cash equivalents and $828 million available under our $1 billion revolving credit facility. Moving on to our outlook for 2025. Based on our results through the first half of the year, we are updating our adjusted EBITDA range for the full year to $675 million to $700 million. This is primarily due to lower expected volume growth and higher start- up costs, partially offset by an increase in anticipated supplemental payments. For modeling purposes, we expect our Q3 adjusted EBITDA to be modestly above Q4, which is in line with typical seasonality. For the full year, we now expect same-facility volume growth in the range of 2% to 3% compared to the prior expectation of low to mid-single digits. Start-up losses are expected to be approximately $60 million to $65 million for the full year. The $10 million increase relative to our prior guidance is due to new facility construction running ahead of schedule. For the full year, we now expect to add between 950 and 1,000 total beds compared to our previously expected range of 800 to 1,000 beds. We now expect net Medicaid supplementals to increase by $30 million to $40 million in 2025 as compared to the prior year, including a $40 million to $45 million recurring benefit from the recently approved Tennessee program. With that, we're ready to open the call for questions.

[Operator Instructions] And our first question today will come from A.J. Rice with UBS.

Just maybe drill down a little bit on your comment about Medicaid, maybe expand a little bit on exactly what you're seeing? Is it an issue with getting you get the patients in, but they are not approving the length of stay you think they should approve? Or are they not referring the patients over? And is this something specific to Acadia or do you think this is happening across the board? And maybe then, where are those patients going, I guess?

Yes, A.J., this is Chris. Thanks for the question. The primary driver of volume coming in below our expectations really was the weaker Medicaid volumes in our acute care business, which is what you're asking about. I'd say a couple of things. I think we believe this reflects some of the evolving utilization patterns among managed Medicaid plans, which are navigating elevated cost pressures across the board. And it appears these dynamics are having some impact on admissions trends across our inpatient services, including behavioral health. There's always a natural tension between providers and payers. And I think we remain confident that the high acuity populations we serve and the strong outcomes we're able to deliver are critical to long-term care cost efficiency as well as network adequacy, and we continue to engage constructively with our partners there on access and outcomes. And so we'll continue to proactively work with our payer partners to that regard.

Okay. On the start-up costs that you're incurring, I think you upped the number for this year by about $10 million, if I have this right. Is that accelerating programs that were going to come in next year, and therefore, hopefully, that helps the year-to-year trend? Or is it -- it's taking longer, the ramp in the new facilities is slower than you had anticipated, and that's contributing to a step-up in start-up costs?

Hi A.J., this is Heather. It's actually a little bit different. So the $10 million in incremental start-up losses is reflective of an accelerated opening pace. So during the year, we have been experiencing some opportunities to open the beds a little more quickly than what we had anticipated. And that means that we are experiencing those incremental start-up costs earlier in the year than what we would have previously anticipated. So that's really what's driving it. What that means, though, is it's effectively a pull forward from 2026. So you would expect to see 2026 start-up losses have decline even more than we had originally anticipated.

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

So Chris, you and I have talked in the past about free cash flow outlook. And is there an opportunity in '26 to kind of pull forward your free cash flow positive outlook? And if so, maybe you could elaborate on that.

Yes. Thanks for the question, John. We have previously guided to being free cash flow positive at the end of 2026. I think a couple of points I would make. First of all, the beds that we have built recently, we just believe are going to continue to pay dividends for years to come as they ramp up, and we continue to be really excited about those. I think as most know, we built and licensed 776 beds last year. And we expect to build up to 1,000 beds this year, and we continue to be on track there. However, given the environment and more specifically, the policy environment, with the amount of uncertainty created by the recently passed Big Beautiful Bill, we're going to absolutely take a harder look and are taking a harder look at capital spending in our pipeline of projects. So we have the opportunity to take a pause on some of our expansion capital spending. This would, of course, enable us to unlock more of the underlying free cash flow of the business at a faster pace. And I'd also add that it would have the added benefit of enabling us to unlock more near-term EBITDA. Start-up costs would decline at a faster pace. And at the same time, we still have the multiyear benefit of a significant number of ramping beds that we have assembled over the past few years that are coming online. And so we're in the process of looking at all this now. I think to give you a granular example, we've identified two facilities in our pipeline that we have hit the pause button on, and that will save us over $100 million in CapEx over the next couple of years. We're still going through the process and we expect to have more to say over the next few months. But to your question, we do think that there is opportunity to accelerate our path to becoming free cash flow positive as a result.

