Acadia Healthcare Company, Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to Acadia's Second Quarter 2022 Conference Call. I'm Gretchen Hommrich, Vice President of Investor Relations for Acadia. I'll first provide you with our safe harbor before turning the call over to our Chief Executive Officer, Chris Hunter. To the extent any non-GAAP financial measure is discussed in today's call, you 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 2022 and beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words believes, anticipates, plans, expects and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's second quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. At this time, for opening remarks, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter.

Thank you, Gretchen. Good morning, everyone, and thank you for being with us today for our second quarter 2022 conference call. I'm here today with our Chief Financial Officer, David Duckworth, and other members of our executive management team. David and I will provide some remarks about our financial and operating performance for the second quarter of 2022. Following our comments, we will open the line for your questions. Acadia has continued to execute our strategy throughout the first half of 2022 with favorable results. Acadia has a proven operating model and diversified service lines across the continuum of care, each of which offers high quality for our patients. After 100 days into my role as CEO, I continue to be confident in our ability to execute our strategy across our growth pathways and service lines to provide quality patient care, to positively impact the communities we serve, and to create long-term value for our stockholders. We look forward to seeing many of you at our first-ever Investor Day later this year planned for December 7 in New York City. Turning to the second quarter. Acadia delivered strong financial and operating results despite ongoing COVID and labor challenges. During the second quarter, we saw increased COVID cases in certain markets, which had a temporary impact on the company's patient admissions and staffing. Our team has done an excellent job managing through these surges with robust policies and procedures to ensure the safety of our patients and staff. I want to thank all of our dedicated employees and clinicians across our facilities who have continued to work tirelessly through these challenges to meet the needs of our patients in a safe and effective manner. We also continue to navigate through a tight labor market. We've remained diligently focused on our recruiting and retention initiatives and we have enhanced and adapted our processes for recruiting, hiring, and onboarding new employees. Our operational leadership, centralized recruiting, and other corporate support teams work in close collaboration with our facility operators and clinical staff to recruit employees in their respective markets. We believe that we benefit from our broad geographic footprint across 39 states and our diversified service lines as we recruit clinical staff for various positions and levels of care in our facilities and clinics. While labor is still a challenging issue for all health care providers, we are cautiously optimistic that the market is improving. We have seen sequential improvements in our net new hires from March through the first half of July, and our contract labor continues to be stable and represents a very low percentage of our labor. During the second quarter, we saw a continuation of our positive trends in revenue per day. We believe this is attributable to our long-standing favorable relationships with our payers, who recognize and appreciate the value and the quality of care we provide. As more payers and states are focused on supporting greater access to mental health and substance use treatment, we are encouraged by the improved coverage trends and positive reimbursement environment. We continue to see strong underlying demand for behavioral health care services. As issues surrounding mental health and substance use have taken center stage in our public discourse, the stigma associated with treatment has lessened, resulting in more people seeking the care they need. Without question, the challenges the past two years related to the pandemic have highlighted the need for quality behavioral health care services. A recent study by the National Center for Educational Statistics found that 87% of public schools reported that the COVID-19 pandemic hindered student's socioemotional development during the 2021 to 2022 school year and 83% of schools reported that student's behavioral development was stunted. As such, we see the importance of extending our role as a leading provider of behavioral health care services to help meet this critical societal need in our country. As we previously discussed, Acadia has a well-defined growth strategy with four distinct pathways to expand our market reach, bed additions to existing facilities, de novos, joint ventures, and acquisitions. Acadia has continued to execute this strategy and meet our objectives in the first half of 2022. Let me briefly outline our continued