Company Research: Acadia Healthcare (NASDAQ: ACHC)

Acadia Healthcare is the largest standalone behavioral healthcare operator of mental health + addiction treatments centers across the United States (operates ≈260 facilities, 11.3k beds across 38 states, serves 80k patients daily vs. 2nd-est. largest Sequel Youth and Family Services (≈40 facilities, 15+ states, est. ann. revs. ≈$200mn vs. ACHC’s ≈$3.15bn FY24). 

Acadia operates through two major business segments: 

• Behavioral Health Facilities: (≈83% ttl. revs., est. op.  margin ≈22% vs. overall behavioral health facilities industry’s op. margin ≈10%–ACHC greater due to 1) scale + op. efficiency (i.e., economies of scale leading to cost efficiencies w/ ops., procurement, etc..) + 2) strategic payer mix (sign. portion– 26% payers)–ACHC prefers payers that use commercial ins.–offers higher reimbursement rates (Commercial insurers pay Acadia higher rates for same svcs–ex: Medicaid might pay $100 for a patient therapy session vs. commercial insurer pays $200 for same session (commercial insurer wants access to Acadia’s patient network so it can insure them–commercial payer op. margin for ACHC ≈18%)–commercial pays more for same treatment per patient since it negotiates w/ Acadia vs. Medicaid + Medicare govt. caps/fixed, lower reimbursements to ACHC)→govt. programs like Medicaid (57% payers, est. op. margin ≈7% ), Medicare (14% payers, est. op. margin ≈12%), self-pay (3% payers, est. op. margin ≈10%)).

Since 2015, Acadia’s insurance (best estd.) payer mix has trended towards the following (“2015-2024” below): 

• Medicaid: ≈32%–>57%–7% op. margin
• Medicare: ≈13%–>14%–12% op. margin
• Commercial: ≈23%–>26%–18% op. margin
• Self-Pay: ≈14%–>3%–10% op. margin

Above trend indicates 2015-2024 unfavorable shift from 1) more Medicaid payers (but lowest-margin business for Acadia) + 2) net stable Medicare and Commercial payers–higher-margin segments (little/no growth)+ 3) sharp gradual decline Self-Pay segment. Still, ACHC’s overall op. margin 22% has remained strong due to scale + op. efficiency + joint ventures (spread risk, lessens costs and pot. op. margin strain). The primary concern here is the cont’d inc. low-margin Medicaid payers–main causes: 1) ind.-wide inc. behavioral health demand (particularly among low-income Medicaid members→data from Substance Abuse and Mental Health Services Administration states 20% adults experienced behavioral health issue 2019-2020–of course, COVID era + % of adults reporting poor mental health inc. 11.5%–>14.1% 2013-2022) + 2) Medicaid expansion (ACA incr. Medicaid coverage for mental health + substance abuse–ACA allowed states to expand Medicaid eligibility to adults w/ incomes up to 138% of fed. poverty level–more lower-income ppl. afforded access, leading to higher utilization rates, leading to higher revs. but margin pressures on Acadia), + 3) ltd. ability to grow commercial payer mix proportionately (many prime behavioral health mkts. dominated by lower-margin, gov. funded, Medicaid + Medicare patients– ≈75% all inpatient behavioral pmnts. are gov. funded (Medicaid ≈ 55% + Medicare ≈20%), which are again typically lower Medicaid + Medicare imbursement for providers such as Acadia→translates lower margin.

Although this is somewhat impt. aspect of the company’s Backdrop (referring to unfavorable margin profile w/ Medicaid growth vs. stable, higher-margin commercial margins), prior to further discussing why the company’s stock is down ≈ 66% LTM, should be noted that Acadia’s Behavioral Health Facilities segment operates 1) psychiatric hospitals (≈ 54% unit revs., est. op. margin ≈ 22%, 24/7 inpatient facilities, aim to stabilize individuals–i.e., psychosis, suicidal, etc..) 2) residential treatment centers (≈24% unit revs., est. op. margin ≈15%, live-in, longer-term patient care, often adolescents, typically w/ complex behavioral issues), and 3) outpatient clinics (≈22% unit revs., est. op. margin ≈12%, patients visit for therapy, counseling, medication–patients don’t live here). Through each of these primary Behavioral Health Facilities segments, Acadia generates revs. through billing insurers (Medicaid–≈57% co. total payers, op. margin ≈7%) , Medicare (14% co. total payers, op. margin ≈12%), commercial (≈ 26% co. total payers, op. margin ≈18%), insignificant amt. self-pay (≈ 3% co. total payers, op. margin ≈10%)–the more patients treated + longer treated →more rev. generated. Example transaction: 1) person w/ mental health crisis, goes to Acadia facility, 2) Acadia confirms person meets medical necessity to become patient, Acadia verifies ins. cov. type (let’s say Medicaid in this example since it’s most common), 3) patient receives treatment (could be therapy, medication detox, and/or 24/7 inpatient care–length of stay depends on severity), 4) throughout stay, Acadia submits patient bills to patient’s state’s Medicaid program, Medicaid pays pre-set, fixed amt. per day of care or ultimate bundled payment (i.e., Medicaid might pay $400/inpatient day regardless of Acadia’s actual cost), 5) Acadia receives pmnt., usually weeks post-discharge–note: even if patient care costs Acadia more than what Medicaid pays (hence why commercial payers are far more profitable for Acadia–commercial insurers have to negotiate to get access to Acadia’s patients, thus have to reimburse more, meaning contr. more coverage to patients inc. ACHC’s margins since they aren’t forced to cover as much by virtue of sharing + spreading higher portion of cost(s) w/ commercial insurer), Acadia takes it due to patient vols. + secured state contracts.

