Acadia Healthcare Company, Inc. Aktie

Good day, and welcome to Acadia Healthcare's First Quarter 2026 Earnings Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Todd Young, Chief Financial Officer. Please go ahead.

Thank you, and good morning. Yesterday, after the market closed, we issued a press release announcing our first quarter 2026 financial results. This press release can be found in the Investor Relations section of the acadiahealthcare.com website.

Today, Debbie Osteen, Acadia's Chief Executive Officer; and myself, Todd Young, Chief Financial Officer, will discuss the results. 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 first 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.

Good morning, and thank you for joining us. I'm pleased to be with you today to discuss Acadia's results for the first quarter of 2026. Since returning as CEO, I have spent time in the business, listening to our teams, assessing operations and getting close to the drivers of quality and performance.

Our mission is unchanged, and I continue to be impressed by the hard work and dedication of our clinicians and employees across the country and the important work we are doing to provide safe quality care for those seeking treatment for mental health and substance use issues. Across Acadia, we share a clear purpose, meeting a critical need and making a difference in the communities we serve.

As the nation's leading pure-play provider of behavioral health services, we are uniquely positioned to address this growing unmet need with our 275 facilities serving more than 84,000 patients daily. We have a strong foundation. an integrated model of care, a deep focus on clinical quality and a proven operating approach. As I shared in our last call, we are focused on building on our strong foundation with operational discipline and consistent execution to deliver significant sustainable value creation.

I have great confidence in our teams and in the near- and long-term direction of the company, and I am fully committed to supporting Acadia through this next phase of execution and improvement. Our first quarter financial and operating results marked a good start to 2026. We delivered revenue at the high end of our guidance range and exceeded the top end of our adjusted EBITDA and EPS range. Our revenue growth was driven by our acute inpatient psychiatric facilities with 14% growth compared to last year as we increased inpatient volumes by 6.2%.

Our specialty team also delivered better-than-expected results by mitigating some of the challenges in Pennsylvania. On the CTC side of the business, while we grew 2.5% compared to the first quarter of 2025, growth slowed sequentially from quarter 4 as that business was impacted by the severe weather we noted on our February call as certain centers had to be closed during that time. The increase in volumes across Acadia reflects the continued strong demand for our services.

Our revenue growth and strong focus on operational improvements and efficiencies at every level of the organization drove adjusted EBITDA to $144.2 million, $7.2 million above the high end of our guidance. Our good start in quarter 1 is allowing us to raise our full year adjusted EBITDA guidance by $5 million at the midpoint.

Todd will walk through the financial results and our guidance in more detail. For 2026, our primary focus is operational execution and deriving more value from our facilities and recent bed additions. That starts with people, having the right leaders in place and supporting our operators in the field. It also requires clear decision-making and accountability at every level so we can drive stronger fundamentals and more consistent performance across all 4 lines of business.

During my first 3 months, I have conducted talent reviews and reviewed our operational structure across our businesses to evaluate leadership at the facility level and the layers and scope of operational oversight above it. As a result, we have made leadership changes at multiple levels, including bringing new leaders into Acadia.

As part of this review, we have reorganized and restructured our acute service line with 2 changes. First, we reduced the number of facilities and geography within each division to enable greater focus and oversight of our facilities. Second, we have created a new operating group for acute facilities, which will focus on our JV hospitals and recently opened facilities. This included hiring a new experienced leader for this group, who will be focused on continuing to build strong relationships with our JV partners and strengthening our referral networks. These changes in our acute service line are intended to support our teams in the field and improve execution.

Alongside the talent work, my leadership team and I have been engaging directly with our teams to reinforce priorities and rebuild a culture of urgency around access to care and patient treatment. We have also focused on our referral relationships. These relationships are critical, and we are pleased with how the teams at the facility level are prioritizing these relationships and working with these partners. We currently have a strong, diversified referral base across all service lines and regions.

Over the last 3 years, we have added over 2,500 beds in new facilities and through expansions in existing facilities. These investments expand access to care and increase the number of patients we can serve each day. The demand is there, and our goal is to meet that demand with high-quality patient care and ensure that we eliminate barriers for treatment through prompt response times. We are focused on execution, referrals and leadership at all our facilities, but particularly in locations that have not ramped as quickly as expected.

We have completed in-depth reviews of facilities opened since 2023, and each of these facilities now has a clear action plan to expand access to care. As a result of this increased focus, this group's revenue and adjusted EBITDA results in quarter 1 were ahead of our expectations. We remain confident in this group delivering on $200 million of adjusted EBITDA growth relative to 2025. We continue to evaluate each facility and market on an individual basis, and we are applying learnings from past openings through a clearer, more standardized approach to new hospital launches. We are focused on our 2026 openings and have adjusted our planning process to support successful execution.

In early February, we opened our JV facility with Tufts Medicine in Greater Boston. We have 24 beds open today, and once fully licensed, we will be able to serve 144 patients. During quarter 2, we expect to open 2 facilities in partnership with Premier Health Systems. our 144-bed JV facility with Orlando Health and our 96-bed facility with Methodus Jenny Edmondson in Iowa.

Our joint ventures and the new beds added provide an opportunity to leverage our combined expertise and resources with a shared commitment to provide quality care and achieve strong clinical outcomes. While we are reducing our capital investment by over $300 million compared to 2025, we are finalizing investments in these new JV facilities while also adding beds to existing facilities.

In the first quarter, we added 82 beds and are on track to add 400 to 600 beds over the course of the year. This focus on operational execution also drives a focus on efficiency. Over the last few years, Acadia has invested in technology, data tools and process improvements that give our facility leaders better real-time visibility into day-to-day operations. These tools help us make more informed operational decisions and deploy resources more effectively across facilities.

We are aligning staffing resources more effectively with patient needs and operating conditions, improving workforce planning and reducing inefficiencies such as premium labor. We believe this more disciplined approach supports stronger operations, a better working environment for our teams and a more stable care environment for our patients while maintaining our commitment to quality, safety and care delivery.

Our corporate team has also reduced headcount to reflect the renewed focus on supporting our operating teams effectively. This renewed focus on management and expense discipline across the organization contributed to adjusted EBITDA exceeding our expectations in quarter 1. As we have been evaluating all aspects of our business, the most important driver of our success is our people. We are pleased that for the eighth consecutive quarter, our staff retention has improved.

We are focused on talent at every level because the right people with the right training enable us to provide the best care to our patients. We are measuring that care through enhanced outcomes tracking through more programs. The ability to measure and validate outcomes is especially important for collaborating with payers who are very focused on clinical health outcomes for their members.

Positive outcomes are equally significant for our referral partners as they reinforce the rationale behind entrusting their patients to our care. As we look ahead, demand for our services remains strong, and we are focused on consistent execution across our care continuum. Above all, we remain committed to our mission and to providing high-quality care for patients and the communities we serve.

With that, I will turn it over to Todd to review the financial details and our expectations for the second quarter.

Thanks, Debbie. Turning to our first quarter results. We reported revenue of $828.8 million, representing a 7.6% increase over the first quarter of last year. Same-facility revenue grew 7.3% year-over-year, driven by a 5.6% increase in revenue per patient day and a 1.6% increase in patient days. Our Q1 revenue growth was driven by our acute and RTC businesses, which grew 14.2% and 6.3%, respectively. Acute performance was driven by increased patient volumes. In addition, we benefited from supplemental payments in line with the Q1 guidance we provided in February from Ohio and Tennessee that were not in our first quarter results last year.

We were also pleased with the performance of our specialty business as it mitigated a portion of the expected volume losses in Pennsylvania from New York's decision to not provide care for their residents in our Pennsylvania facilities. We continue to be very focused on diversifying our referral base to surrounding states and Pennsylvania. The decline in our specialty facility revenue of 6.5% was driven by the previously discussed challenges in Pennsylvania and from closing specialty facilities in 2025. The closures created nearly a 6% headwind to growth. Our CTC revenue grew 2.5% compared to the first quarter of 2025, but it slowed sequentially as it was negatively impacted by the severe winter weather we called out on our Q4 2025 earnings call in February.

The weather negatively impacted our total adjusted EBITDA in Q1 by $3.7 million, in line with the Q1 guidance we provided in February. Adjusted EBITDA for the quarter was $144.2 million or 7.5% growth over Q1 2025 and $7.2 million above the high end of our Q1 guidance. Our adjusted EBITDA performance relative to our guidance was driven by strong performance across our acute facilities, including, as Debbie mentioned, outperformance from our new facilities opened since 2023.

We also delivered better-than-planned cost efficiencies at both corporate and at our facilities. We did have a $3.2 million benefit related to employee benefit costs that we expect will reverse in the back half of 2026. Our losses from start-up facilities were $12 million, $2 million better than our $14 million forecast, primarily from operating efficiency improvements. We had $3 million in net operating costs associated with closed facilities.

On a same-facility basis, adjusted EBITDA was $199.5 million in the first quarter. From a balance sheet perspective, we remain in a solid financial position. As of March 31, 2026, we had $158 million in cash and cash equivalents and approximately $565 million available under our $1 billion revolving credit facility.

Our net leverage ratio stood at approximately 3.9x adjusted EBITDA. With operating cash flow of $62 million and CapEx investments of $77 million in the first quarter, our free cash flow was a negative $15 million. Our free cash flow improved $148 million compared to Q1 of 2025. As we've previously noted, we expect our total CapEx in 2026 to be between $255 million to $280 million, with the second half of the year being lower than the first half as we opened our 3 new JV facilities in the first half of the year.

We continue to expect positive free cash flow in 2026. We also collected $16 million in cash from the sale of 3 closed facilities.

Moving to development activity. During the first quarter, we added 82 beds while closing 251 beds. The closures primarily related to 2 leased facilities in Pennsylvania and 2 other facilities that have been announced in 2025. Looking forward to 2026, as Debbie noted, we expect to add between 400 and 600 new beds, primarily through the opening of new facilities nearing completion.

While we typically do not provide financial guidance for the second quarter, given the substantial out-of-period supplemental payments received from the State of Tennessee in the second quarter of 2025, we are choosing to do so this year to provide clarity to the investment community. In Q2, we expect to deliver revenue between $835 million and $850 million, adjusted EBITDA of $142 million and $152 million and adjusted EPS of $0.30 to $0.40.

For the full year, our revenue guidance of $3.37 billion to $3.45 billion remains unchanged. While we expect to do better in mitigating our specialty headwinds in Pennsylvania, this improvement is expected to be offset by modestly higher-than-expected levels of bad debts and denials. With respect to our full year expectations for adjusted EBITDA, we are increasing the range from $575 million to $610 million to $580 million to $615 million. For adjusted EPS, we are increasing our range from $1.30 to $1.55 to $1.35 to $1.60.

I want to note that given the significant EBITDA earned in Q2 of 2025 from the Tennessee supplemental plan, our 12-month rolling adjusted EBITDA is expected to be between $559 million and $569 million. As a result, our net leverage will be approximately 4.4x to 4.5x at the end of Q2. We expect this higher leverage to be temporary as we expect to end the year in the 3.9 to 4.2x range we guided to in February.

Our team continues to focus on supplemental payment programs that we are confident will be approved in 2026, but we have not included any unapproved programs in our guidance. We continue to estimate that certain programs currently under regulatory review could add at least $22 million in incremental EBITDA to our guidance if they receive approval this year. Based on the latest insights regarding Ford's plan, the $22 million may be conservative.

I will now turn the call back over to Debbie for closing remarks.

I want to end our prepared remarks by thanking Todd for his contributions to Acadia, and I wish him well in his next chapter. I'm proud of the important work we are doing across Acadia to address a critical need in our nation. For 2026, our strategic priorities are aligned to improve our financial and operating performance through consistent execution.

We are well positioned to apply our scale and expertise to help set the standards for care that address the escalating demand for behavioral health and substance use treatment. We will continue to strengthen our capabilities with discipline, deliver the highest quality patient care and create value for our shareholders. With that, we are ready to answer your questions.

[Operator Instructions] . Our first question comes from Whit Mayo with Leerink Partners.

Debbie, I was hoping that you could elaborate more on the correction plans that you have in place for the underperforming de novos. I hear the organizational changes, the standardization efforts. Just might be helpful to hear more about the specifics on what the action plan is.

We have specific plans, as I mentioned, and they really focus on continued ramping of occupancy into the facility. They focus on access with our partner to make sure that we have communication in place. They also focus on service lines that we might do in each facility. So in other words, what services, what are the time lines? Do we need CON approval? Do we need other licensure for them?

And what we've tried to do is we've been working with our partners to make sure we're aligned with them on these plans. We entered this with them to meet a need they had, and each plan is really tailored to the partner, but also to the market and to the facility and perhaps in some cases, the unique features that we see in some of the states.

Okay. That's helpful. And then maybe just on the payer denials, just maybe a little bit more color on that. What's new in terms of payer behavior? It sounds like that's factored in the full year guide. And maybe just how much of the increase in AR days is influenced by that or is something else going on?

Thanks for that question, Whit. Yes, we thought bad debts and denials have started to stabilize in Q4, but then they continue to get a little bit worse in Q1 than what we had previously expected. We do have good game plans in place to make sure we're doing everything to advocate for our patients and to improve on overall collections. We're having good responses, but they are running a little hotter than what we had expected them to. And so we've reflected that in the full year expectations. That being said, there is a lot of focus at our facility level with the finance ops teams on revenue cycle management and doing our best to make that less than what we've currently forecasted.

And I'll just add to that with -- we are looking at our process and where the improvements can be. We're using tools to enhance what we're doing with respect to documentation, making sure we're in compliance with that. We are appealing denials, as Todd was mentioning. And we've also brought back Larry Hard on a temporary consulting basis. He, as some of you may know, worked with Acadia and retired, but he did an excellent job during my last tenure with just this area. And so he's come in and he's evaluating where and what we need to improve. And I think it's fair to say we have a lot of opportunity.

Maybe just one clarification. Is there any -- was this one specific type of payer? Was it managed Medicaid, something else broad-based? Just maybe a little bit more detail.

It's more broad-based, Whit. I wouldn't say there's any one specific area. So -- but that's why we're taking advantage of it across the entire enterprise.

Our next question comes from Matthew Gilmor with KeyBanc.

I wanted to ask about the seasonality with EBITDA implied in the guidance. It seemed pretty typical versus historicals, at least the way we were looking at it. I appreciate in the deck, you called out the Medicaid supplementals being higher in the back half and then you've also got the impact from the ramping facilities. How are you thinking about the seasonality? Are we correct that it's pretty normal?

And then can you help size the EBITDA contribution from the Medicaid supplementals and the ramping facilities as we think about the back half EBITDA?

Yes, Matthew, thanks for the question. I mean, overall, we feel great on how we've started the year and the performance on the EBITDA and our ability based off a good Q1 to increase our full year expectations. We've tried to be very clear on the cadence with the guidance, just given how volatile the quarterly results were in 2025 that creates some noise into that seasonality.

But fundamentally, what we said at the start of the year and what's driving the back half now is the same thing. It's what you just called out. It's slightly higher supplementals in the back half on a run rate basis, just sort of the core embedded supplementals we have in our business. It's been the ramping facilities.

As we noted, Q1 was better than we expected on the 23 to 25 cohorts. And so that continues to have a bigger incremental year-over-year contribution in the back half. So those are the big drivers. Plus, as Debbie mentioned in the prepared remarks, we have done a number of different cost programs and cost efficiencies at the end of Q1 that we think also provides benefits over the course of the year.

And then as a follow-up on the New York Medicaid issue, it seems like you're obviously doing better there than you thought. I want to see if you could provide some details in terms of how you're backfilling the capacity with those Pennsylvania facilities.

Yes, I'll take that. We have a very active business development team that is working with referral sources in surrounding states. And one of the states is New Jersey. Certainly, we also have been working with referral sources in Maryland, but we've also seen an increase in Pennsylvania referral sources. So it's a very concentrated effort to try and refill these beds. And I will say we're also still focused on working with New York to see if we can reopen those referrals.

We're not at any place right now to talk any more about it because it's a process, but we are in conversation with them. And our referral sources there, I think, have really benefited from having these facilities. So we're focusing and working with those referral sources in New York as well.

Our next question will be from Pito Chickering with Deutsche Bank.

I guess 2 questions here. I guess, one more on bad debt denials. Are the payers pushing back on things like length of stay or the actual coverage once they've been admitted? And is that why the admission guidance was increased, but the patient days were left unchanged?

So overall, the length of stay change we're seeing across the enterprise is more a math exercise, Pito, than it is anything changing in the business. We closed 4 specialty facilities last year, plus we now have the challenges on specialty in Pennsylvania. Those are all just longer average length of stays on average than acute.

At the same time, we've been bringing a lot of new acute beds into our business over the last year, and that's continuing here in Q1 with the opening of Tufts and will continue in Q2 with the opening of Orlando Health and Methodist Jenny Edmundson. And so it's really just a math exercise of specialty beds being down, acute beds being up and those length of stays then working through as we presented. And as you'd guess, right, shorter length of stay in acute with more beds there, admissions are going to be higher while the length of stay of those patients is lower.

Okay. Perfect. And then one more follow back on that's question. Can you actually quantify how much more supplemental payments we get in the back half of the year versus the first half of the year. Can you sort of quantify actually how the ramping facilities should be growing in the back half of the year versus first half of the year?

And are there other things you put in our bridge like the benefit costs were reversing. So any way of quantifying the first half of the year bridge to the back half of the year?

Overall, Pito, I mean, it isn't a massive acceleration in the back half given what we've guided to here for the first half on EBITDA. And so there's a lot of moving parts in our business, as you know. But right now, we're calling out a slight increase in supplementals, high single digits, low double digits, not $30 million sort of thing. And then as you can imagine, we're really excited about what we're seeing and the progress on the ramping facilities. those open from '23 to '25. They overachieved our expectations in Q1. And so that will be the other contributors.

There's also our start-up facility losses, they sort of peak here in Q2, and those get better in the back half as well. So there's a lot of good things happening in the business that will help drive that small increase in second half EBITDA versus first half.

Our next question comes from Ben Hendrix with RBC Capital Markets.

I just wanted to dig into the acute operational restructure a little bit more, specifically around the referral efforts across the acute platform. I just wanted to get an idea of what inning we're in, in terms of the referral network enhancements that you're trying to put through there? And how should we think about the magnitude and timing of what you're trying to achieve in acute?

Ben, the referral sources are really critical, as you know, to our business. And we've always had good, strong relationships with them, really, and I mentioned this in the prepared remarks through all of our service lines. What we're really focused on, though, is making sure that they're seeing our outcomes, making sure that we make it our access, we're not putting up barriers for them to refer.

We are in communication with them about what services they believe their patients may need. And so there's a very strong team that works with our referral sources. In specialty, they are called treatment placement specialists, and they work with referral sources. We have a team in acute that service line as well as our RTC.

So each service line has a group that's really in communication, but then we're also making sure they see what we're accomplishing with the patient. And as we have more outcome data, which we started to put on our website, we believe that we will be confirming really what is of most interest to them, and that is their patient gets better in our care.

Our next question comes from Brian Tanquilut with Jefferies.

Congrats on a good quarter. Maybe, Debbie, as I think about -- you've called out some of the changes you've made to leadership. Just curious how you're thinking about the operational or organizational structure where you've had a few months here now in terms of where there are opportunities to either reduce some of the infrastructure or some of the positions there that have been added over time. Just thinking through the G&A opportunity here and where else we can see some areas of improvement as you bring the band back, so to speak.

Well, Brian, we have taken a very hard look at our corporate overhead who is in place, what's needed now by the facilities. And as you alluded to, there is a middle layer of management that I was able to see that had been added. And as we dialogued with the field and those that are using the support, there were decisions made to eliminate some of that middle layer.

We think it's going to speed up decision-making. We think it's going to align better with where we see us going, and that is to provide this excellent patient care, but also improve our performance. So we've made changes there. As far as the structure around operations, as I mentioned in the prepared remarks, we reduced the number of facilities and also the geography that our division leaders were traveling to. And we have tried to make it more manageable, so that they can focus more intently on what are the issues, what do we need to do to problem solve and also to build and to grow, especially with the new facilities.

And as I thought about it, and I think I had a lot of support here at the corporate office, there are a lot of common themes with our JVs. They're all different, and they're in different markets. But there are things that are common. So as I looked at it, I made the decision that we should align them under a person who can learn and to take those best practices from one JV to another and also to improve the ramping of those because we've added those beds primarily around the JVs.

And I think that it's been embraced by the team. Everyone has been very positive about the changes. And I think they feel like their oversight is more manageable. And I think we're going to see the fruits of that as the year goes by.

Our next question comes from Andrew Mok with Barclays.

To the next caller, and we'll see if we get an later in the queue.

The next question comes from Ryan Langston with TD Cowen.

Todd, thanks for all the help. Best of luck at NVA. Maybe just one more on the bad debt. I heard you talk about improving documentation processes internally. I guess are those issues that you've identified, can you fix those in the short term? Or is that more of sort of a longer-term process to improve?

Ryan, I'll start and then Todd can add. I think that documentation is the key to what we do, making sure that what we are offering and doing for the patient is in the medical record. And I think there's always room for improvement. But in this case, we have seen in our processes that have been evaluated that there are areas where we think we could better reflect the acuity. And we want to make sure that we are covering everything that our payer needs to see. We're very firmly in belief that the patient that is in our facility needs that level of care, and we want to make sure that, that's reflected in the record.

And so I think the effort has been going -- ongoing for some time, but we really escalated that. And we're also using tools in some of our facilities to really create more visibility around that. And we're using -- very early stages of incorporating AI into our revenue cycle management. And we are using that to analyze our data.

And also, we're looking at other products for that. But we think we can streamline some. But again, back to the key is the documentation that needs to be present. We also -- as the patient comes into our hospitals, we want to make sure that we are first providing active treatment, but then documenting that. And so that's been the view that we've been taking is just are we reflecting that? And is there a way to improve it.

Our next question comes from John Ransom with RJS.

The legacy management team talked about the fallout from the negative press on the specialty referrals just given people do Google searches and that stuff pops up essentially. Has -- I mean just given the results, are we finally kind of beyond that effect?

Yes, we are, John. And we actually saw some very strong performance at some of our specialty programs that pull patients from around the country. Our commercial payer mix is up, and I think that team is doing very well. We have some very -- we have outstanding facilities, and I was very pleased to see the results and some of the facilities -- specialty facilities that pull from around the country.

Yes. And look, just -- was there also -- I think you mentioned and not maybe hallucinating, but didn't you also mention that maybe the emphasis historically got a little to B2C and you had some commercial relationships that needed to be reestablished. Am I remembering that right? Or am I just making this up, which I do frequently, Debbie?

I don't think you're making it up, John. I think that we had shifted our focus away from commercial. I'm not saying that we weren't still looking at it, but we've really strengthened that. And we've added to our GPS team.

And again, those relationships have in my mind and what I've seen here are very strong, but we tried to do even more with really communicating why we're different because there is competition for those patients that travel. And I think the team is doing a very good job in making sure they understand what we're offering at our facilities.

Great. And just lastly, I think quality sometimes is a bit nebulous in behavioral health. But what -- if you were to grab somebody for an elevator pitch and say these are the 3 or 4 metrics that we really focus on, and we think -- and of course, there's the absence of industry benchmarking, but what are you doing? And what sort of metrics on the acute side are you driving home to payers to say, here's why we're different and better in the absence of a robust industry data set?

Well, the first area is patient satisfaction. What is their experience in our facilities. The second would be, are they coming in with -- as they come into our hospitals, are they leaving with an improved condition. And so we have measurement tools around that, and we're making sure that we use those tools to measure improvement.

And I'm pleased to say that as I look at those measures that they are very, very positive. What we are doing now is really making sure we can do that across all our service lines, not just acute, but with specialty as well. But I think the improvement -- and then obviously, our payers use a readmission metric.

And I think we measure that, too. Have they had to come back for care, what period of time. So all of that goes into looking at what are we doing for the patient and what are the outcomes that we're achieving.

Our next question comes from Joanna Gajuk with Bank of America.

This is [ Joaquin Agada ] on for Joanna Gajuk. I just wanted to ask, could you give us an update on labor? How does wage growth, hiring trends? And how has retention been?

Sure, Joaquin. Things are good. Overall, for the eighth consecutive quarter, our retention of our team improved. So that's just a huge value prop from just a training, from a disruption basis, all of that. So really pleased with what our teams are doing at the local facility levels to improve on retention overall. So -- on a same-facility basis, we were up 3.7%, but even better on a patient per day basis, it was 2% again, which was the same as it was in Q4. So overall, I think the team is doing a really good job of managing that.

I think you heard some of that in Debbie's prepared remarks with regard to less premium pay, less inefficiencies in when staffing is happening. And the team and our nursing team overall has done some really good training to just improve that to help facilities understand how to manage the labor better while not sacrificing anything on quality compliance or patient care. So feeling very good about how that's trended. Obviously, overall numbers are up as we open new facilities, and that just improves over time as we fill the beds and occupy more.

Great. And I just wanted to touch up on your AI comment earlier. So what are your guys' future plans? And how are you looking about that to implement it further in the future?

We're looking at different tools. We're doing some prediction of care just to have better understanding of different risks. We're looking at it with inside our electronic medical record systems to use those and doing pilots before we roll it out in total.

But overall, we're very attuned to the changing environment that we're all living in and making sure we're not caught off guard by something that we're missing. Really strong IT team that's digging in here and providing us tools to get better.

Our next question comes from Andrew Mok with Barclays.

I wanted to follow up on the strong same-store admissions. I think they were up 6.5% in the quarter. One, can you elaborate on the drivers of the acceleration there? And do you think that's a leading indicator for patient day growth? And then secondly, start-up losses are still tracking around $15 million per quarter. When should we see that number start to diminish?

Let me take the second question first. So it was $12 million in Q1, $2 million better than we expected. We pulled out our full year guidance to reflect that $2 million at the top. So now we expect $47 million to $51 million. We've said we expect $15 million in Q2. That's likely the high end of the number, Andrew, for the year from a quarterly standpoint. So again, progress on those fronts on that.