Great. And just my follow-up is going back to A.J.'s question on Medicaid. So a couple of things there. So are you seeing a difference between non-managed Medicaid and Medicaid in terms of admissions? And do you have a stat -- like is there some stat that says, okay, we're -- we can quantify denial rates or prior auth rates that are elevated by x amount? I'm just kind of curious -- or do you think part of this would be the fact that the Medicaid population continues to shrink with redetermination 2.0? So I'm just trying to get a sense, is it a smaller population? Or can you really point to something that says, yes, they're just making it -- that they've stepped up the prior auth, they're just making it harder to get referrals?

Yes. John, I would not call anything out with respect to managed Medicaid plans and the difference, and I just don't think that there are any statistics right now that we -- I mean, it's something that clearly we're going to continue to look at, but there is nothing right now that we would pinpoint on that front.

And our next question will come from Whit Mayo with Leerink Partners.

How much did the underperforming facilities drag on your same-store patient days within the quarter? And then you've called out $20 million of losses on those underperforming facilities. Has that changed at all? Would you expect that to normalize by the fourth quarter? Or those -- could those go lower or higher?

Yes. Thanks for the question, Whit. This is Chris. I'll take it. I think I'd step back and just remind everyone that our 2025 guidance assumed a roughly $20 million EBITDA headwind for the full year from this group of underperforming facilities that we called out back during the fourth quarter. And these facilities have performed overall in line with our expectations. On a year-over-year basis, they did have a negative impact on our same-facility patient volume growth of about 80 basis points in the second quarter. So we expect to begin to comp over this headwind, the volumes in the fourth quarter of this year. A couple of things. I think the underperformance of facilities has tended to be correlated to more intense local media coverage. I referenced that in the prepared remarks within a facility's local market rather than any news at the national level. And I'd also say it's just difficult for us to put an estimate on the timing of the turnaround of the small group of facilities. We, therefore, believed it was prudent to take a more conservative approach when we set the guidance. But we're continuing to work through these every day. And I think that hopefully answers your question.

Maybe I'll just add one more piece in from a numbers perspective with -- we had called out, we thought it would be a drag of around $20 million for the full year. We are seeing that be about $3 million worse than what we had originally anticipated. And that is attributable to the one facility that Chris has called out, which we are clearly watching very, very closely.

Okay. And then maybe just on the guidance for the full year, Heather. Just any bridge or framework that you can provide for us to think about first half to second half to give us some confidence in the achievability of the full year, maybe comment on the net supplemental funding increases in the second half in malpractice?

Yes. Let me take those in turn. I'll say a couple of things on the bridge from a guidance perspective. If you look at the different pieces that are really driving the change that we made, I'd start with the start-up losses that I talked about. So that's about an incremental $10 million. And that, of course, is due to the faster bed opening pace that we just talked about. Those are offset by our incremental supplemental payments. We now expect supplemental payments to be about $25 million to $30 million better than what we previously expected. You recall, we previously expected for supplemental payments to be flat to up $15 million on a net basis year-over-year, and we now expect that to be $30 million to $40 million of a tailwind for the full year. Those -- that's offset by the volume that Chris has been talking about. The remainder of the change in our guidance would be related specifically to those softer volumes, and we think that's around the $30 million drag for the year. So those are the moving pieces. If you -- I mean the second part of your question, you asked about -- what's -- how do we ramp from the first half to the second half and what gives us confidence. I'll talk about a couple of things. If you think about the second half and what will be coming through, the first is our normal rate updates. You'll recall that those disproportionately happen in the second half of the year. And then the second thing I would point to is the supplemental payments again excluding Tennessee, we also expect higher supplemental payments in the second half of the year compared to the first from various other state increases that we're seeing. And then finally, from a volume perspective, we'll be seeing a growing contribution from the new beds that we have added as we move throughout the year. There are two pieces to that. I'd say particularly related to our 2023 cohort of de novos, those have now been in place for long enough that we're seeing some really good contribution from those, and particularly as we move into the second half of the year, just given the timing of the openings for 2023. And then also the recent bed expansions that we have added, remember, we've added almost 200 this year alone. And of course, those will begin and will continue to ramp for the second half of the year. So those are really the moving pieces from the first half to the second half. And I'll just remind you that we're also comping over the headwind from the underperforming facilities that began in the fourth quarter of last year.

