Earnings Call Transcript - ACHC Q2 2025

Operator, Operator

Good day, and welcome to Acadia Healthcare's Second Quarter of 2025 Earnings Call. 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.

Patrick Thomas Feeley, Head of Investor Relations

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 our 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. 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.

Christopher Howal Hunter, CEO

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 timeline 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 that 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.

Heather Dixon, CFO

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, Operator

And our first question today will come from A.J. Rice with UBS.

Albert J. William Rice, Analyst

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?

Christopher Howal Hunter, CEO

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.

Albert J. William Rice, Analyst

On the start-up costs you are incurring, I believe you have increased the estimate for this year by approximately $10 million, if I'm correct. Is this due to accelerating programs that were initially scheduled for next year, which would hopefully improve the year-to-year trend? Or is the ramp-up in the new facilities taking longer than expected, leading to a rise in start-up costs?

Heather Dixon, CFO

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.

Operator, Operator

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

John Wilson Ransom, Analyst

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.

Christopher Howal Hunter, CEO

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.

John Wilson Ransom, Analyst

Regarding A.J.'s question on Medicaid, are you noticing a difference between non-managed Medicaid and regular Medicaid in terms of admissions? Do you have any data on denial rates or prior authorization rates that indicate an increase? I'm curious if this could be related to the shrinking Medicaid population due to redetermination 2.0. Is this a smaller population, or can you point to evidence showing that there has been an increase in prior authorization requirements making it more difficult to obtain referrals?

Christopher Howal Hunter, CEO

Yes. John, I don't have any specific information regarding managed Medicaid plans and their differences. We are certainly going to keep an eye on it, but at this moment, there's nothing concrete to highlight in that area.

Operator, Operator

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

Benjamin Whitman Mayo, Analyst

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 could those go lower or higher?

Christopher Howal Hunter, CEO

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.

Heather Dixon, CFO

I want to add that we initially projected a $20 million impact for the year. However, it appears to be about $3 million worse than we had expected. This is due to the one facility that Chris mentioned, which we are monitoring very closely.

Benjamin Whitman Mayo, Analyst

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?

Heather Dixon, CFO

Certainly. Let me address those points one by one. First, I want to highlight some factors affecting our updated guidance. The start-up losses I mentioned earlier are about an additional $10 million, which results from the quicker opening of beds. However, this is balanced by higher supplemental payments. We now forecast these payments to improve by about $25 million to $30 million compared to our previous expectations. Initially, we anticipated supplemental payments to be stable or increase by $15 million year-over-year, but the expectation has shifted to a tailwind of $30 million to $40 million for the full year. This is counterbalanced by the volume issues Chris has discussed, leading to an estimated $30 million impact for the year due to softer volumes. Regarding your second question about the transition from the first half to the second half and what instills confidence, there are a couple of key aspects to consider. In the second half, we will implement our normal rate updates, which typically occur more frequently during this period. Additionally, excluding Tennessee, we expect an increase in supplemental payments in the second half due to various state-level growths. Moreover, we anticipate a rising contribution from the new beds over the remainder of the year. This includes the 2023 cohort of new facilities, which have now been operational long enough to contribute positively, especially as we head into the second half. Also, we've added nearly 200 new beds this year, which will continue to ramp up throughout the latter half. Lastly, it's essential to remember that we are also comparing against the challenges posed by underperforming facilities that became evident in the last quarter of the previous year.

Operator, Operator

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

Brian Gil Tanquilut, Analyst

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?

Heather Dixon, CFO

Yes. We're noticing some significant improvements and consistency in labor and wage costs, along with a reduction in premium costs, which is all very positive and something we're monitoring closely. As you may remember, we experienced some high labor costs a few years ago, and we have been managing those carefully. Previously, we reported staying below the 5% mark quarter-to-quarter, and we are pleased to see that it has decreased further to approximately 3.5% for the second quarter, indicating stability in that figure.

Brian Gil Tanquilut, Analyst

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. 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?

Christopher Howal Hunter, CEO

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 is going to ultimately cost, but we do currently anticipate a reduction in the costs associated with the investigation over the second half of the year. And anything you'd add, Heather?

Heather Dixon, CFO

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 costs of defending those items is included in our other operating expenses.

Operator, Operator

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

Philip Chickering, Analyst

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?

Christopher Howal Hunter, CEO

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 approvals that we previously streamlined. 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.

Philip Chickering, Analyst

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?

Christopher Howal Hunter, CEO

Thank you for the question. Generally, regarding work requirements, CMS is still developing the regulatory language. The key point for us is that we believe all mental health and substance use treatments will be exempt from the new copays introduced by the Big Beautiful Bill. This will be highly relevant to our patient population overall. There is still some work ongoing with CMS and the language. We believe that a significant majority of the populations will remain exempt. HHS has also mentioned that if a state demonstrates reasonable efforts to implement the rule until 2028, it may be exempted. Therefore, predicting the outcome is challenging. It's possible that many states will delay implementation. Historically, states have had the option to introduce work requirements at the state level, with only a few, like Missouri, opting to do so and subsequently repealing their programs. We are closely monitoring this situation and feel that we are well positioned with our patient population.

