Lifestance Health Group Inc

NASDAQ:LFST

Earnings Call Analysis

Company Raises Full-Year Revenue Forecast

The company has upgraded its full-year revenue projection, now expecting growth of about 20%, up from mid-teens guidance, to reach $1.30 to $1.40 billion. They improved their Center margin outlook by $6 million to $292 to $300 million and adjusted EBITDA guidance by $2 million to $56 to $60 million. Anticipating the historical trend of reduced clinician capacity due to holidays, Q4 is forecasted to bring in $255 to $265 million in revenue with $73 to $81 million Center margin and $17 to $21 million adjusted EBITDA. Looking ahead to 2024, the company expects to sustain mid-teens organic revenue growth without assuming further productivity gains. Margin improvements are planned, particularly in 2025 after pivotal investments stabilize, aligning with an aim for double-digit adjusted EBITDA margins by 2025 end. Despite a significant settlement payment, they are targeting positive free cash flow in 2024.

Exceeding Financial Expectations and Raising 2023 Outlook

The company has met or exceeded all significant financial metrics this quarter and is raising its full-year 2023 guidance for the first time, demonstrating commendable financial performance and confidence in sustained growth.

Strong Patient Satisfaction Scores

An impressive patient net promoter score over 80, coupled with high average reviews of 4.5 out of 5 stars across Google, suggests the company is successfully maintaining a positive reputation among its users.

Robust Revenue Growth and Increased Visit Volumes

The company generated $263 million in revenue, marking a 21% year-over-year increase, primarily thanks to a significant 20% increase in visit volumes and a modest rise in total revenue per visit by 1%, reflecting better-than-expected seasonal productivity and slight payer rate enhancements.

Considerations on Free Cash Flow and Lawsuit Settlement

Free cash flow was negative $35 million, influenced by claim holdbacks and legal costs related to a shareholder lawsuit now settled for $50 million, partially covered by insurance.

Future Capital Raising & Updated 2023 Revenue Outlook

No additional debt or equity capital is planned to be raised, and the company narrows its 2023 full-year revenue range to $1.30-$1.40 billion, anticipating approximately 20% growth and improving center margin and EBITDA guidance.

Strong Organic Clinician Expansion

Clinician numbers grew organically by 18% year-over-year to a total of 6,418, although a lower number of clinician additions is expected in the fourth quarter. The company is shifting focus towards efficiency in clinician capacity usage given substantial prior progress.

Leveraging Scale for Efficiencies and Modest Tech Investment Increases

The company benefits from scale efficiencies and will continue to invest modestly in technology, particularly tools like virtual check-ins to enhance patient convenience without significant year-over-year cost escalation.

Anticipated Advancements in Strategic Partnerships

The company reports continued but slow-moving progress on strategic partnerships, reflecting optimism but also some frustration with the pace of developments.

Expectations on Payer Rate Increases and Shift to In-person Visits

Stable plan designs with anticipated progress in payer rate increases in the latter half of 2023 are noted, alongside a gradual shift from virtual visits back to in-person consultations.

Impacts on Free Cash Flow Positivity

Positive free cash flow in the second half of the year no longer appears feasible due to settlement expenses and slower-than-expected payer claim processing times.

Efficiency Gains from Streamlining Payer Contracts

The decision to forgo the lowest 30% volume payer contracts in favor of billing and credentialing efficiency is starting to yield benefits.

Maintaining a Resilient and Market-Resonant Clinician Base

Despite a highly competitive market, the company's clinician retention remains stable and its value proposition continues to attract a substantial number of new clinicians each quarter.

Commitment to Exceptional Patient Experience

The company acknowledges operational imperfections due to its high growth mode but remains resolute in enhancing each patient's experience to exceptional standards.

Improvements to Support and Service Accessibility

Investments in staffing levels at billing solution centers and in frontline patient support aim to provide easier and immediate assistance for patient enquiries and improved localized support.

Focus on Clinician and Employee Satisfaction and Experience

Clinician and employee satisfaction are central concerns with ongoing tracking and improvement efforts, which directly reflect the stable retention rates and recruitment success. Technological and operational improvements are anticipated to enhance the clinician's work experience.

Prudent M&A Strategy and Mid-term Cash Flow Goals

The company takes a cautious stance on acquisitions, prioritizing the integration of practices onto a high-performing platform, and aligns this with its capability to finance through free cash flow, while aiming for mid-teens revenue growth by 2024 through clinician and per visit rate growth.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the LifeStance Health Third Quarter 2023 Earnings Call. [Operator Instructions]I would now like to turn the conference over to Monica Prokocki, Vice President of Investor Relations. Please go ahead.