And our next question will come from Brian Tanquilut with Jefferies.

Maybe just a question for us on fundamentals. Heather, as I think about wages or wage spend up, what, like 7%, 7.8% year-over- year. Obviously, volumes have been in the low single-digit range. Just curious what you're seeing on the wage front and just the labor expense line?

Yes. We're actually seeing some really good improvements and, frankly, consistency with some improvement on that line from a labor and wage front, we've seen a reduction in premium costs as well. And that's all very favorable that we're watching. We had -- of course, you'll recall that we had seen some pretty high watermarks a few years back from a labor perspective. We've been managing that very closely and focused on it. We had reported previously that we were below the 5% mark whenever we were looking quarter- to-quarter. We've seen that come down even further. It's now roughly around the 3.5% range of what we saw for second quarter, and we see stability in that number.

Got it. And then my follow-up, Chris, as I look at the disclosures, it looks like you spent $54 million or so during the quarter in government investigations [indiscernible]. Curious, anything you can share with us in terms of are there settlement numbers included in that? And any progress you're seeing in terms of the discussions with the government to address these issues?

Sure. Thanks for the question. A few things that I would point out. I think as we've previously communicated, we're committing to and have been committed to conducting a very thorough and independent review of our operations while continuing to work very cooperatively with the DOJ and the SEC. And while the pace of the government investigations and the related internal reviews that we're doing are going to naturally ebb and flow, much of the independent review and the cooperative engagement with the government has been performed in the first half of the year. And so we can't predict how long this process will take or how much the investigation and engagement with the government was going to ultimately cost, but we do currently anticipate a reduction and the costs associated with the investigation over the second half of the year. And anything you'd add, Heather?

Yes. I would just pick up on the last part of your question there around whether there are any settlement costs in there. There are not. Those are just legal fees specifically related to the investigations and sort of the pieces that Chris just walked through. Any settlements on normal recurring litigation items or the cost of defending those items is included in our other operating expenses.

And our next question will come from Pito Chickering with Deutsche Bank.

Back to sort of the managed Medicaid question. A process perspective, if a patient shows up in the ER, how is managed Medicaid blocking them from getting admitted? Or are they just stuck in the ER until they stabilize? Or are they blocking patients coming from the court, schools or parents?

Yes. Pito, I would say it can completely depend. I mean there clearly can be authorization challenges that we can see on the front end where there are frequent approval, things that were streamlined before we have to go back and get multiple approvals. There can just be some general friction throughout the patient stay that we're dealing with as well. We continue to be very confident that we're going to be able to constructively work through this. I want to point that out, but that's what we're seeing.

Okay. Great. And then looking at your Medicaid population in acute specialty, CTC and residential, how do you think that the work requirements could impact each of those segments?

Yes. Thanks for the question. I would say that just generally, with work requirements, CMS is still in the process of writing the regulatory language there. But I think just the broader point for us is that we think that all mental health and substance use treatments are going to be exempt from the Big Beautiful Bill's new copays that are going to apply. And that will directly have relevance to our patient population across the board. I think there is still a little bit of work that's being done with respect to CMS and the language. I mean, I would call out that we believe that the significant majority of the populations will be exempt. But HHS also noted that from the work requirement provisions until '28 that if a state is making reasonable efforts to implement the rule, they can be exempted. So I would say it's hard to predict. There is a scenario that many or most states would delay as much as possible. I'd remember that states have had the option in the past of implementing work requirements at the state level, and only a small minority have actually pursued them as -- notably Missouri, which then quickly repealed its programs. But this is something that we're continuing to follow and feel like we're continuing to be well positioned with our patient population.

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

And reiterate congratulations and best of luck to Heather. Just thinking through the other smaller elements of the guidance -- of the bridge to guidance. I think that last quarter, you had called out about a $5 million headwind from closed facilities year-over-year and $10 million increase in professional liability fees. Just wanted to see if any of those elements, first of all, have changed?

