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Bullish on the treatment industry

April 15, 2014
by Alison Knopf
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Last fall, the Treatment Research Institute (TRI), the prominent Philadelphia-based addiction services research organization, hosted a luncheon for 21 investors. “We invited 25, 21 came, and they stayed all afternoon,” recalls CEO A. Thomas McLellan, PhD. The sums they talked about investing were huge for this field. “$50 million,” says McLellan. “$300 million.”

These are heady times indeed for addiction treatment. “It’s the promise of equitable reimbursement for comparable effective services,” says McLellan. For the first time in decades, insurance is going to pay for addiction treatment on a broad scale, and that attracts investors.

“The macro environment is extremely favorable for people who are in the behavioral health business right now,” says Rob Waggener, CEO of Foundations Recovery Network, one of the administrators interviewed for this article whose organizations' growth has been fueled by private investment.

The federal Mental Health Parity and Addiction Equity Act, usually referred to simply as the parity law, required payers to treat addiction and mental illness the same way they treat medical and surgical conditions—with no extra barriers to care. Then came the Affordable Care Act (ACA), which expanded coverage by private insurance and Medicaid, and included a parity mandate. And finally, there was last fall’s issuing of the final rule implementing the parity law.

That final rule is what really put private investment activity into high gear, because it clearly gave residential addiction treatment the same stature as nursing homes and rehabilitation facilities. Until then, there was a real threat that insurers simply would drop residential treatment from coverage.

“The final rule on parity was a tremendous victory,” says Waggener. “It made the outlook better for the long-term future of subacute treatment services, and it had an impact on the investing world.”

“All of a sudden there’s room to create new providers and new treatment facilities,” one principal with a private equity firm who asked not to be identified told Addiction Professional in an interview. “That attracts investment.”

According to the private equity representative, “Across healthcare, there's an expectation that demand for services will go up as a result of the ACA. And while the ACA applies to all healthcare, parity just applies to behavioral healthcare. That's what makes behavioral healthcare hot right now.”

The next step is for more programs to be added to the market to meet the new demand. This takes money, which most not-for-profit providers don’t have. But the promise of growth means that investors can get a return on their money, which may result in the emergence of more for-profit treatment entities.

Foundations was founded as a not-for-profit in 1995; it converted to for-profit in 2006 when it was acquired by private equity firm Sterling. It was sold to Nick Pritzker’s Chicago-based private equity firm, which is financed with Hyatt hotel family money, in 2012.

Message to insurance companies

Insurance companies have been given a very strong message from the parity final rule, says David Sack, MD, CEO of Elements Behavioral Health.

In the late 1980s and 1990s, managed care programs were able to decimate addiction treatment by subjecting it to arbitrary restrictions that did not apply to other medical services, says Sack. With that ability to restrict treatment arbitrarily now having been taken away, it will be easier for patients to access care, he says.

“I do think some insurers will try to game the system,” says Sack. That points to a weakness of the parity law: lack of enforcement by government regulators, although some recent exceptions have emerged in places such as New York state. Insurance companies are continuing to discriminate against behavioral health services, says Sack. “But the important thing to realize is that there was a large unmet need, and there is now funding for it,” he says.

And with the biggest treatment chains in the country planning to challenge every non-compliant denial of care, as well as the growing rumble about lawsuits, it’s likely that the funding will come through. At least, that is what providers such as Elements, Foundations and CRC Health Group, and their backers, are hoping.

No growth without money

“Change is afoot,” says Jerry Rhodes, former chief operating officer and now CEO of CRC. In Medicaid expansion states, providers are seeing many more patients eligible for services, Rhodes says. This is particularly important to the company’s methadone treatment services, which expanded dramatically with its acquisition for $58 million of Habit OPCO, an opioid treatment program (OTP) chain based in the Northeast.

Without Bain Capital, where would CRC have gotten that money? And in making that acquisition, CRC has further solidified its position in this market, an extremely important one with the country facing an opioid addiction epidemic.

“As an organization we’re extremely excited” about the deal, says Rhodes. “Habit OPCO was a very well-managed organization.” In addition, this expands the geographic footprint of CRC into Massachusetts and Vermont, which are experiencing significant opioid addiction problems.

Mission vs. money