Add’ly, Acadia’s Behavioral Health Facilities unit recognizes revs. when care is delivered (Acadia bills insurers once patient admitted + svcs. provided–again, usually either pay 1) fixed amount per day of care or 2) bundled payment for episode/term of care, rev. amt. based upon 1) patient vols. + 2) length of stay + 3) insurance type (i.e., Acadia receives more revs. from lower-margin Medicaid + Medicare vs. commercial payers).

Acadia’s Behavioral Health Facilities unit recognizes costs as incurred–key expenses incl: 1) labor (≈52.6% of revs., inc. 26% 2020-2023 due to 1) wage inflation (+15.6% 2020-2023–RN wage increases + relied upon contract labor during COVID–notable since temporary) + 2) higher staffing levels (+10.4% 2020-2023 due to inc. patient vols. + regulatory staffing minimums)–labor components incl. therapists, nurses, clinicians), 2) facility costs (≈18.5% of revs., inc. ≈26.3% 2020-2023 due to higher utility rates (electricity, heating, water costs rose ≈17% 2020-2023 due to inflation) + incr. rent due to new facility openings (Acadia opened ≈8 new facilities 2020-2023, added ≈$27mn incremental ann. lease/rent expenses 2020-2023) , 3) regulatory compliance + safety (≈6% of revs. 2020-2023, inc. ≈28.7% 2021-2023 due to 1) stricter federal/state oversight post-COVID (facility inspections, audits)→2) Acadia’s investments corporate compliance teams + new EHR systems–led to ≈$23mn incremental costs, and 3) litigation + settlement reserves (rise in legal claims + regulatory fines relt’d adolescent care centers–led to ≈$13mn incremental costs), and 4) pharmaceuticals + medical supplies (≈3.6% of revs. 2020-2023, inc. ≈16.9% 2021-2023 due to 1) rising drug prices (psychiatric + addiction treatment medication list prices inc. ≈7% 2021-2023 + 2) higher patient acuity (more instances of dual-diagnosis + more intensive care req’d–driving up per-patient pharmaceutical spend), and 3) COVID shortages leading to ≈11% inc. procurement costs 2021-2023.