progress on these four growth pathways. Our first pathway is adding beds to existing facilities. During the first half of the year, we added 78 beds to current Acadia facilities and are on track to meet our goal of adding approximately 300 beds in 2022. As we initially expected, our third quarter will reflect the highest number of bed additions to existing facilities for 2022 with 150 additional beds. These facility expansions are needed to meet demand in our existing markets and will continue to drive same-facility volume growth in the near term and provide efficient and profitable growth opportunities in the long term. Our second growth pathway is de novos, both inpatient acute facilities and CTCs. We've worked to identify underserved markets where we can develop and build wholly owned de novo facilities that meet the critical demand for behavioral health care services. We believe there are significant opportunities in communities across the country to address this unmet need at the local level. In early July, we opened a 60-bed children's hospital in Chicago as part of the three nonoperational facilities acquired by Acadia at the end of 2021, which together, will operate as Montrose Behavioral Health Hospital. Renovation work continues for the 101-bed adult hospital and the outpatient facility for Montrose, which are expected to begin operations in 2023. In addition to the new Chicago facilities, we expect to open a de novo acute inpatient facility, Coachella Valley Behavioral Health in Indio, California early next year. We also continue to identify opportunities to expand our network of 142 CTCs as these facilities play a critical role by providing medication-assisted treatment for patients dealing with opioid use disorder. Demand for treatment has risen dramatically as the increase in opioid use disorder has led to a national epidemic of opioid overdose deaths with more than 107,000 estimated drug overdose deaths in 2021. We opened two new CTCs during the first half of the year, and we're on track to open at least six CTCs in 2022 to support the high demand for effective addiction treatment. Our third growth pathway is joint venture partnerships with leading health systems across the country. We recently announced our 17th and 18th JV partnerships, and we continue to believe these represent an excellent growth avenue for Acadia. We're very excited about two new joint ventures that we recently announced. The first is with Tufts Medicine, which is one of New England's elite health systems to build a new 144-bed behavioral health hospital in Malden, Massachusetts near Boston. And second, a joint venture with ECU Health, one of Eastern North Carolina's premier health systems to build a 144-bed behavioral health hospital in Greenville, North Carolina. The partnership with ECU will expand our acute service line into the North Carolina market. Through competitive processes, these health systems have chosen Acadia as their partner. These joint ventures further our strategy to bring together the best practices and expertise of Acadia and our partners to expand access to quality behavioral health care services in their respective communities. We expect our joint ventures to be a strong driver of our growth in the future. We have previously announced joint venture partnerships for 19 facilities, of which seven are currently open and operational. We plan to open our eighth joint venture facility in partnership with Covenant Health in Knoxville, Tennessee during the third quarter and our ninth joint venture facility in partnership with Lutheran Health Network in Fort Wayne, Indiana, during the fourth quarter of 2022. We plan to open an additional 10 hospitals with premier health systems we have already executed partnership agreements with. We have a strong pipeline of potential partners and will continue to pursue this attractive growth pathway for Acadia. Our fourth and final pathway is expansion through strategic acquisitions. We believe these are attractive opportunities for Acadia to acquire existing facilities and implement our operating model and make the necessary investments in both the infrastructure and service offerings to enhance the level of care. We believe both our disciplined approach to capital allocation and our strong balance sheet that we have maintained since exiting our U.K. business both position Acadia as a proactive acquirer. In conclusion, we're pleased with our continued progress across our four growth pathways. We expect to add approximately 600 beds in 2022 through approximately 300 bed additions to existing facilities, opening one inpatient de novo, two facilities with JV partners, and at least six CTC locations. Acadia has demonstrated consistent execution with favorable results through the first half of 2022, and we believe the strong demand trends across our service lines will support continued growth. We're uniquely positioned to meet this demand with enterprise capabilities that extend across 239 facilities, offering diversified service lines and patient-centered care. At this time, I will now turn the call over to David Duckworth to discuss our financial results for the quarter.

