Faustian
Bargain (def) - A
pact whereby a person trades something of supreme moral or spiritual importance
such as personal values or the soul in exchange for some worldly or material
benefit such as knowledge, power or riches.
Residential Treatment Centers
Residential Treatment Centers ("RTC") provide treatment for eating disorders throughout the United States and abroad. There are currently in excess of 75 residential programs in the United States. This number is significantly up from a mere 22 in 2006. Some attribute this growth to the Mental Health Parity Act of 2008 and the Affordable Care Act two years later. But, whereas those legislative changes may have been an initial catalyst, private investors, specifically large, private equity firms and venture capitalists determined that the probability of a large financial return on an initial investment existed in providing care and treatment to behavioral health problems. As a result, RTCs have proliferated and have become inextricably intertwined with their investor-owners.
Certainly, an RTC can provide a needed service. A
number of eating disorder experts agree that some patients, particularly those
with eating disorders that have been active for a number of years, can benefit
from increased supervision and services available at many RTCs. But,
legitimate, third party objective studies showing the effectiveness of RTC
programs are non-existent and the few studies which do exist have been roundly
criticized as being biased and flawed, if not outright misrepresentative.
Further, a division between academic based treatment programs and the "for profit" RTC programs is widening as academic based programs generally utilize practices which are more "evidence-based" but struggle financially, while RTCs expand and financially prosper. This article explores the basis behind the growth of RTCs and its impact on the eating disorder industry.
A Case Study on ERC
The Eating Recovery Center ("ERC") based in
Denver, Colorado is the most obvious example of the proliferation and growth of
residential treatment programs in the United States. In 2006, ERC
operated one, small facility in Denver, Colorado. Currently, ERC has 26 facilities in 7 different states and markets itself as the preeminent eating disorder residential facility in the United
States. Let's study how ERC reached this lofty height.
In May 2010, the Dallas based private equity firm, Trinity
Hunt Partners purchased a minority interest in ERC and the expansion race began
in earnest. In two years under the tutelage of Trinity Hunt, ERC grew from
its one facility to three additional, new treatment facility developments and
two strategic West Coast facility affiliations. Their employee numbers
increased from approximately 90 to more than 300. The resulting financial
return on Trinity Hunt’s initial investment was such that it did what any
aggressive private equity firm would do. After tripling ERC's revenue, it sold
the asset for a profit.
Trinity Hunt then sold its interest to Lee Equity Partners
in 2012. Lee Equity invested in ERC out of a private loan fund in which it was
participating. In addition, Lee Equity was able to obtain a majority
ownership interest in ERC. This influx of capital resulted in rapid
expansion for ERC. In five years, ERC grew to 26 facilities in 7 states. And
yet, questions began to be asked about transparency of the financial investment
and its impact on quality of care.
In the late spring of 2017, Lee Equity announced that it was
divesting itself of ERC and was going to hold an auction for the sale of its
ownership interest. Welsh Carson, FFL and Apax, all private equity firms,
were participants in the auction but CCMP Capital Advisors prevailed with a
deal which produced a 4X financial return for Lee Equity. CCMP’s
leveraged buyout was estimated to be worth $550 million, with Antares Capital,
LP and Golub Capital Markets, LLC providing the financing for the transaction. Antares
Capital disclosed that it invested $250,000,000 as a first lien credit facility
on the transaction.
ERC was represented by Jamieson Corporate Finance in the
transaction. Jamieson announced that as part of the transaction, ERC and its
management team entered into a new “incentive plan” with CCMP Capital. Dr.
Ken Weiner, the CEO of ERC was quoted as being on board with “CCMP’s mission.”
And yet, CCMP’s mission, as with most private equity firms is to participate in
the acquisition of a corporation or asset, drive up its growth cycle and
then divest for a profit.
As for the "incentive plan," one can question whether the incentive plan pertains to break through discoveries of state-of-the-art, evidence-based medical treatment of eating disorders which would dramatically reduce the death rate of this disease and give hope to the millions who suffer. Or does the incentive plan pertain to financial growth and expansion of ERC facilities. The probable answer comes from the realization that ERC has no formal affiliation or partnership with an academic, medical institution, let alone any such medical institution conducting research into the biological aspects of the disease.
With regard to the acquisition of ERC, Bloomberg reported, “Our
stable rating outlook reflects our expectation that ERC will deliver
strong revenue growth and margin improvement in the new few years
supported by stable reimbursement from commercial payors and consistent
capacity increases.” [emphasis added]. Bloomberg also reported, “We
could consider raising the rating if the company could grow and sustainably
produce positive free cash flow of around $20 million per year.”
