Earnings Call Transcript - ACHC Q4 2025

Operator, Operator

Good day, and welcome to the Acadia Healthcare's Fourth Quarter 2025 Earnings Call. Please note this event is being recorded. I would now like to turn the conference over to Mr. Patrick Feeley, Senior Vice President, Head of Investor Relations. Please go ahead, sir.

Patrick Feeley, Senior Vice President, Head of Investor Relations

Thank you, and good morning. This morning, we issued a press release announcing our fourth quarter 2025 financial results. This press release can be found in the Investor Relations section of the acadiahealthcare.com website. Here with me today to discuss the results are Debbie Osteen, Chief Executive Officer; and Todd Young, Chief Financial Officer. 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 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 2026 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 fourth 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 Debbie.

Debra Osteen, CEO

Good morning, everyone, and thank you for joining us. I'm pleased to be with you today on my first earnings call since returning as CEO. I want to begin by recognizing our clinicians and employees across the country. The work you do every day makes a meaningful difference for patients, families, and communities, and I am grateful for your dedication. I also want to thank our leadership team, partners and Board for their support during this transition. Our mission remains unchanged, and my focus is on stability, execution and clear communication. Since returning, I've spent time assessing the current operations at Acadia. I know this industry. I know many of our teams and I understand what drives quality and performance in behavioral health care. My approach is grounded in focus and accountability. I am committed to supporting our teams in the field to drive strong fundamentals and consistent execution across the organization. With that context, I want to briefly reflect on the leadership transition and how I'm approaching this role. My intention is to bring steady leadership, reinforce operational discipline and help position the company for success in both the near term and the long term. I have great confidence in our teams and in the long-term direction of the company. And I am fully committed to supporting Acadia through this next phase of improvement. Let me now outline the most important priorities that are guiding our work. The first area of focus is the quality of management at all levels. I believe that performance in our business starts with having the right people in the right positions, both at corporate and in the field. I'm reviewing leadership depth and the layers of operational supervision with the goal of ensuring our teams in the field are supported. We are returning to fundamentals. This includes a tighter operating focus and faster escalation when issues arise. Many operational misses result from missed details rather than flawed strategy. The need for behavioral health services remains strong. Our focus is on ensuring we consistently meet that need. We will continue to maintain strong relationships with our partners, align staffing and provider coverage with patient needs and remove internal barriers that slow problem solving. Our priorities translate directly into what we need to achieve at the facility level. Some of our newer facilities have not ramped as quickly as expected. There is no single cause. We are evaluating each facility individually and we will be building a clear, standardized approach to our new hospital openings. We are focused on the 2026 openings and have adjusted our planning process to ensure successful execution. Alongside this work, we continued to expand our presence through joint ventures with leading health systems. In 2025, we opened new joint venture facilities with Henry Ford in Michigan, Geisinger in Pennsylvania, Ascension in Texas, ECU Health in North Carolina, and Fairview in Minnesota. Each partnership is tailored to the needs of the local system and community. And we work closely with our partners to ensure alignment of mission, priorities and values. We are excited about these opportunities to better serve the needs of the local community and advance our position as a leading provider of behavioral health services. As I look across the business, I am encouraged by the significant opportunity. The company has added more than 2,500 beds over the past 3 years and is on track to add an additional 400 to 600 beds in 2026. After a period of record expansion, the priority now is to shift our focus toward operational excellence and execution. The environment is not without challenges, but there is a large opportunity to unlock the EBITDA and free cash flow potential within our existing facilities. Relative to the start-up losses included in our 2025 results, the incremental EBITDA opportunity represented by the new facilities opened from 2023 through 2026 exceeds $200 million. Given my history in this industry and with Acadia, I am confident that we are well positioned to deliver on this opportunity. Our operational and clinical priorities also guide how we deploy capital. We intend to allocate capital with discipline. Each project must stand on its own merits, supported by clear market fundamentals and patient needs. In parallel, we are evaluating our service lines in a comprehensive manner, always with a focus on long-term value creation. At the same time, quality and patient safety are the foundation of everything we do. That's what drives our mission and our results. We keep it simple. We measure what matters. We look at it every day and we act fast when something doesn't look right. Our quality dashboard gives leaders real-time visibility into more than 50 measures so we can spot issues early and share what's working across our facilities. And building on the data that was shared last quarter, we're expanding outcomes tracking across more programs in 2026, so we can be more transparent about patient progress over time. The early results are encouraging, and we've begun to share them on our website. The industry is also operating in a more active survey environment, and I'm pleased with how our teams have performed, including strong accreditation survey results. Surveyors are spending more time on units, talking with patients and directly observing care and we welcome that accountability. At the same time, we're moving faster on prevention. Because of the investments we've made in technology, we are able to identify patterns that may signal safety risk earlier, so we can intervene sooner and prevent harm. Finally, regarding regulatory matters, we are cooperating fully. I will not comment on timing. My focus is on the recruitment and retention of highly qualified leadership and staff that deliver high-quality care to our patients. These are factors we control, and they are critical to reducing risk and maintaining consistency across the business. As we look ahead, the operational priorities we have in place provide us with a solid foundation. We are aligning our teams, sharpening our focus and reinforcing the execution discipline to support more consistent results. With that, I will turn it over to Todd to review the financial details and our expectations for the year.

