Earnings Call Transcript - ACHC Q3 2023

Operator, Operator

Good day, and welcome to the Acadia Healthcare Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note that this event is being recorded today. I would now like to turn the conference over to Gretchen Hommrich. Please go ahead.

Gretchen Hommrich, Vice President of Investor Relations

Good morning, and welcome to Acadia’s third quarter 2023 conference call. I’m Gretchen Hommrich, Vice President of Investor Relations for Acadia. Here with me today are Chris Hunter, Acadia's Chief Executive Officer; and Heather Dixon, our Chief Financial Officer. I'll first provide you with our Safe Harbor before turning the call over to Chris. To the extent any non-GAAP financial measure is discussed in today’s call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by viewing yesterday’s news release under the Investors link. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia’s expected quarterly and annual financial performance for 2023 and beyond. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Acadia’s filings with the Securities and Exchange Commission and in the company’s third quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. At this time, I would like to turn the conference call over to our Chief Executive Officer, Chris Hunter, for opening remarks.

Chris Hunter, CEO

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

Heather Dixon, CFO

Thanks, Chris, and good morning everyone. Our third quarter financial performance reflects the continued favorable growth in our business in 2023. We achieved solid top line growth with $750.3 million in revenue for the quarter, up 12.5% over the third quarter of last year. The company recorded income related to the Provider Relief Fund established by the CARES Act of $4.4 million during the third quarter of 2023 and $7.7 million during the third quarter of 2022. Excluding income from the PRF for both periods, adjusted EBITDA for the third quarter of 2023 increased 13.4% to $175.9 million compared with $155.1 million for the third quarter of 2022. Adjusted income attributable to Acadia stockholders per diluted share was $0.91, up 13.8% for the third quarter of 2023 compared with $0.80 per diluted share for the third quarter of 2022. Adjustments to income for the third quarter of 2023 include the impact of the cost of legal settlements, transaction-related expenses, and the related income tax effects of all items. During the third quarter, we evaluated our professional liability reserves, including an acceleration of our periodic actuarial review. While we perform this review process each year and adjust our reserves accordingly, this time we recorded an adjustment to increase professional and general liability reserves by $5.2 million. After seeing increases in the last two years in the form of reserve adjustments, we do not anticipate a meaningful increase in this line item moving forward. Acadia has maintained a strong financial position, providing us the flexibility to deploy capital to support our organic growth strategy and fund potential acquisitions and future investments. As of September 30, 2023, we had $99.6 million in cash and cash equivalents and $520 million available under our $600 million revolving credit facility with a net leverage ratio of approximately 2 times. Before turning to our guidance, let me briefly touch on the settlement agreements we described in the 8-K filed earlier this week relating to three lawsuits involving the company's former Desert Hills facility. Soon after the settlements are approved by the court, Acadia will pay an aggregate $400 million in exchange for a full release and discharge of all related claims. We believe these settlement agreements are a positive step forward and remove uncertainty and future expense associated with the three cases. We currently intend to pay the settlement funds from a combination of insurance, cash on hand, and existing credit lines and expect the entire settlement amount, less any portion covered by insurance, to be tax deductible. We look forward to turning all of our attention to the continued execution and delivery of the best possible care for our patients, families, and communities we serve. And as you can see from the updates to our guidance, our growth in this respect is strong and is expected to remain so. In fact, as noted in our press release, we have increased our full-year expectations for revenue, which are now expected to be in the range of $2.9 billion to $2.92 billion. Also, excluding income from the PRF, adjusted EBITDA is now expected to be in the range of $655 million to $675 million, and adjusted earnings per diluted share are now expected to be in the range of $3.33 to $3.43. Please refer to our press release for all other metrics. As a reminder, the company's guidance does not include the impact of any future acquisitions, divestitures, transaction-related expenses, or the recognition of additional Provider Relief Fund income. With that, operator, we're ready to open the call for questions.

Operator, Operator

We will now begin the question-and-answer session. At this time, we will take our first question which will come from Whit Mayo with Leerink Partners. Please go ahead.

