|Still Fragmented After All These Years|
If you count the birth of the modern addiction treatment center, alcohol rehab and drug rehab industry as starting with the introduction of the Minnesota Model, then the modern treatment business is well over 50 years old. I have studied many industries as a financial journalist, but never before have I run across a business as mature as the treatment industry that is still as fragmented.
There are many thousands of treatment centers in the $25 billion a year U.S. treatment business - SAMSHA lists over 11,000 nationwide, and Treatment Magazine distributes to about 3,000 - with the average residential operator having only about 40 beds. Some treatment executives we've talked to ascribe the industry's extremely high degree of fragmentation to something inherent in the nature of the treatment business, with some saying that good addiction treatment simply doesn't lend itself to large scale operations.
Typical is a conversation I recently had with treatment entrepreneur A.J. Schreiber, in which he asserted that, from a clinical persepctive, no more than 30 beds was probably optimum. The co-founder of a newly opened South Florida center called Recovery Road, Schreiber is on the acquistion hunt just like so many others are, both institutional and individual, these days.
And while it may be true that small is better, it is only part of the reason why the industry is still so fragmented. In the 1980s, as commercial insurance dollars flooded the industry, big investors saw opportunity and engaged in large scale leveraged rollups. If not for managed care, which pushed at least half of all residential centers into closure, rollup plays like Parkside and CompCare would likely still be around and the private treatment industry would also likely be considerably less fragmented than it is today, with large national players existing in the private side of the industry.
Managed Care Intervenes
But managed care did intervene, and it has been higher end private pay services that have been driving growth in the private treatment industry over the last two decades. With these types of services, smaller is clearly better as clients demand highly personal, non-institutional type care. CRC Health Corp. has definitely understood this, a key part of its rollup strategy being to keep acquired center storefronts intact. But CRC's deal pace has always been relatively slow. The company has done only a few small scale treatment deals a year, mostly, over the years. The result is that, while CRC is by far the largest provider in the nation, it represents perhaps five percent to 10 percent of the private treatment industry and perhaps about 2 percent of the overall industry. Desperate to find a deal with scale, Barry Karlin vastly overpaid for Aspen Education in late 2006, a deal that was fraught with problems from the beginning and CRC - beset with a steady talent exit as key players leave one year after acquisition, typically - hasn't done a deal in a long time. The Cupertino, CA-based for-profit, with a new CEO, is seeking to spruce up what it already has, concentrating on expanding existing programs. And CRC might not be able to take its time getting its act together if it weren't for the steady - and very large - profits from methadone distribution, a business in which CRC is the nation's largest player and is aggressively seeking to open new clinics.
Public services - corrections, grants - skyrocketed pre-Lehman Crisis, but states, the largest source by far of public funding, have been cutting massively with besieged governments like Illinois cutting by 20 percent and more. Over five years ago, Chicago's Gateway Foundation hired M&A bankers - and took out VERY effective ads in Treatment Magazine seeking acquistion candidates - and made a real effort to consolidate on the public side, even looking at private centers, too. But they couldn't find any public centers they thought worth buying that were for sale - bad infrastructire requiring big bucks being a principal reason - and the privates were too pricey for tight fisted CEO Michael Darcy. Phoenix House recently acquired DC-based Vanguard Services - a small non-profit that services about 900 clients a year that is celebrating its 50th anniversary this year - and has over the years grown selectively through acquistion. Vanguard has morphed into Phoenix House Mid-Atlantic. CEO Howard Meitiner wasn't immediately available for comment on whether the Vanguard purchase was a one-off opportunistic event, or part of a strategic consolidation effort. WestCare, in the early 1970s a tiny Las Vegas based human services provider, has pursued a unique strategy where it has partnered with, and in some cases acquired, public addictions and mental health players, creating economies of scale by becoming in essence a centralized services provider. WestCare now operates in nine states and territories and has seen its consolidated revenues skyrocket to nearly $84M in 2009 from under $15M in 2001.
The private side of treatment industry remains highly fragmented fifteen years after CRC started trolling and we think it will remain so. The public side is another matter as bad times are often a key driver of consolidation and these most definitely are not good times for public funding flows. Players like Gateway and Phoenix House, and no doubt many others, are seeking to ramp insurance flows with Phoenix House, and especially Gateway, increasing commercial payor funding as a percentage of the total very rapidly over the last few years. The fact that we now have super high quality public players like these increasingly chasing insurance dollars, a pool we don't think is going to increase much any time soon, could mean trouble for marginal commercial payor reliant players on the private side of the business, which could cheapen assets up and also drive some consolidation.
The Tyranny of Google
On the higher end private side, skyrocketing marketing costs - the tyranny of Google pay per click rates that have been driven ever higher starting with the Passages Malibu's of the world and now with the many hundreds others at the high end - are going to be a major driver of consolidation going forward. (We spoke to one South Florida treatment entrepreneur over the weekend who threw $5K at key words, paid around $20 a click and got zip) Foundations and Elements Behavioral are currently the state of the art models so far. These entities seek to have several centers in key regional markets across the nation and are large enough to handle surging Internet marketing costs, and also get around them with other marketing and outreach strategies that get "heads-in-beds."
In other words, driving consolodation at the high end will be the need to gain back end operating and, especially, marketing efficiences, while maintaining a nimble, individualized focus at the client front end.
...Updated 04 2012...
About the Publisher
Ted Jackson is Treatment Magazine's publisher, editor and majority owner. A veteran financial journalist, Mr. Jackson's work has appeared in newspapers and magazines worldwide, including the Financial Times of London, The Irish Times of Dublin, Chicago Tribune, Toronto Globe & Mail, Reuters and hundreds of others. Mr. Jackson was among the five founding bureau chiefs at Bloomberg News, setting up the Canadian news operation for feed into Bloomberg's global wire. A former bond trader, Mr. Jackson traded in London, New York, and Tokyo.
written by Peter Loeb, April 04, 2012