Todd Young, CFO

Thanks, Debbie, and good morning, everyone. Turning to our fourth quarter results. We reported revenue of $821.5 million, representing a 6.1% increase over the fourth quarter of last year. Adjusted EBITDA for the quarter was $99.8 million. Fourth quarter results included a $52.7 million adjustment to the company's reserve for professional and general liability, in line with the updated guidance that was provided on December 2, 2025. For the full year 2025, we generated revenue of $3.31 billion, an increase of 5% over the prior year and slightly above the upper end of our guidance range of $3.28 billion to $3.3 billion, a reflection of improved volume. Adjusted EBITDA was $608.9 million, near the upper end of our guidance range of $601 million to $611 million. In the fourth quarter, same-facility revenue grew 4.4% year-over-year, driven by a 1.3% increase in revenue per patient day and a 3.1% increase in patient days, an improvement over recent quarters. Included in fourth quarter results was $12.8 million in start-up losses related to newly opened facilities compared to $11.2 million in the fourth quarter of 2024 and $3.6 million in net operating costs associated with closed facilities. On a same-facility basis, adjusted EBITDA was $152 million in the fourth quarter. We invested $93 million in CapEx in Q4 and a total of $572 million for the full year of 2025, nearly $50 million favorable to our prior guidance. Costs related to managing the government investigation were $12 million in the fourth quarter, down 69% sequentially. From a balance sheet perspective, we remain in a solid financial position. As of December 31, 2025, we had $133.2 million in cash and cash equivalents and approximately $595 million available under our $1 billion revolving credit facility. Our net leverage ratio stood at approximately 4x adjusted EBITDA. Moving to development activity. During the fourth quarter, we added 181 beds, including 144 beds from the opening of a new joint venture facility in North Carolina. For the full year 2025, we added 1,089 beds, exceeding the high end of our guidance range. This includes 778 beds from opening 6 new facilities. As previously discussed, over the course of 2025, we made the decision to close 5 facilities, including 4 specialty facilities and 1 acute care hospital. These closed facilities totaled 382 beds. Looking forward to 2026, we expect to add between 400 and 600 new beds, primarily through the opening of new facilities nearing completion. This includes 3 facilities with joint venture partners, including new hospitals with Tufts Medicine, Methodist Health and Orlando Health. During the fourth quarter, we also opened a new de novo in our CTC line of business, bringing the total to 15 new CTCs added to the full year 2025. De novos in our CTC line of business continue to be a capital-efficient way to expand our footprint into new markets that are underserved. Turning to our 2026 outlook. We expect full year 2026 revenue to be between $3.37 billion and $3.45 billion and adjusted EBITDA of $575 million to $610 million. We expect adjusted EPS of $1.30 to $1.55. Full year guidance includes the following assumptions: we anticipate full year same-facility volume growth between 0% and 1%. This growth is driven by the incremental contribution from ramping beds, including approximately 630 beds that will be added to the same-store bucket in Q1. That is partially offset by an approximate 350 basis point headwind to the same facility growth from changes in the New York Medicaid program, which I will discuss further in a moment. Moving to pricing. For the full year, we expect a 2% to 3% increase in same-facility revenue per patient day. This includes a decrease in Medicaid supplemental payment revenue for the full year 2026. As a reminder, our fiscal year 2025 results included a nonrecurring $34 million revenue benefit from Tennessee's supplemental payment program, which was recorded in the second quarter of 2025. We also expect to recognize $11 million of out-of-period supplemental payments in the first quarter of 2026. Guidance does not include any programs that have not yet been approved. We estimate certain programs currently awaiting regulatory approval represent at least a $22 million EBITDA benefit if approved this year. Start-up losses are expected in the range of $47 million to $53 million compared to $56 million in the prior year. Guidance assumes start-up losses will be weighted towards the early part of the year with approximately 60% coming in the first half of the year. 2025 consolidated results include approximately $40 million of revenue from closed facilities. The closure of those facilities is expected to create an approximate $9 million tailwind to 2026 adjusted EBITDA. As we previewed in January, the State of New York has decided that it will no longer allow Medicaid patients to receive care in out-of-state facilities. We continue to estimate a $25 million to $30 million annual EBITDA impact. As a result of this change, we are consolidating our footprint in that market and have closed 2 leased specialty facilities. We are actively working to backfill the remaining occupancy in the market. For 2026, PLGL expense is expected to range between $100 million and $110 million, in line with our prior guidance. We anticipate generating positive free cash flow this year as we expect to see CapEx decline to a range of $255 million to $280 million. Moving to our outlook for the first quarter of 2026. Revenue is expected to fall between $820 million and $830 million. Adjusted EBITDA is expected to be between $130 million and $137 million. This outlook reflects the following assumptions: start-up losses of approximately $14 million, the recognition of $11 million in supplemental payments related to the prior year and the impact from severe weather of approximately $3.7 million. I will now turn the call back over to Debbie for closing remarks.

