The Mental Health Parity Act Crisis of 2018 - Ambactus Cadere (Part Two)

Every economic crisis needs its villains. A person. An entity. People like to assess blame, to point their finger, to revel in the fall of giants. We want to be able to say, with smug self-righteousness, “Tattaglia is a pimp. … it was Barzini all along."

With the Savings and Loan Scandal of the 1980s it was Charles Keating and the “Keating Five.”  The Subprime Mortgage Loan Crisis counted Goldman Sachs, Bear Stearns and Lehman Brothers in its Hall of Infamy.

So too, fingers will be pointed at a number of players in the mental health industry as it surpasses the tipping point and devolves into crisis mode.

Acadia Healthcare Company, Inc.

Why Acadia is an important indicator

In 2011, Acadia Healthcare Company, Inc. was a small, privately owned company owning 19 behavioral health care facilities. It first merged with PHC, Inc. in 2011. The merger was financed with $150 million in unsecured notes issued by Acadia and was backstopped by Jeffries Finance, LLC which pledged a senior, unsecured bridge loan of up to $150 million. Acadia went public and the race began in earnest.  

Acadia underwent rapid expansion. From its humble beginnings in 2011 to March 2018, Acadia expanded its operations to a total of 584 behavioral health care facilities in the United States, the United Kingdom and Puerto Rico with approximately 17,800 beds. Of those 584 facilities, 256 allegedly treat eating disorders in some fashion. Included amongst these 256 facilities are McCallum Place, based in the State of Missouri and Timberline Knolls, based just outside of Chicago, Illinois.

Acadia is now one of the largest mental health system providers in the United States. And, it could be on the verge of financial collapse.

Indicators of a Probable Collapse

Since 2011, Acadia has participated in over 25 separate acquisitions which cost in excess of $5.3 billion. However, these acquisitions have been highly dilutive to cash flow and Acadia’s balance sheet. From 2011 through 2015, Acadia’s debt grew 66% compounded annually to $2.3 billion. That debt continued to grow to approximately $3.8 billion. Further, Acadia’s return on invested capital ranks below its main competitors indicating that it is not allocating their capital efficiently and wisely.

Acadia’s public filings indicate deeper issues.  Acadia has approximately $45 million cash on hand (ready disposable monetary assets). If Acadia began to sell off all of its other assets, it could receive perhaps as much as $2.4 billion.  Therefore, after all assets have been sold, Acadia has a short fall of approximately $1.2 billion.

Acadia’s creditors, fearing Acadia’s financial collapse or a significant regulatory reversal (such as the Affordable Care Act being dismantled), could effectively bing down Acadia by calling in all financial obligations.

Additional warning signs of a financial doomsday also exist.

Indication of Insiders’ Fraud

An indication of a publicly traded companies’ long term strength and stability is the manner in which the insiders of the company, its executive officers and directors, buy and sell company stock.  It is axiomatic that if an officer believes in the substance and growth of the company, they will hold on to or increase their holdings of the company stock in anticipation of long term growth.

Acadia’s officers are bucking that reality. Total Insider Trading Volume by Quarter for Acadia reveals the following:

QUARTER	TOTAL INSIDER BUYING	TOTAL INSIDER SELLING
Q2 – 2016	$0	$97,465,060
Q3 – 2016	$0	$3,418,520
Q4 – 2016	$0	$39,805
Q1 – 2017	$0	$41,781,109
Q2 – 2017	$0	$$160,231,099
Q3 – 2017	$0	$3,180,000
Q4 – 2017	$0	$15,759,096
Q1 – 2018	$0	$9,981,650

In 2014, the 14 directors and executive officers of Acadia owned 30.1% of their class of shares.

In 2015, this number remained static at 30.1%.

However, in 2016, the 14 directors and executive officers owned only 17.2% of their class of shares.

In 2017, the number of directors and executive officers as a group increased in number to 16. But, their stock ownership decreased to 11.1%.

This year, the 15 directors and executive officers’ stock ownership dropped to 2.5%.  As of June 22, 2018, this number decreased to .67%!

This despite the fact that apart from base salaries, executives at Acadia annually receive long term stock-based awards. The massive sell off is even more perplexing since we could not find a sell rating on Acadia that had been issued by any analyst working for any investment bank.