Whit Mayo, Analyst

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

Heather Dixon, CFO

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

Whit Mayo, Analyst

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

Chris Hunter, CEO

Yes. No, thank you, Whit. I'd say all of our service lines are really seeing strong performance. When you look at acute and specialty, they're both up, as well as CTC, RTC is also up, not as much, but I would say primarily the volume growth is driven by acute, specialty, and CTC. And then I would say on the redetermination front, all of the advanced preparation that traces back to really a year ago at this time, we feel like it's really paid off for us and we are not seeing a significant impact on patient volume or payer mix. Just to remind you, when you look at our lines of business, our acute service line continues to outperform and just has seen no noticeable impact from redetermination. Specialty is a little different in that it's protected due to these unique county-level backstop funding mechanisms that we have for patients in Pennsylvania, which is the state that we have most of our specialty Medicaid volume. Regarding RTC business, our experience there just continues to support that our patients are protected because roughly 80% of Medicaid patients are wards of the state, and as a result, they are protected. For us, redetermination is really primarily applicable to our CTC service line, and I would say our patients there are continuing with their treatment either through the reinstatement of Medicaid, switching to another payer, accessing state-based exchanges, and sometimes moving to self-pay as well. More broadly across the country, now that Oregon, which has been the final state, actually started redetermination on October 1, all states have officially launched redetermination. From our side, we estimate just under half, about 40% of our patients have now completed redetermination, and we anticipate this process will obviously continue to move into 2024. I think in summary, we continue to be cautiously optimistic that the impacts will continue to be very manageable. It continues to be a major focus for the company, and we are tracking it very closely. The process continues to vary a little bit by state. CMS came in last summer and encouraged a number of states to pause the pace that they were moving various patients off the rolls. Overall, we believe the impact is going to be modest, particularly in 2023, and our experience to date aligns with this view.

Whit Mayo, Analyst

Okays, thanks again.

Operator, Operator

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

A.J. Rice, Analyst

Thanks. Hi, everybody. I know earlier in the year there was some concern expressed about whether the payment rates when you gave your original guidance that you were seeing sort of across the board would maybe moderate in the back half of the year, but that seems like that's held in there pretty well. I wondered if I could get you for the first question here just to give us some thoughts about what you're seeing in terms of rate updates and maybe you should look into 2024 across your major payer classes.

Heather Dixon, CFO

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

A.J. Rice, Analyst

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

Chris Hunter, CEO

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

A.J. Rice, Analyst

Okay. Thanks a lot.

Operator, Operator

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

Kevin Fishbeck, Analyst

Great, thanks. I guess last night CMS finalized the Hospital Outpatient update, and it included a bunch of things on behavioral health and allowing providers to set up these partial hospitalization programs and things like that. Is that something that you guys would directly participate in? Or is that something that would potentially be increasing competition for the services that you provide?

Chris Hunter, CEO

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

Kevin Fishbeck, Analyst

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

Heather Dixon, CFO

Certainly. Our other operating expenses have been pretty consistent, right around 13% of revenue. If you take out the impact of the $5.3 million reserve adjustment, we would actually be right in line with Q3 prior year, which was 13.3%, and then sequentially, Q2 of 2023 was $13.1. So to answer your question, yes, you can expect that it will come right back in line.

Operator, Operator

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

Ben Hendrix, Analyst

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

Heather Dixon, CFO

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

Chris Hunter, CEO

Yes. A couple of things I'd add. We have been very successful in increasing our net new hires and seeing a decline in the open roles that you referenced. A number of strategies we've put in place, along with some actions that have really helped drive a reduction in turnover. I referenced in the prepared remarks our employee engagement. We did our first-ever employee engagement survey, and we recently did a pulse check to just check on the progress we’re making. We saw a notable improvement over the baseline in a short period of time. The other factor that has really helped us with clinical positions, particularly in reducing turnover for RNs and LPNs, has been our much more intentional approach to training and onboarding new employees. Historically, as a company that has grown by acquisition, we've been very deferential to the facilities to put their own training programs in place. By systematizing training, we've seen a considerable reduction in the turnover of clinical employees because we're better managing their expectations upfront. While we saw this with both RNs and LPNs, we've noted LPNs have shown the most impressive overall improvement. We continue to focus significantly on 90-day turnover across all lines of business, and maintain close collaboration with our operators and HR teams. There are some geographies where we continue to see more challenges than others, but we're doing a much better job overall in the last year by maintaining a close working relationship within our HR department, aligning better with our operators.

Ben Hendrix, Analyst

Thank you.