Debra Osteen, CEO

Thank you. As I look across the business, I am encouraged by the strength of demand and the need for our services as well as the significant opportunity across all of Acadia's service lines. Over the last several years, we have expanded our footprint to over 12,500 beds, taking care of 84,000 patients per day. The focus now is on delivering quality care for patients and consistent operational performance. We have the right mission, the right markets and the right foundation to deliver improved results. This work will take discipline and consistency. We remain focused on providing care with the highest standards for our patients and the communities we serve. We are fortunate to have an experienced and dedicated team who provide quality patient care for those seeking treatment for mental health and substance use issues. I am confident in the value we can unlock through focused execution. With that, we are ready to take your questions.

Operator, Operator

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

Albert Rice, Analyst

Welcome back to Debbie. First, I just wanted to ask, I know last year, the company had embarked upon a, I think, what was described as a value creation review with some outside advisers. That wasn't mentioned in the prepared remarks. I wondered, can you just update us on the status of that? Is that still ongoing? Or now that you're back, has that been put on hold?

Debra Osteen, CEO

Thank you, A.J., for welcoming me back. It's not on hold. Our focus right now is on what's ahead, particularly 2026, and ensuring we address some of the issues from 2025. We are always seeking opportunities to create value, which is an ongoing process. While we didn't mention it, it's crucial to consider both short-term and long-term value, and that work continues. As I mentioned earlier, we are evaluating our service lines to ensure they align with the expectations of our shareholders in terms of value creation. There is a strong emphasis on making immediate progress while also looking at long-term value.

Albert Rice, Analyst

Okay, for my follow-up, I know it's still early in your assessment, but we've typically viewed this industry as capable of achieving low to mid-single-digit organic volume growth and similar pricing gains in a normal environment. Additionally, there is potential for margin improvement over time with new developments. Are you noticing any changes? I understand there has been some noise in the past 18 months, but as the year progresses towards normalcy, is there any reason to believe that this growth expectation might be different as you reevaluate the situation?

Debra Osteen, CEO

No, I don't think it's different, A.J. I do think the demand continues to be very strong. And I certainly don't see anything that would impact that either short term or long term.

Todd Young, CFO

A.J., overall, we feel good about where it is and how we're playing out this year. A lot of noise in the numbers over the last couple of years that we think as we get stable here and add to our beds with less closures, we should get back to more of a normal course on the growth side.

Operator, Operator

Next question will come from Whit Mayo with Leerink.

Benjamin Mayo, Analyst

Obviously, there's a lot of embedded earnings inside the organization from all this development activity. I think you framed it as $200 million of incremental EBITDA, Debbie. What's the time frame that you think you could realize those earnings? Is it 2 years, 3 years, 5 years? Just how do we think about the pace of that?