So who does own Acadia? JPMorgan Chase & Company is the fourth largest beneficial owner of Acadia. Otherwise, pensions, 401Ks and retirement savings plans own millions of Acadia stock. So, as the insider officers have dumped their shares, Acadia stock is being purchased by persons on the outside, persons who do not know the inside workings of this entity and who must rely on the representations made by those insiders.

Unfortunately, Acadia’s financial peril is increased due to recent class based shareholder litigation based upon misrepresentations and fraud.

Shareholder Litigation

In March 2018, the Jackson County Employees’ Retirement System initiated a class action lawsuit against Acadia, and some of its officers and directors in a federal district court in Tennessee.  The plaintiffs allege that the defendants made numerous materially false and misleading statements and omissions regarding Acadia’s business and operations. The plaintiffs further allege that Acadia’s officers conduct allowed Acadia to offload approximately $143 million worth of stock to unsuspecting class members while the stock had been artificially inflated by the defendants’ conduct.

The lawsuit further alleges that quarterly reports issued by Acadia in December 2016, March 2017 and July 2017 grossly inflated Acadia’s earnings for the purpose of supporting a public offering of 1.5 million Acadia stocks in August 2017.  After the stock offering closed, in October 2017, Acadia disclosed that its prior reports were inaccurate. As a result, in one day, Acadia’s stock price fell 26%.

This multi-million dollar lawsuit, when combined with other financial realities of Acadia has the potential to result in financial Armageddon to not just Acadia, but the mental health industry as a whole. And that time bomb is ticking.

Issues plague other Publicly Held Facilities

Fraud and misrepresentations are not exclusive to Acadia. The Citizens Commission on Human Rights International, a 50 year mental health watchdog has filed over 4000 complaints with law enforcement, health officials, state FBI agencies, and Federal and state legislators regarding abuses perpetrated by employees of Universal Health Services, the largest mental health system in the United States.

In 2017, the Department of Defense and FBI joined a multi-federal agency investigation into Universal Health Services with regard to UHS’s billings to Tricare, the insurance plan for active military and their families. With PTSD and Traumatic Brain Injury being significant issues for our returning veterans, the possibility of billing abuse is very real and alarming.

Between 2003 – 2016, National Medical Enterprises n/k/a Tenet Healthcare paid $1.5 billion in Medicare fraud, False Claims act violations, fine and settlements.

Clearly, publicly traded companies in the mental health industry are standing on the precipice of disaster. And when one of the largest companies bows under the weight of its overwhelming debt and/or misrepresentation and fraud, the results across the industry will be cataclysmic. Treatment centers being forced to close. Patients being discharged with no care. And ultimately, many needless and tragic deaths.

Just as the publicly traded companies pose significant risks and dangers, so too do privately operated entities.

CCMP Capital Advisors d/b/a Eating Recovery Center

If Acadia is Patient Zero for publicly traded mental health treatment centers being a catalyst for the mental health crisis, CCMP d/b/a ERC surely owns that label for privately held mental health treatment centers.

In 2006, ERC operated one small facility in Denver, Colorado.  Currently, ERC has 28 facilities in 7 different states and markets itself as the preeminent eating disorder residential facility in the United States.  

In May 2010, the Dallas based private equity firm, Trinity Hunt Partners purchased a minority interest in ERC. In two years under the tutelage of Trinity Hunt, ERC grew from its one facility to three additional new treatment facilities and two West Coast facility affiliations.

After tripling ERC's revenue, Trinity Hunt sold its interest to Lee Equity Partners in 2012. Lee Equity employed an aggressive roll-up strategy resulting in rapid expansion for ERC.  In five years, ERC grew to 26 facilities in 7 states.  

Lee Equity then placed ERC up for auction. CCMP acquired a majority, controlling interest in ERC in October 2017. Subsequent to the CCMP transaction, Moody’s Investor Services for the first time issued a rating for ERC. Moody’s stated that it, “… believes ERC will continue to expand aggressively through growth of existing facilities, new facility openings and acquisitions.” It later reported, “… 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.”

Moody’s, Bloomberg, the S&P Index and any experienced business person understand with all roll-up strategies, to remain successful, a company must continually find new acquisition targets, purchase them and grow revenue and non-GAAP metrics. Therefore, ERC must expand its facilities through either mergers with existing entities or start up facilities in new markets. Without this revenue growth, roll-up strategies lose momentum and the underlying economics of the business are revealed for what they truly are … smoke and mirrors.   