[Monica Prokocki, executive]

Good morning, everyone, and welcome to LifeStance Health's Third Quarter 2023 Earnings Conference Call. I'm Monica Prokocki, Vice President of Investor Relations. Joining me today are Ken Burdick, Chief Executive Officer; Dave Bourdon, Chief Financial Officer; and Danish Qureshi, Chief Operating Officer.We issued the earnings release and presentation before the market opened this morning. Both are available on the Investor Relations section of our website, investor.lifestance.com. In addition, a replay of this conference call will be available following the call.Before turning the call over to management for their prepared remarks, please direct your attention to the disclaimers about forward-looking statements included in the earnings press release and SEC filings. Today's remarks contain forward-looking statements, including statements about our financial performance outlook, business model and strategy. Those statements involve risks, uncertainties and other factors, as noted in our periodic filings with the SEC that could cause actual results to differ materially.In addition, please note that we report results using non-GAAP financial measures, which we believe provide additional information for investors to help facilitate comparison of current and past performance. A reconciliation to the most directly comparable GAAP measures is included in the earnings press release tables and presentation appendix. Unless otherwise noted, all results are compared to the comparable period in the prior year.At this time, I'll turn the call over to Ken Burdick, CEO of LifeStance. Ken?

[Kenneth Burdick, executive]

Thanks, Monica, and thank you all for joining us today. The work that we've been doing to invest in the business, fortify our foundation and standardize our operations is beginning to bear fruit both operationally and financially. This quarter, we met or exceeded our expectations across all key financial metrics. And for the first time in our young history as a public company, we are raising our guidance for each of these metrics for full year 2023.As I reflect on my first year at LifeStance, 3 themes rises to the top of my list. First, after having spent 40 years on the payer side, I am struck by the degree to which payers have underinvested in mental health and the access issues that have resulted. Far too many individuals are still required to self-pay for their outpatient mental health treatment. Despite the headlines, the ever increasing demand for outpatient mental health treatment and unprecedented levels of depression, anxiety and suicide, we as a country continue to underinvest in building clinical capacity and funding clinical research for mental health care. Second, I feel stronger than ever that the founders of LifeStance developed the right business model. In-network mental health care delivered both in-person and virtually by employed clinicians with a broad physical footprint and diverse professional credentials and experience.Third, I continue to be incredibly impressed and inspired by the dedication and passion of our employees throughout the organization. Their connection to our purpose and commitment to our mission is evident in every conversation I've had since my first day at LifeStance. We are resolutely committed to putting patients and clinicians at the forefront of everything we do. We spend a great deal of time speaking with you about financial metrics. However, I assure you that we never lose sight of the reason this business was founded, to make outpatient mental health care more accessible, affordable and unified with physical health care so individuals are treated holistically.While we are focused on initiatives to improve our operational performance, it's important to recognize that our clinicians' delivery of care to our patients has been and continues to be exceptional. As a result, our patient Net Promoter Score is over 80, and our average reviews for all LifeStance centers across Google searches are currently at 4.5 out of 5 stars, reflecting the quality of our patient experience. In addition to patient satisfaction, now that we are on a single EHR, we are working to aggregate our clinical results and share them to quantify our clinical outcomes and the positive impact on our patients' mental health.I'd also like to note the steps that we are taking towards a more deliberate and selective payer engagement model. We are still in the early stages of this strategy. You'll recall that in the first phase, we focused on eliminating low volume payer contracts to reduce the administrative burden on the organization. Earlier this year, we terminated the bottom 30% or so of our hundreds of payer contracts with minimal to no impact on visit volume. We will continue to actively evaluate and streamline the number of payer contracts to allow our internal teams to operate more efficiently.We are also in the midst of a second phase in our payer strategy in which we are becoming more assertive in demanding appropriate reimbursement for our services. We've begun to see positive early results and are focused on aligning only with payer partners who share our vision of expanding access to in-network mental health care and who invest in that vision with rates and terms commensurate with the value that LifeStance clinicians provide.Before closing, I would like to provide an update on the shareholder lawsuit. While we expressly deny the claims alleged in the lawsuit, we've decided to enter into a settlement to avoid incurring additional legal expense and management distraction from continued litigation. We will be able to fund this settlement with our existing financial capacity without raising capital, and this will not impair our ability to make the necessary investments to build a great business. We believe that putting this matter behind us is in the best interest of the company and will ensure that we remain focused on our core mission of caring for patients and building a business that addresses one of the greatest needs in our country today, affordable and accessible mental health care.With that, I will turn it over to Dave to provide additional commentary on our financial performance and outlook. Dave?

