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Upfront
Is CRC a Referral Black Hole?
May 2007

Some Believe CRC Operates As a "Closed System"

Is CRC a Referral Black HoleIn early February, CRC Health Corporation, built into the nations largest treatment provider by a series of debt fueled acquisitions, issued a press release inviting the media to its National Resource Center, an impressive call center that fielded 86,000 inquiries last year from people seeking help. The press release said former Drug Czar General Barry McCaffrey would be at the conference - CRC trots him out at many press events - presumably to help CRC show how its National Resource Center is a "nerve center" of domestic efforts to fight drug abuse. And, indeed, readers of the press release might be forgiven if they mistook the National Resource Center for a charitable undertaking, as CRC proudly proclaimed that it sends about 90 percent of incoming calls to "other treatment opportunities" ie: non CRC centers. But that shouldn"t be surprising to those who understand CRC's operations. Other high-end treatment operators - and that's what CRC is now after recent acquisitions, mostly a high-end private pay operation - report that over 90 percent of their callers cannot afford the treatment services they are calling about in the first place. And, considering the time honored treatment industry tradition of inter referrals between competing institutions, some have been wondering lately whether CRC might actually be more taking advantage of that tradition instead of living up to it. One center reports that it has sent many clients to CRC's Sierra Tucson facility without seeing a single referral back from the Arizona Is CRC a Referral Black Holecenter, and has thus stopped referring to Sierra Tucson if an equally suitable alternative can be found elsewhere. CRC CEO Barry Karlin did not respond to an email seeking comment on whether or not CRC operates as a kind of referral "black hole," sucking in high quality referrals from competitors but rarely, if ever, letting any leave the CRC fold. But CRC's strategy of acquiring disparate types of centers - dual diagnosis, adolescent, eating disorders, etc... - does speak to a strategy of leveraging marketing efforts to create synergistic referral opportunities within the family of CRC enterprises. Nevertheless, CRC EVP Kathy Sylvia claims CRC is "not... a closed referral system, an assertion some have trouble believing. Says Betty Ford CEO John Schwarzlose: "We believe it [CRC] is a closed system, no matter how much CRC denies it."  And, certainly, CRC's fourth quarter results show that the treatment provider appears to need every dollar it can get its hands on, operating as it does under a large private equity induced debt burden. Despite decent, though much lower, operating margins, CRC reported just $331,000 of net income on fourth quarter revenues of over $85 million. Interest costs soared 120 percent to $13.2 million.

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