Acadia’s Behavioral Health Facilities’ key rev. drivers incl: 1) patient vols. (≈9% growth 2020-2023, driven by organic demand growth + new facilities, Acadia data: ≈80k patients/day 2023 vs. ≈72k/day 2020→≈11% growth 2020-2023–each 1% inc. avg. daily adds ≈$27mn ann. rev.) 2) length of stay (avg. stay length ≈10 days, rose ≈1.5% 2020-2023 due to rising patient treatment acuity + post-COVID mental health trends–each 1-days inc. in stay length ≈$70mn in incremental rev. add), 3) payer mix (again, usually higher revs. but lower reimbursements→lower margins w/ Medicaid + Medicare but higher margins w/ commercial insurance–again, commercial forced to negotiate because want access to Acadia’s patients–reminder: Acadia’s current neg. Payer mix–57% Medicaid–low-margin, 7% avg. op. margin vs. commercial 18% op. margin, currently ≈26% rev. base), and 4) service intensity (usually means more revs.–avg. ≈20% higher rev./patient, but pressures ACHC op. margins)–brief note on commercial efforts: Mgmt. has 1) established 20+ joint ventures (JVs) w/ large hospital systems (Ascension, Geisinger, Trinity Health, etc..) which prioritize commercial patients, JVs also permitting Acadia to locate w/in or near these health systems, making them more attractive to commercial payers seeking integrated behavioral health solutions (i.e., more convenient for the commercial payer patient)–est. min≈ 63% of 8 newly built facilities 2021-2023 in commercial-payer-friendly regions (i.e., Chicago, Denver, Austin–selected due to 1) Chicago’s large concentration of health systems + lots of pvt. sector employment, 2) Denver consistently ranks among top US metro regions for commercial insurance penetration + younger, more affluent population + low Medicaid penetration, 3) Austin maintaining various corporate HQs + behavioral health capacity still catching up w/ demand, leading commercial insurers eager to negotiate and insure Acadia’s patients in Austin) + 2) mgmt. focusing on opening more JVs in more affluent/higher-income mkts.–commercial payer mix is generally higher in this mkts. (i.e., less people on Medicaid since they aren’t poor) + 3) focusing on higher-acuity programs that are usually covered by commercial health insurance (which typ. generate ≈25% higher rev./patient, also often boosting Acadia’s op. margin +4%/patient due to commercial insurers reimbursing Acadia’s high-acuity patients at higher rates, offsetting add’l patient costs incurred by Acadia–i.e., fixed costs already in place, but w/ add’l marginal costs w/ high-acuity, inc.≈17%, rev. rises ≈25%–in short, rev. boost from commercial payers for higher-acuity patients outpaces cost incr. for Acadia to deliver care) w/ commercial insurers contracting for these svcs. at higher negotiated rates + 4) mgmt. noting in recent earnings calls that insurers are increasingly more willing to negotiate rates for access to Acadia’s large + growing patient population (daily patients served up 11% 2020-2023, total licensed beds up 4.6% 2020-2023, admissions growth up ≈3.5% CAGR 2020-2023), inherently holding bargaining power vs. commercial insurers 

Acadia’s Behavioral Health Facilities’ key cost drivers (most mentioned above) incl: 1) staffing levels/wages (labor ≈52% Acadia’s revs., up 26% 2020-2023 due to 1) wage inflation–+15.6% and 2) higher staffing levels–≈+10.4%→each 1% inc. labor costs translates ≈$37mn added ann. expense ), 2) facility utilization (fixed costs–rent, utilities, supplies-≈18.5% revs.,–≈74% avg. occupancy as of 2023–underutilization depresses op. leverage–optimal breakeven ≈>equal 75% occupancy + added cost pressures due to new facilities opening w/ ramp-up lag or period between opening and reaching optimal ≈75% or greater occupancy rate, the longer the lag, the longer margins are pressured–8 new facilities 2020-2023), 3) reg. + compliance costs (6% revs., up ≈28.7% 2021-2023 due to expanded compliance staff, EHR system investments (≈$25mn), and legal reserves + fines (≈$12.5 mn ), and 4) case mix acuity (i.e., higher-acuity patients require greater resources–acuity mix up ≈4% since 2020–each 5% increase high-acuity mix raises direct costs/patient ≈13%)

Macroeconomic standing: Behavioral health segment of the healthcare industry is less sensitive to economic cycles (broadly considered non-cyclical–i.e., largely agnostic to broader macroeconomic trends due to nature of business/svcs.–mental health issues + addiction needed regardless of macroeconomic condition, perhaps even slightly countercyclical to a degree (ex: more drinking, drug addiction during times of economic stress→objectively benefits Acadia’s Comprehensive Treatment Center unit while bulk of company’s overall business in Behavioral Health Facilities, which is hardly tied to economic backdrop)–demand for mental health svcs. often remains flat or even moderately increases during periods of economic stress. Even as we are seemingly entering a period (as of 4/19/2025) of economic slowdown, Acadia planning on adding ≈9k beds during 2025 + expecting improved profitability profile as startup costs decline–every time Acadia opens up new facility, startup period is when 1) costs are high (hiring, licensing, equipping, marketing, etc..), 2) occupancy is low (beds take time to fill–takes ACHC’s Behavioral Health Facilities around  ≈2-3yrs. to reach  optimal op. efficiency + profitability–upcoming cycle exp. latest end of 2026 (per CEO commentary), ind. avg. ≈2-3 yrs. also), 3) margins compressed (influx initial costs w/ low initial revs., avg. ACHC new facility op. margin starts ≈-6% op. margin, gradually rises 2-3yrs. + hits peak profitability at ≈15%–op. margin mature/optimal cost efficiency/profitability when occupancy ≈75%–co. doesn’t have distinct hist. delayed openings +–however, mgmt. expecting many of recently opened facilities to hit op. efficiency/profitability stride 2025-2026 (i.e., 8 new facilities built 2020-2023 ≈55% occupancy 2023, but mgmt. expecting 75-80% full by 2026–fixed costs remain the same but higher occupancy improves margins against initially high fixed costs)

