The Mental Health Parity Act Crisis of 2018 and The Crisis Trifecta (Part One)

“Fair is foul and foul is fair

Hover through the fog and filthy air”

  “Double, double, toil and trouble,

Fire burn and cauldron bubble”

          Shakespeare (Macbeth Act I, Scene 1, Act IV, Scene 1)

Macbeth is regarded as one of William Shakespeare’s darker, if not the darkest tragedy as it dramatizes the damaging psychological and physical effects of political ambition for those who seek power for its own sake. The Three Weyward Sisters as they were originally known are generally meant to represent evil, chaos and conflict.

This evil, chaos and conflict were aptly represented and endured by the Republic in the latest two economic crisis, the Savings and Loan Crisis in the mid 1980s and the Subprime Mortgage Crisis of 2008. These two economic crisis came about in great part as a result of our own hubris and greed. The third great crisis is now upon us.

The Savings and Loan Crisis of the 1980s

In the 1980s, we endured the savings and loan crisis. During this period, 1,043 out of 3,234 savings and loan associations failed and were otherwise closed.  By 1995, the Resolution Trust Corporation had closed institutions with a possible book value as high as $407 billion dollars. The General Accounting Office estimated the total cost from taxpayers to be $132.1 billion dollars. Causes of this crisis and exacerbating factors included deregulation, regulatory forbearance and fraud.  In essence, when deregulated, S&Ls were given many of the same properties of banks without the incumbent regulations. And yet, they were plagued by artificially inflated net worths and wholly inadequate net worth regulation. When combined, these doomed the industry. Bankruptcy and criminal prosecutions became the norm.

The Subprime Mortgage Crisis of 2008

Beginning in 2006, the United States subprime mortgage crisis caused financial panic on a worldwide basis. With the perception that home prices would continually rise, and with new legislation allowing banks to engage in riskier business ventures, banks extended subprime loans to people who otherwise did not qualify for traditional loans. Many times, lenders approved no documentation and low documentation loans,  packaged them into loan books and then sold them to private investors.

As home values plummeted, many people began to default on their home mortgages in record numbers. Hundreds of banks that retained the loans on their books failed. And yet, banks were not the only culprits. In 2006, more than 84% of the subprime mortgages were issued by private lending. Out of the top 25 subprime lenders in 2006, only ONE was subject to the usual mortgage laws and regulations. Nonbank underwriters made more than 12 million subprime mortgages with a value of nearly $2 trillion. The lenders who instituted these transactions were exempt from federal regulations. This crisis was borne out of deregulation, greed and the abuse of unregulated industries by private investors and bankers.

To this end, the economic crisis of the mid 1980s and 2008 shared similar causes and exacerbating circumstances. It should come as no surprise the current crisis shares these same characteristics.

The Mental Health Crisis of 2018

The Mental Health Crisis of 2018 is upon us. Its genesis originated in 2008. At that time, the Mental Health Parity Act (“MHPA”) was attached as a rider to the bailout bill designed to rescue the United States banking institutions from the Subprime Mortgage Crisis.

In theory, the MHPA was a Godsend to the struggling mental health industry. It was intended to place mental health benefits on par with physical health benefits. And yet, no regulations were implemented to insure a smooth, orderly, efficient implementation of the MHPA’s mandate. As a result, the private investment sector discovered a largely unregulated industry with the insurance industry attempting to catch up to a new reality … that they were now liable for billions of dollars in claims that had previously been denied under their insurance policies.

The private equity firms (“PE firms”) detected this new “gold rush.” For out-of-network claims, mental health programs could bill amounts which would have been previously denied. Insurance providers could not adapt quickly enough to stem the tide of billions of dollars in claims. Inflated revenues and out-of-network benefit payments provided fodder for questionable profit and loss statements. And the PE firms capitalized on the opportunity.