[David Bourdon, executive]

Thanks, Ken. Like Ken, I'm pleased with the team's solid operational and financial performance. In the third quarter, we achieved robust performance in our top line results with revenue of $263 million, representing growth of 21% year-over-year. This outperformance was primarily driven by increased visit volumes as a result of better-than-expected productivity during the vacation season.Visit volumes of 1,714,000 increased 20% year-over-year, primarily driven by higher clinician count and higher productivity. Total revenue per visit increased 1% year-over-year to $153, primarily driven by modest payer rate increases. For the full year, rates continue to be aligned with our expectations of a low-single digit increase year-over-year.When it comes to profitability, the outperformance on revenue flowed through to Center Margin. Center Margin of $76 million in the quarter increased by 26% year-over-year. Adjusted EBITDA of $15 million was consistent with our expectations.Turning to liquidity. In the third quarter, free cash flow was negative $35 million. This was primarily driven by approximately $20 million from intentionally holding payer claims and approximately $8 million in legal costs paid related to the shareholder lawsuit.As expected, DSO increased sequentially from 43 days to 52 days. As announced on our last call, we anticipated an increase in DSO this quarter as we chose to hold claims for several large payers due to positive updates from rate negotiations. We decided to hold claims until the payers have loaded the new rates into their systems to avoid underpayment and excess rework on over 100,000 claims. We continue to expect DSO to meaningfully improve in the fourth quarter and have already seen a significant improvement in October as we release the held claims. We are now on track to see DSO that is closer to Q2 levels by the end of the year.We exited the third quarter with cash of $43 million and net long-term debt of $248 million. At the end of Q3, we had additional debt capacity from a delayed draw term loan of $41 million as well as a $50 million revolving debt facility.As Ken touched on earlier, we recently entered into a settlement of the shareholder lawsuit to put this matter behind us and avoid the cost and the distraction of continued litigation. I'll now share the P&L and cash impacts of the litigation and the settlement.First, the settlement was $50 million, with $20 million of that covered by insurance. In addition to the settlement, we expect to have approximately $20 million in legal fees related to the litigation. From a P&L perspective, in the third quarter, this settlement, plus legal expenses of $14 million, resulted in a $44 million expense for LifeStance. Prior to this, we incurred approximately $3 million in legal expenses in Q2 and expect around $2 million to $3 million more in the fourth quarter.In terms of cash, the total outlay will be $50 million. In the second and third quarters, we paid approximately $8 million in legal fees. In the fourth quarter, we expect to pay approximately $17 million, which is comprised of $5 million for the settlement and $12 million in legal fees. Finally, in the first quarter of 2024, we will be responsible for the final $25 million settlement payment. We have sufficient capacity to fund these payments and run the company until we reach positive free cash flow, and we do not intend to raise additional debt or equity capital.In terms of our outlook for 2023, we are narrowing our full year revenue range and raising it by $10 million at the midpoint to $1.03 billion to $1.04 billion. The midpoint of this guidance puts us at approximately 20% revenue growth. This is above our original mid-teens guidance and was driven by the power of our organic growth engine, combined with clinician productivity.We are narrowing our full year Center Margin range and raising it by $6 million at the midpoint to $292 million to $300 million. We are narrowing our full year adjusted EBITDA guidance range and raising it by $2 million at the midpoint to $56 million to $60 million. In the fourth quarter, we expect revenue of $255 million to $265 million, Center Margin of $73 million to $81 million, and adjusted EBITDA of $17 million to $21 million. As a reminder, there is seasonality reflected in our fourth quarter guidance as a result of the holidays, which has historically resulted in lower total clinician capacity in the quarter.Now I'd like to spend a minute discussing 2024. We are still conducting our business planning process, and therefore, it is premature to provide specifics on next year's guidance. However, I wanted to give you some perspective on our thinking. We continue to expect mid-teens organic revenue growth, driven primarily by growth in clinician count and higher rates per visit. As with the initial 2023 full year guidance, the mid-teens growth does not include any assumptions for improved clinician productivity.We expect to see margin expansion from operating leverage and modest contribution from rate improvement. As I mentioned in the second quarter earnings call, the margin improvement in 2024 and 2025 will not be linear, and we anticipate greater margin expansion in 2025 as we will have the benefit of a full year of returns on our foundational investments. We continue to expect to exit 2025 with double-digit adjusted EBITDA margins. In regards to free cash flow, even with the $25 million settlement payment in the first quarter next year, we expect to approach positive free cash flow in 2024.Before I turn it over to Danish, I would like to say that the unprecedented demand for mental health access and affordability will continue to provide a tailwind for LifeStance. We look forward to sharing our 2024 guidance with you on our next earnings call. With that, I'll turn it over to Danish for additional color with respect to operations.

