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 Under President Barack Obama’s healthcare law, new health plans must
cover ten core health benefit areas. This includes substance abuse
and mental health disorders, opening up services such as alcohol and
drug detox or addiction therapy to many Americans who previously
couldn’t afford them.
The healthcare law also allows young adults to stay on their
parents' insurance plans until age 26. This offers coverage to many
young people struggling with drug abuse and eating disorders.
And the economic recovery has helped as well, as it means more
people can afford to pay the expenses that the plans won’t cover.
There are now a growing number of major investors, led by private
equity firms and healthcare companies, seeking to take advantage of
a market for addiction services that experts say has grown to $35
billion a year now from $21 billion in 2003.
Prices for rehab businesses are climbing so high that some of those
who bought assets in the previous decade are taking their profits
and selling to a new wave of investors betting on the sector on
expectations of continued strong growth.
"The appetite among private equity firms for these assets tends to
be greater because there is less payer reimbursement risk and the
growth opportunities are so great," said James Clark, a managing
director at investment bank Harris Williams & Co.
The latest wave of investors includes Goldman Sachs Group Inc's
private equity arm, which gave tens of millions of dollars to two
healthcare industry veterans Mitch Eisenberg and Lewis Gold at a
company called Advanced Recovery Systems late last year to acquire
and develop rehabilitation clinics. Franklin, Tennessee-based
investment banking boutique Brentwood Capital Advisors is similarly
backing another management team led by former Universal Health
Services executive Scott Kardenetz to build a rehab center business,
according to people familiar with the matter.
Goldman said in a statement that it was part of an investor group
that “funded more than $50 million towards the recapitalization of
an existing asset in central Florida and committed significant
additional capital towards the de novo build-out of new facilities
as well as the pursuit of add-on acquisitions, on a national basis.”
Advanced Recovery Systems and Brentwood Capital did not respond to
requests for comment.
They are competing against several major publicly traded companies
in the sector, including Acadia Healthcare Company Inc and Universal
Health Services Inc, which have also been acquiring such assets.
Acadia agreed in October to buy CRC Health Group for $1.2 billion
from private equity firm Bain Capital LLC, which bought the company
for $723 million in 2006.
AAC Holdings Inc, the parent of American Addiction Centers - which
operates six substance abuse facilities across the U.S. - has seen
its shares climb nearly 70 percent since going public in early
October.
MENTAL HEALTH LAW
When Obamacare was signed into law in 2010, many investors wondered
whether it would end up being quashed in Congress or the courts
before it was implemented. But once its healthcare exchanges began
providing plans to millions of Americans this year, investors became
more convinced that there was a longer-term opportunity.
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A 2008 mental health parity law that requires health plans that
offer mental health and substance use disorder benefits to provide
coverage comparable to other medical and surgical benefits has also
helped.
According to a 2013 National Survey on Drug Use and Health, an
estimated 22.7 million Americans needed treatment for a problem
related to drugs or alcohol but only about 4.1 million people
received treatment at a specialty facility.
"The affected patient population today has greater financial
resources, which combined with a stronger economic environment,
enables patients to pay for treatment," said Rich Harding, a
managing director at investment bank Moelis & Co.
With the prices for rehab businesses climbing as demand outstrips
supply for such assets, investors are keen to snap up more clinics
so they can lower costs per patient and keep profit margins healthy.
While there are more than 14,500 specialized drug treatment
facilities in the United States providing care for substance use
disorders, the industry is very fragmented and the largest operators
do not own more than several dozen treatment centers, which offers
plenty of scope for consolidation.
Facilities are often small, with the average operator holding no
more than 150 beds, analysts said. Because of efficiencies of scale,
larger facilities and bigger firms are more likely to have higher
margins, as are those that focus on patients that can pay through
their own means or private insurance rather than relying on
government-backed insurance.
Earnings before interest, tax, depreciation and amortization (EBITDA)
margins at rehab treatment centers, as a percentage of revenue, can
reach as high as 25 percent, according to brokerage William Blair.
Market valuations have been surging. Shares of Acadia and AAC
Holdings are trading at 32 times and 56 times their projected
12-month earnings respectively, versus 17 times for a broader group
of U.S. healthcare companies, according to Thomson Reuters data.
Among those selling is private equity and venture capital firm
Frazier Healthcare. Its high-end rehabilitation facility operator
Elements Behavioral Health, for example, is up for sale, sources
said. Elements Behavioral Health, which was set up in 2008, did not
reply to a request for comment. Frazier Healthcare declined to
comment.
(Reporting by Olivia Oran in New York.; Additional reporting by Greg
Roumeliotis in New York.; Editing by Dan Wilchins and Martin Howell)
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