From an admission standpoint, again, a lot of this is new acute beds coming on and those ramping of those new facilities. Because the length of stay in acute is shorter, admissions are higher on that. And then again, as we mentioned on an earlier answer, a lot of the average length of stay change we're seeing is really a mix as we closed specialty facilities last year, -- we've got the challenges in Pennsylvania.

Those were longer lengths of stay that are coming out of the number while we're adding in acute beds with shorter length of stays into the numbers. So overall, we feel good about the referral network, as Debbie talked about, driving those admissions into acute. And so again, a lot of good forward momentum here that the business has and progress on filling up our beds and our new acute facilities.

And I'll just add to that. Our inquiries for acute were up over 20% in the first quarter. Our RTC census was very, very strong. And we also, as I mentioned earlier, had very strong performance in some of our specialty facilities that attract from all over the country. We've made some changes in our marketing approach, and we're looking at our spend on Google, which is a generator of patients in some of our service lines.

And I think that the team is just very, very focused on making sure they understand the referral sources. We're using some tools to bring in new referral sources. So not just taking what we have now, but targeting individual practices and others that we think could be a referral source for patients.

And all of those things are working together to, I think, create the strong volume. Demand is continuing to be strong, and there are individuals that are seeking care, and we have not seen that reduce. We've actually seen it strengthen, and that's contributed to some of our results in the admission area.

Bailey, any more questions in the queue?

There are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Debbie Osteen for any closing remarks.

I just want to end by thanking all of our employees and the corporate staff for their dedication and their hard work to ensure that our patients receive excellent care. I thank you all for being with us this morning and for your interest in Acadia Healthcare, and have a great day.

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

Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the facilities and managed care analyst here at Barclays, and I'm pleased to welcome on stage with me here today, Todd Young, the CFO of Acadia Healthcare. Todd, welcome.

Thank you. Thank you for hosting the conference and the coverage you provide us.

Of course. Todd, you've been in the CFO seat for less than a year. And just as you were settling into the role and diagnosing the issues of the company, there's some leadership changes of the CEO role. Debbie returns, she is one of the most experienced operators in this industry. So what are the biggest changes you've noticed since her return? And what does Debbie emphasize culturally to help turn around the organization?

Yes, less than a year, just over 4 months, in fact. So obviously, a lot of change since I joined. But Debbie coming back has been invigorating to the operators, right? As you noted, she's got the longest tenure of leadership in behavioral health in the industry, 30-plus years at UHS, running behavioral, 3 years as Acadia CEO and now back again for us.

And right now, we've added by the end of this year, 3,000 new beds across facilities across the country. Our opportunity in front of us is to fill those beds and to really execute and run the company from an operating perspective really well. And she's got a demonstrated track record of doing that. It's clear on the expectations from investors, but also internally with the operators, excited to have her leadership back and really focused on taking care of patients really well.

Great. You've highlighted a $200 million embedded EBITDA opportunity from facilities opened over the last 3 years. Looking back, it's still not entirely clear why some of those facilities underperformed relative to initial expectations. So can you help us understand what specifically went off course during the ramp, whether operational execution, payer dynamics or otherwise? And what you learned that's now shaping how you approach new facility openings today?

Yes. That's the opportunity for sure, is this $200 million of embedded EBITDA inside the, as I said, the 3,000 beds we've brought on. I wasn't here for a lot of that time frame to know. But as we've looked back at what has happened, there's been a confluence of events, and it's not always the same at each facility. But certainly, there's been some licensure delays that affected how quickly we could admit Medicaid patients into our facilities. And again, in the acute space, Medicaid is a big driver of it with involuntarily committed patients that come into the facility.

So that's been an area of focus is, all right, how do we make sure we're doing all of the preopening activities appropriately. And then once we open, how do we accelerate timing of patient adds, joint commission surveys, all of those sort of items that have to be executed in order then to get the Medicare tie-in number to then get approval from Medicaid to start serving the patient base that we're really looking to help in the acute facilities.

And so we have made some changes to kind of not have as many facilities open all at the same time as there is a lot of resources needed to open the facility, be just think about staffing up and hiring a lot of people. If you're doing that all with 3 new facilities in the same month, it's different than if you spread those out over the couple. Now downside of that, we have some facilities that are ready to go that we're delaying opening in order to optimize it overall.

But fundamentally, I think those are some of the changes we've looked at. The other area in many of these cases for these facilities, we've been doing them with JV partners. So for example, Geisinger Health in Pennsylvania, Henry Ford in Michigan. We just opened our new facility outside of Boston with Tufts here 3 weeks ago. And we're really focused on those JV relationships. There are strong players in the market that have wanted us to partner with them to treat behavioral health patients.

We want to make sure we're getting the most from those JV partner relationships, be it engagement with payers, engagement with local state regulators on approvals. But also once we are open, helping them with their patient base. That's a big reason they partnered with us was to help treat the patients that come into their network in their emergency rooms and having that option.

And so we've been looking at, all right, how well do we do with our best JV partners and where are the ones where there could be a lot of improvement by improving those relationships. And Debbie is very focused on the people aspect, a big believer that the driver of success comes from your people and your leaders. And so she's been taking -- her first thing she's done is take a look at that across the enterprise.

Great. And looking ahead, can you help us frame the time horizon over which you expect to capture that $200 million opportunity? And what are the key leading indicators we should be watching to gain confidence in that pace and durability of the profitability ramp?

We've not given a specific date. We have said it'd be inside 5 years. Clearly, the opportunity is continuing to add occupancy and grow up to that 70-plus, 75% level that Acadia was running at in the late 20 teens and early 2020s. And that's where you see the losses we currently have from start-ups and new in phase. But fundamentally, you're right, we're talking about 3,000 beds. $50,000 of EBITDA annually per bed gets you to the $150 million. You don't have $50 million from start-up losses and you get to the $200 million improvement versus Our guidance we have this year.

So we do feel like this is about execution on our end that the dynamics out there in the marketplace that are always happening and around are less going to be impactful than our own execution and making sure we're running our facilities well to treat the patients that we know are there.

Great. So occupancy sounds like a key item to measure. Can you give us a sense of where the occupancy is of those new facilities today and...

Yes, they're behind, right? And that's what we've tried to lay out some cohort curves to show where they fall relative to history, relative to expectations, and those have been behind. And that's where the opportunity is certainly there to increase profitability by improving those levels. We've not given specifics by facility, but no doubt, our focus is on all of our inpatient facilities is driving occupancy because, again, that's where our revenue comes from, is treating patients and giving great care and helping families at tough times in the life.

Great. You saw some improvement in same-store volume growth in the fourth quarter and your 2026 guidance assumes roughly 4% growth before factoring in the New York Medicaid headwind. Can you walk us through what's driving that improvement, whether it's underlying demand, operational execution or strength in specific service lines?

It really is about the execution. And so there's 2 components when we think about bed growth, right? We've got what we call expansion beds where we add beds to existing facilities. So once a facility gets into the 75% to 80% occupied, it becomes challenging because you may have an adolescent patient, but you don't have an adolescent bed.

You have an adult bed. And so you get to some occupancy where you just can't get to 100% as a result. And so in those cases, we try to add beds to an existing facility. Then you can leverage the CEO who's already there, the cafeteria, you've already got admissions teams and you just get a better contribution margin from that. And typically, it's lower cost to add beds to an existing facility than building a new facility from the start.

So that's a big chunk of growth we see inside that historic business is that opportunity. And then the ramping cohorts we've talked about, these beds open between '23 and '25. Again, as those continue to improve and frankly, lose less money in '26 than they did in '25 that's what drives the volume. So between both sides is how you get to the 4% growth before we take into account the impact of our specialty business from New York Medicaid.

Great. And as you look across the portfolio more broadly, how would you characterize current demand trends for inpatient psychiatric, specialty and opioid use treatment?

Certainly, we see the demand there. Unfortunately, it still is there and continues to grow on the inpatient acute beds. We don't think that's a driver of our challenges is lack of demand. On the specialty business, again, we've seen other than these impacts and our specialty numbers are noisy as I'm sure most of the investors are aware because we closed a number of specialty facilities last year.

And so you see negative growth in specialty that's really a function of the closures versus how the underlying base is growing. I think we grew specialty in Q4 at just under 4% once you factor the closures in. And then unfortunately, the state of New York made a decision not to pay for their patients to be treated in our facilities in Pennsylvania, and that's creating a drag in 2026. We've called out $25 million to $30 million EBITDA hit from that. That being said, we're focused on backfilling those facilities and hopefully driving that to be a conservative estimate as we get more patients in.

It is a unique situation. Typically, we are enrolled in a state's Medicaid program. New York would not allow us in as a for-profit hospital, but we just were admitted to New Jersey's Medicaid program. And so that's one of the places we are looking in addition to greater Pennsylvania to fill these beds with patients we can help.

And then CTC, again, that's an opioid replacement business. It's a very good business. It's got, unfortunately, again, still demand for that treatment. A lot of patients are not getting treated, and we think there is an ability to continue to find those patients and get them help. We run a really efficient operation, patients are all offered counseling.

Many of them take it up on that. But on a day-to-day basis, they usually are not getting counseling. And so they're in and out of our facility in less than 5 minutes to get their treatment and then get on to their job that day. So that's a really good operating model just given for most patients, it's a daily need to come in. And so being efficient with their time is a big driver of how we get growth and continued build of patients in that business.

Great. Let's move on to some of the payer dynamics and reimbursement environment. Acadia has seen increased scrutiny from payers around length of stay and an increase in denials. Can you walk us through the components of your 2026 pricing outlook? Maybe break it down for us in terms of contractual rate increases and how much is offset by payer behavior?

Overall, we're working closely with all of the payers trying to make sure our patients get treated appropriately. Length of stay has been stable. I will call out there's a math exercise going in. We lose specialty patients that are north of 25 days. We have acute beds that are usually 8 to 11 days and length of stay is going to contract on an Acadia-wide basis just from that math.

So I don't want folks as they see that changing over the course of this year to think it's a payer issue. For us, we're actively working with the payers. Yes, there's been increase in audits from the payers. And we've got to make sure we're doing our job of advocating for our patients, documenting their treatment well and then we're confident we'll get that reimbursement.

We did see bad debts and denials increasing over the course of 2025. We reflected that in our Q4 guidance. And we've generally assumed that what we saw there in Q4 is stable over the course of '26. So certainly opportunities for us to get better, but also risk that it continues to get there. But we feel like we've reflected it appropriately as we move through '26, but the team is certainly focused on those key elements of advocating for our patients and documenting their treatment well.

Great. And do you think this elevated level of scrutiny. Is that a temporary phenomenon? Or do you think there's a more structural shift in how these plans are managing utilization given the broader cost inflation?

I think we've -- I've heard different things. Obviously, coming into the industry 4 months ago from being on the product side, I've been learning this. Debbie certainly views this as part of the cycles of behavioral health. She's seen all the cycles and views this as something that goes through, but that we have to just be there, execute well, understanding that there is a health economic benefit to the overall system by taking care of patients in behavioral health.

They usually have other comorbidities and that cost just increases when you have those 2 things combined. And so we're really focused on outcomes. We've been pleased with the outcomes and the improvements we see in our patients. We've started to publish that on our website and are using that outcome data, both with the payer side, but also with referral sources that they can trust us that we're getting really good outcomes for their patients, which is positive for their network benefits.

And that's something we continue to focus on is how do we use and measuring these positive outcomes and how do we use that to show the value we're bringing to the patients, to the payers, to the referral sources.

Great. Let's move on to some of the policy items impacting this year. You already mentioned that the New York policy change restricting out-of-state Medicaid care is expected to be a $25 million to $30 million EBITDA headwind. You've already taken steps to rightsize the footprint there. But can you walk us through the plan to backfill those facilities and the time line over which you would expect margins to normalize?

Yes. I think we're looking to do that over the course of the year. We're moving with a sense of urgency, as you can imagine. As I mentioned, New Jersey approval is a positive. We're looking to expand. As you can imagine, the reason the EBITDA impact was so big is these were really highly occupied facilities that were run really efficiently. And so we had a really strong network of referral sources that we're continuing to keep these in a great spot.

When you have that, right, there's less need to go out and find more because you're running at such a high level of occupancy. We're now rebuilding that muscle, getting out there, looking for those other referral sources and trying to find those that we can help.

We're also hopeful that perhaps New York will reassess this policy is access to care is important for their population base, and we were doing that at a very efficient price point relative to the cost of care in New York State. But our focus is on really finding new patients to backfill those beds. And hopefully, we get a lot of that accomplished over the course of this year.

Great. And is this item common in your portfolio where you're treating patients in one state that may have coverage in another state?

It is. But as I mentioned earlier, we're enrolled in those state Medicaid programs. And so when they cross state lines, it is not uncommon. And it's really in the specialty facility. I mean we have specialty facilities that attract patients nationwide. Sierra Tucson is generally considered one of the best in the country, if not the best. And so we get patients from across the U.S. to travel to Arizona to be treated. We have other facilities in many places where we do have other patients from other states. So New York is unique in how they treat the for-profit sector. And so we don't view this as something that could have a negative impact on our business from another state.

Great. And another policy item weighing on this year's guidance is the California staffing requirement. It's only a $4 million EBITDA headwind in your 2026 guidance. But can you walk us through the nature of that specifically, how much is driven by the incremental labor costs and compliance costs versus any impact from reduced occupancy or capacity?

Yes. So the state of California has mandated certain staffing ratios from a skill matrix standpoint. And originally, it was going to go into effect at the end of January. Now it's been pushed back to June. We've been actively working to be compliant with this so that we don't have to not treat patients.

And so right now, we feel very good about our ability to hire the higher skilled nurses to fill. We don't have a change in number of employees because our ratios were fine under all standpoints. But we do now need to basically eliminate a lower role to hire a nursing role. That comes with it an incremental cost of the salary difference, but it doesn't really change the benefits, the total number of FTEs.

So that's why we've got a $4 million headwind. We're getting this implemented kind of end of Q1 into Q2 so that we don't have to affect occupancy. So there'll be a small, incremental costs in '27, but it's probably closer to $2 million than thinking about this as a June, a 6-, 7-month impact in '25 that turns into $7 million next year. Our view is we won't have to shut down any beds as a result of this. And thus, it's really just this cost difference between the nurse we need to hire and the tech that we no longer will have to employ.

Great. Let's move on to some of the expense trends. PLGL specifically has been a recent pressure point. I think it would be helpful to touch on that given the accruals that have increased in recent years. And your guidance assumes those expenses step down in 2026. Can you walk us through some of the key quality and patient safety investments the company has made to reduce incident risks and how you monitor claims experience and update those expectations as the year progresses?

Sure. Last year, we had a $61 million increase in our PLGL expense to $115 million. That was driven by looking at a number of factors. The first, we had claims increased by 186% over the previous year. That's a dramatic increase after what had been pretty stable claims numbers on that.

Then as we looked at what was the cost to settle claims, that had also increased. And so we needed to increase the reserves on the balance sheet for historic claims that were sitting already in our books. That was about $18 million to get those claims up to what we view as a sufficient level to deal with what likely settlements are.

We don't expect that to repeat in 2026, which is why you saw the PLGL guidance come down by about $10 million at the midpoint. You say $18 million minus $10 million, that seems to be a little off, Todd, but we've also assumed that we have higher insurance expense. The insurance environment has changed dramatically over the last few years. So in 2022, self-insurance was at the $3 million level and we didn't have to pay on claims above $3 million. Now it's at $15 million and for sexual assault claims, it's even higher on that.

So that's been a big change as well as the cost of that insurance going up. As we look forward, we are assuming that claims activity in this year is the same as last year, but that 186% increase continues. We did not assume a reversion to the mean. The other change we've done is every month, I sit with the legal team and we look at how many claims came in, what are settlement costs and how are those comparing to the actuarial expectations that were set with that actuarial report in December to ideally allow us to adjust faster so that we don't have any surprises with respect to this.

So last year, our balance sheet reserve got up to $155 million versus only being $78 million at the end of 2024. So we feel like we've gotten a handle on it, understanding that claims activity will continue to be something we focus on as the driver. From your question on investments, yes, we've made a lot of investments in safety and quality technology as well as training.

At the end of the day, we're in a people business and people are what drive this. You need good process, you need good technology and you need well-trained people to take care of our patients. The safety of our patients is, first and foremost, the thing we have to deliver every day. And as we do that and focus on it, it should reduce the number of incidents understanding that in our line of treatment, there will always be incidents happening, unfortunately, in facilities.

Great. Let's finish up here with capital deployment. CapEx is expected to decline by more than $300 million in 2026, and you're guiding to positive free cash flow. First, is that a clean cash flow number? Are you making any adjustments to operating cash flow there? And then second, how should we think about the priorities to deploy discretionary cash over the next 12 months across debt paydown, M&A, share repurchase and reinvestment?

I'll start with the last one, which is reducing debt. We're pleased to be guiding to free cash flow positive here in 2026. That is a clean number. That's operating cash flow less CapEx, including all items that we're adjusting out for adjusted EBITDA purposes. We've said that legal and transactional costs, we expect to be about $100 million this year. That's out of adjusted EBITDA, but it is embedded in the operating cash flow assumptions.

We have not assumed a settlement on the current DOJ investigation going on. So if that happened this year, I think we'd be pleased to get that behind us, but we've not assumed that in the number. So that would be one thing that's outside of our current expectations. But really, it is just executing, operating the facilities well and then we're focused on filling the facilities that we've built and reducing debt versus thinking about additional CapEx to grow bed volumes. We've got a lot of embedded growth available to us as we execute and take care of more patients across our entire network.

Great. And as you saw yesterday, one of your peers made an acquisition fairly large in the outpatient behavioral space. Most of your investments over the past few years have seemingly went towards new facilities, JVs, inpatient, things of that nature. How do you think about the outpatient behavioral opportunity that presents?

Yes. We obviously have a huge outpatient business with our CTC business, but with -- you're right, we've been building inpatient acute beds and then adding outpatient as part of that continuum of care. And that's really where our focus is with the outpatient is stepping down patients into outpatients as part of a continuum of care treatment plan versus a pure outpatient business.

Great. With that, we're out of time. Todd, thank you so much for joining us here today, and please enjoy the rest of the conference.

Thank you.

All right afternoon, everybody. [indiscernible] sticking around this afternoon. My pleasure to have Todd Young, CFO from Acadia.

I thought it would be maybe helpful to start since Todd is relatively new to the organization joining in a time of change and you've been at other places in your career. I wanted to hear kind of observations around some of the strengths and weaknesses that you've identified within either the company operations, the finance functions. And maybe we'll just start there.

Sure. Yes. I joined Acadia 4 months ago, right at the end of October. So still new, getting used to being on the services side of health care grew up on the product side, including at Acadia Pharma, which has created a little confusion as I joined Acadia Healthcare.

Overall, the company is in a really good spot from a market positioning standpoint. The demand for our services continue to grow, and we've got a nice diversified business across both the acute inpatient, specialty inpatient, residential as well as the outpatient business with our opioid replacement therapy, what we call CTC. So I think all of those give us a really good spot to drive growth from.

Overall, I mean, the organization is very pleased that Debbie Osteen is back as CEO. Debbie joined us back in mid-January. And so her history in the industry and her proven track record of operating facilities is really something that's breathed fresh life into the employee base and a lot of excitement there. So from the standpoint of our relative strength, certainly, this opportunity to grow from a base of new facilities. We've brought a lot of beds online over the last few years. And I think that puts us in a really good spot to be able to drive growth without needing as much incremental capital.

From the standpoint of opportunities, we do have to improve execution. I think you've heard Debbie talk a lot here in her first month on the job about getting the right people in the right place in order to drive that growth. It is about people, it's about everything from hospital, CEOs, to the divisional leadership and making sure that we're set up to have the right people understanding the way to fill these hospitals because the opportunity really is there.

But overall, certainly, the people and their passion for taking care of our patients is a real strength. And I think we do have this opportunity to drive growth with a lot of facilities we've brought online over the last 3 years that are -- they just haven't filled up at the pace that was originally expected. But we feel good about the markets they're in and that the opportunity is there with the right execution and the right leadership to do that.

So overall, I think the strength is really this opportunity in front of us and the demand for the services. Certainly, it's a different player base. We've seen some of the challenges of the litigation side and medical malpractice. That's a place that I'm getting my arms wrapped around on and an something I just hadn't exposure to previously, but now have been getting up to speed on. But overall, excited for what we can do to serve more patients across the U.S.

And maybe as it relates to just like the organizational review. I know it's incredibly early, and Debbie is just getting her arms listening probably more than taking action at this point. But where are we in terms of like looking at the layers of the organization, identifying the right people? And what would be a reasonable timetable to think about for making some of the changes?

Yes. I think obviously, the benefit Debbie has is she's been around the organization previously the CEO. And so she doesn't start from ground zero. It is something we're actively doing at the moment. So I do think we'll have some movement on that in reasonably short order as we focus on, all right, how do we make sure that the right people are driving it and that we're taking advantage of basically better data streams, as you've heard her talk about on quality and dashboards that maybe we don't need as many people as we thought we did to do those same levels of effort.

So I do think we'll have something in reasonably short order that's faster than you'd normally see just because of her understanding of the company and the people that are here.

Okay. She said something on the call about removing barriers to problem solving. And I think that's probably part of it. But maybe just elaborate a little bit more on what you guys are doing?

I think a part of it is, again, it gets back to people, making sure they feel supported, but we also know who's accountable for decision-making, especially with new facilities and new JV facilities so that it isn't just a committee approach where you look left, you look right, and you're trying to find out who can you go to, but really making that a very clear accountable structure as we move forward.

And so I think overall, as we evaluate any of the different groups, be it my world in finance, be it quality, be it compliance, legal, HR, IT, all of those things, we're just trying to make sure we understand what the team is doing and how they're driving value to the facility level or making sure that we've got the right compliance and other things in place for the enterprise.

Okay. So fewer meetings, less talk more action?

Certainly, that's a part of the goal.

Yes, I don't like meetings.

When you look at the new de novos that you've opened up in the last few years and the underperformance, any common themes as to why they've underperformed some of the targets?

I mean I think we probably had outsized expectations from the start that obviously proven that's an easy one when you know what the actuals look like after the fact. I think the timing element certainly is one where assumptions that things would move faster, meant staffing occurred earlier, which meant you had ran losses with a fixed cost base being delevered even sooner. So I think that's part of it.

I think some of it just gets to understanding the time line and the urgency of getting through licensure requirements. Obviously, most of the new beds we've brought on have been in the acute facility space in order to get to involuntary patients with Medicaid, we've got to go through all the licensure process, including getting Medicare tie-in numbers and the like. Some of those just went much slower than what had been historically the norm. And so that's a part of it.

And I think just a lot of kind of overarching volume of change over the last couple of years that somewhat like in the case of you do a big M&A deal, you assure everyone that it won't cause any disruption internally and yet you're doing lots of change all at the same time, and that does create. And I think there's been some of that over the last couple of years that we're really focused on the facilities, focused on driving admissions and taking care of our patients safely versus a lot of other distractions. And with that, I think we're going to get a bump in quality of delivery as we just focus on that key deliverable, which is running the facility well.

Okay. There's been a handful of underperforming facilities that have emerged in the last year or 2, many of which have been shut down, most of which I think were probably specialty and due to environmental factors and industry factors and GLP-1s impacting the demand for eating disorder. Are we through the bulk of closure activity at this point. It doesn't sounds like Debbie believes that closing facilities is probably the right action to take?

We think so. Our focus really is on taking advantage of the beds that we have and driving occupancy with them. We don't expect to be closing any facilities other than the ones we called out on our earnings call a few weeks back. We did consolidate two facilities in Pennsylvania as part of the New York Medicaid decision that were leased facilities that were leases were coming up, so it made more sense to consolidate into some bigger facilities for efficiency reasons. And then one facility that we had previously announced in Q3 or Q4 of last year that officially closed in January.

But fundamentally, our focus is on making facilities work as we've seen from the cost of adding new beds has become much more expensive with the construction costs. And so we think there's an opportunity to serve more patients in the beds we have and are really looking to do that.

That being said, if there's something that happens to a facility, and we do not think it is financially viable, then we'll make the decision to close it. But right now, our focus in '26 is operating all of our facilities as well as we can run them.

You mentioned the New York, Pennsylvania headwind of $25 million, $30 million. How do you -- what's the math behind that? Is it just saying, here's all of the out-of-state patients. And if we get none of them like that revenue is gone, is that?

Yes. Like fundamentally, it's a conservative assumption based off losing all of those patients that we historically had from New York. We're going to actively backfill and I'd like to think that gives us some additional opportunity relative to the guidance we've given. But fundamentally, yes, we took out that patient population of revenue. We also took out the associated expenses of the care you need as occupancy grows.

But we'd argue it's probably a conservative view. We're actively looking to backfill those beds. We did get approval from New Jersey Medicaid to be inside their system, which means we can take Medicaid patients from New Jersey. We're obviously looking in Greater Pennsylvania as well, just given the location of the facilities.

Okay. You've got a number of de novos you're opening up this year as well. And I would have thought that the start-up losses would have been less than what you're guiding to kind of like flat to slightly down something in that range. How would you characterize that assumption that you've embedded in the plan this year?

Yes. We've got a number of large facilities coming online. We brought on ECU Medical, which I think is 166 beds in December 10. So it's 25, but it's certainly embedded there. Tufts, opened I guess, 2 weeks ago in the big snowstorm in Boston. So pleased to get that one ongoing and then Orlando Health is the next one on the docket. We've generally tried to use good reflective assumptions based off recent history. When building out our guidance because that is the most relevant time frame we have.

Now do we want to do it faster? Are we moving with a sense of urgency? Are we trying to make sure we get all of our documentation done to get joint commission and to do the surveys as promptly as possible? Absolutely, all of that. And I think that's our goal is obviously to do and run everything better than what we've assumed based on the ability to do so, understanding that, we also don't want to just assume initiatives have already worked before we've seen traction of them working. And so that's the balance within that. But we do have a lot of new big facilities coming online here that are driving that number with the 26 facilities being about $30 million of it and the rest of that delta of about $20 million coming from the 25 facilities that haven't moved to the same store yet.

