Impact of New Medicaid Legislation and State Programs on Revenue
The passing of the One Big Beautiful Bill Act introduces potential reductions in Medicaid supplemental payments starting in fiscal 2028, affecting over half of the company's projected $230 million revenue from existing programs.
Management believes the provisions of the bill are manageable due to carve-outs from work requirements and extended implementation timelines for Medicaid changes.
The company expects a $40 million to $45 million recurring benefit from the Tennessee Directed Payment Program, which underscores the importance of state-level behavioral health investments.
Despite potential reductions, Acadia anticipates offsetting some revenue loss through reductions in provider taxes paid in states with Medicaid payment adjustments.
The legislation's impact on Medicaid volumes is expected to be limited in the short term due to exemptions for populations with chronic substance use and complex medical conditions.
Management remains committed to partnerships that recognize the long-term cost savings of integrated behavioral and physical health care.
Impact of State Reimbursement Rate Increases for 2026
Illinois finalized a 3.9% rate increase to $30.80/hour, effective January 1, 2026, adding approximately $17.5 million in annualized revenue with low 20% margins.
Texas finalized a 9.9% rate increase to $17.13/hour, effective September 1, 2025, adding approximately $17.7 million in annualized revenue with margins just over 20%.
Both increases are subject to federal approval and are expected to positively impact revenue and margins in 2026.
Impact of the Big Beautiful Bill on Pediatric and Neonatal Care in Non-Expansion States
Management expressed cautious optimism about the legislation's phased implementation, noting that 60% of their volume resides in non-expansion states.
They believe the bill's initial wording suggests minimal impact on their core patient populations—pregnant women and children—since it primarily targets other demographics.
Management highlighted the importance of legislative details yet to be announced, but they are actively engaging with policymakers to advocate for their interests.
The company’s confidence is based on the bill's focus on different population segments and their strategic positioning in non-expansion states, which may shield them from significant cuts.
Adjusted EBITDA was $380 million compared to $387 million in the prior year, including approximately $75 million from state-directed payment programs.
Cash flows from operations were $87 million for Q2 and $208 million year-to-date, with free cash flow marginally positive in Q2.
Cash flows included $74 million outflows for taxes on gain on sale, paid from divestiture proceeds and excluded from annual guidance.
Contract labor expense decreased by about $5 million year-over-year to $40 million.
EBITDA margin slightly declined to 12.1% from 12.3% in the prior year.
Inpatient admissions increased 0.3% year-over-year, while adjusted admissions declined 0.7%. Surgeries declined 2.5% and ER visits declined 1.9%.
In Q2 2025, same-store net revenue increased 6.5% year-over-year, driven primarily by rate growth and Medicaid state-directed payment programs in New Mexico and Tennessee.
Labor costs increased approximately 4% year-over-year in average hourly wage rate, consistent with expectations.
Medical specialist fees were flat year-over-year at $152 million, representing 4.9% of net revenues.
Supplies expense was down year-over-year and flat as a percentage of net revenue when adjusting for new state-directed payment programs.
Barbara highlighted ongoing concerns with CMS' final hospice and home health rules, noting a modest 2.6% rate increase for hospice but significant dissatisfaction with the lack of full cost recovery.
The proposed 2026 home health rule includes continued cuts, with cumulative reductions exceeding 20% since PDGM implementation, despite rising care costs and demand for home-based services.
Management emphasized that these reimbursement cuts threaten access to care, especially in rural and underserved areas, and could force closures or consolidations of branches.
Enhabit is actively engaging with trade associations and policymakers to oppose these cuts, arguing that the industry provides cost-effective care that reduces overall healthcare expenditures.
Impact of US Healthcare Policy Changes and Uninsured Population on Quest Diagnostics
Management assesses the potential impact of the 'One Big Beautiful Bill' on Quest Diagnostics, estimating a maximum 30-40 basis point volume impact in 2026 due to increased uninsured individuals.
They highlight that the bill reduces US healthcare spending by approximately 1.5% of the total $5 trillion annual healthcare expenditure, with minimal immediate impact on Medicaid and exchange-based revenues.
Management emphasizes that most exchange enrollees are employed and have incomes, thus likely to maintain insurance coverage or pay higher premiums, mitigating volume loss.
Revised Financial Outlook and Impact of Portfolio Actions
The company now expects a $6.5 billion increase in 2025 medical costs versus initial estimates, with specific impacts in Medicare ($3.6 billion), commercial ($2.3 billion), and Medicaid.
Approximately $1 billion of previously planned portfolio actions are no longer being pursued, affecting the outlook.
Recognition of $850 million in unfavorable prior period items and one-time settlements, indicating a more challenging financial environment than initially projected.
Dafinchi