Todd Young, CFO

Yes, Whit, it's Todd. I think we have not defined the pace of it. But clearly, we think it's inside 5 years. We're going to keep doing this based off increasing occupancy. We've added a number of beds since 2023, and we'll add an additional 400 to 600 beds this year. As we look at that on a facility-by-facility basis and looking at it based off occupancy rates, that's how we've calculated out that performance improvement and do think it's inside 5 years. We're not committing, is it 3 years? Is it 4 years? But certainly, it's in this 5-year window as we drive occupancy at all of these new facilities we've brought online.

Debra Osteen, CEO

We built these beds in response to market demand, and we formed joint venture partnerships to address that need. In many instances, these beds have been integrated into our operations. We will act swiftly to remove obstacles and begin to see a return on our investment. There are significant opportunities ahead, and the team is dedicated to moving quickly and collaborating not only with our partners but also in the markets where we are establishing new beds as well as expanding existing ones.

Benjamin Mayo, Analyst

Okay. Maybe just my follow-up, Debbie, I'd just be curious on any of the obvious areas that you see for improvement, whether it's change in the divisional or reporting structure, maybe just more specific details around what you're doing to address. I think you said like removing internal barriers to slow problem solving.

Todd Young, CFO

Operator, next question.

Operator, Operator

The next question will come from Brian Tanquilut with Jefferies.

Brian Tanquilut, Analyst

Debbie, nice to hear back from you here. I guess I was thinking question-wise, as we think through the challenges that the company faced, especially towards the last year at the end of the previous regime, one of the things that got called out was the pressure from managed Medicaid on average length of stay, where approvals on approved days for patients, especially in acute were being pressured. So I'm just curious, how do you foresee pushing against that pressure from managed Medicaid to sort of maintain stability in that length of stay metric?

Debra Osteen, CEO

I've been in the business a long time, as everyone knows. There's always going to be natural fluctuations in the reimbursement environment, not just with managed Medicaid. Some states and payers are more challenging than others, but we address those situations on a case-by-case basis. We have a very stable length of stay, and on a same-store basis, I expect that to remain stable. However, there is an impact this year on length of stay due to the New York Medicaid, which everyone is likely aware of, as those patients tended to stay longer. So we'll see an impact from that. Generally, we consistently advocate for patients when there are concerns about getting authorizations or medical necessity, and we work with our payers to ensure patients are in the right setting. Overall, we have very strong relationships, and this is just part of the behavioral health business. I don't anticipate a significant change this year. We are both doing what we need to do: advocating for the patient while addressing their concerns and collaborating with them.

Brian Tanquilut, Analyst

I appreciate that. And then maybe my follow-up, Debbie, as I think through just the bed adds that Todd laid out for us earlier, I mean, obviously, very exciting. But as we think about, again, the previous regime, there were offsets to the bed adds with bed closures. So just philosophically, as you look through the portfolio today, how are you thinking about the opportunity to grow net beds or kind of like maintaining or maybe even avoiding bed closures at this point?

Debra Osteen, CEO

We have always evaluated our portfolio to determine what makes sense. However, I believe that the accelerated pace of closures we witnessed over the last couple of years is now behind us. We would only consider closing beds if there is no clear path to viability. Our current focus is on operating and improving the existing portfolio, so we are not discussing closures at this time and do not expect to find ourselves in that situation.

Todd Young, CFO

Yes. The only caveat on that is we did close 2 leased facilities in Pennsylvania as a result of New York's decision driving more efficiency by consolidating in bigger locations. And because the leases were up, it just made logical time to close. But otherwise, very aligned with Debbie. The opportunity in front of us is to treat the demand that's out there and look forward to operating all of our facilities.

Operator, Operator

Next question will come from Pito Chickering with Deutsche Bank.

Pito Chickering, Analyst

Welcome back, Debbie. Talked a little about this, but can you give us more details on exactly how you plan to rebuild trust with the referral sources and how you'll change how Acadia operates at the facility level in order to rebuild that trust?

Debra Osteen, CEO

I believe we have strong referral relationships. It's important for us to maintain consistency and focus every day to ensure we provide the high-quality care that our referral sources expect. I think we are already doing that. Regarding some challenges over the past year, particularly with bed ramping, I don't believe that was due to issues with our referral sources; there were other factors involved in getting these hospitals operational. I feel confident in our relationships. We have a dedicated team that actively engages with our referral sources every day to understand their service needs and ensure both their satisfaction and the well-being of the patients. I believe our outcome data will be very beneficial in strengthening these referral relationships, as we are currently achieving very positive results. It’s our responsibility to demonstrate our capabilities to our referral sources, which builds trust. Our track record of providing excellent care for their patients and showcasing that through outcome data is key.