Operator, Operator

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

Benjamin Hendrix, Analyst

And I want to congratulate Heather and wish her the best. Considering the smaller aspects of the guidance and how they contribute to it, last quarter you mentioned a $5 million headwind from closed facilities compared to last year and a $10 million rise in professional liability fees. I'm curious if there have been any changes to those elements.

Heather Dixon, CFO

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.

Benjamin Hendrix, Analyst

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?

Christopher Howal Hunter, CEO

Yes, thank you for the question, Ben. I appreciate it. I have several points to address. First, we are continuously evaluating our portfolio. We've previously mentioned that we will not hesitate to close underperforming facilities if we do not see a path to improvement. We have proactively reached out to referral partners to address the issues faced by many of these facilities, and we have seen significant success throughout the year. However, we currently operate 274 facilities, and we will continue to regularly assess the portfolio. If we encounter a situation where we cannot sustain funding without a clear path to viability or strong utilization, we may consider closing that facility. We believe this approach would ensure responsible use of resources that could be better utilized elsewhere. We are also focused on strategic capital allocation to maximize returns for our investors. Furthermore, if a facility does not align with our strategic goals, we want to maintain the flexibility to reassess its operations. This could involve exiting, temporarily closing, or repurposing the facility to better fit our strategy. At the same time, we will continue to expand our bed capacity and open facilities that make sense and promise strong returns, while monitoring all these aspects daily, including with our respected joint venture partners.

Operator, Operator

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

Andrew Mok, Analyst

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?

Christopher Howal Hunter, CEO

Yes. I would just say, Andrew, that we're observing different behaviors from payers that we continue to monitor every day. I wouldn't specifically point out anything related to the immigrant situation. This is all quite new for us as we keep an eye on it. What's familiar is the ongoing tension that has always existed between payers and providers. We will keep monitoring and working through that.

Operator, Operator

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

Matthew Dale Gillmor, Analyst

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.

Heather Dixon, CFO

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

Christopher Howal Hunter, CEO

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 started out, came down a little bit and then went back up and has leveled off.

Matthew Dale Gillmor, Analyst

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?

Christopher Howal Hunter, CEO

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.

Operator, Operator

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

Ryan M. Langston, Analyst

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?

Christopher Howal Hunter, CEO

Yes, thank you for the question. It really varies. One key aspect is that we are very intentional with our referral sources, emphasizing the acuity of our patients. We also make a concerted effort to bring them to our facilities so they can see the excellent work we do daily. We discuss the significant investments we've made in quality and demonstrate our patient monitoring systems, staff safety devices, EMRs, and quality oversight through our Joint Commission and software. It's crucial for them to observe how we put our commitment to quality into action. We've experienced great success in this area. While we strive to get them on site, we've effectively communicated the benefits of our technology and quality investments, translating them into strong results. Additionally, our patient satisfaction scores are high, and we intentionally measure these metrics. Even with involuntary admissions, satisfaction remains robust. We share these scores as they become available and we actively provide data on patient outcomes, showing improvements in patients’ clinical conditions and quality of life due to our care. All available data indicates that the outcomes have been positive, and we continue to share patient experiences and outcomes, which has proven to be very successful.

Ryan M. Langston, Analyst

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?

Christopher Howal Hunter, CEO

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.

Operator, Operator

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

Joanna Sylvia Gajuk, Analyst

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're 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?

Christopher Howal Hunter, CEO

That's exactly right.

Joanna Sylvia Gajuk, Analyst

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?

Heather Dixon, CFO

Yes.

Joanna Sylvia Gajuk, Analyst

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 the fourth quarter. So do you still expect mid-single digits growth in volumes in Q4 because of the easier comps?

Heather Dixon, CFO

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.

Operator, Operator

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

Jason Paul Cassorla, Analyst

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?

Heather Dixon, CFO

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 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.

Jason Paul Cassorla, Analyst

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?

Heather Dixon, CFO

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.

Operator, Operator

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

Raj Kumar, Analyst

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 as underperforming, maybe driving that near-term constraint?

Christopher Howal Hunter, CEO

Yes, thank you for your question. Health care is definitely local, with each facility operating in a distinct market. We must take this into account for every single one. While there can be staffing issues and potential challenges, I believe we have effectively identified these situations. I don't have any specific concerns to raise on that front. The demand, as I mentioned earlier, highlights the importance of our referral sources in these markets. We have been deliberate in focusing our efforts there. Additionally, I want to emphasize the ongoing investments we're making to ensure we provide proper care to our patients, achieving strong clinical outcomes that we can share not only with our referral partners but also with payers. We have done a commendable job in this regard.

Raj Kumar, Analyst

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 highlighted 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?

Christopher Howal Hunter, CEO

Yes. Regarding PHP and IOP, we have always believed that, especially with our strong acute care patient base, transitioning from higher acuity patients to PHP and IOP settings is a natural progression. We have been intentional about making this transition systematically. We have made significant strides in improving referral patterns and ensuring that we are consistently transitioning patients to Acadia facilities. This wasn't always the case, but this area of our business presents real growth potential over time, and we are actively addressing it. While we won't disclose specific metrics at this moment, we will certainly provide more insights in the future. Ultimately, there is a significant opportunity for us to enhance patient outcomes through appropriate care transitions. Therefore, both PHP and IOP will remain a key part of our strategy.

Operator, Operator

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

Christopher Howal Hunter, CEO

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 of 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.

Operator, Operator

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