Remind me, are there any de novo slated to be opened in '27?

Not right now, there'll be more beds inside facilities that we would expect to continue to grow as licensure goes on a -- especially at Tufts, where they get it on a unit-by-unit basis. And so we only opened 24 beds when we opened Tufts. I think it's 144 bed facilities. So there's a number of units that would come on, including some in '27.

If Acadia has always added beds to existing facilities that hit peak occupancy, whatever, you take a wing down, you build some more beds. Would you expect the target around those number of bed additions to existing facilities to change going forward? And what are you baking in this year for new beds to existing facilities?

We've given the 400 to 600 in total beds. That includes some expansion beds that will come online. We haven't broken it out specifically yet, but we'll do it on an actual basis. We do expect to continue that efficient expansion sort of mindset, often adding 40 beds to a facility where you're already at sort of 80%, which given you have adolescents adults, often that means you're kind of fully occupied. You can leverage the fixed infrastructure, leverage the referral sources and continue to do that efficiently. So I think that will be more of the focus in the '27, '28 time frame, the new facilities as we have brought on a number of new facilities as we've talked about that we need to fill.

Okay. Of all the things you've built, I think, what resonated with investors is at the midpoint, you guided $600 million of EBITDA, let's say, and there's another $200 million of embedded earnings, $150 million like to get to the EBITDA margins you think plus the add-back of $50 million or so of start-up losses. I have you, as a company deployed resources around those facilities to really try to focus on getting them back on plane to get to where they need to be?

As you can imagine, those facilities get a lot of attention. I mean that's where we're sitting, and we're reviewing those on a very regular basis to understand right, how are they tracking? How are they tracking relative to expectations? How are they tracking relative to what we believe they can do in the marketplace. That fundamentally, obviously, a facility that's 85% occupied and going great, we pay attention to because we don't want that to change. But those that are running at 20% capacity. They were opened in 2025, and we've got to get it to 80% capacity. That's where the focus is, is making sure we're thinking about that on the right track, have the right leaders in place really driving that.

And then a lot of focus with our JV partners, I think that's a place where Debbie believes there is opportunities. We will look and have looked at all of our referrals from JV partner hospitals and seeing, okay, what number do we get from our best JV partners versus our worst JV partners? And the question is, all right, why can't we make them all look like our best partners? And so a lot of time being thought about that JV partner strategy and how do we use them both after they're opened as well as on the front end as we talk about how do we ramp things quicker. They often have relationships with payers or governmental approval bodies where we're trying to take advantage of their market position to help us.

I would ask how long is it going to take to realize that $200 million, but you're not going to tell me. But just maybe remind us and refresh what is the typical timetable that you can generally get facilities from open to target?

We've said kind of inside 5 years, not as illuminating as you'd like, understand that. But it's 3,000 beds. That math makes it $50,000 of EBITDA per bed. We have facilities, obviously, that make more than that on a per bed basis. We have some that make less, but we feel like that's a reasonable assumption as we drive these. And obviously, ones that we opened in 2023 are much further along that curve. But then we also have some that had really great starts. Henry Ford, for example, was one with a really great health system in Greater Detroit. They had beds that they were closing down that were moving over to our facility. And so that's an example where the JV partner is hugely beneficial and helpful in driving greater occupancy sooner and that one will get to a higher level of profitability earlier as a result.

But yes, that's the big opportunity in front of us is these 3,000 beds brought on between '23 and '26 primarily acute beds there. That doesn't include expansion beds. As we talked about, we do add 10 to 40 beds, two facilities. Those are already in our same-store base. And we also view that as opportunity to continue to drive profitability in the base business as well.

Okay. Can we spend just a minute on malpractice, something recognizing, of course, the frequency of activity on the legal side has been quite high, and we've seen industry challenges as well. Cost per claim has gone up. But just -- it would be helpful to hear just the process that you guys undertake to establish reserves and any way to maybe characterize your level of comfort around the malpractice reserve today?

Yes. Very fair question given the impact on our 2025 results from our PLGL expense. So embedded in PLGL expense is both the premiums we pay for insurance. And so we do have insurance for these claims but the insurance market has changed a lot. It used to be in 2022, I believe, $3 million of self-insurance and then the insurance would kick in. That's now moved to $15 million. And for certain sexual assault claims, there's cost sharing even up above $25 million. And so that insurance has changed dramatically with respect to its relative protection for most claims.

As we got our actuarial report, which we have to do every year, the big change that had the big impact in 2025, where PLGL expense went up $61 million was both historic claims not being reserved at a higher enough amount, and so we had to increase the amount on those historic claims that were already in our embedded base. That was about $18 million, which is what we don't expect to repeat in 2026, because we feel like we've adequately reserved for those historic claims based off the settlements we see across our entire base.

Then the number of claims jumped up dramatically. After being reasonably stable for 3 to 4 years, they were up 186% last year. That dramatic jump is a big driver of the cost. As we look forward for this year, we assume claim volume would stay at that elevated level, we didn't assume it would get better and revert to the mean of the previous years.

One other difference we've made from just a monitoring standpoint is I meet with our legal team every month and I look at what claims came in the door? What settlements did we have? How is that tracking versus what the actuarial estimate that we used to establish the PLGL reserve is tracking. And so we just gave guidance. I've looked at it. We're in line right now with those assumptions, which is what gives me, I guess, the most confidence at the moment that what we've assumed is running at the right level for 2026.

That is a continued process. If you look at our balance sheet reserve for this, it's now up to $155 million after being $78 million last year. So we do have a lot bigger reserve on the balance sheet. As a lot of these adjustments we've had have really been noncash costs as this new claim volume, this 186% growth, most of that won't play out from either a settlement or a litigation standpoint in the courts for 2 to 7 years, just because of the nature of how long it takes to work through the settlement. So a lot of this was a negative on EBITDA but less of a flow-through to cash flow.

Okay. Some of your peers will perform a malpractice test twice a year. Does it makes sense to you to maybe have a more formal review more often?

Yes. And we'll be doing that at least twice a year, as part of the actuarial assumptions.

Yes. Managed Medicaid, that's been described as a pressure point for you guys plans shifting their behavior. Debbie seems to think that the activity with the plans is probably in her mind, no different than what she's seen in the past. How would you characterize the -- your experience with some of those payers today?

Yes. I think it obviously varies by payer. I take comfort as well in Debbie's long experience in the industry and her view of this as she feels like this is very much sort of the cycles that you go through over longer stretches. We have seen our bad debt increase last year, as we called out, and a lot of that's embedded in the base, and we've assumed that stability into '26 versus a significant improvement.

But the team is very focused on doing the right advocacy for patients, having the right documentation in place so that we can defend our assumptions and our documentation and a review we get, understanding that, obviously, some of those players are having greater financial challenges, and that's always something we have to be cognizant of as they look to improve their bottom line.

But the team is very focused on that and very focused as we have the negotiations with the payers of getting some better data, we've been able to obtain some better information on how others in the industry and rates they're getting from payers that we think will help our team as we focus both at a corporate-wide on lots of big contracts as well as at the facility level with smaller ones. That's a key element every year is those rate negotiations we go through.

Okay. So it was a few years ago that Medicare started to cover partial hospitalization and intensive outpatient programs in the industry is sort of coalesced around the strategy to try to advance that? Just maybe update us on where Acadia is in terms of allocating capital and focusing on an outpatient access point strategy.

Ours is very focused on the continuum of care, making sure that our patients in the acute setting are stepping down into places that allow them to continue to get better over time. And that's really where our outpatient focus is as a step down from the acute versus it being on a pure outpatient model for patients.

Now obviously, our opioid replacement therapy CTC business is entirely outpatient. But when we get to the straight behavioral, it's really more focused on having that right continuum of care, having outpatient be part of the therapy. But we do have straight outpatient as well in a lot of our specialty businesses, that was part of the hit we took in Pennsylvania was a lot of our outpatient population were New York residents that we now can't treat because of New York's decision.

On the CTC business, there was some hysteria among the investment community when there was legislation out. I'm forgetting even the name of the?

AHA or something like that? No?

Well, I think that's a different one. That's a different one. It will come to me in a minute. But the punchline is that you could access methadone from non-CTC locations, it could be dispensed at Walgreens or CVS. Is there any update around that idea that concept, that legislation, is it dead? Is it?

I know it's -- I don't think it's dead, but it doesn't seem to be overly active at the moment either. Our perspective is that we're treating some pretty acute patients that have a real need. And part of what our value proposition is, is patients come in and get their therapy and move on in less than 5 minutes. Now if they have a therapy session, it's obviously longer, but if they're coming in just to get the methadone and move on, less than 5 minutes.

So it's a really efficient well-run process. We're seeing thousands and thousands of tens of thousands of patients a day. And so I think most of us probably been to Walgreens recently, it usually isn't less than 5 minutes. So I do think that, that's a real competitive advantage we have versus an alternative option for people to get a daily therapy, especially before we're 6:00 a.m., 7:00 a.m. type time frames.

We spent some time a few years ago really examining the national opioid settlement. And are you guys seeing any of those dollars directly or indirectly flow into the organization?

Very little. Yes. I think we -- it's something we're always working on and on the lookout for. We have seen a few things on some capital grants where we'll get some mobile units that we put into place that came from grants, that came from the settlement dollars. But given the amount of money that's been allocated to that, we've seen very little flow in from a business demand perspective.

Okay. Thinking about all the organizational review, things you guys are going through right now, how do -- if you're me, and you're looking at my little Excel model and playing with the corporate overhead number. Would I expect that it would be flat on a dollar basis this year, growing at a smaller percentage of revenue? What's the right way to think about the corporate costs this year?

Yes. It's very much in the flat to down. There's a little build back of incentive comp, that is...

That's what I was going to ask. How much is that?

We haven't given specifics, but that's the only thing growing, I'd say, is that add back, I'm assuming that we're back at 100% funding. But overall, that's been a focus where we've got an ongoing review right now of those costs. But as a general matter, as we built the budget back in November, December, it was very much focused on no growth in corporate and where is there opportunities to reduce heads, reduce spend in that area.

Okay. The Board last year authorized share buyback authorization. I don't remember, maybe $200 million, something in that?

I think $300 million.

$300 million. [indiscernible] I can't remember. I can't imagine that, that's a priority at this point right now to think about that.

Yes, I think our leverage now is 4x, and we've guided to being in that general range for 2026, which is a little higher than we would like it to be. And I think most of the feedback we get from investors, it's a little higher than they would like to see it. So I think from a free capital perspective, we'd be looking more to pay back debt than to buy back shares.

As you've seen in the guidance, we're bringing CapEx down dramatically here in 2026, and that's allowing us to expect to be free cash flow positive for the year, and so that should help us start down this path of reducing leverage. But that's certainly more of the focus than stock buyback.

Okay. And then I know we're just in the beginning of '26. But going into '27, what does the slope of the CapEx spend look like?

It will drop off more. I mean, as I said, we don't have a big de novo build plan right now. And so with those being the main drivers of getting these finished this year. I would expect the growth CapEx to take another step down. It won't be $300 million because there's not $300 million to take out of it this year, but I do think it will make another drop and something that we will obviously provide greater guidance on when we get close to '27.

Okay. All right. Well, we've got about 10 seconds here. If there's a question in the audience. I could keep going. But all right, Todd. I appreciate it. Thanks for the time today. Thanks for conference.

Thank you. Thanks for the conference. I appreciate it.

[ Good morning ], everybody. John Ransom. Welcome to our 47th IIC. I've been told I have to say that every time. So you'll get used to hearing that. In a very well-timed sequence of events, we have the returning CEO of ACHC, who made a lot of news last week. You can pull up the chart and see how the stock traded. This is Debbie's second time to have to come back to clean up a mess that she didn't make. So she knows how to do it. And so what we're going to do this morning is a brief presentation. I've got some questions, and hopefully, we'll leave some time at the end for some audience questions. So take it away. We have Todd Young with us as well, CFO.

I'm sorry, I didn't get...

An afterthought, I'm just -- I'm so excited to see, Debbie. All right.

Okay. Well, good morning. I'm Debbie Osteen, as John said. And I'm going to start by giving just a brief overview of the company for those that aren't familiar with Acadia. Acadia is a unique company in that we are #1 as far as pure play for behavioral health, but we have a diversification in our services that some of our competitors don't. We have $3.3 billion in revenue for the full year of 2025. We treat 84,000 patients a day. When I left, we were treating 70,000. So we're treating more patients and obviously, those that need our services. We have 277 facilities, and that's across 40 states. And as you can see, it's made up of acute, which is a shorter-term behavioral health facility, specialty, which is primarily substance use and eating disorder. And then we have residential treatment centers, which is longer-term care for children and adolescents. And we have 178 CTC locations. And these are outpatient clinics that are providing Medicaid or medication-assisted treatment.

As you look at our revenue by service line, you see that acute is our largest service line, 17% is specialty, equal to CTC, which is also 17%. And then RTC is our smallest revenue by service line. The revenue by payers in the middle. If you are looking at Medicaid, which I know we've all been talking about, 57% of our payers are Medicaid. But this includes all our service lines, and it really varies by service and by state, how Medicaid pays us and how they interact with us. We have a revenue chart up by geography. And I think you can see that we don't have any one state that represents more than 15%. I'll just say, and I'm sure John will be asking questions later, but my goal in returning to Acadia is to build a strong company. with a focus on excellence in patient care. To me, that's the foundation of everything we do and also create shareholder value. And so as I think about the 4 areas that I'm most focused on, the first is patient care. And we have outcome measures that we've implemented, and this has been done over several years, and we want to build on those successes.

We are publishing those outcomes, and we're proud of them. They are very positive. They're available on our website. The second area of patient care is safety and quality. Our goal and my goal with the team is to drive continued improvement there. I will say we do lead the industry with our survey results, which is Joint Commission and patient safety, and we've invested a lot over the last few years in patient safety, technology about -- around keeping patients safe, which I think have been well spent. That's behind us. And now we are operating using this technology, but also a focus on the people, which I'll talk about at the end. The second area is volume. We have added 2,500 new beds over the last 3 years. And it's my goal and my focus to see those beds ramp and to see volume improve. We also have new beds coming on this year, 400 to 600 beds will be coming on. And my goal there is to see them ramp faster than the beds in 2025 and to make sure that we're providing access. Some of these are joint venture partnerships that will be added in '26, and we have 1 de novo.

The third area is operational excellence. And I think about payer relationships when I think about operations, making sure we're reimbursed appropriately with our payers. And I think my philosophy, and I believe the team agrees with this, is we have to be constructive. We've got to be collaborative. And it's not really a uniform issue. There's not one payer. We have multiple payers in each state. So you're going to see a lot of variety there. But I think the bottom line with our payers is we want to be a partner with them. To do so, we have to demonstrate that we bring value and that we have outcomes. The second area under the operational excellence is really capital discipline as well as expense management. And I think -- as I think about capital, each project should stand on its own merits. It should meet the market need, but we're going to be very careful and very cautious about how we spend capital in 2026 and 2027. The last area, which is probably the most important other than patient care, and that is having the right workforce and talent.

And we need to recruit, we need to retain and we need to train highly qualified staff. And I will say that our retention rates are going up, which is positive. So our turnover is going down. But that's an area that we're all keenly focused on is making sure that we have the right staff out in the facilities to treat patients. And the second area of that is talent, which is ensuring that we have the right people in the right position. I'm currently evaluating that. I think that what's needed to support our team might have changed over the last few years. So as we think about the beds we brought on, ramping those beds, my lens is around value to the field and what corporate support is needed there. And I want to ensure that we have alignment so that we're working together and that it's not a corporate and a top-down approach.

We want to work with the facilities, and we want to make sure we're meeting their needs. And another part of that is looking at where the scope is for leadership, how we are across the various states, which is 40 that we're in, what kind of supervision are we providing, but also support to the facilities and to the leaders there. My main focus this year is really on execution. And I think that we have made a lot of investment, not just in technology, but all of our bed adds. And as I think about that, I want to make sure we have a framework to realize that value. And I think we can. And I think that part of what my job is, is to make sure that we have the right people and the right talent and that they're focused in the right way, eliminating obstacles for action. And I will let Todd talk about '25 as well as '26 and what we've laid out as far as our expectations.

Thank you, Debbie. Thanks, everyone, for coming out today. As you mentioned, Todd Young, I've been the CFO of Acadia since the end of October. Last week, we released our earnings for Q4 as well as provided guidance for 2026. We encourage you to read the press release and the accompanying slides for just greater background on Acadia. As you can see, we did deliver revenue and adjusted EBITDA in Q4, in line with the expectations we had laid out. And in 2025, as Debbie mentioned, we finished 1,089 beds. It's been a clear focus of the company over the last few years is building out new facilities to take care of more patients across the country. Now it's critical that we ramp those beds from a greater occupancy standpoint to leverage the fixed cost investments we've made. As we think about Q4, pleased, we had 3.1% same-store volume growth, which was an acceleration over Q3. As we look forward, you can see revenue for 2026 at $3.37 billion to $3.45 billion, with adjusted EBITDA in the $575 million to $610 million range.

Our same facility growth, 0% to 1%, obviously, lower than Q4. But at the end of the year, the New York Medicaid made the determination that their patients would not be allowed to be seen in facilities outside of the state of New York. We have a large number of specialty facilities in Pennsylvania that had patients from New York. Unfortunately, those patients now have to travel farther somewhere in New York to find beds to be treated. The result of that is about a 350 basis point headwind to same-store growth for us in 2026. From a patient day, you can see that 2% to 3% coming through on patient day growth. And then finally, on free cash flow. As you mentioned, the last few years at Acadia have been marked by significant investment in new facilities. And with that slowing as we're finalizing new facilities in 2026, we're dramatically reducing CapEx. So over a $300 million reduction in growth CapEx from '25 to '26 and expect that to decline more in '27 as we finish the facilities.

That is allowing us to project cash flow being positive in 2026, which should help our leverage as we move forward. As we think about the opportunity in front of us, 2,500 beds added over the last 3 years with another 400 to 600 beds to be added in 2026. We do believe that this creates a $200 million EBITDA opportunity embedded in our facilities as we ramp and drive the occupancy higher. This is the key driver of growth in 2026 and will be the key driver for us over the next few years. Operational execution is critical to delivering on this opportunity, and that's what the team is very much focused on as we finalize the new facilities that are well on their way from a construction standpoint, but most importantly, drive greater occupancy amongst the capital we've put in the ground. And that's the prepared remarks, and I will turn it back over to John.

So Debbie, second time you've done this, as I mentioned, what's different today, both kind of micro and macro versus the first time around other than the fact that you will have a sprinting start because you've been inside the company versus last time you had invest some time to get there. But now coming back in with a better data set in your head, what's different about this time versus last time?

Well, I think from a macro point of view, there's really not a lot of difference. I think that there's still very strong demand for our services, and there's still not enough resources to treat the patients that need it. So as I think about that, and I know that there's been a lot of discussion. We obviously had questions about payer pressures. I've been in the business a long time. And I think that it's not a uniform issue. I think it's -- in certain states, we've seen more pressure than others. But I do believe it's our job to make sure we're able to speak with payers, be knowledgeable about what our rates are, what we expect and also to demonstrate our outcomes to them. So I think the team, obviously, I've seen some familiar faces that I brought on during my tenure, but also new individuals. And as I mentioned in my remarks, I'm looking at that with the lens of what we need now. And I believe that the company has added a lot of beds, which I think is positive, but now we have to focus on making those beds work and improving the performance of the company.

Under the prior regime, we understood that a new -- a de novo would be 4 to 5 years to get to target margin. And we calculated -- this would never confirm, but we calculated at that point in time, maybe at low double-digit EBITDA on that investment. So if you spend $20 million, you might get $3 million, $2 million, $3 million. So it wasn't a very robust return. What do you say of the investments that you've had? I know you've talked about a $200 million swing in EBITDA, but what's a reasonable expectation for the returns, especially -- I don't think anybody calls with the bed adds, but the de novos, what kind of return should we be? And in what time frame are you -- do you think is reasonable to expect?

We're not providing specifics on the return expectations other than looking forward here on how do we fill the beds and drive as much value out of them as we can. The decisions have already been made on the construction costs and to add these beds in. I can't change that now. Whether or not those are the right decisions, I'll leave others to make that decision. But fundamentally, we believe these can be very profitable facilities and that we will fill them up and drive positive returns from here. And that's what we're focused on, as Debbie said, it's about executing on these new facilities and filling them up.

Yes, that was just -- and do you think 4 to 5 years, is that -- can you get it done faster, do you think? Or is that still how long do you think...

With de novos?

Yes.

I think so.

That's still the right number?

I think we can get it done faster.

Okay. Yes. That's fine. And what is the difference? We used to have at least 2:1 of a bet add versus a de novo, but what do you think the return difference is now given the construction cost reality?

Well, I'll say before I give the mic to Todd, I think that our expansion beds have always had the strongest return. And part of that is because we have existing overhead in place, and we're leveraging that. We obviously had a bed need. And when a facility gets to be about 75% to 80% occupied, then we're turning away patients. So it makes sense to add in our existing facilities. I think that, that is the highest return, John, for when we're construction costs are up in not just de novos and our JV bills, but also expansion beds, but it's still -- if you're turning away business and you can find a way to accommodate and the reimbursement is there and strong, then that makes the most sense.

Is 2: 1 -- is it better than 2:1? Or is that still the right way to think about it?

Right now, we're not focused on building new beds, so I haven't really spent a lot of time there, John, just given what has happened. But certainly, the expansion is certainly significantly better from a return perspective than the de novo builds.

So talking to investors about your stock over the years. I think the biggest concern today is med mal and legal so when you look at med mal, I know the commitment to quality is part of it, but how should we think about the leading indicators of that? And do you still think we're kind of in the thick of increasing accruals? Or do you think the tide might crest at some point?

Certainly, I'll speak to the expense side of the equation and I'll let Debbie speak on the quality and the investment side. We had $115 million of expense on med mal in 2025. We've guided to $100 million to $110 million of expense in 2026. The reason it's coming down year-over-year is in Q4, we made a significant increase in the accrual for cases that were already on our books. We feel like we've gotten that accrual to the appropriate place. And so now this is more just the go forward. We've certainly seen an increasing cost for insurance with higher self-retention. 3 years ago, cases over $3 million we had insurance on, that's now moved up to $15 million. So that certainly changed sort of the risk profile of these cases. But we're monitoring this differently. We're making sure that the actuarial assumptions and our facts I'm looking at that monthly to see, okay, claims coming in, settlements, how are they tracking versus the expectations so that we have less of these Q4 surprises for investors than it's happened in the last 2 years.

Yes. And they are tracking according to the expectations. I think that when we think about quality and safety and I think about malpractice, we have to really focus on avoiding incidents. And it sounds like that's a simple thing. But I think we do have good tools in place. And we've been in partnership, and I won't call it, it's -- we are working with them and they have developed some outcome measures as well as benchmarking and real-time visibility around incidents. So I mentioned this for those that listen to the call, I guess it's been last week or maybe 2 weeks that the time is going fast. 3 months Yes. We can look real time at each facility now, and we can look at each day and each time, and we can look at 50 measures that tell us what's happening at the facility. So that allows the leaders that are in the local , the CEO of the facility as well as those in supervision and quality.

We have a large quality team to say, what do these indicators look like, what are our incidents doing because that's where they start. Our claims result from incidents that we want to avoid. And so we put in this technology around safety to allow tracking rounding for patients. Some of these are basic things. But then also, we'll continue to invest in training of the people that are interfacing with the patients. That's key. They have to do their job. And if they don't, then they need to go somewhere else. But we want to make sure they're trained. And when they come on what they -- to know what's expected of them and that they have to keep the patient safe, then treatment can start, and that's really around active treatment, John. You've heard that for years. I mean, we can't -- we're not a med/surg hospital. We have people that are in a treatment mu, and we need to make sure we're providing excellence there with not just the people, but also the programs that we're doing.

Well, you let me -- this is a perfect segue planned. The Yes, I've been in health care a long time, and I hear quality and what the difference -- the disconnect for me is payers don't really pay for quality. So in your industry, where are we between, I would say, the most progressive payer in terms of trying to lock in incentive payments for outcomes versus the most indifferent? And are we -- is quality something that you just have to have and it doesn't get anything extra, it's the right thing to do, but are we getting to a point where having a differentiated quality makes a difference either in referrals you get. And when I go back to, there's really no great industry database, right, that you can benchmark against. So how do you -- can you turn this into -- long-winded way of saying, can you turn it into dollars? Or is it just the right thing to do table stakes, med mal, but it's not really going to drive any extra sort of incentive reimbursement?

Well, I think that it's difficult, and I know that there's been a struggle to come up with what metrics should be monitored and measured, especially for behavioral health. It's been easier in the med/surg area. But I do think that -- and I would call them enlightened payers.

I said progressive. Okay. That's fine. Neither do I actually, but that's fine. I said progressive, you said enlightened. I like your word better.

Okay, I like enlightened.

I like your word better.

Because really, they're managing risk. And if we can show that they can put a patient in our facility, obviously paying us what we think is appropriate, and we can show them that, that patient is improving then that's a win for them, too, because we do track readmissions and other metrics. That's one metric. But now that we can show outcomes, so the patient came in, they were at this level. And when they left, we can document where they're at. And I think some payers that are managing these populations, they want to see their risk reduced. So I won't say that, that's the only thing they're looking at, certainly, but it is a factor. And now we can demonstrate it better than we were able to before.

Do you guys see follow-up work as well, like 3, 6, 9 months after someone's discharged?

It depends on the program. Some of our specialty facilities do follow up and make sure -- and it's a touch point with the patient. We've also had a focus on putting in partial and outpatients so that there's a continuum we can measure who is getting care after they're in the hospital. And I think that's made a difference also.

So your alumnus announced last week that 10% of their revenue in behavioral is now outpatient, and that's a big focus. How would you characterize your mix and focus on step-down in outpatient?