• Comprehensive Treatment Centers (CTCs): (≈17% ttl. revs., est. op. margin ≈21% vs. overall addiction treatment ind. margin ≈15%–ACHC better due to 1) scale + nat’l footprint (Acadia operates 140 CTCs–largest network of Medication-Assisted Treatment–MAT–facilities in USA–allows centralized administration, billing, compliance, HR, etc.., medications purchasing power, and shared clinical protocols + back-office systems→higher labor productivity + lower SG&A as % revs.), 2) higher fixed-cost absorption (larger, more established CTCs often operate near full capacity→fixed-costs: staff, rent, security–are spread across more patients, thus incremental patients add. translates higher op. margin contributions), 3) favorable payer mix + cash-pay ret’n (net diversified across Medicaid (≈72% CTC payer mix, est. op. margin ≈11%), Self-Pay (≈20% CTC payer mix, est. op. margin ≈27%), Commercial (≈8% CTC payer mix, est. op. margin ≈22%), Medicare (negligible, ≈1% CTC payer mix, est. op. margin ≈9%)–cash-pay payments common in opioid treatment and often recurring–typically daily or weekly–+quicker rev. collection since Acadia doesn’t have to go through insurers, 4) shorter ramp-up (period initial build start→peak profitability, ≈75%+ occupancy) period (≈6-12 mos.vs. Behavioral Health Facilities’ ≈2-3 yrs.→less drag on op. margins, primarily due to shorter licensing timelines + lower op. complexity vs. Behavioral Health Facilities), 5) recurring rev. model (many patients visit daily or weekly–and again, pay cash–→creates high appointment density + rev. predictability), and 6) regulatory tailwinds (federal + state govts. have expanded funding for opioid treatment access–1115 Medicaid waivers, grants, and looser methadone rules–, which reduce reimbursement volatility (i.e., govt. giving more $ to treat opioid addiction→allows Acadia to get paid more easily + reliably due to less risk of delays or funding cuts) –Acadia well-positioned to receive sizable portion of these funds given its existing sizable infrastructure

Between 2015-2024, Acadia’s CTC unit’s payer mix has remained net stable, w/ some minor observations: 

• Medicaid: 2015-2024 respective unit rev.  range ≈65-72%, op. margin ≈ 11%

• Self-Pay: 2015-2024 respective unit rev. range ≈25-20%, op. margin ≈ 27%

• Commercial: 2015-2024 respective unit rev. range ≈9-8%, op. margin ≈ 22%
• Medicare: 2015-2024 respective unit rev. range ≈1-1%, op. margin ≈ 9%

Worth briefly noting mgmt. announced CTC expansion plans 2024–14 new CTCs (should be fully operational by latest 2027, just baking in a little extra time to err conservative (avg. ACHC CTC ramp-up period ≈6-12 mos.)–w/ optimal efficiency/max profitability exp. ≈12-18 mos. post-opening (also ≈75%+ occupancy remains the case here w/ respect to max avg. max profitability, like Acadia’s Behavioral Health Facilities), thus, these 14 new CTCs should reach max profitability ≈early 2026. Acadia also acquiring/rebranding 3 CTCs in North Carolina + 3 CTCs in South Carolina–brief notes on these acquired properties: currently already fully operational (thus, ramp-up or period between beginning build→max profitability/efficiency met negligible) + est. incremental annual EBITDA contribution 6 NC +SC acquired facilities to Acadia ≈$8mn

Acadia’s Comprehensive Treatment Centers segment generates revs. from charging for treatment svcs. (daily or weekly medication dosing, counseling sessions, intake assessments, lab tests, etc..), each visit billed to respective insurance entity or directly to patient (admittedly varies, but recall: ≈72% Medicaid, ≈20% Self-Pay, ≈8% Commercial, and ≈1% Medicare)–avg. rev./patient/day ≈$1k (depending on payer) + ann. rev./mature, established CTC ≈$5mn.

Common CTC transaction as follows: 1) patient comes in for daily dosing, 2) undergo req’d counseling + possibly lab tests, 3) CTC bills respective insurer (i.e., Medicaid, for ex:), revs. recognized as svcs. performed (i.e., medications + therapy actually delivered or performed–just a fee-for-service model vs. Behavioral Health Facilities’ longer-term stay, in-patient model–CTC is an out-patient model, essentially meaning patients don’t stay at facility overnight). Costs recognized as incurred (labor, medication costs, facility costs, compliance/regulatory/billing systems–more on particular cost breakdown below in “Primary cost drivers” section).