Operator, Operator

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

Brian Tanquilut, Analyst

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

Heather Dixon, CFO

Yes, if you think about SWB on a per patient day basis, we have typically tracked that, and we have seen – we saw in previous years how that was sort of growing. It has some other contributions that aren't part of the normal operations that contribute to it. This includes, obviously, same facility wage inflation, corporate function cost benefits that are included, startup losses, and closure. So it has all those different effects. If you look at what's happening with SWB per patient day, it's starting to come back in line with what we're seeing on the other sort of base wage inflation. SWB, as a percentage of revenue actually came down about 60 basis points during the quarter. It came down to 6.3 from 7.5. That, of course, continues the decline from the prior year. You can see that aligning better with what you're seeing from a base wage perspective as well.

Brian Tanquilut, Analyst

I'm sorry. Go ahead.

Heather Dixon, CFO

No, go ahead.

Brian Tanquilut, Analyst

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

Chris Hunter, CEO

Yes, thank you. That's a fair question. I think we've done a really good job overall working through this. We saw a spike in construction costs earlier last year, but we've become increasingly better at managing it. This is particularly helpful when working with joint venture partners who have local market expertise. We also have several strategies we employ, such as prefabricated construction, to get ahead of supply chain constraints for materials that are difficult to procure. Overall, we believe we're on track to continue with our growth and manage any difficulties we encounter, as evidenced by the continued progress in our building efforts.

Brian Tanquilut, Analyst

Awesome. Thank you.

Operator, Operator

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

John Ransom, Analyst

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

Heather Dixon, CFO

Hi, John. It's Heather. I do not have a crystal ball. I wish I did. I can tell you that we are really pleased with what we're seeing happening from quarter to quarter in terms of continued steady decline in the base wage rates and those coming in line with what we're seeing on an SWB per patient day. We feel good about where we are and expect to see declines until we get to a normalized rate of inflation. The question we have is what's a normalized rate of inflation? That inflation will continue moving with overall inflation. We feel good that rate improvements will typically follow that, so we expect all of those metrics to move in tandem. We're also seeing our ability to grow rates at a stronger pace than what we're seeing in labor inflation, helping us build operating leverage. Coming back to your corporate cost question, we're seeing corporate costs level off. They surged in the prior year and throughout earlier portions of this year, but we see them coming down slightly and building leverage as a percentage of revenue. I would anticipate that leverage to continue in 2024. It's early for us to provide a good guide for 2024, but we expect to see continued leverage on corporate costs.

Chris Hunter, CEO

Yes, John, this is Chris. I'd just add that I think there is a direct correlation between the investments and the performance of the business, whether it's on the marketing side with record admissions or quality investments that have shown improved quality outcomes. We continue to focus on corporate costs to get operating leverage and have seen a sequential decline quarter-over-quarter since the beginning of the year. We expect that to continue.

John Ransom, Analyst

And just a quick follow-up on the project to digitize your medical records, where does that stand, and are you seeing any payoff from some of the early efforts there?

Chris Hunter, CEO

Yes, thank you for that question, John. We feel great about the continued progress we're making. Several elements of the IT investment are involved. We're implementing remote monitoring technology nearly in all our acute facilities year-to-date, and we're in 45 facilities. We've seen promising initial improvements in patient incidents, and we expect that to continue. On the EMR front, we have implemented an EMR now and expect to end the year at about half of our acute facilities, continuing to deploy it in our specialty facilities and CTC as well. The benefits show up in various ways. We've had strong praise from our surveyors who've come into these recent JV openings, noting the strength of our EMR and patient monitoring. We've consistently heard about the material improvements in patient safety and compliance, which we believe is really important. Staff engagement has also improved as we see better employee engagement in facilities with an EMR compared to those that don't. Recruiting clinicians trained on EMRs becomes easier, helping us with retention too. We are also starting to observe benefits from improved back-office functionality, reduced paperwork, and increased efficiencies that we believe will become more pronounced in the coming months. We're tracking all of this and expect to share more detail later next year, particularly by our Investor Day.

Unidentified Analyst, Analyst

Thanks so much.

Chris Hunter, CEO

Yes, thank you.

