Residential Treatment Centers and Private Equity Firms ... A Faustian Bargain

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.