Well, we've been working on outpatient since I was my last tenure. I think that there's not a replacement for the secure setting with our patients. So I think that we are keeping patients safe. They have -- if they are homicidal or suicidal, they need safety. But I think there is a continuum that needs to be in place. And so patients where they are stabilized and they are in a secure setting, then I believe that they should step down to the lower level of care. We have an emphasis on that. I'll be honest, I was a little surprised at the 10%.

That's low, lower than that.

No, I think it's high. just based on the other services that my former company is providing. But it's a goal of ours to make sure that the patient is in that right setting. So there are markets where the reimbursement is better than others. And so you have to have a lens on that as well, whether you'll be paid for those services. But I think it's needed to have a way for the patient to progress.

So we got 5 minutes. A couple more for me. The I'll call it the methadone business. I think that makes more sense than the acronym. That's a differentiator between you and UHS. It's a big portion of your revenue. It's growing -- was growing 25%, now it's growing 5%. Some people have concerns about that business because of the cost and some of the alternate treatment options. I know Acadia in the past has defended it is the gold standard. And then there's also the dropping, thankfully, number of overdose tests. So just putting all that into a package. How do you view that business today versus, again, maybe 5 years ago when you left?

Yes. I don't really view it differently than when I left. I think the fact that we don't have as many people dying from opioid Narcan has been very effective in preventing some of those deaths. But there's still a large population out there in the U.S. and other countries as well that are not seeking treatment and do not avail themselves of methadone. And you said part of my answer, which it is the gold standard. But as I think about the business, I think about the low capital needed to grow it. I also think about the low labor intensity. So we're not using the higher RNs. There is are in coverage, but it's not at the level. So I think we feel that it has growth potential. There still is demand. I will also say that if there's value that we can bring to shareholders in another way, we would be open to that. But right now, we like the business. I think it's part of the continuum, and it's certainly directed towards a growing population.

Currently, you're spending $100 million on legal, understandable. But how should -- without providing specific guidance, I know you can't do that, but should we think about that at least as the high watermark and then it will come down? Or is that just, again, an annuity expense that we should think about going forward?

We do believe it will come down from here, John. I mean we've had a significant government investigation that we've been conducting in partnership with the DOJ. It's gone well. The team has done a good job of getting that finished up. It's now really in the government's hands. But the significant step down in Q4 to $12 million in fees versus Q3, we view as more in line with going forward and that there will always be some cash running through that line, but certainly, we would like to think the $100 million will be the high watermark.

Okay. Any questions from the studio audience? I always feel like a game show host standing here with my microphone asking that. But any questions anybody has? Yes, sir. I'll repeat it. Go ahead, [ John ].

So what's the unifying characteristic of the states where you can -- you have the [indiscernible] presence.

I'm not sure I understand.

Like in states where you have high concentration, is there a...

And states with high concentration is there a unifying characteristic as to why you're there versus the other 30 or 35 states? And are you going more towards those? Or is the growth diversifying? Which states that have those characteristics that you [indiscernible]?

I mean I think that as we think about the states, some of this is a result of the activity that was done when the company first started. And so you had acquisitions that were concentrated in certain states. So in Pennsylvania, a lot of that is substance use treatment. In other states, it will vary. In California, you have a mix of specialty and acute. So it's going to differ by state. And as we target a state or make decisions about bed additions or building new hospitals, we look at the -- there's a lot of data out there now about bed need. Also reimbursement has to be factored in, is staffing available. So there are other things that we think about when we choose a state. And it's going to -- as you think about CTC, they're really -- it's a clinic. So it's a lot easier to go in a state and add a clinic than it might be in a CON state where you have to pass a high bar, and that's mainly in the acute area.

All right. I think we'll wrap up. Thank you. Breakout downstairs.

Good day, and welcome to the Acadia Healthcare's Fourth Quarter 2025 Earnings Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Brian Farley, Senior Vice President, Head of Investor Relations. Please go ahead, sir.

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 and 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.

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 flood 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, aligned 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, Medicare 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 began 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 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.

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 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 and our CTC line of business continue to be 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 or 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.

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 standard

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

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 your back is that been put on hold?

Thank you, A.J., for welcoming me back. It's not on hold. I think that what we are focused on right now is really what's in front of us, which is 2026 and making sure that we perform and that we're able to address some of the issues from last year in 2025. We're always looking for opportunities to create value. So that's really an ongoing process. We didn't mention it, but it's important that we look at short-term and long-term value. And so that's continuing. We are -- as I mentioned in the remarks, we are looking at our service lines to make sure they're aligned that they will create the value that our shareholders expect. So I think there's more to come there. There is a real focus right now, though, on immediate progress. And then, as I said, looking at the long-term value as well.

Okay. Great. And let me -- for my follow-up. Just as you had a chance, I know it's still early in your assessment of things. But I think we've always thought about this industry, at least in recent years, in a normal environment can generate low to mid-single-digit organic volume growth, low to mid-single-digit pricing gains. And then with the de novos have some opportunity for margin improvement over time. Is there anything you're seeing? I know there's noise in what's been happening in the last 18 months. But as you come out the other end of this year is probably getting back to normalcy year, is there any reason to think that, that growth algorithm is different as you reassess the landscape?

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.

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.

Next question will come from Whit Mayo with Leerink.

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 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?

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.

And I'll just add with -- we built these beds because there was a market need. And we entered into the joint venture partnerships because of the market need and in many cases, they had beds that were folded into our operations. So we're going to move with a sense of urgency here. We want to eliminate the barriers and really start to see our investment be realized. And as you said, there's a lot of opportunity embedded there. And I know the team is committed to move quickly and to work in collaboration with not just our partners, but put beds in as de novo as well as expansions.

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.

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Operator, next question.

Next question will come from Brian Tanquilut with Jefferies.

Debbie, nice to hear back from you. Maybe just as I think about the some of the issues that the company faced before you step back in, right? Average length of stay was under pressure with managed Medicaid being called out by the previous regime is squeezing the -- end up again at pressure from managed care to sort of maintain length of stay in this business

[Technical Difficulty]

Listening on the call. We seem to have a technical issue our understanding is that you can hear Debbie and I as we speak, but that we're not hearing the questions coming in from the analysts. So hopefully, we'll be back on here in a minute.

As we are having technical difficulties, there will be hold music until we can get our speaker line connected.

We have our speaker line reconnected. Please proceed.

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, the end of the previous regime. One of the things that we got called out was the pressure from managed Medicaid on average, length of stay, where the approvals and on approved days for patients, especially in acute we're being pressured. So just curious, how do you foresee pushing against that pressure from managed Medicaid to sort of maintain stability in that length of stay metric?

Yes, I apologize for the technical difficulties. So a great way to start out our call. I've been in the business for a long time, as everyone knows. And I think there's always going to be a natural push and pull in the reimbursement environment, not just with managed Medicaid. I don't think it's a new development. I think that some states and payers are more challenging than others, but -- and we address those situations individually. We really have a very stable length of stay. It's obviously on a same-store basis we're going to see that, I think, stay stable. However, there is an impact this year on our length of stay with respect to the New York Medicaid, which I think everyone is very well aware of, those patients tended to stay longer. So you'll see an impact on that.

But just generally, we consistently advocate for patients when there are concerns about getting authorizations or medical necessity. And we really try and work with our payers. We want to make sure the patients are in the right setting. But overall, I think that we have very strong relationships. And I think this is just part of the behavioral health business, and I don't see a big change there or see we're not anticipating a change this year. We're both doing what we need to do. Ours is to advocate for the patient. And they have -- their concerns, but we really want to work in collaboration with them.

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 maintaining or maybe even avoiding bed closures at this point?

Well, we -- I think, as I was here at prior time, we always looked at our portfolio to evaluate what makes sense. But in my mind, that accelerated pace that you've seen over the last couple of years in closures is behind us. And I think that we would only consider closing beds if there's no clear path to viability. And our focus right now is really on operating and improving the existing portfolio. So we're not talking about closures at this point and don't anticipate being in that situation.

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 in all of our facilities.

Next question will come from Pito Chickering with Deutsche Bank.

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

Well, I think we have good referral relationships, Pito. I do think that it has to be consistent, and it's got to be a focus every day to make sure that we are delivering the high-quality care that our referral sources expect. And I think that we are doing that. As far as some of the issues in the last year in particular, with just beds ramping, I don't think it was really related to a disconnect with our referral sources, but there were other issues involved around getting these hospitals open. But I feel good about our relationships. And we have -- as you know, a team of people that really want to connect with them, and they do that every day to make sure that we understand what they need in services, but then also that there satisfied and the patient is getting what they need.

Our outcome data, I think, is going to be very helpful with referral relations because it is -- we are in a very good place with those outcomes. So it's our job to show our referral sources what we can do, and that builds trust. And it's a track record of really treating their patients with the excellent care they expect and then also being able to demonstrate that through outcome data.

Okay. Then for the follow-up here. What is sort of your goal on the first 90 days, because 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?

Well, my priorities are improving our volume, which we just talked about with particular focus on the same-store growth, but also on the beds that we've added over the past 2 years. And I think that when I think about the team I want to make sure that we have the right people, and I mentioned that in the remarks, I think that's key. I do think that we need to improve our operational discipline. We do have a lot of visibility now, and I've been very impressed, certainly with the quality dashboards. But there -- we also have benchmarking around some of the other areas with respect to the financial key factors that our facilities need to use to operate.

So what I'm really trying to convey to the team, and they're embracing this is use the data use it for problem solving, but make decisions and take action. So if we see something that is not in line we need to act. And I think that started day 1 here as I rejoined the team.

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

Welcome back. I'll add my salutation as well. Thinking about the long-term CapEx, how should we think about the cadence of that beyond 2026? And then what's the -- are we going to commit to maybe a moratorium on building new hospitals and focus on bed adds? Or what's the capital discipline to look like from here?

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 the need 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 of the underlying business has now that we have these beds available and as we fill them.

And I'll just add to that, John. We really are focusing on the improved performance at our existing facilities. In terms of at least how I look at capital, it has to stand on its own merits, which I mentioned. But we always have said, and I think it's still accurate, that bed expansions to existing facilities, are the best use of our capital. You have the demand there and you already have built in the overhead and other elements. So we're going to be very careful this year about what we do with capital. And Todd mentioned M&A, that's -- we're looking at that really not as a short term unless there's just some great opportunity there. But we're looking really more focused on what we're going to do with the beds that we've added and what we're going to do with the beds that we plan to add this year.

Okay. And my follow-up is med mal, I know it's a lagging indicator, but that's -- the industry has been on a long -- in a cycle where they're chasing experience with increased reserves. So where do you think we are in that? Is there any leading indicators to suggest maybe that's going to crest at some point in the foreseeable future?

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 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.

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

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 denials rates you've talked about recently? Or just, I guess, anything else to call out there would be helpful.

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 than that 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.

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 1 state limits sort of out of state care to another?

I think New York is an outlier. I do think that we have opportunity there to diversify our payer mix. So we were very dependent, as you can see from the impact of it on New York Medicaid in a few of our facilities up in Pennsylvania. But I don't see that as -- it would not be a risk that I would list. I think that states oftentimes don't have the resources available to adequately treat the needs of the patients. So they do send out of state. In this case, there was a policy in place, and they made a decision to enforce that. We're advocating because we don't believe there are sufficient resources in New York understanding that we had to recognize the impact of this, but we're also working very diligently to really find new payer sources. And we're starting to see some early results from that. And we'll continue to do that to ensure that the hospitals that we had there continue to be viable, but with a different payer mix.

Next question will come from Andrew Mok with Barclays.

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?

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.

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 midyear. And what's embedded in guidance for this?

Sure. No, 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.

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.

Your next question will come from Ben Hendrix with RBC.

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 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 at a high level.

Well, as we think about the 2025 issues around the ramp of our new facilities, we have identified common themes. And it's really in getting the facilities open. And there's a lot of detail that go into getting our new hospitals open. We have construction, we have to hire staff. But I think what we have seen as probably a common theme is that we need licensure obviously, and then we need billing tie in to be able to build for the patients within the facility. When we get that, it's not a matter of need. It's not a matter of patient demand. It's really more through these processes that we have to work through in each state, and they vary with respect to licensure.

And then also, as I mentioned, just being able to bill for the patients that are coming to us. So we have a plan around that because I think that we recognize that we can work earlier on some of the areas, and we plan to do that. But as our hospitals open, we are pretty confident that we're going to see those patients come in. And again, back to what I said earlier, there was a need in the market. And we just need to make sure we get our hospitals open as we expect. And not all of them were opened on the time line that I think the team thought was going to happen. So we're going to do -- we're changing our processes for this year, and I'm hopeful that we'll see a difference in the ramp and the issues that we saw in 2025.

And I wanted a quick follow-up on the Pennsylvania facilities. You mentioned that some of -- that you've consolidated those and maybe repositioning those for a change in payer mix and maybe repositioning towards in-state volume. What is the kind of the timing of a shift like that, given the magnitude of this headwind? And then could these be slated for a potential exit or strategic review in the near future?

Ben, great question. I think overall, we have closed the 2 facilities that I mentioned to consolidate from essentially 8 facilities that were impacted by this down to 6. We've opened up 1 new state New Jersey that we're excited to start trying to source patients from -- for these facilities as well as in the Pennsylvania market. And so we've given the $25 million to $30 million EBITDA impact for '26. That is our expectation. At the same time, we're very much looking to change that mix and deliver better results than that. over the course of the year as we find new referral sources and look for ways to fill up these really good facilities to take care of our patients extremely well.

Next question will come from Matthew Gillmor with KeyBanc.

And let me echo the 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?

Yes. I mean we are taking a look not only at the corporate structure, but also the leadership structure that supports those in the field and over my years in behavioral health and being in a public company, I have a strong belief that whatever we do here at corporate has to support what happens in the field and that principle is really should guide what everyone does here in this office. So I have started in the process of looking at scope of each of our leaders, how the geography is set up, and also just what their experience level is and do they have the right experience and we have some new leaders, and we have those that really have been here. And I've seen a lot of familiar faces as I've rejoined. But my focus is on what do we absolutely need and what do we need to support the growth because we've had a lot of that. And what does that look like from a corporate point of view as well as a field point of view.

And I think that it will be an ongoing process, but we've already started to make some changes, which I won't go into detail on this call. But I do think that the team is eager to make sure that we are rightsized, both here at corporate and in the field. So that's going to be a continuing process over the next few months.

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 on 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 perform relative to your expectations? And were there any areas of sort of notable strength to call out in terms of the fourth quarter volumes?

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

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

Welcome back, Debbie. I want to focus my question on cash flow and leverage. So you said earlier in 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?

Thanks, Ann, for your question. As I said, it's certainly inside 5 years to unlock that $200 million opportunity. We're looking to be cash flow positive this year. And so we've brought down the significantly. We expect our legal cost to be a transactional cost to be lower than last year, as I said, expect for some working capital improvements as well. All of that should lead to a positive on reducing debt. As we think about our outstanding legal challenges and the like, we are taking that into account as we look at leverage over both the short and the near term.

But fundamentally, we do expect to grow EBITDA and to improve free cash flow in '26 and in '27 and '28. All of which then drives improvement in leverage, understanding that there may be some additional cash required to pay for a settlement or otherwise that can exist. But fundamentally, we do think our leverage will stay in a reasonable range, maybe not as low as it has been the last few years because of these draws on cash but not in a way that will create any risk to the enterprise.

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?

No, we expect start-up losses to improve. We're improving modestly 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 of substantial beds or new facilities opening that those start-up losses would decline more than they are here in '26 versus '25.

Your next question will come from Jason Cassorla with Guggenheim.

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.

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 do 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 startup losses and really drive that EBITDA growth from just getting a higher utilization of the fixed costs of each of the new facilities.

Great. Very helpful. And maybe just as a follow-up, I just wanted to ask quickly on the first quarter 2026 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 out of period, 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?

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 facility is 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.

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

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, we were thinking they might require a divestiture.

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 regarding 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 referenced looking at all of our service lines, what I'm looking at is 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?

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, as it relates to some other questions about management or are they referred sources? Are there any trust issues maybe with local health care workers that it's creating issues staffing new beds?

No. Staffing, we always have staffing as a focus to make sure that we have -- especially with the new hospital, as you can imagine. But no, it's not about trust of our referral sources. The ramping issues that happened in 2025 really have to do with getting all of the regulatory approvals in place to open. And then as I said earlier, to bill for those services, I think we entered into these relationships with our partners because they were very strong in their market. We've learned that we need to leverage that strength even more than we have in the past and do it earlier. But there -- were focused on really collaborating and meeting their needs and making sure their patients can access the new facility.

So I wouldn't see it as a staffing issue that's been a barrier really or a lack of trust by referral sources. I've met with several of our partners since I've come back, and they're very excited about being able to meet the mental health needs but do it with us and the strength that we bring. So that, I think, is in a very good position. And I don't think that we have issues going forward, really, as we think even about the new facilities ramping, we've got some really strong partners that will be opening facilities with this year.

The next question will come from Sarah James with Cantor Fitzgerald.

Debbie, it's great to have you back. I'm wondering, does your expansion of the quality dashboards include new investments in recognizing and responding to patterns and clinical outcome measures like readmissions or relapse rates, and could those metrics factor into payer negotiations or claims approval rates?

Well, the 50 measures that we are looking at, some of them have to do with on the unit and how our clinicians are performing. Certainly, the performance and the -- of our patients and how they improve within our facilities. I do think can be a key part of our discussions with the payers. We're aligned in that. They would like to see these patients improve as we would as well. So we are using those -- that data. I think we can do it even more than we have, because now we have some published information that we can -- and we're putting it on our website, as I mentioned. So it's very clear that our patients are coming in, and they are improving from admission to discharge.

So we do plan to use that more to demonstrate the difference that we make as they consider what they intend to reimburse us and we want alignment with that. And the dashboards give a lot of visibility and its visibility that is immediate. So that you can look at a particular hospital and a particular measure and know for that day, what is happening, which I think is a great tool.

Great. And just one follow-up on the referral channels. Can you provide us with a framework of what the referral channel mix looks like now? How that's different from 2 years ago? And as you're making these investments on building relationships, where that mix could go in the next few years?

Yes. As I've come back, I don't see a big difference in the referral patterns. They do differ by service line. As you know, Sarah, just from following us, I think that we still give business from the emergency rooms who are in need of placing patients and might be boarded there for a period of time. We also have many professional referral relationships with those out, not only practicing in psychiatry, but also other physicians. In each state, it's going to differ as to who is sending patients.

But I don't really see a big shift there. I think that it's the same group of individuals that are referring. But our job, and I think we're very focused on this is making sure we're connecting with them and that we are being proactive with them to talk about what we can offer to their patients as well as the outcome measures, which we've talked about.

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.

Hello, everyone. Thank you for joining us this afternoon. It's my pleasure to introduce Chris Hunter and Todd Young, the Acadia Healthcare CEO and CFO. We're going to have a presentation and maybe a little time for Q&A at the end. Chris?

Thank you, Harry. Good afternoon, everyone. Thanks for joining us. We're going to spend today covering a few key themes. First, we're going to provide an overview of the company, and then we'll get into some of the progress that we've made in 2025 as well as some of the challenges. And finally, we'll talk about some of the key puts and takes as we look further into 2026.

Before we get into that, I just wanted to flag that we did reiterate our 2025 guidance this morning. We continue to expect revenue of $3.28 billion to $3.3 billion, adjusted EBITDA of $601 million to $611 million, and adjusted EPS of $1.94 to -- $1.94 to $2.04. As usual, we will provide fourth quarter actual results in late February.

For investors who are newer to our organization, I want to provide a quick introduction to Acadia. So we are the largest stand-alone behavioral health company in the country with both national scale and regional density, as you can see from our map here of our 277 facilities. We have programs, services and facilities spanning 40 states and Puerto Rico, and we have 4 complementary service lines.

So the green dots that you see here represent our 59 acute facilities where we treat high acuity patients in inpatient facilities for conditions such as schizophrenia, bipolar disorder and other psychiatric disorders. The orange dots represent our 31 specialty facilities, where we primarily treat patients with substance use disorder via a residential care model. And then the blue dots represent our 178 opioid use disorder outpatient clinics. We call these our comprehensive treatment centers, or CTC, clinics for short. And then finally, the purple dots represent our 9 child and adolescent residential treatment center, or RTC, facilities.

So across these 4 service lines, we're serving more than 82,000 patients daily. And the breadth of our service lines is a key differentiator as many of our patients have comorbidities that cut across service lines and acuity levels. Combined with our clinical quality and our operational track record, we believe this gives us a unique platform to lead the behavioral health industry.

This slide reinforces our leading health system JV partners across the country. And an important part of our strategies that we're very proud of is that we have JV partnerships with leading health systems for acute psychiatric care and really some of the most prestigious names in all of health care. Generally, these health systems either seek us out directly or they choose us as a partner as part of a competitive RFP process as they look for the highest quality psychiatric partner for their patients. Over the last few years, we've been able to establish partnerships with 21 different JV partners across the country. And we're really proud of our track record of success with these JV partnerships. And one outcome of this track record is that we now have multiple partners who have returned to set up an additional joint venture facility with us in a different geography. We'd call out Geisinger and Ascension that both fit that category.

Acadia has strong diversification across 3 different dimensions. As you can see here, we're covering service lines, payers and geographies. So on the left, on our service lines, acute, you can see is the largest of our 4 service lines at 55%. And each of our service lines, as you can see, has significant scale. In the middle, on payers, you can see we treat patients with both government and commercial insurance with over half of our revenue from Medicaid. And then you can see on the right that we have strong geographic diversification with facilities across 40 states and Puerto Rico.

Our strategic vision that we set out several years ago is to lead the industry as the indispensable behavioral health provider for high acuity and complex care patient populations. To achieve that, we have 3 major priorities that you can see in the dark blue boxes here. The first is to deliver high-quality patient care. The second is to further enhance our core capabilities. Examples of this include our technology investments that continue to enhance our quality and operational effectiveness across all areas as well as continuing to strengthen and support our workforce. And then the third is expanding access to care by selectively adding capacity across our business.

I'd like to now talk about the progress that we've made across multiple fronts over the past year. Starting with quality. As we've discussed many times, a core part of our strategy at Acadia is winning on quality. First and foremost, this is because quality drives clinical outcomes and patient experience, but quality also drives operational effectiveness, a diverse set, diverse array of stakeholder relationships, including payer relationships and ultimately drives growth. We are extremely proud of the quality our clinicians and other frontline staff deliver every day, but we're also working to continue to play a leadership role in the industry and to take our quality to the next level.

Because quality is the product of everything else we do, our effort to continue to enhance quality is inherently multipronged, spanning the full gamut of people, process and technology. We've talked a lot about the fact that we're implementing EMRs in each of our acute hospitals and RTCs. While EMRs are commonplace in med-surg hospitals, we are leading the way in the behavioral health industry with our approach.

Another example is our implementation of remote patient monitoring devices to ensure adherence to our care requirements consistently across our facilities as well as to provide critical documentation of patient care and outcomes.

One final example I'll cite, which spans not only technology but also process and people is that we're implementing robust analytics and dashboards for our operators in managing quality across our portfolio of facilities.

On the labor front, we've also seen consistent improvement in labor trends. As previously noted, we've seen 6 straight quarters of increased retention that we're very proud of. This has been a result of both an improving wage rate inflationary environment as well as our efforts around centralized recruitment, employee engagement and targeted training.

Another thing we'd call out is a critical driver of our progress in '25 was the transformation of our acute leadership team. So we recognize that achieving our quality ambitions require not just process and technology, we had a different caliber of leadership at the facility level. And so over the past year, we have enhanced leadership across many of our hospitals with experienced operators who bring deep clinical and operational experience. These leaders are implementing our key quality initiatives at the local level, driving greater transparency and accountability and ensuring data-driven action planning. They've managed this transformation while navigating a threefold increase in survey activity and external scrutiny across the entire industry, all while remaining laser-focused on maximizing clinical outcomes for our patients.

This transformation wasn't about reacting to short-term challenges. It has been a deliberate forward-looking move we've made to raise the bar across our entire acute network. Our acute leaders are laser-focused on maximizing clinical outcomes for our patients, strengthening payer relationships and positioning Acadia as the standard setter in behavioral health care.

Finally, on new beds, we opened nearly -- we opened over 1,000 new beds in 2025, including 778 beds in newly constructed facilities. And over the past year, we've added over 2,500 beds from newly constructed facilities alone. As you'll see in a few minutes, there is a significant EBITDA opportunity to unlock as these facilities continue to ramp.

This next slide, we've put together because we're really proud of the care that our providers deliver every day to patients in need. And this slide is reflecting the outcomes that we're beginning to see that our teams are driving as well as patient experience. On the left, you can see the strong patient outcomes. Our caregivers are driving a 29% improvement in mental health quality of life and a 54% improvement in depression. On the right side, you can see that we're also driving an improved patient experience. Over the past year, we've seen an over 10% improvement in the overall rating of care provided and a greater than 10% improvement in the likelihood to recommend our facilities. At the same time, we significantly increased the number of patient surveys we're capturing with a 43% increase in surveys collected versus the year ago period.

I want to spend a moment on this slide talking about our CTC business. As mentioned earlier, our CTC line of business is comprised of 178 clinics for the treatment of opioid use disorder. We combine medication management with individual and group therapy as well as other specific support services to assist the patient acclimate into the community. Our scale in this business allows us to strategically invest in technology to improve the overall patient experience. And that scale is what allows us to continue to make significant strides in how we manage our clinics to ensure the highest quality and best patient outcomes.

For example, we realized early on that access and wait times were critical to the success of each clinic as these often play an important role in keeping our patients in regular care. Through a series of studies and analyses at our clinics, we've made process improvements to ensure that all patients can receive care. There are no wait lists at all at our facilities and that our patients can receive care in the most efficient manner possible with wait times at our clinics now around 5 minutes or below on average.

This greatly improves the patient experience. You'll see at many competitor facilities lines down the block, which is not only a deterrent to patient care, but it also can create a negative perception in the local community. At the same time, shorter wait times has improved throughput, driving operating leverage in our clinics, and this is also a relatively low capital intensity business. So we can efficiently deploy capital to grow our footprint while generating strong free cash flow within these CTCs.

