Private-Equity Pours Cash Into Opioid-Treatment Sector (WSJ)

Firms are betting billions to expand and acquire facilities as demand soars

Drug-overdose deaths have soared since the late 1990s, according to the Centers for Disease Control and Prevention, and widespread opioid addiction is largely to blame.

By Jeanne Whalen and Laura Cooper
Sept. 2, 2017

Private-equity firms are piling into a new business opportunity: the opioid addiction crisis.

Drawn by soaring demand, expanded insurance coverage and the chance to consolidate a highly fragmented market, firms plowed $2.9 billion into treatment facilities last year, up from $11.4 million in 2011, according to research firm PitchBook Data Inc. The number of private-equity deals rose to 45 from 25.

The firms are acquiring or expanding clinics that provide everything from detox and residential care to outpatient and methadone treatment. In some cases, private-equity firms have approached not-for-profit outfits in an attempt to buy and convert them to for-profit entities, say treatment-center executives.

Private-equity has become the “driving force” in growth in methadone clinics over the past 10 years, according to Mark Parrino, head of a clinic trade association. While a decade ago roughly 60% of the clinics were nonprofits, today nearly 60% are for-profit entities, he said.

Some nonprofit treatment veterans look with skepticism at the new profit-seeking investors. “There are some very good private, for-profit groups,” says Dick Steinberg, president of WestCare Foundation, a nonprofit provider of addiction treatment and other services in 18 states. Others “are going to invest in it, market it, get people in, and I’m not sure the quality of treatment will last,” he said.

Mr. Steinberg says he has turned down frequent inquiries from private-equity investors interested in buying WestCare facilities. “When you see these health crises happen people see a dollar as opposed to how to really help somebody,” he said.

Private-equity firms say they are bringing capital to an industry that badly needs investment, helping increase the number of treatment facilities. Nonprofits “don’t have the capital to have the best compliance, services and marketing,” says Simon Bachleda, managing partner of Revelstoke Capital Partners, which owns a majority stake in an operator of two dozen methadone clinics—some acquired and some built from scratch. “Usually we enhance the service offering.”

Among recent deals are Kohlberg & Co.’s $180 million acquisition of The Meadows, a rehab center in Wickenburg, Ariz., best known for treating Olympic swimmer Michael Phelps after his 2014 DUI arrest. Investors including LLR Partners, HealthInvest Equity Partners, NewSpring Capital, Petra Capital Partners and SV Life Sciences spent $34 million last year for a stake in Sun Behavioral Health, which runs free-standing psychiatric hospitals that treat addiction and other conditions. Private-equity firm Flexpoint Ford acquired and expanded Summit Behavioral Health and is now considering a sale of the firm, which operates in 10 states.

The demand for treatment is plain. Drug-overdose deaths have soared since the late 1990s, and now cause more fatalities each year than traffic accidents, according to the Centers for Disease Control and Prevention. Widespread opioid addiction is largely to blame for the surge, the CDC says.

U.S. drug- and alcohol-addiction clinics generated $9.5 billion in revenue in 2016, up from $7.5 billion in 2011, according to Los Angeles-based data provider IBISWorld. There were 2,902 enterprises engaged in drug and alcohol rehabilitation in 2016 compared with 2,435 in 2011, the data firm said.

Investors say legislation has also made the sector more attractive by extending insurance coverage to more Americans. The Mental Health Parity and Addiction Equity Act of 2008 required insurers that provide mental-health benefits to cover them as favorably as they do physical-health benefits. The 2010 Affordable Care Act also expanded coverage by mandating that ACA insurance plans sold to individuals cover mental-health treatment. The law also stipulated that children could be covered under their parents’ insurance until age 26.

“The Affordable Care Act created more insured lives. That combined with the opioid crisis has changed the fabric of what we’re seeing in these treatment centers,” says Hunter Peterson, a partner at Riverside Co., which recently purchased Florida-based treatment provider Lakeview Health LLC from another private-equity firm, Trinity Hunt Partners, and plans to expand it to Houston and other markets.

Lakeview, like many private-equity-backed treatment providers, doesn’t accept Medicaid or Tricare, the taxpayer-financed insurance programs for low-income people and active-duty military members, respectively. Those programs offer reimbursement “below our cost,” and the paperwork can be excessive, says Roy Serpa, Lakeview’s chief executive. Lakeview’s patients are mostly covered by commercial insurance, he said.

Medicaid is the largest source of funding in the U.S. for mental-health care, including substance-abuse treatment, according to the Robert Wood Johnson Foundation.

Private-equity’s move into rehab “might not necessarily ease access issues for those on Medicaid,” says Michael Botticelli, executive director of Boston’s Grayken Center for Addiction Medicine, which like many nonprofits does accept Medicaid. “But it does help overall access issues,” said Mr. Botticelli, who is the former director of the White House’s Office of National Drug Control Policy.