Special report: Addiction treatment growing as a financial investment

Editor’s Note: Today, we’re pleased to welcome Alison Knopf, editor of the Alcoholism & Drug Abuse Weeklyas a first-time Points guest blogger.   We’re republishing, with her kind permission, her article on addiction treatment as big business, which first appeared at A&DAW on November 5th, 2012.  Several interesting issues raised in this piece, we thought, will merit further discussion among our readership. 

In September, when Tennessee-based Acadia Healthcare Company paid $90 million for Timberline Knolls, a 122-bed inpatient treatment program in Chicago, treatment providers wondered if their programs were worth that kind of money, bed for bed. Other deals in recent months, including Foundations Recovery Network’s acquisition in early October by Nick Pritzker Capital Management for an undisclosed amount, point to the possibility that addiction treatment — at least in the commercial (non-Medicaid, nonpublic) sector — is a profitable enterprise. For this story, ADAW talked to some of the most influential leaders of the addiction treatment field in the private for-profit sector.

In early September, Michael Cartwright, founder and former CEO of Foundations, and Jerrod Menz of Forterus, which in 2008 began investing in addiction treatment programs (see ADAW, October 20, 2008), joined with Treatment Solutions to form American Addiction Centers, which announced that it would provide “a comprehensive and cutting-edge suite of treatment-related services to the masses.” Forterus’ main treatment program is A Better Tomorrow.

Cartwright, who started his career as an inner-city case worker making $16,000 a year and is now on his fourth addiction treatment company, said that the treatment business is not ready for the stock market. “Forterus went public, and that was a mistake,” he told ADAW. But it is ready for private equity, or for just personal investment, he said.

Cartwright thinks addiction treatment is a good investment — for commercially insured patients — because 3.5 million people a year go to treatment, there have been no rate decreases and the average length of stay is consistent.

Cartwright’s first company was a not-for-profit. His second was a managed care company that he sold to the employees. The third was a privately held company that he sold to private equity — Foundations. And his fourth — American Addiction Centers — now has operations in six states and a healthy revenue stream, he said. But it is not ready for an initial public offering, which he said requires $100 million, and which most addiction treatment providers — with the exception of CRC Health Group — don’t have.

Healthcare reform

The untapped market combined with healthcare reform is what makes the field attractive to investors, explained David Sack, M.D., CEO of Elements Behavioral Health. “The portion of the population that is affected is very large, but only 9 to 10 percent of them go to treatment,” he told ADAW. In 2014, many people who don’t have adequate health insurance to cover treatment today will have it, he said. And with Medicare reimbursement for screening, brief intervention, and referral to treatment (SBIRT), doctors will be encouraged to identify problems and refer patients to treatment, he said. More people are likely to seek treatment as a result of parity and increasing destigmatization, he said.

But not everyone is banking on healthcare reform. “There’s a lot of speculation about what Obamacare means,” said Cartwright. “I haven’t met anyone who can tell me what it means. I don’t know that the rules have been laid down.”

Michael Walsh, CEO of the National Association of Addiction Treatment Providers (NAATP), said that there is some concern among his members that the future of healthcare will give addiction treatment funding to hospitals for detoxification and to pharmaceutical companies for medication-assisted treatment. A recent board meeting included discussions about the increasing number of players vying for treatment money, and he said that the “Hazeldens and Carons and Betty Fords” have proven that it is possible to do well financially and to deliver quality treatment.

Private equity

The introduction of private equity can help the treatment field get ready for expansion, said Sack, saying that the field is still “disorganized,” with many programs owned by individual operators or not-for-profits. “Private equity is a way to improve in both performance and profits,” he said.

Perhaps the biggest private equity deal was the acquisition of CRC by Bain Capital in 2005. CRC now has a systemwide quality control program that is designed to make all of its programs of high clinical quality (see ADAW, August 29, 2011). On October 29, when we talked to Rhodes, he was also in the process of working to make sure patients in the areas hit by Hurricane Sandy would be able to access treatment, including medication.

What makes a program valuable?

Asked what would make a program a good investment, Rhodes said that there’s no formula for being acquired. But he did say that programs with an established track record of clinical success, and an established market regionally or even locally, with a diverse group of payers, including public payers, would be good targets for a company like CRC. “Obviously a mom and pop or a small program doesn’t necessarily have all the benefits,” he said. But that doesn’t mean they aren’t good programs. “Making a profit and providing quality care are not mutually exclusive,” said Rhodes.

For Cartwright, the programs that are most appealing are those that can provide integrated care on site. “You need good solid psychiatry and addictionology,” he said. “We don’t have single-diagnosis clients any more.” In addition, Cartwright is interested in programs that have a good reputation, a referral network and a clinical management team, and are profitable.

Timberline Knolls’ profit margins were “through the roof,” which is one reason why Acadia paid so much for it, said Cartwright. “The money was fair value,” he said. And he noted that the real estate — park-like acreage and buildings — was part of the deal.

“The problem is people see those kind of deals and they all think they’re worth that,” he said. “If on paper people have 5- or 10-percent profit margins, and they have a lease in a hotel where they take people, that’s not a good deal.”

The Internet

One of the biggest concerns — some people think one closely related to profits – is Internet marketing. “Rehab” and “addiction” are valuable Google search terms, so there is great interest in how the Internet is helping addiction treatment businesses grow.

Sometimes treatment centers advertise online as if they are an independent referral service when they are actually funded by a treatment program.

“Any form of advertising has abuses,” said Sack, who said addiction treatment isn’t singled out. “It’s the national trend for people to educate themselves online, and this is true for our field and it’s true for cardiac bypass,” he said. “People are forced to be more self-reliant.”

There’s a lot of competition in the higher-end private pay programs, with the Internet being a significant force in marketing. Foundations, for example, has gravitated more toward commercial insurance. But whether the health insurance exchanges or Medicaid will cover these high-end programs is unclear, said Rhodes.

“For consumers, it’s the Wild West,” said Rhodes, who has worked with people who have gone on the Internet to try to find treatment. Call centers may try to place people in programs that are inappropriate, said Rhodes. “It’s potentially dangerous, and there’s no regulation,” he told ADAW.

For example, Narconon programs, which are run by the Church of Scientology, have a “very major web presence,” said Rhodes. “If you start looking for treatment on the Internet, sooner or later you will end up at Scientology,” he said. Many patients don’t even know that Narconon is Scientology, he said.

Walsh of the NAATP said that he has to be on the lookout to make sure that treatment programs don’t advertise that they are “accredited” by the NAATP, which doesn’t accredit programs but is a membership organization. Some programs that are not even NAATP members use the name as an endorsement, he said.

The Internet has been a “highly disruptive force” to the field, said Rhodes. But he also isn’t sure there is any connection between growth on the Internet and profitability of treatment programs. What the Internet has done, he said, is to allow programs to start up with a minimal investment, and achieve some market share, he said. “This allows you to have a market presence rapidly,” he said.

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