This slide reinforces that '25 was another year of very strong bed growth for the company. We opened nearly 1,100 new beds in 2025, including new joint venture facilities with key partners such as Henry Ford in Michigan, Geisinger in Pennsylvania and Ascension in Texas. Those beds, along with the beds opened over the last few years, represent a significant EBITDA opportunity that we'll talk more about shortly.

We've also been undertaking a portfolio review process and closed 5 facilities in 2025. When community needs evolve, we work with local stakeholders to adjust our service offerings and facility locations accordingly. And these decisions are never taken lightly, but they reflect our commitment to maintaining an optimized high-performing portfolio that supports long-term growth and operational excellence.

By concentrating our resources on markets and service lines with the strongest demand fundamentals and reimbursement dynamics, we're positioning Acadia to deliver stronger, more consistent results. And we'll continue to assess our footprint with rigor and make thoughtful adjustments where appropriate, always with the goal of enhancing performance, improving shareholder returns and creating long-term shareholder value. And we'll continue to do this while creating a world-class organization that sets the standard for treatment and behavioral health.

I'd say, finally, as we previously communicated, we expect CapEx to come down materially this year in 2026. We anticipate a reduction of at least $300 million relative to our $610 million to $630 million 2025 guidance, while still adding between 500 and 700 beds this year. And we'd anticipate CapEx to decline further in 2027. That will enable us to begin generating meaningful free cash flow for the business.

While we've made progress against many key initiatives in 2025, it was a difficult year from a financial performance perspective. You can see here the drivers of the gap between our initial guidance at the start of 2025 to the midpoint of our current guidance.

Starting with PL/GL in the first yellow bar on the left, over half of that variance versus guidance has been driven by higher-than-expected professional liability costs. We've experienced an increase in costs for claims related to prior policy years as well as elevated claim frequency. The good news is that we materially ramped up our investments in quality and oversight beginning over 3 years ago, and we've made significant progress since that time. We expect these investments will help mitigate future growth in these expenses. However, given the long tail on many of these claims, it will take time to show up in our financial results.

In the middle, on the volume front, we saw softer-than-anticipated growth as our operating environment faced headwinds as we moved throughout 2025. This was particularly notable in our Medicaid book in the acute line of business. And what we've experienced is incremental pressure, as we've discussed before from payers, Medicaid payers in particular. And we think that's been, in large part, a reflection of the pressure some of the Medicaid health plans have been under in their own businesses. We've also seen a slower ramp in occupancy from our recent cohorts of newly built facilities.

And then finally, on the rate front, we've experienced incremental pressure on the revenue yield per patient day. That includes increases in bad debt and denials as we've seen increased payer pressure, and that pressure was offset in part by improved Medicaid supplemental payments as states continued to expand access to those programs.

Turning to occupancy ramp for our recent new facility cohorts. This is an area where we faced headwinds in 2025. This chart shows our expectations versus actual occupancy for the 2023, 2024 and our 2025 cohorts. The light blue bars on the left represent where we expected occupancy to be for each cohort in 2025 and the dark blue bars next to them are the actual occupancy in 2025. So as you can see, actual occupancy trailed our initial projections across these cohorts.

I think the question is why? And the answer is 2 main factors. First, softer volume trends in Medicaid-heavy markets driven by payer pressure and more aggressive utilization management. And then secondly, the complexity of ramping new facilities in an environment of heightened regulatory scrutiny on our industry.

To give you a sense of some of the complexity of ramping a new facility, first year ramp is gated by licensure surveys and accreditation, which is usually around 75 days; and then a Medicare tie-in, which can take another 2 to 6 weeks; a Medicaid eligibility, which is often 6 to 8 months; and payer credentialing. In markets where payer contracting moved quickly and referral pipelines were strong, we've seen occupancy build ahead of plan. These facilities demonstrate that our operating model works when external conditions align. Conversely, certain geographies have faced friction, particularly around Medicaid credentialing and authorization processes. Even with very strong referral activity, delays in network participation and heightened utilization management have slowed census growth in places. That said, these cohorts, overall, represent a significant embedded growth opportunity. And as we'll discuss in the next slide, we expect these beds to continue ramping and contribute meaningfully to EBITDA as we execute targeted initiatives.

This next slide shows the opportunity that we see with these new facility openings. And despite some of the near-term ramp challenges, we still believe that the long-term opportunity for our recent investments is very compelling. Over the past 3 years, we have opened more than 2,500 new beds, and we expect to add another 500 to 700 beds in calendar 2026. These 4 cohorts, 2023 through 2026, represent over 2,000 beds from new facility builds, translating into at least $150 million of future EBITDA at maturity.

When you factor in the burden of start-up losses on current run rate EBITDA, the incremental opportunity exceeds $200 million. This is powerful untapped earnings and free cash flow growth engine for Acadia. Importantly, this estimate excludes expansion beds. These expansion beds would be incremental.

Many of these projects are joint ventures with leading health systems, as we've covered before, which accelerates our volume ramp and certainly enhances our referral pipelines. Our focus in 2026, in one word, is execution, optimizing occupancy, leveraging payer engagement and driving operational excellence to unlock this value.

Let's speak for a moment about several of the headwinds and tailwinds that will impact us in 2026. While we will provide formal guidance as we always do in February, I did want to take a few moments to call out some additional color here. Overall, we remain confident in the strategy we're executing across the company to provide strong clinical outcomes for our patients and the communities we serve. We see the following headwinds and tailwinds as we enter 2026, and we'll start with headwinds in red here on the left.

We do anticipate continued softness in acute care Medicaid volumes along with continued payer-related pressures, consistent with trends observed throughout 2025. We're also closely monitoring the reimbursement environment, which continues to evolve as government payers face significant cost pressures. We remain a committed partner to our payers, and we believe we can play a meaningful role in improving outcomes for the patients we serve.

In one recent state development, the state of New York has decided that it will not allow its Medicaid patients to receive care in out-of-state facilities. We have multiple specialty facilities in Pennsylvania near the New York border that will feel the impact of this change. We currently estimate a $25 million to $30 million annual EBITDA impact if we're unable to backfill those beds.

As we've disclosed previously, we had a nonrecurring $28.5 million benefit from Tennessee's 2024 supplemental payment program, which was recorded in the second quarter of 2025. And then finally, we're closely monitoring changes in staffing ratio requirements for the industry in California. California is a tight labor market, as many of you know. And if these ratios go into effect, we may need to reduce census at our California facilities.

Turning to the right side of this slide in green on the tailwinds. Several key adjusted EBITDA tailwinds include ramping contributions from the large number of bed additions over the last several quarters that we've covered before, expanded supplemental payments, which, if implemented, we estimate would provide a $22 million onetime EBITDA benefit as well as an incremental run rate EBITDA benefit in excess of that. We anticipate generating positive free cash flow this year as we expect to see CapEx decline by at least $300 million. And finally, we expect a tailwind from anniversarying recent facility closures and a modest decline in start-up losses.

This final slide I'd like to cover focuses on the multiple operational improvement initiatives that we've put in place across the company. As we move into 2026, we've taken decisive action to optimize both our growth investments and our existing portfolio to position our company for improved financial performance in a more uncertain environment, particularly in light of the current headwinds, which we believe will ultimately be transitory in nature. First, we are very focused on capturing the inherent growth opportunity that currently exists in the business. As I noted earlier, we have over -- we've added over 2,500 beds over the last 3 years, and we expect to add another 500 to 700 beds in 2026. This includes new facilities developed in partnerships with new marquee joint venture partners such as Tufts Medicine and Orlando Health. These are facilities that -- new JV partners that will open this year. These additions are expected to contribute meaningfully to both same-store volume and EBITDA as they ramp over the next several years and reach their full performance potential.

As we continue to optimize the impact from beds added in recent years, we are also driving execution across all of our facilities in order to provide high-quality and effective health care to our patients. To support these efforts, we've implemented a series of targeted initiatives focused on acute care referral sources. We've developed these referral source action plans at underperforming facilities with senior operator ownership and weekly executive team updates. We've repositioned key clinical roles, introduced more data-driven planning and allocated dedicated resources to support execution.

Over the past several years, we've made meaningful investments in our quality platform, including standardized clinical protocols, enhanced data systems, outcome tracking, all of which are becoming increasingly important to both our payer partners and to our accrediting agencies. These investments are designed to strengthen care delivery and demonstrate the value of our services, and we expect them to drive long-term benefits for patients, payers and our business. We're closely engaging with our important payer partners, particularly in Medicaid, to demonstrate how our unique investments in technology and process position us to be part of the solution to the cost pressures facing government and other providers and other payers.

As a result of these steps, as we finish 2025 and move into 2026, our company is in a better position to serve more vulnerable patients in our communities with higher quality care, while at the same time, delivering long-term growth and unlocking the free cash flow generating power of the business.

So with that, I'm going to turn things back over to Harry, and we'll get into the Q&A.

Great. Thank you, Chris. That was awesome. A lot of great information there. I wanted to first touch upon the significant number of beds you've added over the past few years. And Todd, feel free to jump in here. Just overall, how do these investments position Acadia for growth long term?

Yes, we're very excited about the new capacity we've brought online. There's a lot of unmet need across the industry, and this is really the focus of our team across all of our facilities is how do we help this vulnerable patient population in times of distress get to better outcomes. And as you saw from the outcomes that Chris shared, meaningful reductions in depressive symptoms, meaningful improvements in quality of life. And so what these facilities are doing, first, they're with these really high-quality JV partners.

In many cases, they're new beds working with some of the best health systems in those states. And they've turned to us as a way to treat this patient population because it is a really hard patient population to treat well. And again, that's where these quality and clinical outcomes, we're thrilled to finally have data to share because it does go to what our teams are doing on the front lines every day.

From the standpoint of EBITDA growth, these are the beds that are available. No more capital will be needed to fill these patients and these cohorts we brought on in '23, '24 and '25. And most of the capital is behind us for the '26 beds. This is a great opportunity. As we noted in the presentation, they've not been filled as fast as would be expected or what history would show with the information we shared last year. But we're very confident that we are going to continue to increase the occupancy rates and be able to provide for that. And with that, we're going to unlock a lot of growth. As we said, over $200 million from these new facilities, excluding the expansion ones relative to what we're doing here of about just over $600 million in 2025. So a lot of earnings potential that's really from this bed growth.

At the same time, we've made a decision to slow down these investments because we have asked a lot of our teams to digest this level of expansion to deal with all of the investments we've been making in quality and process and technology at the facility level. And so we had some growing pains in '25. We didn't deliver at the level we expected, but we think with greater continuity of leadership teams on the ground will help that as we move into '26 and forward.

Great. And you sort of started to touch on it there, but Chris had mentioned the plans to reduce CapEx spending in '26. How do we think about that decision in the broader context you were just playing out?

Yes, a lot of it is we've got a lot of embedded growth available. And with that, we need to deliver against that and deliver higher occupancy and look to do that over 2026, '27, '28.

The other element, construction costs have ballooned over the last few years. So the cost to add beds has jumped up dramatically where the rate environment we're facing is mitigating. It's going back to the historical norms of a couple of percent a year. So we're factoring all of that into where do we look to deploy capital. But we feel very good that we can continue to grow well while not adding the same number of beds that we've added in the last couple of years, understanding that as we start to generate this free cash flow, we'll delever. Leverage is up a little higher than we would like, but the opportunity to bring that down. And then we'll look at the M&A environment as well.

It's a very fragmented industry. As Chris noted, we're the #1 independent behavioral health company. There's one other big public competitor in the space, but there's a lot. So it may be more efficient to acquire beds than to build our own depending on the different capital markets at the time we look at it. But right now, we're very confident we can get growth without needing to add beds here in the next few years as we get these facilities to ramp up to that sort of 80% occupancy that most of our historic facilities run at.

And Chris had touched upon some of the headwinds that you all are experiencing, and that's, I think, broadly felt across the industry. Can you dig a little deeper on the ways you're addressing those challenges? And I think it would be interesting to hear about some of the payer pressure you're seeing, how you're partnering with your payer partners and then also just the slower ramp in the new facilities as you bring those online.

Yes. Our government relations team does a great job of interacting with the different state and federal organizations. At times, there are decisions made that we don't, frankly, understand from an economic standpoint. This decision by the state of New York not to provide for their patients if they go to a facility right across the state line in Pennsylvania is one of those. That's a headwind to our business in '26. It's unfortunate patients are going to have to travel further to get care that's probably not as good as what we provide, and it's going to cost the state more money.

So those are things that we are often trying to understand. The staffing ratios in California, again, not something that's going to be good for patient care. Our focus is on delivering for patients, delivering that high-quality care with really good outcomes. And with that, it improves both the government relations side, but also on the payers. We've called out this payer friction that we've been experiencing, especially in the back half of 2025. It continues to be something we're engaging with all the time, but it is a part where we want to be able to show these outcomes because we think that helps in those discussions on length of stay and how long a patient needs to be treated for.

Our acute patients are treated in the U.S. for a far shorter amount of time than anywhere else in the world. And that's not ideal for patient care. And so this is something where we've really made these investments in quality and data so we can provide outcomes and really help the payers understand the impact of their system of these patients coming back in. If you have both a behavioral health need and another comorbidity, it increases your cost 3 to 5x on the network. That's the sort of information we're sharing with payers. We're getting in front of them and having those conversations because it is such a critical element when over 50% of our revenue comes from Medicaid.

Right. And maybe on the flip side of that, what are the bigger opportunities that you all are keeping your eye on and teams are preparing for, say, for the next 3 years that you're trying to capitalize on?

Our focus is fundamentally the quality of care, delivering that with good process. Attrition in the industry is still very high. It's a tough environment for people to work in. And with that, we need really good process, really good technology to be able to deliver consistent care every day to the patients. And those investments are paying off. We're seeing it in the outcomes. And so for us, it's really continuing to do that while ramping occupancy, working with our referral partners, making sure we're getting payers to understand the best outcomes with us and to have those emergency rooms, those police departments knowing that they can go to Acadia and get really good care.

Given the number of beds we have available to occupy, that really is the focus for the next few years. And as we do that, we're going to see profitability increase, cash flow increase, leverage come down. And again, we think that all provides a good result for shareholders.

That's great. You talked a little bit about clinical quality there, and so I just want to double-click clinical quality outcomes, like how do you think about that in your overall strategy? How do you see it differentiate Acadia?

Yes. I think as you saw, this 27% improvement, 54% improvement affect sizes at the 97% level, like having a big material impact on patients' lives. First off, that's what we're here to do. That's what our people on the ground are focused on every day is really making that impact on the patients. And so as we do that, we're then taking the data. The investments we've made in electronic medical records now means we have the data. We're taking our data when a patient comes in the front door and then collecting that when they leave so that we can compare that.

That then gives us more information to go to payers to help them reduce their overall care costs within the network on it. So far, I would say we've made those investments, and we're starting to deliver on the care and the data, but we haven't been able to get yet the higher level of reimbursement, but that will continue to be our focus as we do it. But really, it comes down to that process and technology so that we can give that consistent care. That's been investments.

Our cost at our facilities is up because of the IT investments we've needed to make license fees. But we do think, over time, that's going to be the driver that lets us give this consistent quality of care. It also should help on this litigation risk. Chris talked about the big downside to us in 2025. It was this increase in the cost of the product -- I guess, not product liability in this side, now that I'm on the provider side, but the provider liability that comes with treating patients.

Most of those claims and the increases were from cases from 2019, 2020, before these investments were made at Acadia. As we're making them, we have better visibility to what's causing incidents to happen. We've got better control over that. And that should then reduce this and help bring that cost much lower than what we expect it will be in '25 or '26.

So all of those things feed into this integrated loop that we've been driving, which is investments, good people on the ground, taking care of patients, delivering high-quality outcomes. With that, it makes for a long-term sustainability of our business. We'll have payers that want to work with us. We'll have referral partners that are excited. We'll have more JV facilities and health systems that want us to be the provider of choice and better outcomes should lead to lower litigation costs in the future.

Yes. That's great. I think we have maybe time for one more, so I just want to squeeze this in. Zooming out on behavioral health has been a recurring challenge in our country for a number of years, to say the least. What is your view on the demand trends overall heading into 2026 as you're working with your payer partners or the JV partners that you have?

Yes. And I think we put some stats in there, and they don't get refreshed quite as often as we would like. So they're a little dated. But unfortunately, I don't think that trend is stopping. Suicide rates for young people certainly higher than we would like. I think a lot of us thought coming out of COVID that we'd get back to more of a normal course on this topic. But unfortunately, that hasn't been the case. I don't know if it's the screen time or whatnot that we all deal with our kids. But certainly, it is an area of the opioid use. Deaths have come down with Narcan being far more available, but the incidence rates are still really high. That's where, as Chris mentioned, great results on our CTC business and where that plays out from just helping more people. So unfortunately, we don't see the demand dropping at all, and we think we're really well positioned to help those patients as they come in need. And again, that's fundamentally the mission our teams have and what we look to do every day at Acadia.

Awesome. Looks great. I think we're going to have to leave it there. Thank you both. Thank you all for joining us today. Have a great rest of your evening.

Thanks, Harry. Thanks, everyone.

Thank you.

Hey, everyone. I'm Joseph Overman, I'm on the health care managed care and facilities team here at UBS. Today, we have Acadia Healthcare with us. We have Chris Hunter, Chief Executive Officer; and Todd Young, Chief Financial Officer.

Just a good place to start off today would be the 8-K that you all filed after the close yesterday, which announced that the company has agreed to settle previously disclosed shareholder litigation for $179 million. Can you just walk us through some of the key considerations there? And why would you all agree to settle that case?

Yes. Thank you, Joseph, and thanks for having us. On the 8-K, I think the first thing that I would mention is just that the company has consistently denied any wrongdoing and the announced settlement that we put out this morning will not include any admission of fall or liabilities. So pending the expected court outcomes, the settlement just brings us one step closer to finally putting this behind us. This is going on for many years.

This is a case that goes all the way back to 2018 time frame and centered on allegations that the company had made misleading statements about its business and financial performance between April of 2014 and the end of 2018. So $179 million settlement. We expect to finalize this at the end of November here. The payment is going to be funded through a combination of approximately $30 million in anticipated insurance proceeds, the remainder from cash on hand and existing line of credit.

We also believe that we continue to be very well capitalized with a strong balance sheet. Our net leverage will increase modestly from 3.4x to approximately 3.65x, which we view as manageable just given our cash flow profile and just our ongoing efforts to unlock value across the business. So we believe that it's in the best interest of the company and shareholders to move on here and that's really the reason that we want to reinforce that settling does not mean we accept the allegations.

Okay. Got it. At this point, we're now 10 months into the year, into 2025. How has the year been so far for you all? How have the results compared and differed from your expectations coming into 2025?

Yes. I would start and maybe just turn it over to Todd. I think I'd start by saying through the third quarter, our results have come in modestly below expectations, and we've taken steps to reflect that in our guidance that we provided last week. I do want to cover what I think we have done in 2025 that really sets the company up for significant growth in 2026, and I think positions us to really unlock the free cash flow generating power of the business.

So we brought on 1,700 beds over the course of the last few years. So calendar 2024 and then year-to-date 2025, 632 of those beds will drop into the same-store calculation in the first quarter of next year. We've done work on optimizing our portfolio. We've had to close down a few underperforming facilities.

We've been very outspoken on our commitment to capital deployment and taking our CapEx down by $300 million next year, while still being able to generate significant beds. We have invested heavily in quality and safety initiatives that really have set the company up well as we have seen an environment across the entire industry that is becoming more scrutinous and that we're seeing more surveys of facilities. And we're the company that is expanding access to care and building all these beds. So we're really proud of the progress that we've made on that front. Todd, what would you add just on the -- considerations.

I mean that's -- fundamentally, as we look across the next 3 to 5 years. The earnings power of the company has been built with this additional beds being added on and our ability to execute. Now unfortunately, we've had to close a few facilities that were underperforming and that happens when you have nearly 280 facilities in the total portfolio. But all of those things, I think, have been done with great rigor and insights. And now we're looking to really increase that free cash flow generation of the business, reduce leverage and give ourselves a better platform moving forward.

But again, overall, the company has weathered some storms and is getting through that. And I think that's what sets us up to really drive growth going forward is the ability to continue to drive volumes into our new facilities and work with our really high-quality JV partners to provide great care to patients.

The end of the day, that's what will create the value. And the team is really focused on that and build these quality initiatives to really handle the additional regulatory scrutiny that's being put on the industry at the moment.

Okay. And then what is the latest you all are seeing on the volume trends? I know you all have been dealing with some pressure, primarily, it sounds like for managed care companies. Can you just talk about how these headwinds have developed and what the impact has been for Acadia?

Yes. I think overall, as we talked about last week on our call, we have seen more pressure with managed payers with pre-authorizations looking at things after 3 days versus but an acute patient be in for 7 to 10 days. We've seen greater focus on those elements. And so while we're very pleased with the 3.3% same-store admission increase that we saw quarter-over-quarter it was offset by less revenue per patient day and again, some strengths on average length of stay coming down.

Now generally, we've been adding a lot of acute beds. And then the acute patient is typically in a facility for 7 to 10 days. And thus, over time, our average length of stay as a company is going to drop because of just the percentage of acute beds relative to other beds. But it is something that we're working with, with the payers, especially on the managed Medicaid side.

And we think those conversations are going well. We have seen their public earnings calls talking about their behavioral health spend, and we think they're being a little reactionary in certain areas that we'll work with our data. I mean, I think one of the things we talked about already is the increase in putting electronic medical records in the facilities, getting better quality data and outcomes that we can take to the payers. And when we do that, we get good responses from them. We're continuing to do that at every level.

Okay. And the recent guidance updated with the third quarter earnings call implies a deterioration in the fourth quarter versus the third quarter. We've gotten a lot of questions when investors asking, is this pressure that we should extrapolate into the future, into future quarters and 2026 potentially? Just sort of in your view, what's the right way to view these headwinds that you've called out for 2024 -- sorry, for fourth quarter 2025.

Yes. Joseph, let me take that one. We've been clear that the fourth quarter, particularly when we provided our guidance last week, reflects a number of different headwinds from volume softness, some of the rate pressures that we've seen, certainly elevated bad debt and denials and we called out an incremental $5 million PL/GL expense.

So those collectively drove the step down in our guidance. But that said, we do not believe that the fourth quarter should be viewed as a new baseline for '26. And I think there are several factors that I would point out. And I think the first is from a start-up losses standpoint, we expect start-up losses to decline modestly in '26 as we shift to more of a focused growth strategy, Q4 represented the peak for start-up losses in '25, and we anticipate having a step down next year and then certainly into 2027 as well.

The next thing I would call out is that we have taken decisive action on underperforming facilities, which should not only improve our margin mix but also reduce some drag on EBITDA next year as well. A third would be the ramping contributions that we're seeing from the recent bed additions. I just called out the 632 beds that are entering the same-store calc in Q1. That should really help us from a volume growth standpoint and also operating leverage.

And then I'd say that we also have just been actively engaging with payers across the country. Just trying to have discussions directly about the caliber of investments that we've been making and how we can continue to be partners there. So I think just stepping back, we're still finalizing '26 in our budget there, and we're going to be providing formal guidance on our Q4 call in February. But we do remain very confident in our long-term strategy. And we just believe that the actions that we're taking here are going to continue to position us very well for '26 and the future.

Okay. The provider sector more broadly, has talked about some of this increase just scrutiny from payers over the past couple of years, although it does seem like Acadia might have been dealing with more than what some of the other providers have been seeing. Do you view this as something specific to behavioral health? Is it specific to the payers you contract with, the geographies that you operate in? What -- how do you view -- what's causing Acadia to maybe see trends that are different from some other providers?

Why don't I start and then see if Todd wants to add anything on this front. But I would say we are in a part of health care and behavioral health that has seen historic underinvestment relative to the rest of health care. We know that the HITECH Act that provided meaningful use dollars and certainly led to electronic medical records and other parts of health care, including the med-surg providers left the behavioral health companies out.

And so we have been a company that has been very intentional about investing in quality infrastructure, that we believe is going to directly help payers manage cost and certainly improve outcomes. And that's something that -- we want to be a partner to the payers.

We know that there are under significant cost pressures, particularly in Medicaid, and we really believe that given the acuity of the patients that we're serving and the exploding costs that we have seen documented in other parts of the system that these patients don't get strong care that we really can be a high-quality, evidence-based partner for these payers. And that's something that we want to leverage the investments that we've made and continue to talk about ways to be more of a partner. But Todd, what would you add?

Yes, I think that just -- there is pressure on federal and state programs depending on states taking different approaches. I'm sure folks have heard about those that are having cuts on reimbursement as we've had these negotiations. And so all of those things are things that we're using our data and our quality of our outcomes to help offset, but the demand for the services is up and you're seeing that with the payers' budgets being impacting them calling out behavioral health as an area.

That again is an opportunity for us going forward as we've got more ability to help those patients in need. And that's what we have to do is keep converting it and demonstrating the payers that we are net improvement to their overall network of costs. I think we know the comorbidities that come with behavioral health diagnosis that it's 4 or 5x more costly to treat those patients if their mental health area is not treated. And so that's the facts and the data that we keep having as our teams interact and negotiate and talk with the payers frequently.

Okay. Acadia has added 1,700 new bed additions in 2024 and through the first 3 quarters of '25. Can you walk us through just the typical ramp-up for new bed additions? How should investors be thinking about the embedded earnings potential from these new bank additions as we head into 2026?

No. It's really exciting. We're excited to be able to treat and help more patients across the U.S. and we start with our JV partners. Those facilities that we've brought on in 3 new JV facilities next year that drives most of that a 400 to 600 bed increase or with partners like Tufts, like Orlando Medical.

And those are the opportunities to take a new facility and ramp faster than one that doesn't have a partner. If we start with the slowest ramp is probably new -- brand-new facility in a new area where we don't have a JV partner, just given you have to get all the staffing, we don't have the local relationships at the same level.