Thanks, Chris, and good morning. Looking at the second quarter, we delivered strong financial and operating results as we successfully delivered on our key performance metrics, demonstrating consistent execution of our strategy. Revenue for the second quarter increased 11.9% to $651.7 million compared with $582.2 million for the second quarter of 2021. Our revenue growth includes an increase in same facility revenue of 8.5% compared with the second quarter of 2021, including an increase in revenue per patient day of 7.8% and an increase in patient days of 0.7%. Our revenue per patient day growth continues to reflect rate increases received across many of our payers, geographic markets, and service lines, as well as a favorable payer mix. Additionally, during the second quarter, the company received a one-time payment of $5.4 million from one of the states in which we operate. Our adjusted EBITDA was $165.9 million for the second quarter of 2022 and adjusted income attributable to Acadia stockholders per diluted share was $0.91. The company recorded income of $8.6 million during the second quarter of 2022 related to the Provider Relief Fund established by the CARES Act. Excluding this income, Acadia's adjusted EBITDA for the second quarter of 2022 was $157.3 million, and adjusted income attributable to Acadia stockholders per diluted share was $0.84. Adjusted EBITDA and income exclude transaction-related expenses and their income tax effect. Our balance sheet remains strong with ample liquidity, flexibility, and capital to support our growth strategy and future investments. Our operating cash flows were strong during the second quarter and first half of 2022, reflecting our positive operating results and working capital trends. Additionally, we received approximately $22 million of distributions from the Provider Relief Fund and American Rescue Plan during the second quarter. This funding will be further evaluated in the second half of 2022 and is not included in our financial guidance. During the second quarter, the company continued its repayment of amounts received pursuant to the Medicare accelerated and advanced payment program under the CARES Act. Of the $45 million of advanced payments received in 2020, the company repaid $25 million in 2021 and made additional payments of $15 million through the first half of 2022. We will continue to repay the remaining $5 million balance throughout 2022. We will also pay the remaining $20 million of the approximately $39 million of 2020 payroll tax deferrals in the second half of 2022. Looking at our debt position and activity. We paid down $75 million during the second quarter and $85 million in the first half of 2022 on our revolving line of credit. As of June 30, Acadia had $120 million in cash and cash equivalents and $515 million available under our $600 million revolving credit facility. Our net leverage ratio at the end of the quarter was approximately 2.1. Moving on to guidance. As noted in our press release, due to our strong financial performance through the first half of the year, we have increased our financial guidance for 2022 as follows: revenue is in a range of $2.56 billion to $2.6 billion; adjusted EBITDA, including income from the Provider Relief Fund in a range of $591.5 million to $621.5 million. Adjusted EBITDA, excluding the income from the Provider Relief Fund, is in a range of $583 million to $613 million. Adjusted earnings per diluted share, including the income from the Provider Relief Fund, is in a range of $3 to $3.25. And adjusted earnings per diluted share, excluding the income from the Provider Relief Fund, is in a range of $2.93 to $3.18. Operating cash flow is in a range of $380 million to $430 million. And expansion capital expenditures are in a range of $240 million to $280 million. 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 in the second half of 2022. With that, Joe, we are ready to open the call for questions.