Pito Chickering, Analyst

Okay. Then for the follow-up here, what is sort of your goal on the first 90 to 180 days? Is at the facility level going into each hospital individually? Is it at the divisional level? And as you think about the current utilization of dashboard systems and processes, kind of where do you want to focus on most in the next 90 to 180 days?

Debra Osteen, CEO

My priorities are to enhance our volume, particularly focusing on same-store growth and the 1,200 beds we've added in the past two years. It’s essential to have the right team in place, which I've mentioned before. Improving our operational discipline is crucial, and I'm impressed with the quality dashboards we now have, along with the benchmarking in financial key factors that our facilities need for effective operation. I want to convey to the team that it's important to use the data for problem solving, make decisions, and take action. If something is not in line, we need to act on it. I believe this started from day one when I rejoined the team.

Operator, Operator

The next question will come from John Ransom with Raymond James.

John Ransom, Analyst

Welcome back. I'll also extend my greetings. Considering the long-term capital expenditures, how should we approach the timing of those beyond 2026? Are we going to implement a pause on constructing new hospitals and concentrate on expanding bed capacity? What will capital discipline look like moving forward?

Todd Young, CFO

John, we appreciate that question. I think you see a significant reduction in CapEx in 2026, which is going to lead back to free cash flow growth. We will continue to evaluate opportunities in markets that have high demand and meet our threshold for bed adds, understanding that the cost of construction has increased a lot over the last few years. So that bar has changed versus where it was 3 years ago. With that lens, we'll also look for continued expansion opportunities within existing facilities and the possibility that M&A may be a better option than building depending on what that cost multiple is. But fundamentally, right now, we're focused on delivering in '26, ramping the new facilities we put in the ground and then being very disciplined on CapEx in the years after that as we get back to generating free cash and really showing off the cash-generating power the underlying business has now that we have these beds available and as we fill them.

Debra Oosten, CEO

I want to add to that, John. We are truly concentrating on enhancing the performance at our current facilities. In terms of capital, it needs to justify itself, as I've mentioned. However, we have consistently stated, and I believe it remains accurate, that expanding beds at existing facilities is the most effective use of our capital. There's existing demand, and the overhead and other factors are already accounted for. So, we will be very cautious this year regarding our capital allocations. Regarding M&A, Todd noted we are considering it, but primarily not as a short-term strategy unless an exceptional opportunity arises. Instead, we are more focused on optimizing the beds we have recently added and those we plan to add this year.

John Ransom, Analyst

Okay. For my follow-up on medical malpractice, I understand it's a lagging indicator, but the industry has been in a prolonged cycle where they're adjusting to experience with increased reserves. Where do you believe we stand on this? Are there any leading indicators that might suggest it could peak in the near future?

Todd Young, CFO

It's a fair question, John. Obviously, the PLGL expense was a significant headwind to 2025. We've continued to analyze our claims coming in, and they are consistent with where we were in December relative to that expectation, which is why we held guidance for 2026. As we look out, we're making a lot of investments at the facilities and really focused on the training. It's our people that make the difference. And we think they will continue to provide really quality care. And that will be the driver, understanding that this is part of our industry and we're never going to get incidents to 0. But certainly, our goal is to continue to provide quality care and reduce the opportunities for more lawsuits in the future.

Operator, Operator

The next question will come from Ryan Langston with TD Cowen.

Ryan Langston, Analyst

DSO was up, I think, 6 days year-over-year. Was there a particular payer, maybe group of payers driving this? And is this related to the higher denial rates you've talked about recently? Or just, I guess, anything else to call out there would be helpful.

Todd Young, CFO

Yes, Ryan. It's a good call. We did see some slower payments on a couple of things. A couple of these were nuanced. There were 2 states that had different programs that needed to get finalized, including the supplementals we saw here in Q1 of this year that meant we had to wait for the payments on previous services until those came in. So those monies have started to come in such that I wouldn't be concerned about the DSO. But we did see denials in line with what we expected for Q4, but cash collection is certainly a focus of the team and do expect it will be better in 2026.