Operator, Operator

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

Sarah James, Analyst

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

Chris Hunter, CEO

Yes, thank you for the question, Sarah. It’s difficult to know how others are performing based on their geographies. However, we have extensively prepared for redetermination, particularly with our CTC business where it’s most pronounced. We have proactively engaged with these patients through kiosks in our facilities and by putting QR codes in place to prepare them for redetermination. Many patients come into our clinics with letters stating they've lost their Medicaid coverage, and we assist them. Our dedicated support line helps patients reapply in person when they lose coverage. We've had a high success rate in assisting our patients, particularly our CTC patients, and also in our other lines of business. A majority of our patients who have lost coverage have positively resolved their issues within 30 days, and we expect this trend to continue into 2024.

Sarah James, Analyst

That's great. And then on the Opioid settlement money you've previously discussed, views of it coming down to the county level in 2024 and 2025. Can you provide some timeline? Once it reaches the county level, how long does the grant process take, and when could we see that impacting build-out decisions?

Chris Hunter, CEO

Yes, it's a fair question and one where we wish we had more detail. Every state is a little different. While there have been $50 billion in Opioid settlement dollars, only a small portion has been distributed to the states. The states are slowly beginning to funnel these funds to individual counties. We're partnering with these counties to showcase effective strategies for opioid addiction treatment. We've collaborated with the University of North Carolina for an independent study available for each county. We are demonstrating positive outcomes due to our harm reduction treatment efforts, and have established strong quality metrics recognized by CARF. We're working hard with counties as they prepare to allocate these funds, and while many counties are forming task forces to discuss their specific needs for opioid addiction treatment, we have built a dedicated team focused on grants and are optimistic about capitalizing on this funding as it presents.

Operator, Operator

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

Gary Taylor, Analyst

Hi, good morning. Just a couple of questions. Chris, I just wanted to confirm, I think the latest number we've seen for new bed additions next year is 1150. Given your commentary about all the development, I wanted to understand whether that number is illustrative or if there's a reason to think the bed growth could be even higher than the number you showed us before, and then related to that, just Heather, I know last quarter you talked about generally $15 million to $20 million a year of pre-opening costs that burden the P&L. But with potential bed growth of around 70% next year, should we think about a commensurate increase in that pre-opening burden?

Chris Hunter, CEO

Thanks, Gary. To clarify, we referenced the slide at our Investor Day to emphasize our projection of 1150 bed additions in 2024 and 2025. We're progressing well with numerous hospitals opening next year. The previous target includes our six facilities coming online, of which three are set to be built in 2024, contributing approximately 440 beds, while our de novo hospitals will add another 400 beds. Lastly, we expect about 300 from expansions to existing facilities. We're actively exploring options to exceed the 300 level, which historically has yielded the highest returns. So to summarize, we believe that growth will align with that target, with the possibility of additional increases.

Heather Dixon, CFO

Hi, Gary. To answer your question on start-up costs, we are trending at around $16 million at the end of Q3, which reflects the ramp-up from two JVs Chris mentioned. We'll see this level continue, consistent with Q3 into Q4 at around $6.5 million, noting that we've already raised this number in the back half of the year. For 2024, we expect to maintain this pace. It’ll be commensurate with what we've observed currently, so it's slightly elevated from last year, but we think our current trajectory will stabilize around this rate.

Gary Taylor, Analyst

Got it. Thank you.

Operator, Operator

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

Pito Chickering, Analyst

Hey, good morning, guys. Nice quarter, and thanks for fitting me in. Two quick questions here. One more follow-up on Medicaid redeterminations. As you look at your DSOs tick up slightly sequentially given redetermination has a bigger impact. Can you let us know how you learn if a CDC patient has been re-determined? I believe you bill CDC weekly. So I assume that you know within one or two weeks if that person has been re-determined so that there's minimal risk of billing gravities that you can't collect.

Chris Hunter, CEO

Yes. Thank you, Pito. The process continues to vary by state. We experience states that have proactively informed us when patients will lose their coverage, which allows us much better engagement, while other states lack that transparency and patients can come in with letters indicating they've lost coverage. We've focused our efforts to ensure we can communicate effectively with patients about upcoming changes.

Pito Chickering, Analyst

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

Heather Dixon, CFO

I think that's right. As noted, our other operating expenses have remained around 13% of revenue. If you deduct the $5.3 million charge, we are aligned with Q3 last year at 13.3%, and sequentially, Q2 of 2023 was 13.1%. So, yes, you can expect that to return to its prior levels

Pito Chickering, Analyst

Great. Thank you so much.

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.

Chris Hunter, CEO

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

Operator, Operator

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