Hi, good morning. Revenue per patient day was up almost 8%, driving the majority of organic revenue growth. Can you break out the pricing increases by payer for us? And are there any significant revenue streams that you would call out as being sensitive to either the public health emergency or some other government support programs? Thank you.

Yes. Andrew, we saw another quarter of strong revenue per day trend that we've seen in the past several quarters, and that is driven by payer rate increases that we've received. And we have received rate increases pretty broadly across the different payer types and service lines and geographic markets that we operate in. Of the 7.8% that we reported for the second quarter, the one-time payments that we highlighted contributed about 1%, but we would attribute most of the revenue per day growth, somewhere between 5% and 6%, certainly to rate increases that we're broadly receiving across our payers. And it's been consistent. We would not highlight any specific payer or service line in market. Our managed care and our financial operations team have just done a great job over many years working with our payers on those rate increases. With respect to the public health emergency, certainly our Medicaid business is the coverage that we're focused on there as to what impact that might have over the next one to two years, as certainly many states may look at their Medicaid eligibility. But that's the only stream of our patients that we would be focused on as it relates to that and continue to believe that people will continue to have access to mental health and addiction treatment as that might change where that coverage is from. We hope that those people would become eligible for commercial or maybe some other type of coverage.

Great. And then you lowered discretionary CapEx by about $55 million. What was the reason for that? And what effect will it have on 2022 earnings?

Yes. When we entered the year, we talked about an expectation that our expansion capital expenditures would step up over the course of the year, really reflecting the joint ventures that were under development and beginning construction. We have continued to just revise the timeline of those projects. We are seeing a step-up in those investments. We invested, I think, $39 million in expansion CapEx in the first quarter and saw that step up to $62 million in the second quarter. We believe that will continue to step up over the second half of the year, but the adjustment that we made to our guidance is entirely related to the timing of those projects. There are no projects that we had planned at the beginning of the year that we have canceled, still planning to complete all of the plans and announcements that we've made before. And we've just adjusted the timing of the step-up in those projects and still believe, we talked about two of our joint venture facilities opening in the second half of this year and another 10 facilities that are in the process of being developed and planned. And the construction is beginning for those 10 facilities and still believe those will open over the next several years. So we're excited about bringing those beds online as quickly as we can, and those plans continue.

Thanks. Maybe first question just on the CTC business. The physician fee schedule had some, I think, some positive developments as it relates to the OTP industry. Still some uncertainty around how they're going to address the Medicare bundle. They proposed a 5% increase. What do you make of all of this? And I guess sort of the follow-up is also if you could comment on just the performance of the CTC segment in the first half and the outlook for the second half.

Yes. The fee schedule that was released provides ongoing support for the Medicare coverage that we have that's still somewhat new. We're two years into that for the CTC business. And so we are happy to see the ongoing coverage and rate improvements for that service line. Each market can be different in terms of how the rates work. So we're still reviewing those provisions and understanding how that affects the different payer contracts that we have across that service line. The CTC business is performing well. We are seeing revenue growth for that service line that's in line with our expectations. A lot of de novo facilities have been opened from 2021 through the first half of this year. Several more will open in the second half of this year. And we continue to have a number of tailwinds as we believe more and more people will have coverage for that treatment, and we will have the capacity to provide that coverage. And so they've had a good first half of the year, and we expect that to continue and are excited to see the ramping and continued de novos in that service line.

I think you mentioned that the business is performing similarly to the overall enterprise. Is the revenue growth higher than, in line with, or below the overall enterprise growth? Additionally, could you discuss the opioid settlement and what implications it might have for you?

Yes. I'll take the first part of that question, Whit. The CTC service line, to the extent it performs ahead of our inpatient service lines as a group, we see an incremental or an accretive impact to our revenue per day growth. And to the extent it's below, we see a dilutive impact to our revenue per day growth. For the second quarter, our revenue growth was almost exactly in line with our inpatient facilities as a group. So our CTC growth is very much consistent with our inpatient facilities as a group. And like I said a minute ago, we're pleased to see that performance.

Yes. And Whit, this is Chris. I'll speak to the opioid settlement funding and just the status there. So just to remind everyone, I mean, overall, we think this is a real positive for the company. The total funding is right at $26 billion, and that's paid to 46 states over an 18-year period. So this is really just beginning. 46 of the 50 states participated in the settlement. There's 20 approved uses of the funding, and some of those are actually geared towards treatment and access. So we just feel like we're positioned well with 142 clinics across 32 states, having these leadership teams that are in place, having existing programs, these proven de novo models. And I spoke in my prepared remarks about the new facilities that we're bringing up. And then just our state and local relationships and support from the trade associations, I think, will continue to position us well. Many of these states are still in the very early stages of deploying the funding, and many of them are figuring out exactly how they will be overseeing it. And we're in active dialogue with many of these states that have been a little bit ahead. I think it's too early for us to quantify the impact, but we do think there will be a significant benefit. And obviously, this is a huge societal problem. And as a leader in the space, we think that we really want to continue to expand access and I think are going to continue to really focus there. So overall, I think we are very well positioned, but there's a lot that is going to play out over time.

Okay. Thanks, guys.