ERC’s debt ceiling continues to escalate each year as it must service its debt obligations to those lenders who procured and secured the financing of the most recent acquisition. ERC is the responsible party on the notes financing the transaction as well as any subordinate agreement with  investors. ERC is also responsible for servicing its sizable debt obligation while paying its ordinary operating expenses and the management fees due CCMP. And the overwhelming majority of ERC’s revenue is derived from insurance payments and private pay clients. ERC has little, if any, unencumbered, tangible assets which could be liquidated for ready capital.

History has taught us that economic models rarely predict financial catastrophes, suggesting that there is something fundamental to financial behavior that is being missed. With regard to escalating debt, the non-partisan Congressional Budget Office reported: "... there is no identifiable tipping point of debt relative to GDP indicating that a crisis is likely or imminent. But all else being equal, the higher the debt, the greater the risk of such a crisis."

“Tipping point” is loosely defined as, “that critical point at which a series of small changes or incidents becomes significant enough to cause a larger, important and often unstoppable effect or change.”

The “tipping point” for ERC has arrived … and been passed. ERC’s main source of revenue is imperiled. Insurance providers are reducing payments to mental health providers.  In September 2017, Minnesota’s largest health insurer, Blue Cross and Blue Shield of Minnesota announced it was cutting payments for mental health therapy by double digits, sparking concern that the cuts will cause therapists to turn away patients and aggravate the state’s shortage of mental health care.

In November 2017, The Milliman Group found:

1.    In 2015, behavioral care was four to six times more likely to be provided out-of-network than medical or surgical care;

2.    Insurers paid primary care providers 20 percent more for the same types of care than they paid addiction and mental health care specialists, including psychiatrists.

In December 2017, a report from RTI International not only corroborated the Milliman report but further revealed that higher rates are paid to physical health doctors than to psychiatrists, even for those patients whose primary diagnosis is a mental health condition.

In addition, the Trump Administration is systematically dismantling the Affordable Care Act. Recently, the Administration announced that it was “temporarily” withholding $10.4 billion in risk adjustments due insurers participating in the ACA. Blue Cross’ response was immediate and strong: "Without a quick resolution to this matter, this action will significantly increase 2019 premiums for millions of individuals and small business owners and could result in far fewer health plan choices. It will undermine Americans' access to affordable coverage, particularly for those who need medical care the most."

A perfect storm exists which could give birth to a huge, economic crisis not just for ERC but other providers of eating disorder treatment and mental health treatment in general. To this end:

1.    ERC has few, tangible unencumbered assets;

2.   ERC has no consumer goods or products to mass market and sell;

3. ERC has no patents and no significant intellectual property attractive to third parties;

4.   ERC has very large debt obligations generated as a result of three, separate acquisitions of its corporate structure within a short period of time;

5. The Affordable Care Act is under attack by the current Administration;

6.  Insurance providers are significantly reducing payments to mental health providers;

7. The White House Administration and Congress have not prioritized mental health reform;

8.   The specific treatment provided by ERC is financially outside the capability of average citizens to afford and without whatever insurance coverage may exist, ERC cannot serve the needs of some of the most vulnerable people afflicted with eating disorders.

Whether ERC will be able to restructure its debt in the future or again, be the subject of another acquisition or take over and thus allow it to operate in the best interests of its patients as it is required to do is problematic if not doubtful especially when you consider that ERC has hundreds of millions of dollars of debt it must service.

If it cannot, it will face the inevitable disgrace of reducing staff, turning away patients, closing treatment centers, and bankruptcy. The human toll could be far worse. Patients, our loved ones who desperately require medical care, will be turned away and left without medical resources. How many families will pay the ultimate price for ERC’s lack of vision and business acumen?

Those are the greatest reasons supporting opposition to PE firms in the eating disorder industry. Those are the reasons why PE firms should have been prohibited from entering this field of medicine.  That is the folly resulting from the lack of Congressional foresight and vision in not having regulations enacted to implement and enforce the Mental Health Parity Act. That is the folly with Attorney Generals and State Boards of Medical Oversight failing to enforce the Corporate Practice of Medicine doctrine.

We are standing on the escarpment of calamity. And yet, I sincerely hope in five (5) years, society will be able to point its finger at me and say, “Dunn was merely a Chicken Little, an idiot! The sky did not fall.” I fervently hope that is the case. If so, that will mean the mental health industry is stable and millions of people are receiving the life saving treatment they need. If not, the alternative is too horrendous to fully grasp and ... Ambactus Cadere - Villains Fall.