Ryan Langston, Analyst

Great. And then just following up. Debbie, welcome back. On the New York and Pennsylvania issue, I guess, are there any other sort of geographies in the portfolio that you could maybe potentially see a similar dynamic where one state limits sort of out of state care to another?

Debra Osteen, CEO

I believe New York is an exception. There is potential for us to diversify our payer mix there. Our reliance on New York Medicaid, as seen with some of our facilities in Pennsylvania, highlights this. However, I wouldn’t categorize this as a risk. Often, states lack the resources to adequately meet patient needs, which leads them to seek care out of state. In this situation, a policy was enforced, and that decision was made. We’re advocating for more resources in New York, while also recognizing the implications of this. We are actively seeking new payer sources and are beginning to see some positive initial outcomes. We will continue pursuing this to ensure that our hospitals in New York remain viable with a different payer mix.

Operator, Operator

The Next question will come from Andrew Mok with Barclays.

Thomas Walsh, Analyst

This is Thomas Walsh on for Andrew. The core EBITDA growth in the bridge seems to outpace the underlying components of rate and volume. Can you help us understand what else is contributing to the 6% to 7% core growth potentially on the cost side?

Todd Young, CFO

Certainly, Thomas. The big driver of the core growth is the ramping facilities opened in '23 to '25. So you're getting an occupancy benefit and just getting the greater leverage in the EBITDA than what you would have at facilities that are already at a high occupancy level. And so that's a big driver of the core growth in the bridge and why we're very confident that the initiatives we're putting in place in these facilities and as they get longer tenured in the markets are getting that traction and driving the growth.

Thomas Walsh, Analyst

Great. And following up, could you help us understand how you're preparing for the changes in California's staffing requirements expected to phase in mid-year? And what's embedded in guidance for this?

Todd Young, CFO

Sure. Now as everyone is aware, California has some new guidelines regarding nursing staffing ratios. The team was working very diligently to be ready for this for January 31. It's been pushed back to June 1. We expected to have about a $4 million EBITDA impact that's embedded in our guidance. Overall, it's really not about us needing more people because we were very well staffed to take care of patients across California, but rather, we now need a higher level of nurse in many cases, which is just an incrementally higher cost to us versus a full FTE, it's at the margin. So that's our expectation for the impact in 2026.

Debra Osteen, CEO

And I'll just add that we're obviously not the only company that's being impacted in California. And we're working very closely with the California Hospital Association, their position, and we certainly agree that if a new regulatory requirement comes in, that there should be an offset in funding for that. I don't want to say that, that's been set, but I do know that there are discussions with the state about putting in new regulatory requirements and the practice and what we believe to be their responsibility to fund that regulation.

Operator, Operator

The next question will come from Ben Hendrix with RBC.

Benjamin Hendrix, Analyst

Welcome back, Debbie. I wanted to talk a little bit about the ramp of new facilities, and I appreciate that you're in the process of assessing those on a facility-by-facility basis. But it does sound like some of the top line outperformance versus the high end of guidance for 4Q was driven by that new capacity. I'm just wondering if there's any early observations on the puts and takes of the ramp pacing? Are there some new projects that are gaining better traction than others? Any high-level thoughts on what might be working, what might be lagging in those new projects in a high level?

Debra Osteen, CEO

As we consider the challenges related to the ramp-up of our new facilities for 2025, we have pinpointed some common themes, particularly the necessity of getting the facilities operational. There are numerous details involved in launching our new hospitals, including construction and staffing. A recurring theme is the requirement for licensure and the capability to bill for patients at these facilities. Once those are in place, the focus shifts from demand to navigating state-specific processes for licensure and billing. We have developed a plan to address these issues early on, and we are confident that as our hospitals begin to open, patient traffic will increase. There is evident market demand, and we must ensure our hospitals are ready as anticipated. However, not all facilities opened on the timeline initially projected, so we are adjusting our processes this year in hopes of improving the ramp-up and addressing the challenges we faced in 2025.

Benjamin Hendrix, Analyst

I wanted to follow up on the Pennsylvania facilities. You mentioned consolidating those and possibly repositioning them for a change in payer mix and focusing more on in-state volume. What is the timing for that kind of shift, considering the significant challenges? Also, are these facilities being considered for a potential exit or strategic review in the near future?