Great. Thanks. The strong pricing, obviously a welcome sight. But I guess I was a little bit surprised that the volume metric wasn't better in the quarter. I mean, obviously, we're all aware of the secular drivers to that demand growth. So why isn't that demand growth translating into something more than 1% volume growth?

Yes. Kevin, we continue to see strong demand. We talked about this some in our release and in our opening remarks. But we did see throughout the quarter that a number of our facilities had an increase in the COVID cases in their patients and their employees. And we've always said that that can cause a temporary disruption in our admissions and in our outpatient days. January was certainly the highest month of COVID cases that we've seen this year, but we had really seen a significant decline from February to April and saw an increase in the later part of April through May and June. And so I think without that, we would have seen a stronger occupancy and stronger patient day growth. We certainly expect in the second half of the year to return to what we expect. We're excited to bring bed additions on. We have a number of beds opening in the third quarter that I think will continue to drive a return to the 3% plus volume growth. And then lastly, we did see just a very strong second quarter in 2021. The occupancy was the strongest in that quarter of all the quarters that we saw throughout last year. And so we are up against a comp. But I think with the bed addition coming online with some of the COVID disruptions, we think settling out over the second half of the year, we should see a return in that volume growth to what we've seen historically.

It sounded like you were indicating that the COVID disruption experienced some fluctuations during Q2. I'm uncertain about how Q3 has begun. Additionally, when someone contracts COVID, does that affect your rates? Or are your rates not significantly influenced by COVID? I'm trying to understand if there are any potential rate changes if COVID is no longer a factor.

We do not receive any benefit from COVID in terms of an add-on to our rate. When we treat a COVID patient, if they don't have a medical need to be discharged, we continue their treatment, but we have protocols to isolate them and possibly other patients who may test positive. This may mean dedicating a unit to those COVID patients, which can limit additional admissions to our facility. If a significant number of employees are unavailable, it can be challenging to fill those positions in a way that supports volume growth and occupancy. This has been a temporary challenge we've faced and has varied in different markets during the second quarter. It did not build consistently throughout the quarter. May was our strongest month overall, but we are optimistic about starting the third quarter and seeing an acceleration in growth rates compared to the second quarter.

Okay. Thank you.

Good morning, guys, and congrats on the quarter. Chris, I guess as I think about the cash generation of the business and where your balance sheet is today, I mean, obviously, a lot of cash coming through, just wondering how you're thinking about capital deployment now and kind of like the opportunities you're seeing in the market for M&A and where your mind is in terms of what kind of assets you're interested in.

Yes. I mean we clearly have an opportunity to deploy capital in numerous growth areas as we've gone through in the past. I think as it relates, and clearly talked about some of the real tailwinds we're seeing with our joint ventures as well as the de novos and just building out existing beds. But I would say on the M&A front, with our strong balance sheet, I mean we have been very disciplined in the past. As David referenced, we're down to only 2.1 times leverage. But I think we have the opportunity to be opportunistic but also patient. And we've been very proactive in getting out there and meeting with companies across the service lines. There has been a particular focus on the acute side and looking at facilities that are in attractive geographies for us that meet our profile. And I think this is a process over time where, given some of the valuations that we've seen in the last year, there will be more and more companies that are interested in a partner, we think, over time. And it's incumbent on us to build that relationship and to get out and meet with them proactively, which we're doing. So we feel optimistic that with our balance sheet that we'll continue to see numerous opportunities. We're working hard on that every day and just continuing to be proactive here moving forward and look forward to discussing it in more detail.

That makes sense. And then I guess a follow-up question for me. I saw the bill that was proposed in the house, the Restoring Hope legislation. Just curious what your thoughts are on that and how you think that could benefit Acadia if that's passed.