Primary rev. drivers incl: 1) patient volume (+1% daily census–# of Acadia patients served/day ≈$27mn systemwide revs.), 2) payer mix (commercial + self-pay payers generate ≈35% more rev./patient vs. Medicaid), 3) service intensity (dual-diagnosis care or bundled therapy svcs. ≈20% higher rev./patient), and 4) visit frequency (daily visits increasing rev. consistency, ≈87% Acadia’s CTC patients currently daily patients–req’d by Medicaid, great for Acadia)

Primary cost drivers incl: 1) labor (RNs, therapists, ≈53% of ttl. revs., up ≈26% 2020-2023 due to inc. wages + staffing levels), 2) facility costs (rent, utilities, ≈18.5% of ttl. revs., up ≈26% 2020-2023 due to opening new treatment centers (w/ ramp-up lag + heightened rel. initial fixed-costs vs. revs.) + inflationary pressures in real estate, utilities (energy), 3) medication + supplies (≈3.6% of ttl. revs., up ≈17% 2020-2023 due to higher medication-assisted treatment patient vols., + rising unit cost of methadone→up ≈12% 2020-2024 primarily due to increased demand), and 4) compliance + admin (≈6% of ttl. revs., up ≈29% 2020-2023 due to audits, EHR upgrades, and litigation reserves–note: add’l audits + litigation reserves exp. dec. over time since 1) most legal fees + regulatory costs are front-loaded (i.e., these add’l fees tend to peak during height of investigations) + recent litigation led to one-time charges–litigation-relt’d costs + one-time settlements exp. Dec. 2025-2026 as cases settled/resolved) + to decline thereafter.

Backdrop

• Beginning late 2024, Acadia has been subjected to multiple federal investigations + legal challenges regarding patient care and billing practices–primary reason sending ACHC shares down ≈66% LTM (as of 4/21/2025
• a) Late 2024 Acadia disclosed it was under investigation by federal authorities, incl: US Attorney’s Offices Southern District of New York + Western District of Missouri–both focused on Acadia’s admissions processes, length of patient stays, and billing practices (essentially accusing Acadia of unjustly bilking patients). Acadia agreed to settle for $19.85mn (resulted in rather inconsequential one-time charge for Acadia 2024) to settle allegations for medically unnecessary inpatient (long-term patients, part of company’s Behavioral Health Facilities division) behavioral health svcs. Acadia also has, as of April 2025, resolved the majority of its material legacy legal liabilities (including massive $400mn settlement 2023–more consequential than more recent $19.85mn settlement→recorded as one-time charge 2023, resulted op. margin decl. ≈15.1% 2022→1.3% 2023 ($400mn settlement was by far the main cause, as ex: settlement, Acadia’s op. margin would’ve been ≈15.5%), w/ some current yet presumably less threatening investigations surrounding its VA billing practices + but a seemingly serious securities class-action lawsuit vs. the co., accusing mgmt. making false/misleading statements regarding Acadia’s business practices–incl: detaining patients w/out medical necessity and billing for unnecessary svcs.–court denied Acadia’s motion to dismiss, as of 4/22/2025 in discovery phase, motions for summary judgment exp. by May 23, 2025–worst (practical) outcome est. ≈$150mn settlement + ≈$80mn net cash cost (post-co. insurance), one-time EPS/FCF impact ≈-$0.60/shr., w/ existential co. threat–going out of business–incredibly low as it remains EBITDA pos. (even in $200mn settlement scenario, ACHC’s 2024 adj. EBITDA guidance ≈$775mn, pot. settlement thus represents ≈5-15% of one year’s EBITDA) + mkt. share/importance to struggling mental health community (unlike some past separate cases, Acadia unlikely to be barred from Medicaid + Medicare funds–nothing in this case restricts Acadia’s payer relationships + state and federal funding remains flowing, esp. due to opioid treatment expansion), all along w/ general heightened DOJ scrutiny). The company’s recent lawsuits have continued spooking Wall Street, settlements imposing material impacts on Acadia (but ≈60% Acadia’s legal matters 2020-2024 resolved, 40% still ongoing–namely, aforementioned securities lawsuit).