[Danish Qureshi, executive]

Thank you, Dave. This year, we have focused on solidifying the foundation of our business. We have made significant upgrades in our senior operations leadership across the country and brought far more focused prioritization and data-driven decision making to the organization in 2023. We've also simplified and streamlined the business, setting us up for operating leverage in 2024 and beyond.As an example, we continue to evaluate the in-person usage levels across our centers to identify where we have opportunities for consolidation. On our last earnings call, we announced that we have consolidated 36 centers with little to no disruption to our patients or clinicians. Since then, we identified an additional 35 to 40 centers for consolidation, bringing the total to over 70 centers in 2023. This consolidation project is largely complete, and we feel that our real estate footprint is now better optimized. Our ability to deliver in-person care across more than 500 locations continues to be a key differentiator.In terms of de novos, we also continue to intentionally moderate our pace of openings. We remain on track to open no more than 36 this year and expect to open fewer de novos next year. Optimizing our real estate footprint will allow us to drive margin improvement over time as we continue to scale.Turning to growth. In terms of net clinician adds, we grew by 286 in the third quarter, bringing our total to 6,418 clinicians, an increase of 18% year-over-year. Importantly, this growth remains 100% organic. This is a record number of organic net clinician adds in a single quarter and is a testament to the amazing work performed by our recruiting and operations teams as well as the strength of our value proposition to clinicians. As a reminder, there is variability in clinician starts throughout the year, and we do expect a lower number of net clinician adds in Q4.In terms of productivity, we continue to drive operational discipline to optimize utilization of clinician schedules at the top, middle and bottom of the patient funnel. At the top of the funnel, we are attracting new patients above the growth of our clinician base, demonstrated by our growing waitlist for services. Our boots on the grounds primary care referral team continues to expand local relationships in conjunction with continued growth in online organic patient traffic and increased brand awareness.Next, at the middle of the funnel, we continue to improve patient matching and scheduling, both over the phone and through our online digital capabilities, leading to a higher number of inbound patient inquiries converting to scheduled appointments.Finally, at the bottom of the funnel, a higher number of scheduled appointments are converting to completed visits with our cancellation and no show rates improving from 10.4% in Q2 to 9.6% in Q3. This represents 5 points of improvement from a year ago, which has had a significant positive impact on the ability of our clinicians to use their time productively. As a reminder, late cancellations and no shows are a loss to LifeStance, to clinicians and to patients. Visits that are scheduled but not completed result in lower revenue to LifeStance, an unfilled appointment slots and lower compensation to clinicians and reduced access to care for patients who could have received much needed metal health services during that time. They are a net negative to all parties, and we will continue to focus on reducing patient late cancellations and no shows.Over the last year, our efforts to optimize utilization at the top, middle and bottom of the patient funnel have been the primary driver of productivity improvements. While we will continue to focus on operational enhancements in this area, we expect benefits to be more incremental going forward given the progress made so far. We therefore feel that now we can shift our focus to the other side of the productivity equation capacity. It is still early, but we are exploring initiatives to grow overall clinician capacity, and we'll share more on this on future earnings calls.As we continue to focus on our growth priorities of net clinician adds and productivity, our top priority remains delivering an amazing patient and clinician experience. For example, we know how complex understanding health insurance can be for patients, including differentiating between copays, deductibles, patient responsibilities, in-network versus out-of-network benefits and appointment no show or late cancellation fees. To that end, we have continued to invest in our billing solutions call center to improve the overall experience and help patients get answers to their questions faster.Additionally, we are piloting a digital patient check-in tool. If successful, this tool will allow us to collect and verify patient insurance information upfront as well as allow patients to pay their copays and past due balances more easily. This will reduce stress for our patients and manual complexity for our operations teams, delivering an improved patient experience and streamlined operations. We are also refining our new nationwide phone system and increasing our front office staffing levels to create better support for our clinicians locally and to ensure that our patients have easier access to our staff.In closing, I'm impressed with what our teams have accomplished this year. We have made progress in our 2-year plan to strengthen and solidify the foundation of our business, whether that be through improvements in the utilization of clinician schedules, moving to a single EHR, phone system and online booking tools, optimization of our real estate footprint or the myriad of other behind the scenes ways that we are driving a more efficient and standardized operating model. All of this is a testament to the hard work of our clinicians and teammates around the country.With that, I'll turn it back over to Ken for his closing remarks.