Yes. I mean it's passed the House in June and still prepared to go to the Senate. But I think overall, there's several components of the bill that we think are advantageous to us. I think some of the changes in federal opioid treatment standards overall, particularly for mobile units that previously had to be separately registered, we have a number of mobile units already. And so being able to increase access to rural and just transportation challenges, communities will be beneficial for us, too. There also have been some adjustments to the number of cases that a physician or a provider could care for. And so just given the eligible lives that we're managing, we think that that will ultimately benefit us as well. And then there's also a number of just expansion of access that the bill is appropriating over time that we think will benefit us also. There's a number of additional things in the bill, just screening treatment for maternal mental health and substance use disorder, all things that we think ultimately are advantageous to Acadia overall. So we're very supportive of this bill and look forward to just watching it advance and doing everything that we can with our partners on the lobbying side and with NABH, et cetera.

Hi, everybody. I have two questions. First, it seems to me there may be an increase in joint venture announcements. Can you comment on whether you believe this is happening and what the future pipeline looks like? Is this being driven by hospitals facing labor challenges, leading them to say they need to offload certain responsibilities, or is there another factor contributing to this increase in joint venture wellness? Also, has there been any change in the structure of these deals as more of them are being announced?

Yes. A.J., this is Chris. I'll take that. Thanks for the question. I mean I would say that the pipeline continues to build. I mean there's a number of reasons that Acadia has continued to be chosen as the partner of choice. I mean I think it starts with just the expertise that we have around behavioral that these partners just increasingly tell us is lacking. And just our focus and core competence around behavioral is differentiated. Our track record obviously speaks for itself. But I think also just the capital that we can bring to these facilities and just the track record, the referenceability have all been instrumental. And I think the pipeline continues to look and will continue to look very strong. We've talked in the past about our hope of continuing to add four to five JVs into next year, and we still feel very comfortable about that. If anything, we're looking at are there ways to accelerate that. And so overall, we just feel very good about not only the pipeline but our current and prospects around execution as well.

I was just going to say, A.J., the terms of those joint ventures and the way we think about the structure has not changed significantly. I didn't want to leave that question unanswered.

Yes. So several things on that. I would say we're big believers in leveraging technology in the virtual world. And I think there's significant opportunity for us in the future. I think we're trying to be very focused right now on how can we leverage technology to really gain cost efficiencies and generate revenue enhancements with the core business today. I think there's also significant opportunity around analytics. I think just as an industry, most would recognize that behavioral providers are just behind relative to other parts of health care. And there's a number of reasons for that. I mean just the lack of investment in meaningful use means that all behavioral providers seem to have less mature EMR systems, don't have the scale and the ability to track patient outcomes and then ultimately to prepare for the continued move towards value-based care. So I think there's a lot of opportunity around analytics in addition to some of the things that we can do on the virtual side. And then 988 clearly has now been launched, still very much in the early days. We're trying to do everything we can to be as supportive as possible. Given our extensive capabilities and our call center capabilities, we're looking for continued ways to plug in on that. But it is still very early on 988, but we're glad to see it off to a good start.

Hey, good morning. So the Medicaid rate cycle is usually July 1. So do you have a number for just what the rate looks like there and if that's going to be bigger than a red box in the back half of the year?

The Medicaid rate cycles vary by state. Some states have a new year that begins in July, while others begin in October. We work with numerous states from a Medicaid standpoint and have many managed Medicaid payers in those states. We are seeing positive rate discussions and increases from these payers throughout the year. Therefore, we do not anticipate any specific changes related to July. However, we expect that there will be rate increases taking effect in the second half of the year, as rates are negotiated continuously with all of our payers, except for Medicare, which typically aligns more consistently with an October 1 start date.

Chris, did you notice he didn't give me a single number? That was well done, David. Not a single number in that answer. So looking for a number, the second question, my follow-up is how much did the Medicare coverage affect the growth in MAT when it was layered in? And what's your approximate Medicare mix there? And then could you just kind of size the revenue mix this year, this quarter, 2Q '22 versus 2Q '21? Any of that would be helpful. Thank you.