Todd Young, CFO

Ben, that's a great question. We have successfully closed two facilities to consolidate from eight that were affected, bringing the total down to six. We are also excited to open a new facility in New Jersey to start sourcing patients, which will complement our efforts in the Pennsylvania market. We anticipate an EBITDA impact of $25 million to $30 million for 2026. However, we are aiming to improve that outcome as we identify new referral sources and find effective ways to utilize these excellent facilities that provide outstanding care to our patients.

Operator, Operator

The next question will come from Matthew Gillmor with KeyBanc.

Matthew Gillmor, Analyst

Let me echo that, welcome back to Debbie. Maybe following up on the operational discipline discussion. Debbie, you had mentioned a comment about looking at operational layers. I was hoping you could just help us sort of unpack that and sort of understand maybe how the team is organized today and what changes you're contemplating and how that might benefit the organization?

Debra Osteen, CEO

We are reviewing both our corporate and leadership structures that support our field operations. My experience in behavioral health and in a public company has reinforced my belief that our corporate efforts must align with field realities. This principle should direct everyone's actions in this office. I have initiated a review of the roles of our leaders, the geographical setup, and their experience levels to ensure they are adequate. We have a mix of new and familiar leaders, and my priority is to identify our essential needs and the support required for our ongoing growth. This evaluation involves considering both corporate and field perspectives. While I won't detail specific changes during this call, we have already begun making adjustments. The team is motivated to ensure we are appropriately sized at both the corporate and field levels, and this will be an ongoing focus in the coming months.

Matthew Gillmor, Analyst

Understood. And then on the fourth quarter volume performance, particularly on patient days, it seems like that came in a little bit better than recent trends and the length of stay improved a little bit and that then drove the upside to revenue or was at least part of it. I was curious how the volumes performed relative to your expectations? And were there any areas of sort of notable strength to call out in terms of the fourth quarter volumes?

Todd Young, CFO

No. We're very pleased with the team's delivery in Q4, as you noted, slightly better than expectations. And that was really pretty broad-based with strength in both acute and specialty.

Operator, Operator

The next question will come from Ann Hynes with Mizuho Securities.

Ann Hynes, Analyst

Welcome back, Debbie. I want to focus my question on cash flow and leverage. So you said earlier on the call that it could take 5 years to unlock the EBITDA. And I'm assuming that's the same timetable for cash flow. I guess that would be my first question. But my real question is, I know you don't want to discuss the outstanding lawsuits. But how do you think about leverage with the potential upcoming settlements with the timing of unlocking the EBITDA and cash flow? Do you have any maybe short-term, intermediate and long-term leverage goals that you could share with us?

Todd Young, CFO

Thank you, Ann, for your question. As I mentioned, we are aiming to unlock that $200 million opportunity within five years. We expect to achieve positive cash flow this year, which has led us to significantly reduce our capital expenditures. Our legal and transactional costs are anticipated to be lower than last year, and we also expect improvements in working capital. All of these factors should contribute to a reduction in debt. As we consider our ongoing legal challenges, we're taking that into account when assessing our leverage in both the short and near term. Ultimately, we expect to see growth in EBITDA and an improvement in free cash flow in 2026, 2027, and 2028. This should enhance our leverage, although there may be additional cash needs for settlements. Nevertheless, we believe our leverage will remain in a manageable range, likely not as low as it has been in recent years due to cash demands, but without posing any risk to the business.

Ann Hynes, Analyst

Great. And the de novos that are not performing to your expectations, what's the drag on EBITDA in 2026? And do you expect that to continue like have these start-up losses in 2027 and 2028?

Todd Young, CFO

No, we expect start-up losses to improve. We're improving modestly in 2026 versus 2025. And as I mentioned earlier, a big part of our core growth is the ramping of facilities opened in '23 to '25, and that continued ramping of these facilities will be the driver of improved EBITDA and cash flow performance in the next few years. So we would expect in '27 given we don't have substantial beds or new facilities opening that those start-up losses would decline more than they are here in '26 versus '25.

Operator, Operator

The next question will come from Jason Cassorla with Guggenheim.

Jason Cassorla, Analyst

Welcome back, Debbie. I wanted to hit on 2026 volume quickly. You've got flat to up 1% total same facility, 350 basis point impact from the New York Medicaid dynamic. You've got facility closures and you've got over 600 beds coming into the same facility stat. I guess could you help maybe bifurcate what the volume growth expectation would be on like a non-Pennsylvania, non-new bed same-facility basis? I'm just kind of like relative to like the over like the 2% to 3% longer term. Just curious on what you're seeing on that front would be helpful.