1. Investors also concerned regarding Acadia’s recent (growth-driven) margin dilution
2. Acadia has been recently aggressively expanding–added 8+ new Behavioral Health Facilities (2020-2023) + planning ≈9k new bed by YE25→translates inc. amt. ramp-up costs→1) high-fixed costs during ramp-up (i.e., staffing, licensing/zoning, overhead), 2) low initial occupancy (≈55% initial patient occupancy avg., then ≈75%+ by ≈2026 latest), 3) delayed rev. recognition + margin dilution during initial start-up phase. Ultimately, large initial capital outlays to fund expansion→temp. margin repression during start-up + ramp-up phases

Set-Up

• Litigation pressures of the past are still inordinately weighing on investor’s views of Acadia’s future

1. The legal matters vs. Acadia stem from practices that occurred in recent yet past years (2014-2017, leading all the way up to the company’s $400mn settlement 2023 + $19.85mn settlement 2024, both cumulatively squeezing Acadia’s margins, decl. ≈15% 2022-2023) and are no longer occurring + as a result, prev. legal reserve costs not exp. repeat, but represent one-time expenses not tied to Acadia’s underlying performance nor demand for its services–
2. Consequently, worth just generally noting that there isn’t anything fundamentally wrong w/ Acadia’s business nor is there any demand shortage–core businesses (BHF + CTC) remain growing + operationally sound (despite ugly recent headlines, Acadia continues opening new Behavioral Health Facilities–(added 776 beds to its network 2024 vs. 302 beds 2023→represents 157% increase) + Comprehensive Treatment Centers–(opening 14 new CTCs + acquiring 6 existing clinics in NC + SC–in 2023 Acadia opened 6 new CTCs vs. 2024 announced plans to open 14 new CTCs)+ total serves ≈80k patients/day w/ strong rev. visibility (≈80k 2024 up  ≈6.7% YOY from  ≈75k daily 2023
3. More relt’d to litigation matters, however, Acadia currently taking proper + intentional steps in resolving issues–incl: 1) separated its quality and compliance depts. into 2 distinct/separate units in order to provide better + more specialized oversight (i.e., Chief Medical Officer + Chief Quality Officer now oversee patient safety + clinical quality while Chief Compliance Officer manages corporate compliance programs–overall more streamlined oversight + compliance) + 2) each facility now having safety committee incl. facility mgmt. + facility staff to ensure quality assurance + 3) invested ≈$100mn in electronic medical records (EMR) systems, wearable patient monitoring devices, + staff communication/alert systems + 3) generally strengthened compliance and reporting programs across the co.
4. W/ respect short-term repression due to spec. recent expansion plans + associated ramp-up lag (8 new Behavioral Health Facilities developed 2020-2023→exp. profitability ≈2026 given ≈2-3yr. avg. ramp-up, build→max profitability + max. efficiency + announced plans late ‘24 build 14 new Comprehensive Treatment Centers, avg. ramp-up period ≈1-2 yrs., both new BHFs + CTCs max profitability ≈2026), investors seemingly being overly myopic with this leg of Acadia’s current perfect storm (i.e., combo of string of lawsuits–leading to margin repression–has to pay settlements, legal fees, etc..+ further margin repression due to recent aggressive growth measures)–1) start-up margin compression is temporary, not structural (current margin pressure mainly byproduct of front-loaded costs from facility expansion–fixed costs largely in place, and as patient vols. ramp-up, op. lev. kicks in–visualized below:

, 2) facility ramp-up lag is temporary + predictable cycle–ramp-up margin dilution inherently part of any given cost–heavy expansion model (for Acadia, avg. Behavioral Health Facilities ramp-up to max profitability ≈75%+ occupancy, ≈2-3 yrs. post-initial build, avg. Comprehensive Treatment Centers ramp-up ≈1-2 yrs. Post-initial build, same ≈75%+ occupancy→max profitability + op. efficiency)–Acadia’s newly opening facilities 2020-2023 already approaching profitability maturity, mgmt. exp. many hit full op. efficiency latest YE26, signaling op. margin recovery near-term vs. long-dated + uncertain, 3) fixed-costs already largely in place–large portion (≈80% facility’s full cost structure is in place by time it begins ops., when occupancy initially low ≈55%–primary implication: as occupancy rises, incrementally added revs. flows in at higher incremental margins)–primary facility costs (i.e., staffing, licensing/zoning, overhead, etc..) 80% initially sunk–see visual below: 