Subsequent to the CCMP transaction, Moody’s Investor
Services for the first time issued a rating for ERC. Moody’s
reported that ERC has a $30 million senior secured revolving credit facility
expiring in 2022; a $190 million senior secured first lien term loan due
in 2024, and; a $30 million senior secured delayed draw term loan due in 2024. Moody’s
rating outlook for ERC is stable. Moody’s states that it, “… believes ERC will
continue to expand aggressively through growth of existing facilities, new
facility openings and acquisitions.” It later reported, “The company has no
exposure to direct government reimbursement and maintains in-network contracts
with most large insurers. However, given the high daily cost of
treatment, there is the risk that payors will pressure length of stay or steer
patients to lower cost settings.” Moody also reported, “The
ratings could be upgraded if ERC materially increases its size and scale. Revenues
were approximately $152 million for the last twelve months ended June 30, 2017.”
To start to accommodate this demand for growth, ERC
announced in March 2018 that Rebecca Steinfort had been appointed to the
newly-created position of Chief Operating and Business Development Officer. The
press release noted that, “Ms. Steinfort has extensive experience leading
mission-driven healthcare companies with significant growth potential.” One may
wonder as to the reasons why this position had not been previously created
until one realizes that the position was created not by the medical
professionals at ERC to improve the quality of medical services provided to
patients, but instead by CCMP to further their mission of growth, expansion,
profit and divestiture.
From this dizzying array of multi-million dollar
transactions and statistics, we know the following:
(1). ERC has a multi-milllion dollar debt ceiling;
(2). ERC’s credit and improved business ratings depend on
aggressive expansion;
(3). Until CCPM divests itself of ERC, as the
majority owner, it will dictate the terms of any such expansion;
(4). ERC’s operating revenue depends upon insurance entities
and individual families continuing to pay for extended lengths of treatment so
that lines of credit and revolving credit lines do not need to be repeatedly
drawn against to meet daily financial demands.
The logical conclusions drawn from these facts are that ERC’s
current on-going operating revenues are controlled by insurance entities and
banking institutions, ERC’s expected future aggressive expansion is being
dictated by a private equity firm and its secured lenders, employment of high
ranking officers is controlled by CCMP and $220 million in loans mature in less
than 6 years after a $30 million senior secured revolving credit facility expires
in 2022.
One cannot automatically assume that just because an RTC is
owned and controlled by a private equity firm, that the RTC cannot provide
reputable treatment and assist in the healing process. In fact, the in-pouring
of capital and expansion of facilities arguably makes access to treatment
centers more readily available to those who previously did not have access.
However, when a private equity firm controls an RTC and financial success
depends on rapid expansion, that RTC's business and financial structure makes
it susceptible to practices that maximize revenue generation rather than
prioritizing evidence-based practices and optimal treatment outcomes for its
patients.
The ultimate conclusion that can be drawn is that eating disorder sufferers and their families are potentially being treated as mere commodities instead of patients fighting for their lives.
Evidence Based Treatment
"Evidence-based treatments" are generally defined
as interventions, (therapies) that are supported by reputable, published
research demonstrating some type of effectiveness. And yet, there are no
specific therapeutic modalities which have emerged as a definitive “evidence-based
treatment” for adults suffering from anorexia nervosa. In general,
enhanced Cognitive Behavioral Therapy is regarded as the most effective
treatment for adults suffering from eating disorders. Family based
therapy is generally regarded as being more effective for children and
adolescents suffering from anorexia and bulimia.
Whereas many RTCs represent that they include CBT as part of
their therapy model, eating disorder experts generally agree that the least
restrictive setting whenever possible, is the best environment for treating
eating disorders. And that treatment module runs contrary to the RTC
profit and expansion model.
So, how effective are RTCs in treating eating disorders?
That is the multi-billion dollar question. And it is a question which remains
largely unanswered.
With regard to ERC, as with most RTCs, they do not publish
their recidivism rates. In fact, industry experts cannot even agree as to
the manner in which to define recidivism. ERC does not release the
percentage or number of its patients who are released AMA … Against Medical
Advice. Being released AMA generally occurs when the insurance provider
stops paying for treatment.
Further, the paucity of information released by ERC, does
not include reporting systematically collected objective data, such as weight
change data for patients with anorexia nervosa. In fact, most
published treatment descriptions and weight gain data are from hospital
programs affiliated with academic centers. This objective, outcome
related data is crucially important in evaluating the effectiveness of a
treatment facility since weight restoration is the single strongest indicator
of recovery for treating anorexia nervosa.
