Published: 3 Oct 2024
Acadia Healthcare - Short
Acadia Healthcare (NASDAQ: ACHC — $7.26 billion) presents itself as a leader in behavioral healthcare, operating 253 facilities with approximately 11,200 beds across 38 states. While the company touts its aggressive growth strategy, which includes facility expansions, joint ventures, de novo developments, and acquisitions, this approach has led to serious concerns. Most notably, a New York Times investigation raised allegations that Acadia extended patient stays unnecessarily, casting a shadow over its operational practices. Additionally, ballooning debt and relentless labor cost pressures in the non-hospital sector point to deeper issues lurking beneath the surface.
Lawsuits Continue to Mount
Acadia Healthcare has faced a series of legal challenges, primarily revolving around allegations of improper patient care practices. A New York Times investigation highlighted claims that the company manipulated medical records to extend patient stays beyond what was medically necessary, allowing it to bill for services that may not have been required. Additionally, accusations have surfaced that Acadia pressured emergency responders to direct patients to its facilities, inflating revenue by prolonging patient stays. These practices have triggered multiple lawsuits, including a notable $19.85 million settlement for violations of the False Claims Act. Reports suggest that these issues are not isolated, with similar allegations surfacing in a majority of the states where the company operates.
Beyond these claims, Acadia also faced a major setback in July 2023 when it was ordered to pay $405 million in a civil case involving child abuse within its foster care program in New Mexico. Such legal proceedings not only harm Acadia’s public image but also carry significant financial repercussions.
We anticipate that these legal challenges will continue to weigh on the company over the next several years. While we estimate that Acadia’s legal cost burden may decrease from 13.46% of revenue to roughly 5% this year and potentially 2% next year, these projections remain conservative given the ongoing nature of the legal challenges. Both the financial strain and reputational impact are likely to persist, presenting a significant headwind to Acadia’s overall performance.
Labor Costs Squeeze Margins
Labor remains a critical issue for Acadia, particularly as the healthcare sector recovers unevenly across different specialties. While general hospitals and medical labs have seen some relief in staffing shortages, psychiatric and substance use disorder (SUD) hospitals — where Acadia operates — continue to struggle. Psychiatric and SUD facilities experienced the highest wage inflation in 2024, with an 8.4% year-over-year increase in wages. Additionally, the burnout rate among psychiatrists remains alarmingly high, driven by emotional exhaustion and depersonalization, which further exacerbates the staffing crisis.​
The Journal of Affective Disorders reports that a significant portion of psychiatric professionals face burnout, which Acadia must address or risk further operational strain. We estimate that labor costs will contribute to a ~1% increase in cost of goods sold (COGS) from 2023 to 2024, further tightening margins.
Overvalued and Overleveraged
Our discounted cash flow (DCF) analysis indicates that Acadia Healthcare is significantly overvalued. Despite a recent dip in the stock price, we project that there is further room for the price to decline, with a fair valuation range between $36.99 and $53.65 per share.
Acadia's growth has been largely fueled by debt, with the company expected to carry nearly $2 billion in debt by the end of 2028. The need for continued borrowing at an accelerated pace makes Acadia a risky investment.
Conclusion
While Acadia Healthcare has positioned itself as a key player in the behavioral health sector, the reality behind the company's growth strategy raises serious concerns. The combination of unethical patient care practices, a growing list of lawsuits, unsustainable debt levels, and rising labor costs paints a grim picture of the company’s future. Acadia's aggressive growth through acquisitions and facility expansions may not be enough to offset the financial and reputational damage it faces. We believe that the market has yet to fully account for these risks, and Acadia remains a prime short opportunity.
Note1: We do not hold or have ever held stock in ACHC or competitors
Note2: This is solely an opinion and should not be considered as investment advice