Todd Young, CFO

Sure, Jason. And as you just rattled off there, we've got a lot of moving pieces that does make this a more complicated baseline than normal. As we called out, we think underlying core growth is in the 1% to 2% range, and then we're going to get a 1% to 2% benefit from our ramping facilities on the '23 to '25 basis. And so again, that ramping facility is going to be a big driver going forward. We've added a lot of new beds to our facilities and to new facilities and JVs over the last couple of years. But again, this drag on the 3.5% roughly from New York Medicaid is the big negative this year that we don't expect will repeat in future years, and then we'll get back to this growth as we ramp our facilities and exit the start-up losses and really drive that EBITDA growth from just getting a higher utilization of the fixed costs of each of the new facilities.

Jason Cassorla, Analyst

Great. Very helpful. And maybe just as a follow-up, I just wanted to ask quickly on the first quarter '26 guidance. If you net out the $11 million of out-of-period DPP benefit that you're expecting to book, it looks like first quarter EBITDA is down about high single digits. '26 guidance, if you net the out-of-periods, it's pretty flat on a dollar basis. Maybe it's the run rate PLGL, maybe it's the maturation of new beds, start-up cost timing and seasonality. But is there anything to call out in the first quarter '26 specifically that might be impacting the guide? Or is it just conservatism given some of the moving pieces?

Todd Young, CFO

No, a very fair question. I think we do have a weather impact here in Q1 that the big storm that really knocked out the team here in Nashville. We had a lot of folks without power for a week. That hit a lot of our facilities because it just hit so many states and so we called out about a $3.7 million headwind there. We do expect that the facilities ramping will create a greater EBITDA benefit in the back half of the year than in the first half of the year. So that also is different than the Q1 run rate would suggest. And then finally, we expect supplementals from just the normal course of already approved programs also has a bigger second half benefit than it does first half. So those are the number of pieces that allows for us to feel good about the acceleration in the EBITDA run rate relative to Q1.

Operator, Operator

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

Joanna Gajuk, Analyst

Debbie, great to have you back for sure. So you mentioned in your prepared remarks also a review of service lines. So can you give us a little bit more color on kind of what metrics you're looking at to kind of make these decisions and maybe early indications which of these service lines you were referring to, were thinking they might require divestiture?

Debra Osteen, CEO

Thank you for welcoming me back. I really wasn't trying to infer that we're going to be taking any action on any of our service lines. What I meant by those remarks is we are wanting to make sure that all of our service lines are performing at the highest level that they can. And I think that certainly, most of the new beds that we've added have been in the acute area. So we're looking at that as a separate focus. But with regard to CTC, we really feel like that's a very important and strategic part of the company. It actually has some very attractive characteristics. When you think about it, it's low capital intensity, it's low labor intensity and we really have just very, very strong predictable demand. So when I reference looking at all of our service lines, what I'm looking at is just where are they performing now, how can we improve that performance? And do we have the right leadership and the right teams in place to see that happen.

Joanna Gajuk, Analyst

If I may, a follow-up on the commentary around new hospital ramp-up. It sounds like it could be construction delays or just approvals. But you also mentioned staff. So can you kind of maybe double down on that topic in terms of are there any markets with some shortages or just issues around staffing? And in particular, also as it relates to some other questions about management or other referral sources, are there any trust issues maybe with local health care workers that it's creating issues staffing new beds?

Debra Osteen, CEO

Staffing is always a priority for us, especially with the new hospital. However, it's not a matter of trust with our referral sources. The challenges we faced in 2025 were primarily related to obtaining the necessary regulatory approvals to open. We've established partnerships because they are strong in their respective markets, and we've realized that we need to leverage that strength more effectively and sooner. Our focus is on collaborating with our partners to meet their needs and ensure their patients can access the new facility. I do not see staffing as a barrier or a trust issue with our referral sources. Since my return, I have met with several partners who are very enthusiastic about addressing mental health needs in collaboration with us, utilizing our strengths. Overall, I believe we are in a good position moving forward, and I don't foresee any issues. Looking ahead, we have strong partners who will be opening facilities with us this year.

Operator, Operator

This will conclude our question-and-answer session as well as our conference call for today. Thank you for your participation. You may now disconnect.