[Kenneth Burdick, executive]

Thank you, Danish. In closing, I'm proud of the team's progress this year. This is the fourth straight quarter that LifeStance has met or exceeded expectations. And with continued disciplined execution, we are well positioned to deliver on our full year commitments. In addition to achieving solid financial results, we also continue to attract high quality clinical and operational talent. The heavy lifting that we are doing this year and next to streamline and standardize our systems and processes was sorely needed after nearly 100 acquisitions over 6 years. I am encouraged by our progress and momentum, yet recognize that our work is far from done. I look forward to continuing to demonstrate the tangible benefits of this work when we share our 2024 guidance.We will now take your questions. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Craig Hettenbach with Morgan Stanley.

[Craig Hettenbach, analyst]

I have a two-part question on margins. First part is just on Center Margin improvement. If you can just expand on some of the things you're seeing there and perhaps some of the productivity improvements. And then the second part, just the increased investment that you've driven in the business this year, particularly around technology and operating initiatives, how do you expect that to trend into 2024?

[David Bourdon, executive]

Craig, it's Dave. So on the Center Margins, we did see the increase, and we expect that to be stable in the fourth quarter. And that was really driven by 2 things. Scale, so the higher revenue relative to the fixed costs. And then the second thing is, is seeing some efficiencies in areas like the contribution from the real estate consolidation. And then in regards to technology investments in 2024, I would expect that to be a modest increase year-over-year as we implement things like the virtual check-in for patients and things like that that Danish represented in his prepared remarks, but not a meaningful increase year-over-year.

[Craig Hettenbach, analyst]

Got it. And then just as a follow-up for Ken. Any update on some of the partnerships you're driving with companies like Gennev and how that's influencing the overall opportunity set?

[Kenneth Burdick, executive]

Yes, Craig, thanks for the question. I continue to be encouraged by the discussions, but a little frustrated that it's taking longer than we would have expected to sort of close and finalize some of these deals. So there's still good momentum. I look forward to the opportunity in the future to share more specifics. But it's going to continue to be an important part of our strategy going forward. And we are not daunted; just a little impatient.

[Operator]

Next question comes from the line of Lisa Gill with J.P. Morgan.

[Lisa Gill, analyst]

I just want to understand two things on the payer side. Ken, I appreciated your opening comments when you talked about payers under investing in mental halls, too much self-pay, et cetera. Are you seeing any changes in plan design for 2024 that's going to drive improvement in that? And then secondly, when you talked about 2024, you talked about an increase in rates. You also talked about an increase in rates for 2023. Is it just simply the rate increase when 2023 is carrying forward to 2024? Or are you expecting an incremental increase in rates as we move into 2024?

[Kenneth Burdick, executive]

Yes. We're not really seeing changes in plan design. To your question about the rates, we're in the early stages, but we are seeing progress, as I mentioned in my prepared remarks, in the latter half of 2023, and we expect that to continue. So 2024 should represent more than just the annualization of 2023 contract negotiations. We just -- we're going to have a concerted effort to make sure that as we deliver a great experience to our patients and the insured members, that we receive reimbursement that's commensurate with that. And commensurate, frankly, with the step-up in demand that we've seen for our outpatient mental health services now for several years.

[Lisa Gill, analyst]

Okay. Great. And then just as a quick follow-up. I know in the past you've given us virtual versus in-person. Can you just update us on the percentage of each for the quarter?

[Danish Qureshi, executive]

Lisa, this is Danish. I can provide that update. So virtual visits in Q3 represented approximately 73% of our total visits. That was relatively in line with the previous quarter. Obviously, as we've mentioned, prior to that, prior to Q2, we have seen a slow shift back towards in-person. And so, like we've mentioned before, we'll see where this eventually plateaus. We don't believe that we're at a plateau. When you look at the number of inbound inquiries from prospective patients looking for in-person, that continues to grow, which gives us an indication that we will continue to see our mix shift more towards in-person over time.

[Operator]

Our next question comes from the line of Ryan Daniels with William Blair.

