Addiction Treatment Industry Worried Lax Ethics Could Spell Its Doom

Private equity investors purchased Lakeview Health in 2013 and decided to clean up its act, which Thorne said has happened. Straightening out the marketing side has also forced the center to improve its treatment program, so that it could begin to rely on patient referrals and a positive reputation.

The truest sign of Lakeview’s successful rehabilitation, she said, is that shady treatment centers now steal its name and branding in an effort to lure patients. While she reaches out to each one of those centers to stop the practice, Thorne said later, she gets a sense of satisfaction knowing that Lakeview’s reputation is worth stealing.

“Nobody would’ve ever thought to use our name before,” she said.

Perhaps, then, the influx of corporate money could paradoxically boost the industry’s ethics. Though largely unreported in the national press, consolidation has moved rapidly. Publicly traded companies Acadia and American Addiction Centers (AAC) have swallowed up significant portions of the industry, with private equity firms gobbling up still more.

Kevin Taggart and Cory Mertz came to the conference to represent their company, Mertz Taggart, which assists treatment centers that are selling out to large conglomerates. Mertz said he has high hopes that Wall Street money can clean up the addiction business.

“With such a fragmented industry, with so many cowboys out there, consolidation will help standardize the care these folks are receiving,” he said.

But the way the new owners are going about it raises the question whether standardization is their goal. One consultant for several centers purchased recently said that Acadia, for instance, insists that its clinics not advertise their new ownership.

“There’s a ton of them now that are private equity-backed, but it’s not necessarily public knowledge,” said Taggart, who puts the number of treatment centers and groups of centers quietly owned by private equity at 30. “It’s not something that’s real public. We know it because we’ve been in this space.”

The Braff Group, which does financial analysis of the treatment industry, is largely bullish on the future. But the same themes that ran through the NAATP conference give its experts cause for concern. In one Braff analysis following the successful initial public offering of AAC, the note added:

It’s not all kittens and rainbows. As we have seen countless times in other frenzied health care sectors, when the money flows in, so do the ne’er-do-wells, which can bring the sector the kind of attention it doesn’t want. Markets in hyper-drive are extremely fragile. And sometimes all it takes to bring a high-flying sector crashing to the ground are a few, high profile cases of chicanery that paints the entire industry with a broad brush of suspicion (and in a sector sorely lacking definitive data to quantify the good work you do, the industry is particularly vulnerable).

A collapse, the analyst added, isn’t imminent, but worth thinking about: “Something to consider in planning an exit strategy.”

Both Taggart and Mertz indicated the industry is in the midst of a bubble, and Mertz said the big money doesn’t plan to stick around.

“They’ll buy a good-sized company,” said Mertz. “They’ll pay a nice multiple for it, for the infrastructure, for the management team, all ready to go out and expand, and then they’ll go out and buy a bunch of new ones, smaller ones, put it all together, and in five years turn around and sell them to another private equity group or a strategic buyer like Acadia or UHS [Universal Health Services] or the other public companies doing these.”

Worse, the publicly traded companies have been busted engaging in the same kind of behavior you’d expect from fly-by-night operations. AAC, for instance, was accused last year of charging insurance companies for many more drug tests than necessary. In a widespread practice, treatment centers are known to charge $1,200 or more for a $5 test, which they run several times a week for each patient. Industry investors now look at the portion of revenue that comes from drug tests in gauging the ethics of a potential acquisition target.

Indicative of how little coverage the addiction industry gets, AAC’s alleged billing practice was revealed in a college student’s blog post, using basic math. The student’s post whacked the value of AAC’s stock, and it has yet to fully recover. (AAC has said it did nothing improper.)