The fastest ones that ramp are bed additions, we'll have a facility that's 100 beds, we'll expand it to 130 beds. That usually goes much quicker just given the nature of that sort of expansion. And so overall, we've shown at previous conference last year, cohorts going back to 2020 and how fast they ramp. But generally speaking, we're looking to ramp these as quick as possible. And that is the big embedded opportunities we take the average EBITDA from the new facilities and get it up to a corporate average, there's a lot of embedding earnings growth available that will demonstrate over the next couple of years.

Okay. Acadia has closed down a handful of underperforming facilities recently. You've talked about it on the earnings calls. Can you just walk us through the process for how you make those decisions? Is this something that is part of an ongoing process that would be expected to continue going forward? Is this more of you've worked your way through most of your reviews, and it's smaller going forward? How do you view the closing of facilities.

Yes. Joseph, I'll take that one. I'd start by saying that we do have 278 facilities across 4 different lines of business and it's always a difficult decision to close a facility. We're taking a very disciplined and deliberate approach to the way that we think about optimization and we go through a number of criteria.

I mean it starts with does the facility continue to have the potential into the foreseeable future to contribute meaningfully to patient outcomes and to clinical outcomes and operational efficiency. Is there a path to alignment with our long-term strategy? Is there a path to delivering sustainable EBITDA and earnings growth?

In '25, we did announce the closure of 5 facilities that after going through a facility-by-facility process in review, we decided to make -- to take action there. We've also ring-fenced a small group of facilities that are on a watch list, but we're continuing to watch closely.

But other than that, we do not see any other actions that we'll need to take. I mean, again, we have 278 facilities. We're always in the process of reviewing our portfolio and holding our operators accountable. But we're really looking forward to moving into '26 and having taken these actions, I think will help us kind of put our business forward.

Okay. Acadia has also announced the pause of several new facility developments in the past couple of quarters. Were any of these JV facilities? Or are they all company-owned de novos? And are these more of temporary short-term pauses as you wait for the environment to change? And if there is a rebound in demand or a rebound in dynamics could you restart these projects quickly? Or is that more of indefinitely on pause and revisit in the future?

Yes. Todd just referenced the significant importance of joint ventures to our strategy into our growth and we're very proud of that. I mean, again, just in calendar 2025, being able to open really important facilities with Henry Ford in Detroit, Geisinger in Pennsylvania, Ascension in Austin, Texas, and then looking ahead to next year with Tufts in Boston, Orlando Health in Florida.

Here in Florida, we are looking to continue to execute on these JV commitments that we've made. So many of these decisions have really been more focused on de novos, where we've decided to scale back from a given market. There certainly, to answer your question, could be circumstances that we would restart and review these projects in the future.

But we also have a very high bar for the deployment of capital, and we look at every single opportunity to deploy capital individually. And we have a committee that goes through that, and this would be no exception there. So we've made these decisions, and we're moving forward.

Acadia operates across multiple different segments. You have your acute, your residential, specialty and the comprehensive treatment center segment. It sounds like the closures have been spread across various types of facilities. Has your view on the long-term attractiveness of any of these specific segments changed over the past couple of years?

I would say it has not changed. We continue to view all of our core service lines, acute specialty, RTC, CTC, all is strategically important and tying into our long-term growth framework. And so -- that said, we have taken a more focused approach to portfolio management over the past year than we have in the past. And that's clearly reflected in the 5 facility closures that I just talked about, 4 of those were specialty facilities and 1 was acute.

So in that specialty segment, I would say the closures were driven by shifting market dynamics primarily, particularly in areas like eating disorders where we just overall did not see the ongoing and continued demand, but really a recognition that certain programs just didn't meet our hurdles with respect to outcomes that we're able to generate and long-term strategic fit.

On the acute side, the single closure that we had in 2025 was tied more to persistent underperformance and just a lack of a clear path to improvement there. So overall, on the CTC front, we disclosed last week, really strong growth quarter-over-quarter in that business. We've added 14 new CTCs year-to-date. We continue to see meaningful opportunity for accretive growth there, both on the organic and the inorganic side.

And so overall, I would just say that we've made targeted adjustments, but our broader strategy remains unchanged. We're very focused on growth in markets and service lines with strong fundamentals, and we just continue to remain confident overall in the attractiveness of each of these segments.

Moving on to the expense environment. The labor environment has been cooling off a little bit in 2025 after a few very tough years post pandemic. In the 3Q earnings call, you all mentioned some incremental headwinds from employee health care costs. Just looking broadly, are the total salaries and benefits still trending as you've been expecting them to? And what type of wage inflation are you expecting as we head into 2026?

Yes. I think a fair question on the labor front. I would say overall that we're seeing very encouraging signs of stabilization in the labor market, particularly relative to what we were seeing as a contrast at the end base wage inflation has ticked down slightly in Q3, and we've now had 6 consecutive quarters of improved employee retention, which for us, reflects the success of some of the really significant employee engagement and workforce development initiatives that our HR team has put in place with a lot of success.

From a cost perspective, same-facility salaries, wages and benefits or SWB per patient day did increase in Q3, but that was primarily driven by lower patient day volume which reduced the denominator and created a little bit of upward pressure on per day metrics. So we also saw some modest headwinds from internal medical expense, as you called out, particularly employee health care costs, but these were also manageable.

So as we look ahead to calendar 2026, we expect the labor market to remain generally stable, and we're going to provide more guidance on that when we come back in February time frame. But in the meantime, the investments that we've continued to make on the technology front in centralized recruitment in our quality infrastructure, all of those have continued to support staffing efficiency and overall retention at better levels than we've seen in the last few years. And we really believe that's going to position us to convert these rising referral volumes that we've seen into admissions even more effectively.

Professional and general liability expense was a headwind for you all in the third quarter. Coming into 2025, that was already an area that was expected to be a source of some pressure. Can you give any additional detail on that line item? And was the step-up in 3Q more of a onetime true-up to catch up? Or is it closer to a run rate for future accrual of that line item?

Yes. So we're still waiting on our actuarial report for the year on this. But based off what we've seen across the industry is this is an industry-wide issue, it's not a Acadia specific one and then also our own internal case experience. We made the decision that we needed to add additional expectation of a higher expense for that here in Q4.

Now that does reflect an expectation that we've probably been a little under accrued throughout the first 3 quarters of the year, much like you saw in Q4 of last year when we had an incremental $14 million. So this doesn't necessarily reflect a full run rate, but we also don't know what the final answer will be. We've given prudence in our guidance here on our expectations, we'll learn more and then were reflected in 2026.

But certainly, one of the things is we went and renew this insurance with our carriers, the investments we've made in quality, the investments we've made in patient safety, all of that is really being recognized by those carriers and helping us get better rates than we would have otherwise had. Now again, that's always a tough situation when it's better than you'd otherwise had, but it's still worse than where you were.

But again, we do know that these investments we're making and the results we're able to demonstrate is being recognized even though we are in this tough environment when it comes to these risks and insurance costs related to them.

Okay. You all have talked about $22 million of EBITDA upside from pending supplemental payment programs that could be included in 4Q results if these programs are ultimately approved by the end of the year. Do you have any updates on the status of these programs? And is this $22 million number, just the amount that you expect to recognize in 4Q? Is this close to an annualized run rate? Is it close to a single quarter of benefit? How should we think about how much of business catch up versus forward-looking earnings?

Sure. No. And these are kind of 4 states generally that make up this possible $22 million yet this year. It looks like the government is going to reopen based off the last, I guess, 24 or 36 hours, that's a positive as we need CMS to work with the states and approve these programs. It could come -- yet this year, it could come right in early comes in early '26, and it will be almost all retroactive and then we'll get this benefit from having these programs in place for our base business in '26 as well.

So we would expect run rate basis once these are going to have at least $22 million of annual EBITDA improvements from the programs. But where it hits yes, '25, early '26, but it's a net positive for our economics and our cash flow going into 2026.

The current administration has made some major cuts to the Substance Abuse and Mental Health Services Administration, including laying off about half of the workforce and terminating some grants to state health departments that were intended for addiction and overdose prevention funding. Are you seeing any impact from these administrative changes or any other administrative changes that are impacting your business?

Well, I think from a public health standpoint, we continue to track all of this, and we're absolutely tracking some of the cuts to SAMHSA, for example. But these programs overall we believe, to provide a really critical role in the community for a number of different programs, including the distribution of NARCAN, which is incredibly important in our CTC business peer recovery programs that we see in many of our lines of business and early intervention services.

So reductions in funding there could ultimately have real impact on our service lines. But as it directly impacts Acadia, we're currently seeing very limited exposure directly to our business. We don't have direct funding sources that are tied to SAMHSA an example, and our core business is it reliant on these grant programs, but we continue to monitor the situation very closely, and we continue to advocate on behalf of the industry for high-caliber behavioral health care.

Have there been any updates on opioid settlement dollars? I know when we spoke with you in the past, it sounded like many states were still sort of early figuring out the RFP process? How far along has that gotten enough there been any RFP wins or anything that's worth calling out for Acadia?

Yes. There really have not been many major developments that we would call out which is a little bit surprising. We do believe that when there are RFPs that we have been particularly innovative and particularly given the strong quality outcomes that we have with the CARF measures that are extremely high relative to the competition that is out there that we're going to continue to be very well positioned. We were very innovative with the mobile vans that we've been able to roll out in a number of rural communities as an example.

And when these states do begin putting these RFP frameworks in place, we feel like we're going to be extremely well positioned to capitalize on them. But the dollars that are flowing to the states and then ultimately to the counties that then put the RFPs in place. We just are not seeing that many come about right now.

But as they do come about, we're tracking them. We'll certainly be applying and we've been able to win our fair share to date. So we see that as something that will really help us serve even more patients that have opioid use disorder and to really leverage the strength and breadth of our CTC business.

On a similar topic, the rural health transformation fund another large pool of funding potentially that's out there? Have you all been involved in looking at those applications? It looks like all 50 states have submitted them to CMS. It's still very early. We're still trying to figure out where that money will go. You mentioned mobile clinics that helps rural communities. Do you have any sort of insight into what that would look like?

Yes, it's a great question. I mean that's something that we've been tracking very closely, and that is something that in a number of our participating states, we think that there could be opportunity. We've obviously made the decision to move forward in putting electronic health records into all of our acute facilities some time ago and are well along our way in making that happen.

But this could be an accelerant certainly for us, but for the broader industry. And for that, we really applaud this fund that's been put in place, and they're going to do everything possible to capitalize on those opportunities.

Okay. Great. Do you all have any closing remarks, any sort of key takeaways that you want investors to have about Acadia going forward?

I'd start. I mean -- I'd say I'm only 2 weeks into the new role, but very excited about the passion the team has. Their focus on patients and taking care of those patients really well. And then this underlying earnings growth we will have from filling up the beds with the capital we've already put in the ground. It is a great opportunity to drive future cash flows and really show off the free cash flow generation of the business. So I'm impressed with the team, impressed with the quality of the outcomes we're delivering and excited for what's ahead.

Okay. Great. Thanks for the time, Chris and Todd.

Thank you, Joseph.

Hello, and thank you for standing by. My name is Lacy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Acadia Healthcare Third Quarter 2025 Earnings Call. [Operator Instructions]

Thank you. I would now like to turn the conference over to Brian Farley. You may begin.

Thank you, and good morning. Yesterday, after the market closed, we issued a press release announcing our third 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 Chris Hunter, 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 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 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 Chris.

Good morning, everyone, and thank you for joining Acadia's Third Quarter 2025 Earnings Call.

I'm pleased to be joined today by Todd Young, who recently joined Acadia as our Chief Financial Officer. Todd brings nearly a decade of public company CFO experience, most recently serving as CFO of Elanco Animal Health, where he helped shape the company's strategic direction following its spin-off from Eli Lilly. Prior to that, he served as CFO of Acadia Pharmaceuticals. Todd's deep experience in health care finance, capital allocation and operational transformation will be instrumental as we continue executing our growth strategy and enhancing shareholder value.

I also want to thank Tim Sides for his leadership as Interim CFO over the last few months. Tim will now resume his role as Senior Vice President of Operations, Finance.

Likewise, I would like to take a moment to thank Dr. Nasser Khan for his many contributions to Acadia Healthcare over the past 3 years, including most recently as our Chief Operating Officer. Nasser is stepping down from the role of COO and will continue to serve as an executive adviser to the company through the end of the year to help facilitate a seamless transition.

Turning to our third quarter results. We reported revenue of $851.6 million, representing a 4.4% increase over the third quarter of last year. Adjusted EBITDA was $173 million, compared with $194.3 million in the prior year period. As previously disclosed, these results reflect softer-than-expected volumes in our Medicaid book of business, particularly in our acute care segment.

Same-facility volume growth was 1.3% in the quarter, which was consistent with the preliminary commentary we shared at the Jefferies Healthcare Services Conference in late September. This was approximately 100 basis points below our internal expectations.

In addition to this increased pressure on our volumes since our Q2 earnings call in August, we have also faced incremental headwinds from rates and benefit expense related to employee health care costs, along with an anticipated increase in professional and general liability expense, or PLGL. These items are causing us to reduce our adjusted EBITDA guidance for 2025 to $650 million to $660 million from our previously issued guidance of $675 million to $700 million. Todd will take you through the specifics in more detail later in the call.

Stepping back, we recognize that our operating environment has faced increasing headwinds as we moved through 2025, particularly with regard to pressures on managed care companies and increased uncertainty on Medicaid funding at the state level. Accordingly, we have taken decisive steps to optimize both our growth investments and our existing portfolio in order to position our company for improved financial performance in a more uncertain environment, particularly due to ongoing headwinds that we believe will ultimately be transitory in nature.

As a result of these steps, as we finish 2025 and move into 2026, our company is in a better position to serve more vulnerable patients in our communities while sustaining both top and bottom line growth and unlocking the free cash flow generating power of the business. We are doing this in 3 primary ways. First, capturing the growth opportunity currently embedded in the business. Second, realigning our capital spending priorities. Third, optimizing our portfolio of existing facilities.

First, let me expand on how we are focused on capturing the inherent growth opportunity that currently exists in the business. Having added over 1,700 beds across 2024 and 2025 year-to-date, we have increased our capacity to serve more patients in need. And we expect to add another 500 to 700 beds in 2026, including new facilities developed in partnerships with our marquee joint venture partners such as Tufts Medicine and Orlando Health. These additions are expected to contribute meaningfully to both same-facility volume and EBITDA as they ramp over the next several years and reach their full performance potential.

As we continue to optimize the impact from beds added in 2024 and 2025, we are also driving execution across all of our facilities in order to provide high-quality and effective health care to our patients. To support these efforts, we've implemented a series of targeted initiatives focused on acute care referral sources.

For context, approximately 80% of acute admissions originate from professional referral sources such as emergency departments, police departments and schools. We've developed referral source level action plans at underperforming facilities with senior operator ownership and weekly executive team updates. We've repositioned key clinical roles, introduced more data-driven planning and allocated dedicated resources to support execution. Our execution across these initiatives drove over 3% same-facility admissions growth in Q3 compared to last year, which is an acceleration from trends in the first and second quarters.

In parallel, we are closely engaging with our payer partners, particularly in Medicaid, to demonstrate how our unique investments in technology and process position us to be part of the solution to the cost pressures facing government and other payers. Over the past several years, we've made meaningful investments in our quality platform, including standardized clinical protocols, enhanced data systems and outcome tracking, all of which are becoming increasingly important to both our payer partners and to accrediting agencies. These investments are designed to strengthen care delivery and demonstrate the value of our services, and we expect them to drive long-term benefits for patients, payers and our business, which I will talk more about momentarily.

Second, we are realigning our capital spending priorities. As a backdrop, the demand environment for behavioral health services remains structurally strong. We continue to see rising acuity across patient populations, greater awareness and destigmatization of mental health and a persistent supply-demand imbalance, particularly in underserved geographies. These trends are durable and support our long-term runway for growth.

That said, we're taking a more measured approach to capital deployment in the near term. We've recently completed a comprehensive portfolio and capital allocation review, and we're prioritizing growth in markets with favorable reimbursement dynamics and strong demand fundamentals. As a result, we are pausing several development projects that no longer project an acceptable return, and as previously disclosed, we now expect our capital expenditures in 2026 to be at least $300 million lower than our revised 2025 CapEx guidance of $610 million to $630 million. This discipline allows us to focus on projects with the highest return potential and ensures a more linear path to EBITDA growth. And importantly, it positions us to generate positive adjusted free cash flow for the full year 2026, a milestone we previously expected to reach on a run rate basis exiting 2026.

Looking ahead to 2027. We anticipate further reductions in CapEx as we concentrate our resources on high-performing markets and ramping facilities, while maintaining flexibility to pursue targeted opportunities that align with our long-term strategy.

Third and finally, our goal is to ensure we have a portfolio built to serve patient demand and help address the persistent supply challenges in behavioral health. This means investing prudently to grow the business, but also actively managing our existing portfolio to ensure we meet demand, maximize the returns on our investments and best position us to deliver sustainable, value-accretive growth.

As part of our ongoing portfolio optimization, during the third quarter we made the decision to cease operations at 5 facilities that no longer aligned with our strategic priorities or demonstrated persistent underperformance relative to our expectations. Two of the closures are in the previously discussed group of underperforming facilities: 1 acute care facility and 1 specialty facility. The others are eating disorder facilities that do not fit with our broader portfolio.

We make a decision to close a facility only after careful review and analysis of a variety of factors, such as community needs, demographic trends and existing health care resources within a region. When community needs evolve, we work with local regulators, community leaders and other behavioral health providers to adjust our service offerings and facility locations accordingly. These decisions are never taken lightly, but they reflect our commitment to maintaining an optimized, high-performing portfolio that supports long-term growth and operational excellence.

By concentrating our resources on markets and service lines with the strongest demand fundamentals and reimbursement dynamics, we're positioning Acadia to deliver stronger, more consistent results. We will continue to assess our footprint with rigor and make thoughtful adjustments where appropriate, always with the goal of enhancing performance, improving returns and creating long-term shareholder value. One of Todd's immediate priorities is to thoroughly review the more stringent lens we have been applying to capital deployment to ensure that every investment, whether in facilities, technology or partnerships, meets our threshold for return and supports our long-term objectives.

Before turning the call over to Todd, I want to discuss our continued focus on quality. I've spoken about this topic on numerous calls because it's the key to our mission and critical to our long-term success. Our Integrated Quality Dashboard now provides real-time visibility into more than 50 key performance indicators to our field operators and senior management, supporting our commitment to operational excellence and payer engagement.

These initiatives have helped us attract and retain talent, and we're seeing more favorable labor trends in 2025, supported by centralized recruitment, employee engagement and targeted training. These efforts have demonstrated real results as Q3 reflected Acadia's sixth consecutive quarter of improvement to employee retention, a key factor in helping us manage labor costs.

It's also worth noting that the broader health care provider industry is seeing an expected increase in rigor on surveys in the new post-COVID normal. CMS has publicly directed accrediting organizations and state survey agencies to significantly increase the diligence and thoroughness in how they survey all hospitals, not just behavioral health. And we are pleased with how we are performing. Across the industry, surveyors are spending more time on the units, with the patients, directly interviewing and observing staff. We welcome these interactions as we are increasingly able to capture proof points on the tremendous work that our teams in our facilities are doing every day.

The positive clinical outcomes we have been able to achieve at a recently opened JV facility are an excellent example of how process improvements, along with our investments in technology, and by extension, our overall ability to demonstrate clinical and quality outcomes, are allowing us to deliver value to the patient community. At this facility, which opened earlier this year, we have been able to serve more than 1,700 patients through the end of the third quarter.

Furthermore, outcomes data at this facility shows significant improvement in psychiatric symptoms, including a 47% reduction in depressive symptoms, a 47% reduction in anxiety symptoms and a 34% improvement in quality of life, a testament to the quality and consistency of care our teams deliver every day.

These results are representative of how we are positioning our business to meet the evolving demands of the behavioral health environment. And even more importantly, they speak to the dedication of our caregivers, clinicians and support teams who are advancing patient recovery every day. We're excited to begin sharing more examples like this in 2026 across service lines and with more transparency into clinical outcomes.

In short, we remain confident that these investments and initiatives will remain a key differentiator for Acadia in a health care sector that has historically seen underinvestment in technology.

And with that, I'll now turn the call over to Todd Young.

Thanks, Chris, and good morning, everyone. I'm honored to join Acadia Healthcare and excited to be part of a company that is leading the way in behavioral health. Throughout my career, I've had the opportunity to help organizations navigate complex transitions, optimize capital allocation and unlock long-term value. I look forward to bringing that experience to Acadia as we continue executing on our strategic priorities and delivering sustainable growth. In my short time since joining, I've been deeply impressed by the strength of the team, the mission-driven culture and the scale of opportunity ahead.

I'm particularly focused on ensuring that our financial strategy supports disciplined expansion, operational excellence and shareholder value creation. That includes a rigorous approach to capital deployment, a clear framework for evaluating growth investments and a commitment to transparency and how we communicate our performance and outlook.

Turning to our third quarter results. We reported revenue of $851.6 million, representing a 4.4% increase over the third quarter of last year. Same-facility revenue grew 3.7% year-over-year, driven by a 2.3% increase in revenue per patient day and a 1.3% growth in patient days.

Adjusted EBITDA for the quarter was $173 million. Adjusted EBITDA came in at approximately $5 million below our internal expectations, driven primarily by lower volumes and an increase in bad debt and denials. Supplemental payments served as a partial offset to these headwinds.

These results include $13.3 million in start-up losses related to newly opened facilities, compared to $7.3 million in the third quarter of 2024. We continue to expect full year 2025 start-up losses to come in at the prior outlook range of $60 million to $65 million. We expect start-up losses for the full year 2026 to decrease modestly from 2025 levels with a more material step down expected in 2027. As a reminder, though CapEx will step down meaningfully next year, start-up costs will decline less on a relative basis due to the large number of new beds coming online in 2025.

On a same-facility basis, adjusted EBITDA was $224.7 million in the quarter. We invested $135.8 million in CapEx in Q3, which is more than $20 million favorable to our Q3 plan.

From a balance sheet perspective, we remain in a strong financial position. As of September 30, 2025, we had $118.7 million in cash and cash equivalents and approximately $790 million available under our $1 billion revolving credit facility. Our net leverage ratio stood at approximately 3.4x.

Costs related to managing the government investigations were $39 million in the third quarter, down 28% from the high watermark in Q2. We expect this spend to continue to moderate in Q4.

Let me now turn to development activity. During the third quarter, we added 83 beds to existing facilities, bringing our year-to-date total to 274 beds added through expansions. We also commenced operations at 3 previously announced joint venture hospitals, including a 96-bed hospital in Danville, Pennsylvania, which is our second joint venture with Geisinger Health; a 106-bed expansion in Austin, Texas with Ascension Seton, which is also our second joint venture with Ascension; and 144-bed hospital in St. Paul, Minnesota, developed through a joint venture with Fairview Health Services.

We have added 908 beds through the end of the third quarter. We have 3 projects that may still open trough the end of the year, and thus, we expect to add 945 to 1,076 total beds in 2025.

Our comprehensive treatment centers, CTCs, offer scalable, capital-efficient solutions to meet a pressing public health need. In addition to our hospital development, we added 3 CTCs for opioid use disorder in the third quarter, extending our reach to 177 CTCs across 33 states. We've now added 14 CTCs in 2025, and we continue to see strong demand for medication-assisted treatment as the opioid epidemic persists.

Turning to our outlook for the remainder of 2025. We have revised the range for revenue to be between $3.28 billion and $3.3 billion, from our prior range of $3.3 billion to $3.35 billion. We now expect adjusted EBITDA of $650 million to $660 million versus the prior outlook range of $675 million to $700 million. The revised outlook incorporates incremental volume softness and rate pressure. This rate pressure includes increased denials and bad debt expense along with rate updates that came in modestly below prior expectations.

In the fourth quarter, we also expect to record an incremental $4 million to $6 million charge related to our professional and general liability expense to reflect the evolving legal environment facing our industry. We now anticipate full year same-facility volume growth to land at the low end of the prior outlook range of 2% to 3%.

For the full year, we continue to expect low single-digit growth in the same-facility revenue per patient day, though we now expect to be towards the lower end of this range. We expect net Medicaid supplemental payments to be at the high end of our prior estimate of $30 million to $40 million, reflecting payments recorded in the third quarter from already approved programs. We now expect adjusted EPS of $2.35 to $2.45 versus the prior outlook range of $2.45 to $2.65, reflecting similar dynamics as the revised adjusted EBITDA range.

As Chris mentioned, we're tracking several supplemental payment programs that currently are awaiting CMS approvals. These payments could provide up to $22 million of additional adjusted EBITDA that is not included in our 2025 outlook given the uncertainty surrounding their timing and magnitude.

I will now turn the call back over to Chris to provide some color on 2026.

While we will provide formal guidance on our earnings call in February, I did want to take this opportunity to provide some color on our financial expectations for 2026. Overall, we remain confident in the strategy we are executing across the company to provide strong clinical outcomes for our patients and the communities we serve. And we see the following headwinds and tailwinds as we enter 2026.

On the positive side, key adjusted EBITDA tailwinds include: a reduction in start-up losses due to our more focused growth investments next year. Ramping contributions from the meaningful number of bed additions over the past several quarters, with 632 new beds entering the same facility calculation in the first quarter of 2026. And a modest EBITDA uplift from targeted facility closures.

These benefits will be partially offset by several headwinds, continued softness in acute care Medicaid volumes along with continued payer-related pressures, consistent with trends observed throughout 2025. Incremental cost pressure related to PLGL expenses. And the absence of the nonrecurring $28.5 million benefit from Tennessee's 2024 supplemental payment program, which was recorded in the second quarter of this year.

We are also closely monitoring the reimbursement environment, which continues to evolve as government payers face significant cost pressures. We remain a committed partner to our payers, and we believe we can play a meaningful role in improving outcomes for the patients we serve.

With that, we're ready to open the call for questions.

[Operator Instructions] Your first question comes from the line of A.J. Rice with UBS.