Banking institutions were still rebounding from the subprime mortgage crisis. And as a result, perhaps one can still justifiably speculate the reasons why the multi-national banking institutions are not involved with directly funding the growth and expansion of mental health/eating disorder facilities. (Or are they?) Why haven’t the residential programs gone directly to those banks to fund their growth ambitions? This would have avoided any possible corporate practice of medicine disputes. It would have eliminated middle-men companies and allowed those residential programs to expand in accordance with their unique vision alone. However, the banks saw the residential programs for what they are, shell entities devoid of tangible, transferrable substantive assets which were bad investment risks led by inexperienced (in terms of mergers & acquisitions) medical professionals.

The only tangible assets an eating disorder residential treatment facility arguably owns is the following:

1.             Employment contracts with its doctors, counselors and staff;

2.            Contracts with insurance providers;

3.            Possibly contracts with governmental entities;

4.            Accounts receivables;

5.       Possibly the real estate and buildings on the property (unless they are merely being leased or included in a sale/leaseback transaction);

6.            Office supplies, fixtures and equipment.

Once the curtain is drawn back, we see that these assets are merely “double, double boil and troubled” and are mere incorporeal employment contract rights, possibly some real estate holdings and the buildings affixed thereon and office equipment and supplies. 

Valuation of real estate and buildings is largely determined by taxing authorities. Office supplies, fixtures and equipment have no substantive, transferrable value. Employees come and go. Therefore, the only real asset of value is the contract with insurance providers and the payments associated therewith. This value, in an unregulated industry was looked upon as a “payday certain with an ever escalating future.” In part, this is how Trinity Hunt can sell a residential program for a profit to Lee Equity and how Lee Equity can then turn around and sell that same residential program for a profit to CCMP Capital Advisors.

And so, the only realistic manner to increase the treatment program’s asset base is by expanding its facilities through either mergers with existing entities or start up facilities in new markets. This expansion results in increasing the revenue stream from insurance providers to the treatment program as the number of insureds, our loved ones increase. Since any other tangible assets are static, the treatment providers’ debt ceiling continues to escalate each year as subordinate loans become due to various lenders within the probable unitranche loan structure securing the financing of the acquisition. And all the while, their asset-to-debt ratio continues to dramatically decrease.

Further, the treatment provider is taking on the debt associated with the financing of the sale. Earlier we had stated that banking institutions are not directly involved with the sale of the treatment provider on a one-on-one basis. However, banking institutions are still involved in the sale and front the vast majority of the funds. The PE firm solicits investors to participate in the sale up to a certain percentage. This money is leveraged to provide the initial capital and to induce the bank to invest in the transaction. The PE firm collects a fee for putting together the deal. It also collects a fee for managing the treatment facility after the transaction is closed. 

Once the PE firm and its investors have achieved their profit margin, the PE firm puts the treatment provider on the market for sale and again, collects a fee for the transaction. All the while, the PE firm assumes none of the risk or liability. The treatment provider is on the financing note with the banking institution as well as any subordinate financing agreement with the investors. The investors may too assume some of the liability and/or their financial position is subordinate to the superior position of the banking institution. But, if the transaction collapses because the assets diminish and the debt obligation cannot be met, the PE firm has no liability and all of the financial burden falls upon the treatment provider.

Private equity is not invested in the mental health industry for philanthropic reasons. Private equity firms invest in the mental health industry to make a large profit in the most expeditious manner possible and then divest itself of the asset. In order to propagate this type of transaction and to meet its financial obligations, the target treatment facility is required to rapidly expand its asset base, i.e., the number of insureds. If it fails to expand this asset base, it is in danger of defaulting on its financial obligation resulting in failure and bankruptcy.

Most importantly, unlike the prior two economic crisis, when real estate and mortgages were the depreciating assets, in this crisis, our loved ones who are suffering from this insidious disease are the depreciating corporate commodities. In this crisis, the price that will be paid will not be homes foreclosed upon and jobs lost.  It will be lives being taken.

And that is a price too dear to pay.

[Part Two will address specific examples of the dangerous house of cards which has been built and entities which may come to be the poster companies for the Mental Health Crisis of 2018]