[Jack Senft, analyst]

This is Jack Senft on for Ryan Daniels. Looking at cash flows, it looks like free cash flow took a pretty significant step down sequentially. And I think in prior calls, you suggested that free cash flow should be positive in second half 2023. So first, is this still the expectation, given where it came in this quarter? And then two, can you just talk about the impact of the payer contracts you terminated earlier this year and your early findings of how that has impacted the RCM functions and free cash flow as of late?

[David Bourdon, executive]

Sure. This is Dave. There's a couple things there. So first, let's talk about free cash flow. So when we gave guidance at the beginning of the year, we did say that we expected free cash flow will be positive in the second half of the year. That's no longer going to happen. And it's the result of two things. The first is the settlement and the legal costs associated with the shareholder litigation. And then the second is, as you pointed out in the third quarter, we had negative free cash flow, and that was the result of us choosing to hold claims for payers where we were getting rate increases until they uploaded those new rates in their system. And that's just taking a little while to work through. So the combination of that impacted us in the third quarter, and as a result, I do not expect free cash flow positive for the second half of the year.In regards to payer, our initiative that we did this year was around more of an efficiency play rather than an improvement in rates. We culled the lowest 30% payer contracts from a volume perspective to be able to become more efficient for our billing, credentialing the payer teams, those areas, rather than looking for rate improvement. And we are seeing the benefits of that. So it's played out as we expected, and I would expect another tranche similar to that of reducing our payer contracts in 2024.

[Jack Senft, analyst]

Okay. Great. Just a quick follow-up then, too. How should we think about net clinician adds going forward? Given that you're 100% organic now, do you have a baseline target per quarter on organic hires? And then given you are adding all these clinicians and onboarding them, can you just talk about the ramp for these clinicians and kind of how that ramp has trended and improved over time?

[Danish Qureshi, executive]

Sure. This is Danish. I can comment on that. So as we mentioned in our prepared remarks, we had a very strong quarter of 286 net clinician adds, which was 100% organic and the strongest organic quarter that we have had to date in terms of net clinician adds. You will see quarter-to-quarter variability there, and I indicated in the prepared remarks that you should expect a lower number in Q4.As Dave mentioned as well, we are not at a point in providing specific guidance on 2024. We will do that on our next cal. And we typically do not guide on clinician adds. But as Dave did mention, we expect to see mid-teens organic revenue growth next year. Obviously, a significant component of that will be our growth in our clinician base.

[Kenneth Burdick, executive]

Jack, in terms of ramping?

[David Bourdon, executive]

Sorry, in terms of ramping, as we talked about optimization of our patient funnel or just optimization of utilization, that continues to play out in terms of overall improvements in productivity, and it particularly plays out in the speed to be able to ramp new clinicians. We continue to see overall new patient demand exceed our supply of clinicians as indicated by our growing wait list. And that will continue to be a positive as it comes to both ramping new clinicians as well as keeping existing clinician schedules filled to the caseloads that they desire.

[Operator]

Our next question comes from the line of Kevin Caliendo with UBS.

[Kevin Caliendo, analyst]

I think the math on the fourth quarter would suggest a little bit of a stepdown in productivity per doc. I know there's a bunch of new ads, and you also called out the holiday season. I'm just wondering what the net impact is of the calendar in 4Q in terms of days? And also, was there any calendar impact in Q3 year-over-year?

[David Bourdon, executive]

Kevin, it's Dave. Thanks for the question. In regards to the fourth quarter, I think you nailed it around the reason for the stepdown sequentially in revenue. It is the result of less, call them effective -- we think of them as effective business days because of the holiday vacation season for our clinicians. So as a result, we do expect to see a step down in productivity or visits per clinician in the quarter. That's partially offset by the pickup in rates, which is what's driving adjusted EBITDA almost doubling when you think about fourth quarter this year versus last year. So that's the primary dynamic of what's happening.

[Kevin Caliendo, analyst]

Okay. That's helpful. And again, these rates are really just kind of kicking in now. This is what you're holding the claims back for. That gets added back. That's the delta. Is there any way to quantify the rate increase or the net rate increase? I know that's a difficult question.

[David Bourdon, executive]

Yes. We're not going to dimension that, but it's -- what you said is accurate, which is the rates came in or kicked in, in the middle of the quarter, so we're going to get the full effect of those in the fourth quarter. And we also have some additional contracts that are being updated for improved rates in the fourth quarter as well, which also helps.