It sounds like the situation with the payers is still challenging. I want to just maybe if we can get a little more color on exactly what is happening there. This sounds like it's primarily in Medicaid, and it sounds like there's some denials and some challenges on getting referrals. Do you have a sense, is this specifically in the markets where you had some of this adverse publicity over the last year or so? Or is it across the board? Is it -- and the denials, are those tending to happen after you've treated the patient, or is it a denial of extra days of stay? Maybe just flesh out a little more of what you're seeing. And has it indeed gotten worse over the last quarter or 2?

Great. Thank you for the question, A.J. This is Chris. I'll go ahead and take that. I would say, first of all, we know that we can be a highly critical partner to these payers that are clearly under significant cost pressure, I think, particularly on the Medicaid side. And we're doing that by delivering really high-quality, evidence-based care with better outcomes, which they need.

That said, we are seeing some, what I would call, payer friction, manifest across both rate dynamics and volume. And while it's not universal, it's more concentrated, we would say in certain areas, particularly in Medicaid. So on the volume side, the most notable pressure has been around length of stay, where we've observed a more frequent utilization review, especially from Medicaid managed care plans, which are increasingly scrutinizing discharge criteria. And let's say this is a trend that we're seeing across the industry, but the impact, to your question, is just most pronounced in Medicaid-heavy markets.

On the rate side, we're seeing some incremental pressure as we've moved through Q3 and into Q4. Many of our recent negotiations have resulted in low to mid-single-digit rate increases, but -- which is pretty consistent with our historical norms. But there's definitely a handful of states and payers where rate updates have been a little bit more challenging. And we're trying to approach those situations very constructively and remain highly focused on aligning around value and outcomes, which I think we're continuing to have some real success with.

I think just to your question on adverse media, we really are not seeing that. And I would not use that as a factor at all. On the bad debt front, the pressure that we're seeing is primarily driven by reimbursement for fewer days than maybe the full length of care that we've provided. And this can happen during a patient's stay or even post discharge, where a payer can determine that a portion of this data doesn't meet criteria for coverage. And so that would flow through as a denial expense. So thank you for the question. I hope that helps.

Your next question comes from the line of Pito Chickering with Deutsche Bank.

I guess the biggest question I've been getting sort of all night this morning is just thinking about fourth quarter as a run rate as we sort of think about sort of 2026, so -- just as a launch pad. So how should we be thinking about sort of the durability of these bad debt, sort of denials, pressure on length of stay and professional liability that we're seeing in the fourth quarter as we [indiscernible] for 2026? Should these be durable? Are these going to be more onetimers? Just any color on the durability of those headwinds.

Peter, it's Todd. Thanks for the question. Let me step back a little bit on just -- Q4 just seasonally is our slowest quarter of the year. So we wouldn't want folks to run-rate volumes based off the Q4 reality just given the nature of how our services get used. There are a few items that aren't going to repeat at the same level going forward. As we called out, we've added a lot of beds in Q3, adding less here in Q4. So start-up losses are going to get to the high end of the year here in Q4, $18 million to $20 million based off our $60 million to $65 million full year guidance.

So that will step down in 2026. As we mentioned, it'll step down even more in 2027 just given the number of beds we brought on this year and the ramping of those facilities. There's also some closure costs here in Q4 that won't repeat, in the low single-digit millions.

And then as you called out, the professional and legal insurance cost we're really happy with the investments we've made on quality and how that's going to continue to improve our overall clinical results. We've talked with that -- with our insurance carriers, and they understand it. But there's still just this industry-wide pressure, and that's why we've added this incremental expense expectation into Q4. So again, as Chris called out, there's a number of tailwinds for next year.

And then the other big one that's in play is we've got up to $22 million of EBITDA contribution from supplemental payments that are under review at CMS. Clearly, the government shutdown is having an impact on the timing of those, and that may fall into Q4 or it could be falling into next year. So overall, I wouldn't just run-rate Q4. That would be overly conservative as we continue to have the seasonally low quarter for the year.

Great. And then a quick follow-up. Just looking at the DSOs, which spiked in the quarter, just curious to what led to that increase. And as you're looking at your change in denials and bad debt, is there any concern about collecting some of the AR that you booked this quarter?

Yes, it's the right focus. Those are what's driving out the DSO. We've also got some slower payments from some federal plans that we do expect to collect. But overall, the team is doing a great job of following up and really working to make sure we collect all the payments that are due to us.

Your next question comes from the line of Brian Tanquilut with Jefferies.

Chris, maybe as I think about the CapEx commentary in your release, that you're reducing CapEx by $300 million next year and you're looking at 500 to 700 beds. Just trying to reconcile, what does that mean from a dollar CapEx perspective when you're still opening 500 to 700 beds? Or maybe the opposite way of thinking about it, were you essentially planning like 1,200 by reducing $300 million of CapEx? So just curious how we should be thinking about the cash flow outlook for next year.

Yes. Let me start and see if Todd wants to chime in, but thank you for the question, Brian. I would say going back to the visibility that we provided at the end of September, the Jefferies Conference, we did make the decision to reduce '26 CapEx by at least $300 million. And that was a very deliberate shift towards more disciplined growth and capital efficiency, and it was informed by a comprehensive, literally facility-by-facility review of everything in our development pipeline, taking into account volume trends, reimbursement dynamics, really a number of factors across the board.

And so we will be opening multiple large acute care facilities in 2026. And actually, the majority of the capital spend associated with those facilities has already been spent in '25. So on average, we're going to end the year around 85% complete from a development standpoint in '25, which really allows us to have a meaningful step down in capital spend in '26.

I think one other thing I would just point out, as part of the review, we did pause a combination of new facility developments and expansion projects that just did not meet our threshold for return or strategic fit. And we're just really concentrating on -- all of our resources on markets with strong demand fundamentals, really strong reimbursement. And we expect this emphasis moving forward on both margin expansion, but also free cash flow generation as we head into '26 to be the real focus. So I hope that answers your question.

Yes, Brian, just to weigh in on the numbers. Our new guide here is $610 million to $630 million for CapEx in 2025, and then dropping that by more than $300 million in '26.

Your next question comes from the line of Whit Mayo with Leerink Partners.

Maybe just a follow-up on that. For the de novos that you're pausing, and it sounds like the returns aren't that good, I mean, can you and would you walk away from those? Or do you have contractual obligations to see those projects through?

And if you could comment on CapEx for 2027. And then also given the opening of these facilities in '26, how much will D&A be going up year-over-year?

Yes. This is Chris. Thanks for the question. Why don't I just go ahead and start on that? I would say for the joint ventures that we've done, I mean, these are contractual obligations, and we would not walk away from those. There are situations across the board, including de novos that we have done, where we have either purchased land or we have not launched construction, and those were relatively easy decisions in markets where we didn't think there was favorable reimbursement over time or we just -- or one of the criteria just didn't make sense as we looked at everything in totality.

So we're going to continue to be very aggressive there on all fronts. But just joint ventures is going to continue to be a strong use of capital and really a strategic imperative for us to grow the business. Todd, do you want to take the...

Yes. We'll obviously get to '27 later on as we exit '25 here. I'm not going to comment on the depreciation and whatnot as I'm digging in to everything from a budget and expectations for next year. I will say, we would expect CapEx in '27 to continue to be lower than in '26. As we've commented that in '27, we'd expect to bring on 150 to 250 beds versus the 500 to 700 that we'd bring on in '26.

Your next question comes from the line of Ryan Langston with TD Cowen.

On the legal expense, around $40 million this quarter. Certainly, I know you expect it to come down as we move through the next few quarters, and it came down from the second quarter. But should we sort of expect that to be sort of a gradual ramp down or maybe more of a material step down in the near term?

Yes. Thanks for the question. Legal expenses in Q3 did step down about 28% from the prior quarter. So we do continue to expect another material step-down in spend as the majority of the work that we've been doing with respect to ongoing litigation and some of these government investigations was completed in Q2 and ended in Q3. So it's something that we're obviously super focused on. But we do think that we've hit the high watermark and you're going to see a consistent step down from here.

Your next question comes from the line of Jason Cassorla with Guggenheim.

Great. Maybe can you just give us a sense of the runout costs for the 5 facility closures as we think about 2026? I know it sounds like you're anticipating some EBITDA uplift from the closures on a year-over-year basis. But maybe also just triangulate what the EBITDA headwind from those facilities were this year.

And maybe broadly, just a follow-up on that. As you look at your facility footprint, can you talk about the balance of further facility closures or how you're weighing that against any divestiture opportunity at this juncture?

Jason, thanks for the question. I mean the -- we have had expenses from the closure side with some runout costs. We expect that to flip into kind of a mid-single digit tailwind in 2026. Overall we continue to look at the footprint. We will continue to do that. But overall, we've got a number of facilities, and we've ring-fenced this down to 5 to 7 that we've been talking about, that we're continuing to see improvements on and green shoots, but we're going to take a stringent lens to make sure we're getting the right return on those as we go forward. As Chris mentioned in the prepared remarks, that's one of the things I'm turning to, once we get through the earnings, is looking at the returns on the facilities across the footprint.

Overall the team has done a great job of already having done that work and concluding. And we've got these that we've closed this year. And we're not looking to see significant closures going forward. That being said, we'll be rigorous in our evaluation, and if that makes the right thing to do from a return on capital, then we'll make those tough calls.

Maybe one thing I would just add is -- to answer your question just on the select asset sales. We have been very successful in generating cash and doing that, and we'll continue to look for opportunities just on that front. Even considering land, but also, in the event that it makes sense and there's greater value creation, selling a license along with the underlying real estate. That's something that we're always considering as well, anything to maximize value.

Your next question comes from the line of Andrew Mok with Barclays.

You noted 3Q EBITDA came in $5 million below internal expectations, which implies a $28 million cut to fourth quarter EBITDA. Outside of the $5 million professional liability, can you help break apart the headwind on the remaining $23 million between payer issues and bad debt?

And secondly, given the mounting pressures building into year-end, do you think you're in a position where you can grow earnings next year?

With respect to the bridge to Q4, it's split pretty evenly between the rate side with bad debt and some of the challenges we've seen on rates, as well as in the volume declines that we called out at the Jefferies Conference that are then continuing into Q4, plus the PLGL expense that you noted.

As we look, I'm digging in on the business, trying to get my full understanding. We called out a lot of the tailwinds we have going into '26 with all the bed additions and the ramping and execution of the facilities we brought online. There's obviously some headwinds as there always are. But we look forward to giving full guidance on in February, but we're excited and do believe that this is going to be a growing business as we move into '26 and '27 overall.

Your next question comes from the line of Matthew Gillmor with KeyBanc.

For the $22 million in Medicaid supplemental benefits that could come through for '25, can you give us a sense for what the annualized benefit would be into '26? And just give us a sense for the key states that are underneath that $22 million.

Yes, I think the 1 key state there is Florida. We've got 3 others that are in the mix that we're also working through. Certainly, the $22 million would be an incremental here in Q4, and it would provide a pretty nice incremental run rate going forward. But we're not getting into the specifics of those at this time with the '26guidance to come in February.

Your final question comes from the line of Joanna Gajuk with Bank of America.

So I guess most of the questions were answered here. But just coming back to -- I know you don't want to give us specific numbers for '26 and you said Q4 not a good kind of starting point thinking about into the next year. Is a better starting point of, say, second half, third quarter and Q4, and then adjust for start-up losses and some of these other items maybe? So is that a better way to think about next year?

Joanna, there's a lot of moving pieces in the business, and we will get into greater detail with full guidance in February. I think we are excited about all the new beds going on, the ramping. The team is really focused on continuing to get the most out of every one of our facilities. Excited by the growth in the CTC business as we've added more opportunities to treat patients there in a really high demand space.

And all of these things are items that are still coming together. We're in rate negotiations with a number of states. And we're looking to get the government back reopened. That will also be a helpful item with respect to supplemental payments as well as continued work on some of the federal programs.

That being said, there are risks out there of different states and the like that we're making sure we're capturing appropriately so that as we give guidance going forward, it's very well informed with our expectations for our business. So I'll leave it at that with a big picture and turn it over to Chris.

Yes. I would just add that we really do look forward to working constructively with payers. I think we have made so many investments on the quality front and have very, very strong clinical health outcomes that I began to allude to in my prepared remarks. We look forward to sharing more of that. But I think that data is going to be extremely relevant for payers here going forward, and we really look forward to partnering with them to make that happen.

And I think just one other thing I would point out is that when you just look at the way we're launching into Q1, 632 new beds will be entering the new store, new same-store calculation, in the first quarter of the year. And again, I think that just sets us up so well to partner closely with the payers moving forward. Thank you.

This concludes today's question-and-answer session. I would now like to turn it over to Chris Hunter for closing remarks.

Thank you. In closing, I just want to thank once more our committed facility leaders, clinicians and nearly 26,000 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 U.S., we continue to be so proud of the important work that we're doing every day 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.

This concludes today's call. You may disconnect.

All right. Good morning. This probably will be the most packed presentation of this conference. So we're pretty excited to have this. This is our second company for this 2025 Jefferies Healthcare Services Conference is Acadia Healthcare, one of the largest operators of behavioral health facilities in the U.S. And joining us this morning is Hunter, the company's CEO.

Chris, thanks for doing this. Really appreciate you being here. I think you just popped it up. But I know you issued an 8-K this morning, and we were just chatting how -- I was planning to ask you anyway to address in this forum, the activism that has come out for Acadia. So -- maybe let's hit the 8-K and just address some of the announcements you made this morning.

Yes. Thanks so much, Brian, for hosting us. And just maybe a few things that I would just say at the outset. I think, first of all, at Acadia, we just really feel like we're playing a very important role in the nation's health care system overall, delivering evidence-based high-quality behavioral health services to vulnerable populations. And we know that there's a growing need for behavioral health, and there's a real supply-demand imbalance across the country. So we continue executing a very focused strategy as a result. And that strategy is very focusing -- very much focused on high-quality behavioral health care, improving our clinical health outcomes and also driving operational efficiency across our national network.

I think we also would just acknowledge that 2025 for us has been a challenging year. On the volume front, we've come in a little bit below our expectations this year, primarily due to weaker Medicaid volumes in our acute line of business. We've also seen some incremental weakness in the third quarter, which we did highlight in the 8-K this morning. And then on the local dynamics front, we've seen some underperformance of a certain number of facilities that go back all the way to last fall. And so with that in mind, as we look ahead to 2026 and beyond, we're taking several actions, and that really was what we were trying to accomplish in the K this morning that we believe will set the company on a path to sustainable top and bottom line growth. And we're also expecting to demonstrate the underlying and inherent free cash flow potential and generating power of the business into '26.

So really kind of 3 main actions that were in the K and that I would speak to. I think the first is on the CapEx front. We have paused several projects in our portfolio, which will lower our '26 CapEx by at least $300 million versus our 2025 levels. We expect to lower that even further in 2027 as we work to demonstrate the underlying free cash flow generating power of the business. The second is on the volume front.

The company, as everyone here that follows the story knows, has seen record investment in facilities and volume over the last few years. So we've added nearly 1,800 beds between 2024 and '25. And we expect to lower -- we expect to add an additional -- an incremental 500 to 700 beds in 2026. And that includes new facilities with a number of marquee joint venture health system partners like Geisinger Health and Ascension who, this year alone as JV partners, we added our second facility with each of them, one in Pennsylvania with Geisinger and one in Austin, Texas with Ascension.

So we really expect material contributions here to both same facility volumes and the EBITDA as these new beds ramp over the next few years. And then the final thing I would just say is on the -- from a portfolio review standpoint, it's always a difficult decision to close facilities. We recently announced the closure of 5 facilities. And I've said before, if there are instances where there is a facility that doesn't fit our strategy, and we're going to be aggressive, and we won't hesitate to take action. So we just continue to be very focused on improving performance, and enhancing shareholder value, working to create a world-class organization that truly sets the standard for treatment in behavioral health. And I think that's the backdrop on the K.

Chris, lots to unpack there. Maybe I'll start with the volume commentary on Q3. So I'll just go right at it. What does that mean for full year guidance for 2025?

Yes. No, completely fair. So we're not providing an update on full year guidance at this time. We will provide any relevant updates on our Q3 call. We are making several portfolio changes that I would point out that we expect to lead to improved EBITDA next year, including not only the closure of these facilities, but this reduction in CapEx and associated lower start-up costs. So as we look out to '26 and '27, we expect to see a pretty significant improvement in EBITDA growth and an acceleration in our free cash flow generation due to really 3 things. One is just the ramping volumes from the significant number of bed adds over the last few years, again, 1,800 over the last few years with guidance with visibility into 500 to 700 from the facilities that will open next year, declining start-up costs, which will come down next year and then taking a much more aggressive stance towards closing underperforming noncore facilities. So we will provide further updates as well when we provide '26 guidance next year.

So I was going to ask you about CapEx, but maybe let's just hit on this first. So as I think about volumes, Chris, what do you -- I know you mentioned Medicaid. If you don't mind walking us through the dynamics of what's happening in Medicaid and why do you think volumes have softened?

Yes. I think we've pointed out, particularly in the acute line of business that we've just seen some challenges with payer behavior and just I think the traditional push and pull that you see between payers and providers that has just become more pronounced on that front. I think that said, we are serving some of the most critical acute patients in the country. And we've invested heavily in being able to demonstrate the strength of our clinical health outcomes, and we have very good outcomes that we are able to share with payers. And I think that is going to continue to position us well here moving forward.

We've always thought that the progression in the industry would be towards more leveraging technology and being able to clearly articulate outcomes, and that's something that we're clearly seeing in our payer negotiations and discussions, and we think that, that will continue going forward.

Chris, is that payer denials of admissions? Or is it reduced days, tighter scrutiny of approved days? How do we think about what the Medicaid is -- and I'm guessing it's MA plans, right, versus state-run Medicaid?

Yes, primarily managed Medicaid. And I think it can range from denials upfront to reductions in the length of stay for a given patient depending on the actual service line. So it's really across the board, and I think those can ultimately be interrelated.

Got it. Okay. So maybe let's shift gears a little bit. So CapEx. Can you tell me more about the review of your capital allocation priorities that you mentioned that led to the decision to cut CapEx by at least $300 million next year. I mean what spur this? Is this a Board-driven move or management seeing what's happening in the market making that call?

Well, I would just say, going back several years, I mean, a big part of our growth strategy continues to be prudent investments to expand our portfolio. So we have just continued to see opportunities not only to partner with health systems on the JV front, but also with payers and just a number of state governments that just recognize the importance of addressing behavioral health, particularly higher acuity patients and those needs that are truly are across the nation. So we have been doing a thorough truly facility-by-facility review of future growth opportunities. And we've decided, as we had first acknowledged on our Q2 earnings call, where we first referenced that we would look at pausing facilities on that call, we referenced pausing at least 2 projects, which collectively would be $100 million collectively. And we have since taken that further. And as a result, we have decided to take down our CapEx next year by the $300 million versus our '25 CapEx guidance, which is $600 million to $650 million, while still, I would point out adding 500 to 700 beds next year, which we think is really important. So we're refocusing a number of our planned bed additions as well to a narrower group of locations that we believe have a more favorable reimbursement environment. And so we've really had to look at this. I mean, health care is local, obviously, and we're looking at this on a market-by-market basis as well as looking at the demand. And we believe this is going to enable us to reach positive free cash flow for the full year next year. We've previously talked about that happening by the end of next year. And obviously, the significant reduction in CapEx will only enable us to accelerate that.

Chris, what kinds of projects are you cutting out? Or where is the focus of the reduction in CapEx?

Yes. Well, I think there's a number of different ways that, that shows up. I mean we're -- we've been pretty actively managing the portfolio across the board. There -- it can range from our acute facilities. We've certainly seen some specialty facilities as well. I think those are the primary areas as we've made those reductions. But it really is on a project-by-project basis. And there are certain facilities that we just did not feel like had the demand characteristics in a given market, sometimes didn't have the broader labor trends that we would expect, competitive environment, just all the things that you would look for in a given market. And so those are all the things that we're constantly trading off. And as we went through this very comprehensive review took into consideration.

Chris, when I think about the -- one of the bold thesis for Acadia historically was that there's very strong demand for behavioral health. And you just touched on some of the markets that don't have that demand. So what are you seeing in the market? And what's changing in the behavioral health space?

Well, I would say to step back, the demand for behavioral health services overall, I would say, still remains structurally very strong. We can -- I think particularly when you look at patients that have rising acuity and we are continuing to see that across our lines of business everywhere from inpatient acute where patients will present that have comorbidities, but also schizophrenia, bipolar disorder, all the way to our CTC patients, those coming in with opioid use disorder have a higher intensity and a higher acuity than they have before. So I think the demand overall continues to be very strong. I would say there's also greater awareness, obviously, of mental health. We saw this through COVID, kind of the destigmatization of mental health. And there is the supply-demand imbalance, particularly in underserved geographies. And we believe, overall, these trends are durable and they support -- they continue to support a long-term runway for growth. But all that said, we're taking a much more measured approach in the near term. We've gone through this portfolio review. We're looking for markets that have -- that continue to have favorable reimbursement. We're also just taking this time to step back and look at bed additions as well and where -- when we're doing bed additions to existing facilities, obviously, those facilities, we have strong visibility into the growth dynamics, what the market demand is, what the reimbursement is, what the competitive landscape looks like. And so we are being very scrutinous on that front as well, which we think also is going to position us well. So just overall, I would just say the demand characteristics in behavioral health are still there. And we're very, very much attuned to continuing to track and monitor that as we contemplate continued capital deployment here in the coming years.

Chris, what are you seeing with -- private equity has been chasing the space as well, building units and platforms around behavioral health. So I'm just curious like what are you seeing in the market? I mean when you say the demand dynamics are there, there used to be a big supply-demand imbalance. So what does that look like right now in your key markets?

Well, I think in our key markets, we obviously have spent a significant amount of time investing and talking to our referral sources and our payer partners about the differentiation that we've had, particularly from a technology standpoint, but also from a quality standpoint that we think continues to really set the company apart. So this is one part of health care, obviously, that has seen historic underinvestment really across the board in behavioral health. And I think that's well known by investors that follow the industry more broadly. But that was one of the reasons all the way back in our first Investor Day in December of '22 that we made this commitment to investing in EMRs and patient remote monitoring and quality platforms and staff safety devices that we've been able to now incorporate into the company, and we really think set us up. So I think all those things, those are really helping us on the labor front. It's helping us attract staff in. And I think it's also helping us in our top markets continue to set the company apart.

Chris, maybe just going back to the CapEx and capital deployment question. So how do facility closures fit into your review of your capital allocation priorities? I mean, what does that look like? And what are you shutting down? I mean I think it's been a little bit all over the place. So just curious how you figure out what gets shut down.

Yes. Well, I would -- let me go back to just what we've been doing here on the portfolio review. So we've recently gone through this very comprehensive review, literally facility by facility. Overall aim has been kind of sharpening our operational focus, optimizing capital deployment. And then as part of that process, we did identify 5 specific facilities for closure, 2 that were due to continued underperformance and 3 that we just didn't think were a good strategic fit. These were eating disorder facilities that are just nonstrategic and that had been impacted by some of the demand shifts for those specific conditions. So these 5 closures, we believe, reflect a very deliberate effort to concentrate resources on our core lines of business in those geographies that we just see the longest-term potential over time.

Now I think there are specific facility improvement plans that we've also put in place kind of across the board for underperforming facilities. We've been very intentional about bringing in flex resources, in-house kind of floating pool of staff. We've brought in clinical resources where it made sense on the nursing front, as an example, working closely with facility leadership. We've also been really intentional about understanding demand in the marketplace. So there are markets where we've had -- we've historically served adult populations where we see record demand for adolescents, and we'll start an adolescent unit and sometimes we'll flip those if there's changing or shifting demand there as well. And so beyond that, there are -- there have always been facilities that we're constantly working with our leaders to improve performance.

We've invested so heavily on the quality side that, that has also become a very routine part of the way that we're running the company. And I think is a real distinction from the way we have looked at things in the past, which I think very much complements the financial review. And I think those two are very, very synergistic. So hopefully, that helps.

Yes, it does. But Chris, as I think about the portfolio review, I mean, is there a time line that you've set at the management level to get the review done? Or should we be expecting more closures in the coming months?

Yes. We've continued to work on this, and we do have a very methodical process that we've gone through. We continue to have our eye on 5 other additional facilities that we're monitoring. But this is something that we're wrapping this review up. We're constantly -- we have 274 facilities. So we're constantly in a process of monitoring them, but we really believe that this process is winding up.

Chris, maybe last question on sort of capital deployment netting out. As I think about some of these closures, some of them are in fairly prime real estate, right? So is there a decision factor between closing and selling?

I mean that's something that we always have to take into account. We do have valuable real estate in some markets that will factor into the calculus. We are always looking for opportunities to enhance shareholder value. So if we don't see a sustainable path for a given facility and the underlying real estate, we think that there's an opportunity to unlock value, of course, we're going to capitalize on that.

Chris, since you mentioned the Investor Day in one of your comments earlier, as I think about the last Investor Day, December of '23 or '22...

'22. December of '22.

I remember you guided to kind of like organic growth of double digits, basically 10% EBITDA growth. So with the facility closures, pulling back in CapEx, demand equation, what does that look like today?

Yes. We're going to stop short of providing long-term guidance. But I would just go back to the fact that this company is extremely well set up for the next few years, having made record investments in all of these facilities with our start-up losses coming down and then being very prudent on the portfolio optimization. We really believe that the top and bottom line growth is -- we have strong line of sight, and we'll be coming back and providing more detail on our guidance here for the year.

That makes sense. So Chris, maybe as I take a step back and think about the letter that you got last week, I mean -- and we talked a little bit about labor here today. So just curious how you're thinking about the ability to drive cost improvement across the system.

Yes. I mean I think on the labor front, that's something where we've seen real stability. I think that we saw the high watermark on the labor front in terms of wage rates kind of at the tail end of '22. And as a company, we've been very intentional about doing employee engagement surveys across our 26,000 employees. We've gotten very strong insights from that. And again, I think the way that we have leveraged technology, that's something that attracts candidates in. And I think we've done a very good job of talking about the investments that we're making in the business and also in our staff. So that has really helped us attract talent in, bring retention down. And there's always going to be pockets of labor challenges across the country. But overall, in aggregate, I think we've been able to do a very good job on that, and we've been pleased with the trends that we're seeing. Premium pay has come down as well. And so the overall trends on the labor front, we'll always continue to monitor, but we believe that those have stabilized.