No. And thank you for the kind words, Ben. I appreciate it. There are not any changes to those other items. It's really just the few that I talked about.

Okay. And then just following up a little bit on the headwind from the underperforming facilities. Can you talk a little bit about your strategic alternatives for addressing those facilities in the future? Specifically, how are you balancing your ability to address the referral headwinds that you're having there that may be press related versus potential for exit in those markets?

Yes. Thanks for the question, Ben. I appreciate it. I would say several different things. First of all, we're constantly evaluating our portfolio. And as we go through the trade-offs, we've said in the past that we just won't hesitate to close underperforming facilities if we don't see a path to improvement. We have worked extensively in -- with so many of these facilities that have had media headwinds to be proactive in reaching out to referral partners and to be very deliberate in making that happen. And we've been doing that all year long, and we've seen real success in making that happen. But we do have 274 facilities. And as always the case, we're going to continue to routinely evaluate the portfolio. And when on a case-by-case basis, we can't -- we find a situation that we can't indefinitely fund without a path to viability or strong utilization, then that would be a scenario that we would look at potentially closing a facility. We really believe that would be in a responsible use of resources that could be deployed where more acutely needed. And we're very focused on capital allocation and getting a maximum return on our capital for investors. So -- also, if we have a facility that doesn't fit in strategically, we want to have the flexibility to reevaluate the operation. That could mean an exit. It could mean we temporarily close it, we repurpose the facility to better fit strategically as well. But we're also going to continue to expand our bed capacity and open facilities across the portfolio that do make sense and have a continued strong return, and we're just monitoring that each and every day, including with our very respected JV partners.

And our next question will come from Andrew Mok with Barclays.

I'm still confused on the weaker Medicaid volumes. How are you able to isolate this as a payer issue versus broader Medicaid disenrollment or a pullback from the immigrant population? Is that just a working theory on your end? Or is there more concrete evidence to support that? And if this is a payer issue, why would this improve when the national Medicaid payers are well below margin targets and likely increasing utilization management near term?

Yes. I would just say, Andrew, that we're seeing different behavior by payer that we're continuing to monitor every single day. I wouldn't call anything out on the immigrant front. I mean, this is all very new that we're continuing to watch and monitor. I mean, it's -- what's not new is that there has always been a natural tension between payer and providers. And we're going to continue to monitor and work through that.

Okay. And maybe just a follow-up on cash flow. I think your operating cash flow guidance was revised down $12 million for the year, which was in line with the EBITDA reduction. Can you remind us what's excluded from that number and what that number would look like on a reported basis?

So the cash flow -- the free cash flow obviously is looking at our operating cash flow. It then excludes sort of the usual items that would come about -- that are sort of the fundamental items like debt service and those types of things. But it also -- sort of in our case, the question that we have been going through on two things: one, CapEx; and then also recurring legal-- sorry, nonrecurring legal costs are excluded there as well.

Got it. So that number needs to be adjusted down at least $100 million for the transaction costs, correct?

Yes. So yes, so there was roughly $30 million in Q1 and then another $50 million in Q2. So if you're looking at the full year, that's not a bad estimate, Andrew.

And our next question will come from Matthew Gillmor with KeyBanc.

Best wishes to Heather as well. Following up on the acute volume pressures you called out for Medicaid. Is there anything you'd note in terms of how volumes progressed throughout the quarter and maybe even into July? Just curious if there was a cadence with respect to some of the pressures you're seeing on the Medicaid side.

I'll let Chris answer that. But I'll just say thank you for the kind wishes, Matt. I appreciate it.

Yes. I would say we started out the quarter with volumes running a little bit higher in the 3% range, and those came down and then have leveled out to between 1% and 2%, which we saw in the final month of June. So it was -- it started out, came down a little bit and then went back up and has leveled off.

And then I wanted to see if you could provide some comments on the stronger commercial and Medicare volumes. I guess intuitively, it would seem like given the supply and demand dynamics, you can probably backfill some of the softer Medicaid volumes. But just kind of curious on the Medicare commercial trend, if there's anything in particular driving that? And is there a comment with respect to kind of backfilling that capacity as it becomes available?

