When King of Prussia developer Brian O’Neill convinced a New York private equity firm to back his fledgling Recovery Centers of America, he capitalized on one key trend: The long stigmatized field of addiction treatment has become one of health care’s hottest investment sectors.
Federal changes boosting access to care for alcoholics and drug addicts as well as people with mental illness, and growing attention to deaths from prescription painkillers and heroin, are luring investors to buy into addiction treatment.
Plus, investors see a shortage of places for people with mental illnesses to go, said Leslie Henshaw, a partner at Deerfield Management©, which in May committed $231.5 million in equity and debt to Recovery Centers’ development of 15 locations from Boston to Washington.
“Historically, despite the prevalence of disease and the enormous impact it can have on the quality of life, productivity in the workforce, crime rates, and community dynamic, there has been insufficient funding directed to the mental-health space,” she said.
Investors still see a largely untapped market; federal laws expected to boost addiction treatment – the Mental Health Parity and Addiction Equity Act and the Affordable Care Act, which made addiction treatment an essential benefit – have been slow to take effect in addiction services.
Experts said 8 percent to 10 percent of the U.S. adult population, roughly 20 million to 25 million people, are addicts or alcoholics. Yet 90 percent of them don’t get help.
The annual economic cost of addiction is rough $700 billion, including higher health costs, crime, and lost productivity, the National Institute on Drug Abuse said. That’s equal to the combined economies of the Philadelphia and Boston regions.
But there are reasons so few addicts get help, and it makes some in the industry doubtful that millions more will seek treatment, despite the prospect of expanded insurance money.
“It’s a disease of denial and minimization,” said Edward M. Diehl, president of Seabrook House Inc., a tax-exempt drug- and alcohol-treatment center in Bridgeton, N.J.
“People do not line up down the street and around the corner to joyfully enter addiction rehab. People come kicking and screaming into treatment,” said Diehl.
In addition, the shame and guilt that substance abusers and their families experience create more resistance to treatment, industry experts said.
O’Neill’s ambition is to break down those barriers through advertising.
“We are going to spend $20 million a year on a campaign that says, ‘If you don’t get your loved one help, you’ve become their dealer,” said O’Neill, 56, who has an aggressive rollout plan for Recovery Centers of America.
O’Neill is aiming to have seven inpatient facilities with 1,200 beds in operation by the end of next year and an additional 1,100 beds in 2019. He envisions treating 30,000 people a year, seven times more than the 4,300 Caron Treatment Centers served last year at facilities in Florida and Pennsylvania.
In South Jersey, O’Neill plans facilities in Blackwood, Mount Laurel, and Mays Landing. Pennsylvania sites are planned in Paoli and Plymouth Meeting. In most cases, building approvals are pending and could test O’Neill’s real estate savvy.
Haddonfield has already rejected a proposal at the Bancroft School site. O’Neill took Gloucester Township to court after a proposal in Blackwood was denied. A Rhode Island town rejected a zoning change.
Recovery Center’s strategy calls for facilities close to population centers, rather than in “fly-away” locations in Florida or California. RCA’s argument is that staying close to home makes it easier for the patient and family members to engage in long-term care, from detox to Alcoholics Anonymous meetings.
O’Neill said his facilities will be “five stars,” part of a bid to make people stay.
“If you have to be in a place for 30 days, it had better be nice: nice linens, a comfortable mattress, a beautiful room, great food, fantastic ambiance. And why not, because it’s been proven that people who are treated well get well sooner,” O’Neill said.
But that also means that RCA will rely on a combination of patients who pay their own bills and those with commercial insurance, according to applications for proposed facilities in Maryland.
The applications do not anticipate revenue from Medicaid or Medicare, but they do say RCA will provide charity care amounting to 6.15 percent of patient revenue.
By contrast, charity care at the tax-exempt Caron Treatment Centers, based in Berks County, amounted to 15 percent of patient revenue in the year ended June 30, 2014.
When a competitor in Maryland suggested that RCA should boost charity care to the 15 percent range, RCA said its operating margins would fall to 12 percent, from 16 percent, making investors unlikely to back the projects.
American Addiction Centers Inc., a publicly traded company that operates 18 substance-abuse treatment centers, told analysts last month that 90 percent of its $154 million in revenue in the first nine months of 2014 was from commercial sources, with none from typically less profitable government programs.
RCA told Maryland regulators that its average daily rate would be $788, or $23,640 monthly, compared with a $30,000 monthly base at Caron.
Deerfield©, RCA’s private equity backer, is the biggest outside investor in American Addiction Centers, with a 7.15 percent stake.
Henshaw, of Deerfield©, which has about $7 billion under management, said RCA and American Addiction are Deerfield’s© only investments in addiction treatment. Most of the $231.5 million from Deerfield©, which bought 37.5 percent of RCA, is debt.
O’Neill, along with family and friends, invested $15 million in RCA.
RCA was attractive, in part, Henshaw said, because it’s a start-up with a leader who has not been “jaded” by failed models.
O’Neill’s real estate knowledge is also valuable, especially when a facility is not wanted, she said. “It takes a good amount of real estate expertise to navigate this dynamic.”
The typical time horizon for a private equity investment is not long, usually three to eight years, depending on how it goes.
One industry veteran from the tax-exempt side said there are positives to the influx of capital into addiction treatment, such as the advertising that draws attention to the problem.
But Doug Tieman, chief executive of the Caron Foundation, also recalled an industry upswing in the 1980s, which drew for-profits to the field, until managed care slashed payments in the early 1990s.
Tieman said the same decline could happen again if profit-driven firms fail to deliver good results.
“When that happens, private equity will exit the industry and we won’t have the kind of bed capacity that we have today or that we will need for tomorrow,” Tieman said.