[Kevin Caliendo, analyst]

Great. This is a little bit more sensitive, perhaps, but when you have a compensation model, sort of class action suit, how does that impact -- how has that impacted internally, your churn rate or anything else? Has it had any impact? Now, you gave us the net number which was fantastic. I'm just wondering if there was -- if you saw any increase in churn because of these headlines that you have to deal with? And just wondering what it does internally, operationally, how do you manage something like that, because obviously, it can be challenging.

[Danish Qureshi, executive]

Yes, this is Danish. I can speak to that. So our clinician retention continues to remain stable. Our ability to attract new clinicians continues to be strong, as indicated by our 286 net clinician adds in the quarter. So, though there will always be background noise in anything, and that this has always been a competitive or a highly competitive market, we still believe strongly that our value proposition continues to resonate in both our ability to attract and retain clinicians.

[Kevin Caliendo, analyst]

Great. And thanks for all the color on the litigation stuff. Super helpful.

[Operator]

Next question comes from the line of Jamie Perse with Goldman Sachs.

[Jamie Perse, analyst]

I wanted to go back just to center level margins and Danish's comments around another 30 centers that can be consolidated over -- for the near term. Should we think about the progress you guys have made on Center Margin and as you consolidate those incremental centers, a similar type of benefit? Or just any color on how to think about the contribution from consolidating those on gross margins.

[David Bourdon, executive]

Jamie, it's Dave. Thanks for the question. So we're going to -- as Danish mentioned in his prepared remarks, we're going to close approximately 70 centers this year. The financial benefit, we're only getting a partial this year. So think of that in the $2 million to $3 million range for favorability to our expenses this year. In regards to 2024, that run rate is more in the over $5 million. So that's what we think of in the contribution to improved center costs for 2024.

[Jamie Perse, analyst]

Okay. Perfect. And then just going back to, I guess, the initial kind of strategy for the company a few years ago and going into new states, I wanted to ask about that, if that's still an opportunity for you guys as you shifted away from M&A? Or if you feel like you have enough opportunity in existing states to continue to grow?

[Kenneth Burdick, executive]

Yes, Jamie, this is Ken. We think we have tremendous opportunity within our existing footprint. It doesn't mean we will not expand into greater states. But more emphasis for the foreseeable future is going to be building out our presence in the 33 states that we already reside. And as it relates to M&A, I'm glad you asked. We've been very clear that we're really going to hold off on tuck-in acquisitions until we have solidified our platform and can move acquired practices onto that solid, stable and high performing platform. We also look to do that when we can fund it out of free cash. So that is on the horizon, but not on the near-term horizon.

[Operator]

Next question comes from the line of Brian Tanquilut with Jefferies.

[Brian Tanquilut, analyst]

Congrats on the quarter. I guess my first question, I know in your prepared remarks, you touched on NPS and some of the things that you're doing to improve the patient experience. Maybe if you can just elaborate on some of those things and what you're doing to address some of the concerns that are out there in the market on cancellation fees and things like that that patients are having to face as they approach your clinics and try to get care.

[Kenneth Burdick, executive]

Yes, Brian, I'm going to give you my thoughts, and then I'd love for Danish to weigh in. We're certainly aware of some of the noise that's out there. We're not going to dignify it with a direct rebuttal. But what I can tell you is that the thought that somehow we are inducing cancellations and no shows is absolutely nonsense. As Danish has reported every quarter, it's been a priority for us to reduce cancellations and no shows. And we've done that in a meaningful way over this past year.So the way I would describe it is we have been in a hyper-growth mode since our founding. We're now conducting approximately 6 million patient visits a year. As we shared in these calls, our operations are not as buttoned up as we will be going forward. So I'm not going to say that every patient experience meets our standard. But what I will absolutely say is there is no strategy or systematic approach to try to make the patient experience anything other than exceptional. And frankly, we're offended when somebody suggests otherwise.

[Danish Qureshi, executive]

Yes, I think that's very well said, Ken. The only thing I would add is as we look at continuing to improve the overall experience for our patients, we're very proud of the NPS that we're delivering today of 80. But we will remain focused on any patient or clinician experience that is not positive to looking to mitigate that and improve that overall feeling where and when we can. I think some of our very direct investments in increasing staffing and service levels on our billing solutions centers to be able to ensure that patients, when they do have questions, have the easy and quick access to someone who can help them understand their bill or any concerns they may have as related to fees as well as our increases in frontline staffing so that at the center level, our patients and our clinicians feel a more direct level of support in their local market rather than trying to navigate a call center.