The only thing that I would call out is just that our managed care team, I think, has done an excellent job of just continuing to secure commercial and Medicare contracts throughout the year and over the past year. We obviously have a strong Medicaid concentration, but we've done a really good job of being deliberate about trying to diversify that and have been able to successfully contract across the board. So that's all I would call out.

And our next question will come from Ryan Langston with TD Cowen.

I guess, looking for any updates on the conversations with these referral sources at these underperforming facilities. I guess, are you making any progress there at all? And maybe just more broadly, like what are these referral sources looking for from you to maybe start ramping up those referrals again?

Yes. No, thanks for the question. I would say it really depends. I think one of the things that we always do with our referral sources is we're very intentional about pointing out the acuity of the patients that we serve. And we're also very deliberate about bringing them into the facilities so that they can actually see the good work that we're doing every day. We are very intentional about discussing the strong investments that we've made in quality, and we show them what we're doing with respect to patient monitoring, the staff safety devices we put in place, our EMRs, the way that we are monitoring quality through our Joint Commission and software. It's really important that they see not only the talk around quality, but how that's following -- how we're following through on that. And we've seen real success across the board. We're always trying to get them on site. But even when we're not, I think we've done a very good job of helping them translate the investments that we've made across the board in technology and quality into very strong results. I think the other thing I would point out is we have very strong patient satisfaction scores that we have been very intentional about measuring. And we're -- even with involuntary admissions, they continue to be very strong. So we certainly share those as they become available. And we also have been very intentional about sharing data with respect to patient outcomes. Our patients getting better clinically as a result of our care, is the quality of their life improving. All of our data says that the outcomes have been very strong on that respect. And so we're sharing that patient experience, the patient outcomes, the data and getting them on site. And that has just proven to be very successful.

Great. And you mentioned sort of issues at one particular facility. I think you said local market pressure. Could you elaborate on exactly what that means? Is that pressure to that facility specifically or something kind of more broad based in that particular market?

What I said in the prepared remarks was with respect to local media that goes back many years that has just proven to be problematic and has challenged us with respect to volumes. And as a result, our performance in that one singular facility.

Our next question will come from Joanna Gajuk with Bank of America.

So a couple of follow-ups. First, on the comments in the prepared remarks around the impact of the reconciliation bill and specifically the state Directed Payment Program. So you said more than half of the, I guess, $230 million benefit comes from states that you think may begin to reduce these spreads in fiscal '28. So just to clarify, you saying like more than half as in like not every state because these are the states where the rates under these programs are above Medicare? Is that the reason why you say more than half, not every state?

That's exactly right.

And as it relates to those programs, the benefit from the Tennessee program is higher than you had expected in year-over-year. So is it essentially because the rates in that particular state under this program are moving up close to commercial rates?

Yes.

Okay. And how, I guess, another question, hopefully, yes or no answer. In terms of your volume outlook, and you mentioned that the comps will be easier in fourth quarter. So do you still expect mid-single digits growth in volumes in Q4 because of the easier comps?

I think that's a reasonable expectation for sure. We still expect that. We had previously said low to mid-single digits and growing to that mid-single digits in the second half of the year, particularly in Q4. We still believe that's true.

And our next question will come from Jason Cassorla with Guggenheim.

Great. You talked about perhaps taking a bit of a pause on capital spending on a couple of facilities. But maybe can you just help square up the step-up in the midpoint of bed additions this year against the lower CapEx guide? Maybe just said another way, has the CapEx allocation towards kind of bed additions changed, in your view?

So it's a great question. So if I think about that in a couple of different pieces, we look at the CapEx for this year, certainly, we had a significant step up related to the significant number of beds that we're adding. What we are seeing is our ability to open some of those beds that we had anticipated earlier than what we had expected. So the CapEx, we expect will decline in the second half of 2025. We continue to expect that. And then we believe it will continue to decline even further as we move into 2026. So the small decrement that you see for the balance of the year is related to what Chris referred to, the pausing of a couple of those projects. Those are projects that are very early stage. So while it takes around two years to complete construction on a facility, the sort of the work in advance of that related to planning and design and some of those elements begins even earlier. And so it's really the elimination from 2025 of those types of costs related to where we will see a reduction in those related to where we're pausing.