Yes. John, as we look at the CTC business, which did have the Medicare coverage beginning in early 2020, we've certainly seen that mature to a place where we think it's settled out. And for the last quarter, it was around 18%. We've really seen it be consistent around that 18% level. And we do believe that more individuals gained access to treatment through that coverage, but there's also some just shift where self-pay or Medicaid coverage could have shifted over to Medicare coverage. So it's a combination of a shift as well as more coverage. And then our overall payer mix has been very stable. Medicaid continues to be about 50% of our revenue. Commercial is just over 30%. And then Medicare overall for the company is right at 15%. And there are several numbers that I just gave you to make up earlier.

I was asking the MAT mix of revenue, not the overall payer mix. So what's that kind of this year versus last year?

Yes, earlier we mentioned that the CTC business was growing at a similar rate to our inpatient business, which is 16%. It has remained consistently around 16%. So, you can estimate it at approximately $300 million annually.

Good morning. Thanks for taking my question. You actually have Ben Rossi filling in for Matt here. So just regarding the patient acuity, when looking at revenue per patient day and length of stay, we're seeing that strong growth in rates with length of stay remaining elevated compared to previous years. Is that a reflection of the type of acuity case that you saw this quarter? Or is it possibly more related to your discharge capabilities? And then how do you anticipate the cadence looks for the remainder of the year? Thanks.

We have analyzed our length of stay by service line, considering the various programs within each line, and observed that it has remained relatively stable. We believe that patient acuity plays a role in determining length of stay. Additionally, the different types of patients and programs we offer can influence this metric. For instance, we have specific programs tailored for children and adolescents, and we have units in many acute facilities dedicated to this population. These patients generally have a longer length of stay, and we've experienced growth in that service area along with the variety of programs. Therefore, this could contribute to our overall length of stay. Moreover, we've noticed that patients are remaining in treatment for slightly longer periods, particularly in our specialty business, as they navigate through the continuum of care. This also supports our strong length of stay. We anticipate that these trends will continue, similar to what we observed in the second quarter.

Got it. And just a quick follow-up here. You mentioned the bed additions possibly being attributed to some volume growth during 3Q. Can you just give me some idea of the timing of when these additions will officially roll out and be operational?

Yes. We do have more than 150 of our 300 beds for this year opening in the third quarter and are excited about those beds coming online. Depending on the size of the project and other factors, we should see a variety in the ramping of those beds. But our team has a very strong track record of very quickly filling those beds, staffing those beds, and having them contribute to volume growth. So the way that a project would ramp up does depend on the size of the project. But we believe those new beds will contribute to growth in the second half of the year.

Thank you. I wanted to understand a little bit better what the assumptions are in guidance for your cost trends. So are you expecting a moderation or flatter uptick in your supply cost and labor cost trends in the second half versus what you experienced in the first half?

Sarah, we estimate that about 70% of our operating expenses are related to labor, with the remaining 30% consisting of a variety of smaller costs. We view these costs in terms of ranges, making it challenging to predict the exact outlook for the latter half of the year. We hope to see some easing in wage inflation, utilization, and rates for premium labor alongside other costs. If our guidance skews towards the higher end, it would indicate a notable improvement in the trends we've observed in the first half of the year. Meanwhile, the lower end of our guidance would suggest that cost growth continues at the same pace. Our baseline expectation is for this trend to persist, with perhaps a slight easing in wage inflation, although making precise projections remains difficult.

Got it. And if you take a step back and you look at your cost trend inflation versus your pricing growth, you talked about the 5% to 6% core on commercial. Are you guys in a positive spread situation this year where pricing growth is exceeding cost trend growth?

No. We think that those two metrics are fairly correlated over the last several quarters. We've seen operating expenses per patient day grow at just over 5%, and we've seen our wage inflation at just over 5%. So we think that we've been fairly closely correlated between those two increases.

Okay. Before we end the call, I just want to thank our committed facility leaders, clinicians, and over 22,000 dedicated employees across the country who just have continued to work tirelessly to meet the needs of patients in a safe and effective manner. Thank you all for being with us this morning and for your interest in Acadia. And if anyone has further follow-up questions, please do not hesitate to contact us directly. Have a good day, everyone. Thank you.

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