Therefore, as occupancy rises from base-level ≈55%→≈75%+ ≈2-3yrs. post-initial Behavioral Health Facility build (Comprehensive Treatment Center optimal profit–or ramp-up–timeline ≈1yr.), incremental added revs. flows at high contribution margins (enabling op. leverage–mainly repeating for emphasis here to emphasis how revs. flow into profits at higher rate for Acadia’s facilities mainly due to ≈80% fixed-costs sunk into facilities, since not spread out as much over time, profits generated at higher rates due to front-ended fixed-costs) + 4) near-term margin compression tied to heightened demand, not demand weakness–factors inc. demand incl: 1) mental health crisis acceleration throughout COVID (Acadia reported ≈50% spike psychiatric consultations March 2020 comp. prev. yr. + WHO reporting ≈25% global rise in depression 2020-2021), 2) cont’d federal + state-level support (in 2022 Medicaid accounted ≈51% Acadia’s ttl. revs., + during FY 2024 Health Resources and Services Administration awarded over ≈$12bn in grants to expand healthcare svcs. for underserved populations–incl. behavioral health svcs.), 3) undersupply inpatient psychiatric + substance use beds (experts recommend 30 psychiatric beds/1k ppl.–US, on avg., currently stocked ≈12 beds/1k ppl.–supports Acadia’s current (yet expected, from my vantage point just acting as another shareholder stressor, might not be thinking rationally given the recent legal investigations)–ultimately, margin dilution stemming from front-loading investment to meet demand, not to combat optimal op. underperformance.

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Stock Pitch: Acadia Healthcare (NASDAQ: ACHC)

Executive Summary

Acadia Healthcare (NASDAQ: ACHC) is the largest standalone behavioral healthcare provider in the U.S., operating ~260 facilities with ~11,300 beds across 38 states, serving ~80,000 patients daily (2024).
Its nearest competitor, Sequel Youth and Family Services, operates only ~40 facilities, generating ~$200M in annual revenues versus Acadia’s ~$3.15B (FY24).

I’m initiating a Buy on Acadia Healthcare because the company is emerging from a multi-year operational and legal trough. Facility ramp-up maturity by 2026, stabilized legal overhangs, and robust behavioral health demand create a setup for ~200–300bps operating margin expansion, ~8–10% revenue CAGR, and ~80.6% stock price upside into 2027–2028.

Upside Drivers

• Facility Ramp-Up to Full Profitability (~2026):
  

1. 1. • 8 Behavioral Health Facilities opened between 2020–2023 operated at ~55% occupancy in 2023.
        
      • Historically, Acadia’s Behavioral Health Facilities reach ~75–80% occupancy ~2–3 years post-opening, enabling full operating leverage.

      • Management expects these 8 facilities to mature by 2026, contributing ~200–300bps margin expansion.
        

• Patient Volume Growth:
  

1. 1. • Daily patients served grew from ~72,000 in 2020 to ~80,000 in 2023 (~11% growth).
        

• Management guiding for additional 9,000 new beds by YE2025, implying ~8–10% organic revenue CAGR 2024–2027.
  

• Legal Resolutions Improving Visibility:
  

1. 1. • ~$400mn 2023 settlement and ~$19.85mn 2024 settlement resolved majority (~60%) of Acadia’s outstanding legacy legal issues.

      • Remaining risk is primarily a securities class action, with worst-case ~$80mn net cash outlay (~10% of 2025E EBITDA).
        

• Favorable Behavioral Health Demand Tailwinds:
  

1. 1. • Behavioral health demand surged ~25% during COVID per WHO estimates; U.S. adult mental health incidence rose from 11.5% (2013) to 14.1% (2022).
        

• Federal and state funding support remains strong — e.g., $12bn+ in Health Resources and Services Administration behavioral health grants in FY24.
  

Business Segments

• Behavioral Health Facilities (BHF) (~83% of FY24 revenue, ~22% op. margin):
  

• • • Revenue Mix (2024): ~54% psychiatric hospitals, ~24% residential treatment centers, ~22% outpatient clinics.

    • Payer Mix (2024): ~57% Medicaid (7% margin), ~26% Commercial (18% margin), ~14% Medicare (12% margin), ~3% Self-Pay (10% margin).
      

• Comprehensive Treatment Centers (CTC) (~17% of FY24 revenue, ~21% op. margin):
  

• • Largest Medication-Assisted Treatment network (~140 centers).

  • Payer Mix (CTC 2024): ~72% Medicaid (11% margin), ~20% Self-Pay (27% margin), ~8% Commercial (22% margin).
    

Backdrop (Recent Challenges)

• Litigation Settlements:
  

• • • $400mn (2023) and $19.85mn (2024) settlements related to historical admissions/billing practices (2014–2017).
      

• Remaining major litigation (~$80mn est. worst-case cash outflow) would equate to ~10% of 2024E EBITDA and is fully manageable.
  

• Margin Pressure from Expansion:
  

• • • 8 new CTC facilities operated at ~55% occupancy in 2023; each prospective 1% increase in occupancy adds ~$27mn systemwide revenue.
      