Okay. Got it. And maybe just as a follow-up. I know it's early to discuss 2026, but as we think about the '25 EBITDA jump-off point, would we just be excluding the '24 retro Tennessee supplemental payment and think about a kind of a $660 million EBITDA base to jump off for growth next year? Or are there any other puts and takes that might impact kind of where we should think about the jump off point for growth?

So you're right, Jason. It's early to talk about 2026. So I don't want to try to even put any guidance out there, but let me give you a couple of points. First, we have high confidence in the accelerating growth that we're seeing, the success with the bed additions, our ability to pull some of those forward and open them even faster. I just want to make sure that I'm really clear in regards to your question on Tennessee. We walked through the numbers, and they're all laid out in the release. But for 2025, we now expect that the full year will include $40 million to $45 million of net impact from Tennessee, and that will be related to the in-year amounts. So said another way, we can expect somewhere in that range as a run rate on a go-forward basis. So I want to make sure that, that's clear that these are not a onetime payment. They were just a little lumpy. And then finally, I'll mention it again, I think it's worth mentioning again. The start-up costs will go down. We always knew that 2025 was going to be a very high watermark from a start-up cost perspective because of the significant number of beds we added in '24 and '25, and then to some element, at the end of '23 as well. So those, we will expect to step down. So I'll stop short of putting any other pieces out there or any numbers around it, but hopefully, that gives you a good idea of how to think about 2026.

And our next question will come from Raj Kumar with Stephens.

Just kind of wanted to reflect on the supply and demand mismatch for higher acuity behavioral services that the company has called out, and hence, the development pipeline and comparing that again the same-store metrics. Maybe can you walk us through where are the gaps beyond just the Medicaid dynamic, just kind of relating to maybe labor, if there's competitive dynamics in your markets that you're seeing that are kind of causing the non-handful facilities that are not the previous call out is underperforming, maybe driving that near-term constraint?

Yes. No, thank you for the question. I mean, clearly, health care is local, and it's -- every single one of these facilities is in an individual market that are different. And so each one of them, we have to consider that. I mean, there certainly can be situations where there are staffing challenges, and there could be headwinds, but I think we've done a really good job of trying to identify that. There's really nothing I would call out on that front. I think the demand is something that, as we've discussed in the prior question, reinforced that our referral sources in these markets are very important. And so we've tried to be very intentional of focusing there as well. So I think those are the major things that we would call out in addition to the things that I previously mentioned in terms of just reinforcing all the investments that we are continuing to make sure that we're treating -- we're caring for these patients appropriately. We're treating them with strong clinical outcomes and that we have results that we can share not only with our referral partners, but also with payers. And I think we've done a very good job of doing that.

And then as my follow-up, looking at the growth pathways that you've laid out, just maybe an update on the PHP, IOP kind of penetration across your portfolio facilities? I know that was something that you'd previously highlight in terms of how many facilities that you're kind of adding those programs to, but maybe kind of any update in the quarter around that?

Yes. What I would say on PHP, IOP is that we have always believed that, particularly with the strong acute book that we have, that there is a natural step down from our higher acuity patients to PHP and IOP settings. And we've tried to be very intentional about ensuring that, that happens on a very methodical basis. I think we have taken some strong ground in enhancing those referral patterns and ensuring that across our book of business, we're always looking to step those patients down to Acadia facilities. That was not always the case. But this is a part of the business that we think has real growth potential over time and that we're continuing to address. We're not going to call out any specific metrics right now on that, but that's something that we will certainly be coming back and talking more about in the future because at the -- at its essence, there is such an opportunity for us to improve patient outcomes by having an appropriate step down in care. And so PHP will continue -- PHP and IOP will both continue to be an important part of our strategy.

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. In closing, I just want to thank our committed facility leaders, clinicians and approximately 25,000 dedicated employees across the country who have continued to work tirelessly to meet the needs of our patients in a safe and effective manner. As the leading pure-play behavioral health provider in the United States, we are proud the important work we're doing to address a critical societal need in our nation, and we remain focused on our purpose to lead care with light. Thank you all for being with us this morning and for your interest in Acadia. Have a great day.

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