Without objective standards being published by RTCs,
families and patients are left in the shadows as to the effectiveness of a
program and instead are subjected to puffery, vague statements regarding a
program's success and the purported accolades of its medical staff and
programs. And all the while, the deadly disease continues unabated.
Other Residential Treatment Centers
The focus of this article has been on ERC and CCMP.
However, many of the other major residential treatment centers also have
private equity firms as their owners and overseers.
Trinity Hunt purchased Castlewood Treatment Center in July
2008. In January 2017, it announced the sale of Castlewood to The Riverside
Company, which markets itself as recapitalization and leveraged buy out
specialists.
Coker Capital Advisors represented McCallum Group, Inc.
d/b/a McCallum Place when it was acquired by Acadia Healthcare Company, Inc. in
September 2014. Acadia operates a network of 76 behavioral healthcare
facilities. McCallum represents that it provides innovative,
evidence-based treatment.
In 2015, Levine, Leichtman Capital Partners acquired Monte
Nido Holdings, LLC d/b/a/ Monte Nido from Centre Partners. Centre
Partners "invested" in Monte Nido in December 2012.
In September 2012, Acadia Healthcare paid approximately $90
million for Timberline Knolls.
In August 2015, Vestar Capital Partners purchased a majority
ownership interest in Veritas Collaborative, LLC.
Kohlberg & Company, LLC acquired Meadow Behavioral
Healthcare in 2016. They operate Remuda Ranch at the Meadows.
This list is not meant to be exhaustive. However, it
is illustrative of the current state of financial affairs in the eating
disorder industry as private equity firms gear up to do battle and start to
move the pieces on the chess board. The possible reward? Control over a
multi-billion dollar industry. The cost? One little commodity ... one precious life every 62
minutes with no improvement in sight.
But then some commodities are meant to be exploited ... and
then discarded.
https://medium.com/@pl_52879/a-perfect-storm-how-mental-behavioral-healthcare-became-a-financial-crisis-45d39f4c6215
ReplyDeletePenn, thank you for the very interesting article. Some very good points were raised which are so applicable in this matter.
DeleteFrom a Coker Capital 2015 report..."While all sectors benefit
ReplyDeletefrom current market conditions, key factors driving investment and contributing to a positive long-term outlook for eating
disorder treatment include the following:
- Highly Prevalent, Lethal Disease: Eating disorders are the most lethal of all psychiatric diseases. Individuals with eating
disorders have a mortality rate 12 times that of their peers, and the average age of death is 34 years old. Estimates
place the prevalence of these diseases at 15 to 25 million Americans at any given time. Unfortunately, social factors
and poor dieting habits are likely to continue driving prevalence of the disease.
- Shortage of Beds and Treatment Options: This patient population remains significantly underserved, with limited space
available in quality treatment programs possessing the necessary expertise to treat these complicated diseases.
Estimates place the current number of inpatient and residential beds devoted to eating disorder treatment at 1,000
beds. Although some acute care hospitals and multi-disciplinary behavioral health facilities offer treatment, the
complicated nature of the disease demands specialized treatment from eating disorder focused programs.
- Increasing Awareness of Disease and Access to Care: Researchers estimate that that only 10% of sufferers actively seek
treatment for this often-fatal condition. However, due to the ongoing efforts of industry operators, awareness of
the disease continues to increase, and families are seeking treatment at an earlier stage and thereby reducing the
treatment gap. Further, recent legislative initiatives, such as the Affordable Care Act and updated Mental Health
Parity Rules, have increased health insurance coverage for mental health and forced insurers to cover eating
disorders, eliminating some of the financial barriers to treatment.
These factors drive what currently represents a $3 billion annual industry that is expanding at a compounded annual growth
rate of 5%, yet the industry remains fragmented with no participant controlling more than 5% of the market. As investors
continue to line up for chances to take part in the industry and as existing platforms seek increased market share, the
sector’s landscape will continue to transform itself over the next 3 to 5 years. "
It is sad that nowhere do they speak of the potential for quality care to attract more demand for treatment. You are right Stephen, our kids represent dollar signs to these companies.
This is my breaking point - It's the last time I can stand to hear, "people are going have to die for eating disorders to be taken serious." Will make contact. I did not sell.
DeleteDr. Benita Quakenbush
CEO/Founder Avalon Hills Residential Eating Disorder Programs
www.avalonhills.org
Steve, your blogs continue to educate and inspire. Thank you for the work you do in your research to create such provocative articles.
ReplyDelete