[Brian Tanquilut, analyst]

Understand. Appreciate the comments. Maybe if I could flip the question to the other side. Any color you can share on clinician or employee satisfaction? And any efforts you're putting in there to drive that further up?

[Danish Qureshi, executive]

So both clinician and employee satisfaction is always top of mind for us. It is something that we track on a regular basis through multiple engagement surveys throughout the course of the year. As a direct indication of that, again, we talked about, at least from the clinician standpoint, our retention remaining stable, which we believe is the most direct indication that we have a positive level of engagement in our clinician base and similarly on our non-clinician base. However, as Ken said, we do not rest on our hands. We believe that there is always room for improvement. And we'll continue to put our patient, the clinician experience as well as all employee experience and engagement at the top of our priority list.

[Kenneth Burdick, executive]

Yes. Just a quick add on. We talk an awful lot about standardization, simplification and automation. And obviously, for the purposes of our earnings call, it tends to focus on the operating leverage that we can achieve. But make no mistake, as we make these investments in running a better business, the clinician's experience will directly benefit from these investments.

[Brian Tanquilut, analyst]

I appreciate it.

[Operator]

And we do have our last question comes from the line of Gary Taylor with TD Cowen.

[Gary Taylor, analyst]

Two clarifications and one question. I just wanted to clarify, when you talked about 2024 cash flow approaching breakeven, you mean free cash flow, correct? Not just cash from ops?

[David Bourdon, executive]

It's Dave. That's correct. Free cash flow.

[Gary Taylor, analyst]

Yes. Got it. And then just on the legal settlement, I think this is clear. I just want to confirm, since I think only the securities class action was in the 2Q. But you're saying today, all 3 of those class actions have now been settled, correct? That's the full $50 million for all 3 of those, right?

[Kenneth Burdick, executive]

No, Gary, we're referencing today the settlement relative to that shareholder litigation.

[Gary Taylor, analyst]

Okay. So in the press release, yes, there was a privacy and then a compensation class action. So there's no reserve or estimated amount for those at this point?

[Kenneth Burdick, executive]

That's correct. Those are in early stage and are ongoing.

[Gary Taylor, analyst]

Got it. And then my last one would be -- I think I understand this, but I just want to make sure. So when we look at year-to-year growth in the revenue per visit in the first quarter was up about $6, and the second quarter it was up about $4, and this quarter was up about $1 year-over-year, and you're achieving these better low-single digit rates underlying. Is that cosmetic deceleration? Is that just the -- in any given quarter, that's the mix of clinicians, that's the mix of acquisitions, divestitures, all of that's impacting that? And if so, when we think about 2024, do we get back to a place where we're kind of just sort of modeling the low-single digit on that revenue per treatment line?

[Kenneth Burdick, executive]

Well, Gary, we're not going to give specific guidance relative to 2024, but you're on the right track. There's a lot of moving parts and a lot of influences on that revenue per visit. A couple that you didn't mention is obviously we have geographic differences. So we have different rates across different geographies, so our growth can influence that. And we have some payer rate differentials, which will also play into the mix. So there's a lot of moving parts. But I prefer to share with you the 2024 specifics when we provide guidance in our next earnings call.

[David Bourdon, executive]

Yes, that's right, Ken. And just to pile on is that in my prepared remarks, I did say for 2024, we drive mid-teens revenue growth, and that would come from both clinician growth as well as rate per visit growth. We just didn't dimension that yet. And that's what we'll do on the next earnings call.

[Operator]

There are no further questions at this time. I would like to turn the call back over to Ken Burdick, CEO, for closing remarks.

[Kenneth Burdick, executive]

Thank you, operator. I want to just take a moment to thank you for your continued interest in LifeStance. For those of you that have been following this story since we went public, there's no question that the first 6 quarters, we were on our heels and it was a challenge. Hopefully what you're seeing now is that we are focused on standardizing, simplifying and stabilizing this high growth business. We have now had 4 quarters where, in fact, we have delivered on our commitments. And we very much look forward to the day where in the very near future, where we're really on our toes instead of on our heels.And with that, I want to take a moment to thank all of the employees of LifeStance for their hard work and for the contribution they've made to the progress. As I've said before, Danish, Dave and I have the privilege of sharing these results, but we're not confused about how these results are generated, and it's through the collaboration of thousands of our employees across many, many geographies. And we are very thankful for their dedication and hard work. With that, I wish you all a Happy Thanksgiving and a safe and healthy holiday season.

[Operator]

This concludes today's conference call. You may now disconnect.