• New facilities initially operate at ~–6% margins but typically reach ~15% mature margins once ~75% occupancy is achieved (~2–3 years post-opening).
  

• Payer Mix Shift:
  

• • Medicaid mix rose from ~32% in 2015 to ~57% in 2024 (lowest margin payer, ~7% op. margin).

  • Self-pay mix declined from ~14% to ~3% (higher margin, ~10%).
    

Set-Up

• Behavioral Health Facilities opened 2020–2023 are on track to reach 75–80% occupancy by YE2026, implying full operating leverage unlocked (~200–300bps margin expansion).

• Comprehensive Treatment Centers expansion (14 new CTCs announced 2024) expected to mature by early 2026 (~6–12 months typical CTC ramp timeline).

• Incremental revenue from maturing facilities will flow at ~60%+ contribution margins, given ~80% of fixed costs are already sunk at facility opening.

• Higher-margin commercial payer mix targeted to rise via new Joint Ventures — ~63% of new facilities opened 2021–2023 located in higher-margin-commercial-penetration markets (Chicago, Denver, Austin).
  

Key Financial Metrics (as of April 30, 2025)

Metric	Value
Current Stock Price	~$23
Market Cap	~$2.04bn
2025E P/E Ratio	~7.98x
2025E EV/EBITDA	~6.04x
2024 Revenue	~$3.15bn
2024 Adjusted EBITDA	~$556mn
2024 Adj. EBITDA Margin	~23.4%
Net Debt / 2024 EBITDA	~2.7x
3-Year Expected Revenue CAGR (2024-2027)	~8%
3-Year Expected Adj. EBITDA CAGR (2024-2027)	~9%

Management Overview

• CEO: Christopher Hunter (appointed April 2022)
  

• • • Former President of Cigna’s commercial business.

    • Deep experience scaling healthcare service operations profitably.
      

• CFO: David Duckworth (since 2018)
  

• • • Oversaw Acadia’s major 2020–2024 facility expansion cycle and financial restructuring.
      

• Chief Medical Officer: Dr. Jeffrey Woods
  

• • Oversees patient safety and quality improvement initiatives across the system.
    

Leadership is focused on aggressive compliance strengthening (e.g., separated Compliance and Quality departments, ~$100M invested in EMR upgrades, safety tech).

Primary Risks

• Ongoing Legal Risk:
  

1. 1. • Securities lawsuit (worst case ~$80mn cash outflow) pending — court discovery phase ongoing, summary judgment motions due May 2025.
        

• Prolonged Margin Dilution:
  

1. 1. • If facility occupancy recovery lags (e.g., remains below 70% through 2026), margin rebound would be delayed.
        

• Labor Cost Inflation:
  

1. 1. • Labor is ~52.6% of total revenue; 2020–2023 saw ~26% cost increase due to wage inflation (+15.6%) and higher staffing (+10.4%).
        

• Continued Medicaid Payer Mix Creep:
  

1. • Higher Medicaid patient mix (~57%) could structurally compress blended margins if commercial expansion efforts underdeliver.
     

Why Risks Are Manageable

• Litigation Fully Absorbable:
  

• • • ~$80mn worst-case legal settlement equals ~10% of annual EBITDA — manageable without threatening operations or funding access.
      

• Facility Ramp-Up Historically Predictable:
  

• • • Behavioral Health Facilities consistently reach profitability maturity (~75% occupancy) within ~2–3 years; current facilities trending appropriately (~55–60% 2023).
      

• Commercial Payer Strategy Executing Well:
  

• • • ~63% of new facilities (2021–2023) deliberately located in higher-commercial-penetration markets.
      

• Labor Productivity Initiatives Underway:
  

• • EMR investments, staffing optimization, and process automation mitigating some wage pressure impacts.
    

Current Market Sentiment

Sentiment Snapshot	Details
Analyst Consensus	Moderate Buy
Buy Ratings	9 analysts
Hold Ratings	6 analysts
Sell Ratings	1 analyst
Avg. Price Target	~$40 (~80.6% implied upside from current $23 levels)

Investor fears around litigation and margin pressure remain elevated, but improving operating fundamentals and resolution of major legal risks are beginning to shift sentiment more favorably.

Bottom Line

Acadia Healthcare (ACHC) offers an attractive near- and medium-term recovery story.
Facility ramp-ups, stable demand growth, resolution of major legal headwinds, and payer mix improvement efforts collectively position ACHC for ~8–10% revenue CAGR, ~200–300 bps margin expansion, and ~38% stock price upside into 2027.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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