Chris, as you've invested in technology. I know I remember December of '22, that was one of the highlights of your presentation back then. It is an investment. And in theory, you should be [ reaping ] rewards out of those investments, whether that's improved quality, improved reimbursement. You can draw a laundry list of what the payers would think would be the benefits of all these dollars that you spent. What is that discussion like in terms of quality translating to reimbursement or honestly, like them trusting you with hours and days for patient approvals?

Yes. I've always believed, and that was really the impetus for us coming to investors and talking about the commitment that the significant commitment that we were going to need to make on the investment front. That has continued to play out. I think you see it across lines of business. So whether that is us talking about the 50-plus quality measures that we're tracking the KPIs that we have on any given day in every single one of our acute facilities and being able to demonstrate the progress to payers on that front to our CTC business, which has a different regulatory body but is regulated by CARF. And from a CTC standpoint, there's kind of 13 major quality measures and we have been faring extremely well across the board. And so I think when you're having a conversation with a payer and having been on the payer side for a long time, it can't just be we need a higher rate. I think we obviously talk about the acuity of the patients that we serve, and we're able to demonstrate that. But then we're increasingly able to come in with the improvements in quality that we're seeing across the board and what that looks like and the commitment that the company has on that, and we're very granular in terms of being able to show the improvement across the board. And that's not just in one line of business, payers frequently want to see us demonstrate in multiple lines of business. So we've had success in doing that. And I just think that there will become increasingly more demand for more data, more transparency with respect to what we're seeing on clinical outcomes. And we feel like the investments that we're making have really set us up to do that well.

Chris, you had very healthy rate growth from -- really from '21 through '24. So what are you seeing now in terms of payers' willingness to give you the rates that you were getting and that you had guided to during Investor Day?

Yes. Well, we've seen obviously record levels on the rate side, and we incorporated into our outlook earlier this year, rate growth moderate a bit to low single digits across most of our payers. And I think that's something that we've continued to track pretty extensively. I think as part of the more comprehensive review that we've done, I think we've been pretty intentional on the just tracking the geographies, the service lines, the overall portfolio. And there -- I think there are still pockets of opportunity for mid-single-digit growth in various markets, particularly those that have been underserved for a period of time.

I think our joint venture partners that have frequently been in a market sometimes for a century are very well known in that market, and they can certainly be helpful on the reimbursement front. But in terms of our guide in the beginning of the year to low single digits, I mean, I think we stand by that, and I think that is pretty consistent with what we've seen.

Chris, not that long ago, we were all focused on the one big beautiful bill, obviously, that passed. Just curious what your thoughts are in terms of how final bill, what does that do for your business, state directed payments a pretty big part of your revenue mix. So just curious just thoughts on that.

Well, the bill is passed, but I would still say we're still in the early days on the implementation side. I mean our government relations team does a terrific job. We're very closely monitoring how this is going to evolve. But I do think that we believe that based on the populations that we serve, we expect most of our patients to be exempt from Medicaid work requirements due to the intensity, the acuity, the severity of their behavioral health conditions. And so there's no question that the broader reimbursement environment is becoming more complex, particularly to your point, when you look at the step down in state-directed payments that will really begin to start in 2028. But I think at the same time, given the investments that we've made, the acuity of the patients that we're serving, I mean, I think that we continue to see real offset from that as well. And that's just something that we'll just have to continue to track as we go forward. But we do believe that in the near term, so many of these investments that we've made have been able to help us offset that. And this is not only on the federal level, but on the state level, it's just something that we have to be mindful of in every negotiation that we're heading into. So -- and I'd stop there.

Chris, we've got 2 minutes. So we're asking this of all the companies here at the conference. So what is the one thing about Acadia that you feel is underappreciated or misunderstood by investors at this point?

Yes. I think for us, what's underappreciated, I think, is the depth and sophistication of our quality infrastructure overall. I mean we have built a data-driven platform that not only promotes positive clinical health outcomes, but really drives operational consistency and enables us to run the business with a level of granularity and visibility into our quality that I always have believed has a downstream implication on our financials. So the 50 KPIs that we're tracking by facility, I think, are highly unique. And then I think the only other thing you said one, but I would just throw in our operational discipline at this moment. We've taken a very hard look at our capital allocation across the board. We've made the decision to pause a number of projects and to take our CapEx down. I think that kind of discipline, particularly in the context of reimbursement pressures is really critical for ensuring sustainable growth and long-term expansion.

And so as we look ahead to '26, we anticipate accelerating volume, strong EBITDA growth given all these beds coming online, and we expect to truly unlock the free cash flow generating power of the business.

Awesome, Chris, we're right on the dot. So thank you so much for your time today. Good luck.

Thank you, Brian.

Good day, and welcome to Acadia Healthcare's Second Quarter of 2025 Earnings Call. [Operator Instructions] Also, please be aware that today's call is being recorded.

I'd now like to turn the call over to Patrick Feeley, Head of Investor Relations. Please go ahead.

Thank you, and good morning. Yesterday after the market closed, we issued a press release announcing our second quarter 2025 financial results. This press release can be found in the Investor Relations section of acadiahealthcare.com website. Here with me today to discuss the results are Chris Hunter, Chief Executive Officer; and Heather Dixon, Chief Financial Officer.

To the extent any non-GAAP financial measure is discussed on today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in the press release that is posted on our website. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Acadia's expected quarterly and annual financial performance for 2025 and beyond. These statements may be affected by the important factors, among others, set forth in Acadia's filings with the Securities and Exchange Commission and in the company's second quarter news release. And consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

At this time, I would like to turn the conference call over to Chris.

Thank you, Patrick, and good morning, everyone. Thank you for being with us for Acadia's Second Quarter 2025 Conference Call. We're pleased with our progress to date in 2025 as we continue to execute our strategy in line with our growth objectives. We reported solid top line growth with total revenue of $869.2 million, up 9.2% over the second quarter last year, while adjusted EBITDA was $201.8 million, a 7.5% increase over the same period a year ago.

I would like to speak for a moment about the recently passed One Big Beautiful Bill Act. We believe the provisions of the bill are manageable over the coming years particularly due to the carve-outs from work requirements and the extended time line for implementing changes to the supplemental payment provisions of the Medicaid program.

For the full year 2025, we expect gross revenue of approximately $230 million from existing state Medicaid supplemental programs. More than half of this revenue comes from states that may begin reducing these payments starting in fiscal 2028 if proposed changes to the programs are implemented. If these changes occur, we also anticipate that a portion of the revenue loss would be offset by a reduction in the provider taxes we pay in those states.

Regarding the Medicaid work requirements included in the legislation, we do not expect a material impact on our operations as these begin to be phased in next year. This is largely due to exemptions for the populations we serve, including individuals with chronic substance use disorders and those with serious and complex medical conditions.

At Acadia, we remain committed to delivering essential care to underserved and vulnerable populations. We will continue to prioritize partnerships with payers and state agencies that recognize the long-term cost savings of integrating mental and physical health care and the importance of addressing behavioral health needs nationwide.

On that note, we're pleased to share that the state of Tennessee has approved a new Directed Payment Program, underscoring the critical role behavioral health services play in supporting community well-being. This approval marks a meaningful step in the broader national movement to invest in behavioral health programs that are vital to expanding access, improving outcomes and meeting the growing demand for behavioral health services across the country.

Turning to development activity. For the second quarter, we added 101 beds to existing facilities, bringing the total to 191 beds added to existing facilities for the first half of 2025. Including the 288 beds from newly constructed facilities, we have added a total of 479 beds to date in 2025. Our new facility construction projects have also progressed nicely. We are extremely proud to be a preferred partner to many premier names in health care who want to integrate behavioral health into their system with a shared purpose of improving both mental and physical outcomes for more patients.

Over the past 2 months, we have completed construction of 3 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 4 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 1 facility, which continues to face particularly strong local market pressures which we are closely monitoring.

More broadly, volumes in our acute care business came in slightly below expectations. While demand across the majority of our business remains robust, health care is inherently local, and we experienced pockets of weakness in volumes in certain acute care markets with higher Medicaid exposure. We believe this pressure on Medicaid volumes is consistent with what peers experienced during the second quarter. Medicaid volumes at our acute care hospitals were down slightly on a year-over-year basis in the second quarter, while commercial and Medicare volumes increased by 9% and 8%, respectively.

Before turning the call over to Heather, I want to talk about our quality initiatives. As we extend our market reach in 2025, patient safety and quality patient care are central to our mission, and we continue to focus on quality across our operations, leveraging technology and utilizing data to reduce medication errors, improve care coordination, support quality and ensure the consistent delivery of evidence-based care and support strong clinical outcomes. We believe Acadia has led the industry in adopting the latest technology and evidence-based practices. Our facilities are licensed, accredited and regularly inspected to uphold high regulatory and quality standards, including rigorous requirements for employee training and patient safety.

We have remote 24/7 patient monitoring devices in Acadia's acute facilities, which enhance patient safety and provide critical documentation of patient care and outcomes and ensure more consistent care protocols across our facilities. Our hospital staff and clinicians are also provided with wearable safety devices that enable expedited responses and mitigation of adverse events. We have implemented robust analytics through an integrated quality dashboard that provides real-time visibility into over 50 distinct safety, patient experience and regulatory compliance-related key performance indicators, providing facility leadership with real-time insight into operational effectiveness across our hospitals. Our operators use this data on a daily, weekly and monthly cadence to drive our continuous quality improvement efforts at the bedside and throughout our facilities.

Our ability to harness this data and accurately measure outcomes is an important advantage in negotiating with payers who are focused on value-based care. We will continue to invest in technology to strengthen our core capabilities and support a strong culture of accountability for quality.

Our Corporate Quality and Safety Committee conducts quarterly performance reviews that help us maintain consistency in clinical practice across our operations. And our Corporate Compliance Committee conducts quarterly reviews to ensure compliance with our internal code of conduct. Importantly, our quality initiatives investments in the latest technology tools and evidence-based protocols support the work of our employees and clinicians. Working together with our facility operators has helped us attract skilled practitioners and maintain talent in a competitive labor market. We are experiencing more favorable labor trends in 2025, supported by our initiatives centered around more centralized facility level recruitment, retention and employee engagement and a strong focus on extensive training in our local markets. We commend our approximately 25,000 dedicated employees for an outstanding job in providing quality, compassionate care for the patients and families who seek our care.

Lastly, I'd like to take a moment to recognize Heather Dixon, who will be stepping down from her role as Chief Financial Officer later this month. Over the last 2 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 a permanent successor, I'm pleased to announce that Tim Sides, currently Senior Vice President of Operations Finance, will assume the role of interim CFO. Tim brings extensive experience and deep operational expertise, and we are confident in his ability to ensure a seamless transition and continued financial stewardship.

With that, I would now like to turn the call over to Heather to discuss our financial results for the quarter.

Thanks, Chris, and good morning, everyone. We reported $869.2 million in revenue for the quarter, representing a 9.2% increase over the second quarter of last year. Adjusted EBITDA for the second quarter of 2025 was $201.8 million, reflecting an adjusted EBITDA margin of 23.2%. Same-facility revenue grew 9.5% year-over-year, including a 7.5% increase in revenue per patient day and 1.8% growth in patient days. On a same-facility basis, adjusted EBITDA was $256 million, and adjusted EBITDA margin was 30.1% in the second quarter of this year.

During the second quarter, the Tennessee Supplemental Payment Program was approved. As a result, we recognized a favorable pretax benefit of $51.8 million in the quarter, of which $28.5 million related to the fiscal year 2024 and $11 million related to the first quarter of 2025, with $12.3 million related to the second quarter of 2025. This compares to $8.6 million in net supplemental payments from the state recognized in the second quarter of 2024. Also included in our second quarter results were start-up losses of $14.2 million related to recently opened facilities compared to $4.6 million in the second quarter of 2024.

Looking at the balance sheet. Maintaining a strong financial position remains a top priority, providing us with sufficient capital to make strategic investments in our business. As of June 30, we had $131.4 million in cash and cash equivalents and $828 million available under our $1 billion revolving credit facility.

Moving on to our outlook for 2025. Based on our results through the first half of the year, we are updating our adjusted EBITDA range for the full year to $675 million to $700 million. This is primarily due to lower expected volume growth and higher start-up costs, partially offset by an increase in anticipated supplemental payments. For modeling purposes, we expect our Q3 adjusted EBITDA to be modestly above Q4, which is in line with typical seasonality.

For the full year, we now expect same-facility volume growth in the range of 2% to 3% compared to the prior expectation of low to mid-single digits. Start-up losses are expected to be approximately $60 million to $65 million for the full year. The $10 million increase relative to our prior guidance is due to new facility construction running ahead of schedule. For the full year, we now expect to add between 950 and 1,000 total beds compared to our previously expected range of 800 to 1,000 beds. We now expect net Medicaid supplementals to increase by $30 million to $40 million in 2025 as compared to the prior year, including a $40 million to $45 million recurring benefit from the recently approved Tennessee program.

With that, we're ready to open the call for questions.

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

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

Yes, A.J., this is Chris. Thanks for the question. The primary driver of volume coming in below our expectations really was the weaker Medicaid volumes in our acute care business, which is what you're asking about. I'd say a couple of things. I think we believe this reflects some of the evolving utilization patterns among managed Medicaid plans, which are navigating elevated cost pressures across the board. And it appears these dynamics are having some impact on admissions trends across our inpatient services, including behavioral health.

There's always a natural tension between providers and payers. And I think we remain confident that the high acuity populations we serve and the strong outcomes we're able to deliver are critical to long-term care cost efficiency as well as network adequacy, and we continue to engage constructively with our partners there on access and outcomes. And so we'll continue to proactively work with our payer partners to that regard.

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

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 decline even more than we had originally anticipated.

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

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

Yes. Thanks for the question, John. We have previously guided to being free cash flow positive at the end of 2026. I think a couple of points I would make. First of all, the beds that we have built recently, we just believe are going to continue to pay dividends for years to come as they ramp up, and we continue to be really excited about those.

I think as most know, we built and licensed 776 beds last year. And we expect to build up to 1,000 beds this year, and we continue to be on track there. However, given the environment and more specifically, the policy environment, with the amount of uncertainty created by the recently passed Big Beautiful Bill, we're going to absolutely take a harder look and are taking a harder look at capital spending in our pipeline of projects. So we have the opportunity to take a pause on some of our expansion capital spending. This would, of course, enable us to unlock more of the underlying free cash flow of the business at a faster pace. And I'd also add that it would have the added benefit of enabling us to unlock more near-term EBITDA. Start-up costs would decline at a faster pace. And at the same time, we still have the multiyear benefit of a significant number of ramping beds that we have assembled over the past few years that are coming online.

And so we're in the process of looking at all this now. I think to give you a granular example, we've identified 2 facilities in our pipeline that we have hit the pause button on, and that will save us over $100 million in CapEx over the next couple of years. We're still going through the process and we expect to have more to say over the next few months. But to your question, we do think that there is opportunity to accelerate our path to becoming free cash flow positive as a result.

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

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

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

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

Yes. Thanks for the question, Whit. This is Chris. I'll take it. I think I'd step back and just remind everyone that our 2025 guidance assumed a roughly $20 million EBITDA headwind for the full year from this group of underperforming facilities that we called out back during the fourth quarter. And these facilities have performed overall in line with our expectations. On a year-over-year basis, they did have a negative impact on our same-facility patient volume growth of about 80 basis points in the second quarter. So we expect to begin to comp over this headwind, the volumes in the fourth quarter of this year.

A couple of things. I think the underperformance of facilities has tended to be correlated to more intense local media coverage. I referenced that in the prepared remarks within a facility's local market rather than any news at the national level. And I'd also say it's just difficult for us to put an estimate on the timing of the turnaround of the small group of facilities. We, therefore, believe it is prudent to take a more conservative approach when we set the guidance. But we're continuing to work through these every day. And I think that hopefully answers your question.

Maybe I'll just add one more piece in from a numbers perspective with -- we had called out, we thought it would be a drag of around $20 million for the full year. We are seeing that be about $3 million worse than what we had originally anticipated. And that is attributable to the 1 facility that Chris has called out, which we are clearly watching very, very closely.

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

Yes. Let me take those in turn. I'll say a couple of things on the bridge from a guidance perspective. if you look at the different pieces that are really driving the change that we made, I'd start with the start-up losses that I talked about. So that's about an incremental $10 million. And that, of course, is due to the faster bed opening pace that we just talked about. Those are offset by our incremental supplemental payments.

We now expect supplemental payments to be about $25 million to $30 million better than what we previously expected. You recall, we previously expected for supplemental payments to be flat to up $15 million on a net basis year-over-year, and we now expect that to be $30 million to $40 million of a tailwind for the full year. Those -- that's offset by the volume that Chris has been talking about. The remainder of the change in our guidance would be related specifically to those softer volumes, and we think that's around the $30 million drag for the year. So those are the moving pieces.

If you -- I mean the second part of your question, you asked about -- what's -- how we ramp from the first half to the second half and what gives us confidence. I'll talk about a couple of things. If you think about the second half and what will be coming through, the first is our normal rate updates. You'll recall that those disproportionately happen in the second half of the year. And then the second thing I would point to is the supplemental payments again. Excluding Tennessee, we also expect higher supplemental payments in the second half of the year compared to the first from various other state increases that we're seeing.

And then finally, from a volume perspective, we'll be seeing a growing contribution from the new beds that we have added as we move throughout the year. There are two pieces to that. I'd say particularly related to our 2023 cohort of de novos, those have now been in place for long enough that we're seeing some really good contribution from those, and particularly as we move into the second half of the year, just given the timing of the openings for 2023.

And then also the recent bed expansions that we have added, remember, we've added almost 200 this year alone. And of course, those will begin and will continue to ramp for the second half of the year. So those are really the moving pieces from the first half to the second half. And I'll just remind you that we're also comping over the headwind from the underperforming facilities that began in the fourth quarter of last year.

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

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

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

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

Sure. Thanks for the question. A few things that I would point out. I think as we've previously communicated, we're committing to and have been committed to conducting a very thorough and independent review of our operations while continuing to work very cooperatively with the DOJ and the SEC. And while the pace of the government investigations and the related internal reviews that we're doing are going to naturally ebb and flow, much of the independent review and the cooperative engagement with the government has been performed in the first half of the year.

And so we can't predict how long this process will take or how much the investigation and engagement with the government was going to ultimately cost, but we do currently anticipate a reduction and the costs associated with the investigation over the second half of the year. And anything you'd add, Heather?

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

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

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

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

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

Yes. Thanks for the question. I would say that just generally, with work requirements, CMS is still in the process of writing the regulatory language there. But I think just the broader point for us is that we think that that all mental health and substance use treatments are going to be exempt from the Big Beautiful Bill's new copays that are going to apply. And that will directly have relevance to our patient population across the board.

I think there is still a little bit of work that's being done with respect to CMS and the language. I mean, I would call out that we believe that the significant majority of the populations will be exempt. But HHS also noted that from the work requirement provisions until '28 that if a state is making reasonable efforts to implement the rule, they can be exempted.

So I would say it's hard to predict. There is a scenario that many or most states would delay as much as possible. I'd remember that states have had the option in the past of implementing work requirements at the state level, and only a small minority have actually pursued them as -- notably Missouri, which then quickly repealed its programs. But this is something that we're continuing to follow and feel like we're continuing to be well positioned with our patient population.

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

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

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

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

Yes. Thanks for the question, Ben. I appreciate it. I would say several different things. First of all, we're constantly evaluating our portfolio. And as we go through the trade-offs, we've said in the past that we just won't hesitate to close underperforming facilities if we don't see a path to improvement. We have worked extensively in -- with so many of these facilities that have had media headwinds to be proactive in reaching out to referral partners and to be very deliberate in making that happen. And we've been doing that all year long, and we've seen real success in making that happen.

But we do have 274 facilities. And as always the case, we're going to continue to routinely evaluate the portfolio. And when on a case-by-case basis, we can't -- we find a situation that we can't indefinitely fund without a path to viability or strong utilization, then that would be a scenario that we would look at potentially closing a facility. We really believe that would be in a responsible use of resources that could be deployed where more acutely needed. And we're very focused on capital allocation and getting a maximum return on our capital for investors.

So -- also, if we have a facility that doesn't fit in strategically, we want to have the flexibility to reevaluate the operation. That could mean an exit. It could mean we temporarily close it, we repurpose the facility to better fit strategically as well. But we're also going to continue to expand our bed capacity and open facilities across the portfolio that do make sense and have a continued strong return, and we're just monitoring that each and every day, including with our very respected JV partners.

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

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

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

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

So the cash flow -- the free cash flow obviously is looking at our operating cash flow. It then excludes sort of the usual items that would come about that are sort of the fundamental items like debt service and those types of things. But it also -- sort of in our case, the question that we have been going through on 2 things: one, CapEx; and then also recurring [ legal ] -- sorry, nonrecurring [ legal ] costs are excluded there as well.

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

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

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

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

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

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

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

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

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

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

Yes. No, thanks for the question. I would say it really depends. I think one of the things that we always do with our referral sources is we're very intentional about pointing out the acuity of the patients that we serve. And we're also very deliberate about bringing them into the facilities so that they can actually see the good work that we're doing every day.

We are very intentional about discussing the strong investments that we've made in quality, and we show them what we're doing with respect to patient monitoring, the staff safety devices we put in place, our EMRs, the way that we are monitoring quality through our Joint Commission and software. It's really important that they see not only the talk around quality, but how that's following -- how we're following through on that.

And we've seen real success across the board. We're always trying to get them on site. But even when we're not, I think we've done a very good job of helping them translate the investments that we've made across the board in technology and quality into very strong results.

I think the other thing I would point out is we have very strong patient satisfaction scores that we have been very intentional about measuring. And we're -- even with involuntary admissions, they continue to be very strong. So we certainly share those as they become available. And we also have been very intentional about sharing data with respect to patient outcomes. Our patients getting better clinically as a result of our care, is the quality of their life improving. All of our data says that the outcomes have been very strong on that respect. And so we're sharing that patient experience, the patient outcomes, the data and getting them on site. And that has just proven to be very successful.

Great. And you mentioned sort of issues at 1 particular facility. I think you said local market pressure. Could you elaborate on exactly what that means? Is that pressure to that facility specifically or something kind of more broad based in that particular market?

What I said in the prepared remarks was with respect to local media that goes back many years that has just proven to be problematic and has challenged us with respect to volumes. And as a result, our performance in that 1 singular facility.

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

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

That's exactly right.

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

Yes.

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

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

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

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

So it's a great question. So if I think about that in a couple of different pieces, we look at the CapEx for this year, certainly, we had a significant step up related to the significant number of beds that we're adding. What we are seeing is our ability to open some of those beds that we had anticipated earlier than what we had expected. So the CapEx, we expect will decline in the second half of 2025. We continue to expect that. And then we believe it will continue to decline even further as we move into 2026.

So the small decrement that you see for the balance of the year is related to what Chris referred to, the pausing of a couple of those projects. Those are projects that are very early stage. So while it takes around 2 years to complete construction on a facility, the sort of the work in advance of that related to planning and design and some of those elements begins even earlier. And so it's really the elimination from 2025 of those types of costs related to where we will see a reduction in those related to where we're pausing.

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

So you're right, Jason. It's early to talk about 2026. So I don't want to try to even put any guidance out there, but let me give you a couple of points. First, we have high confidence in the accelerating growth that we're seeing, the success with the bed additions, our ability to pull some of those forward and open them even faster.

I just want to make sure that I'm really clear in regards to your question on Tennessee. We walked through the numbers, and they're all laid out in the release. But for 2025, we now expect that the full year will include $40 million to $45 million of net impact from Tennessee, and that will be related to the in-year amounts. So said another way, we can expect somewhere in that range as a run rate on a go-forward basis. So I want to make sure that, that's clear that these are not a onetime payment. They were just a little lumpy.

And then finally, I'll mention it again, I think it's worth mentioning again. The start-up costs will go down. We always knew that 2025 was going to be a very high watermark from a start-up cost perspective because of the significant number of beds we added in '24 and '25, and then to some element, at the end of '23 as well. So those, we will expect to step down. So I'll stop short of putting any other pieces out there or any numbers around it, but hopefully, that gives you a good idea of how to think about 2026.

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

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

Yes. No, thank you for the question. I mean, clearly, health care is local, and it's -- every single one of these facilities is in an individual market that are different. And so each one of them, we have to consider that. I mean, there certainly can be situations where there are staffing challenges, and there could be headwinds, but I think we've done a really good job of trying to identify that. There's really nothing I would call out on that front.

I think the demand is something that, as we've discussed in the prior question, reinforced that our referral sources in these markets are very important. And so we've tried to be very intentional of focusing there as well. So I think those are the major things that we would call out in addition to the things that I previously mentioned in terms of just reinforcing all the investments that we are continuing to make sure that we're treating -- we're caring for these patients appropriately. We're treating them with strong clinical outcomes and that we have results that we can share not only with our referral partners, but also with payers. And I think we've done a very good job of doing that.

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

Yes. What I would say on PHP, IOP is that we have always believed that, particularly with the strong acute book that we have, that there is a natural step down from our higher acuity patients to PHP and IOP settings. And we've tried to be very intentional about ensuring that, that happens on a very methodical basis. I think we have taken some strong ground in enhancing those referral patterns and ensuring that across our book of business, we're always looking to step those patients down to Acadia facilities. That was not always the case. But this is a part of the business that we think has real growth potential over time and that we're continuing to address.

We're not going to call out any specific metrics right now on that, but that's something that we will certainly be coming back and talking more about in the future because at the -- at its essence, there is such an opportunity for us to improve patient outcomes by having an appropriate step down in care. And so PHP will continue -- PHP and IOP will both continue to be an important part of our strategy.

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

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

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