High-End Keeps On Expanding

July 2006

Successful in a number of business ventures – law, mediation and real estate – Perry Litchfield over the last few years has turned his attention to opening a high-end Northern California center in tony Marin County, just across the bay from San Francisco. With its business model based on California’s famous six-bed treatment zoning law, Bayside Marin, as the new center is called, has been a very successful startup indeed. “What we have done here is created a center that offers state-of-the-art treatment of a kind that we feel can be found nowhere else,” says Litchfield, who has assembled a clinical team in which all therapists have doctoral level education and vast experience in their counseling specialities. And top flight medical talent too, with Haight Ashbury Free Clinic founder Dr. David Smith recently joining the center as chief of addiction medicine. And, certainly, there is no doubt that the range and depth of services offered at Bayside Marin are found at few centers nationwide, with the same to be said for its top-flight luxury facility with spectacular bay vistas. Of course, Litchfield’s high cost treatment model won’t be doing much to close the treatment gap any time soon, but it has attracted more than 200 clients who have been willing to pay as much as $60,000 a month to enter treatment at Bayside.

Particular Specialty

One area of particular specialty at Bayside, which has accounted for some 40 percent of the center’s well-heeled clientele so far, is the center’s chronic pain program. While the program has all the elements that go with Bayside’s core addiction treatment program, clients in the chronic pain track also get a thorough going analysis of their medication regimen by physicians who examine it in the context of addiction. There are also hydro-therapy, acupuncture and exercise regimens conducted by highly trained therapists, as well as special attention from dieticians, among many other things. There are few startup businesses that can claim the kind of quick, dramatic success that has occurred for Litchfield with his Bayside Marin venture. “We were full within a month without any marketing whatsoever,” he says, adding that the center has pretty much remained that way for the two years of its existence.Now there is a waiting list to get into Bayside Marin and Litchfield is doing what all high-end treatment entrepreneurs do in California when they want to expand: he’s buying more houses nearby. In addition to the two he owns on his current property, Litchfield has acquired an additional two homes that will expand Bayside Marin’s primary care capacity to 18 beds from the 12 its has now, as well as add six beds for a new high-end sober house. While Litchfield’s success with Bayside Marin has been remarkable for its swiftness, just as remarkable has been the rise of high-end treatment since its modern incarnation was invented 20 years ago in Arizona at places like Sierra Tuscon and The Meadows, whose owners over the last year have made large fortunes selling their centers to treatment operators and investors for top dollar.

High-End Profits

Sierra Tucson founder Bill O’Donnell made many tens of millions from his investment in the center, first through astute sales of stock after Sierra Tucson became a public company in 1989, and then by selling the company to CRC Health Group last year for $130 million after, in 2001, taking the center private for a fraction of that price. And veteran treatment investors like Steve Irwin and others made out handsomely when they sold The Meadows to a private equity investor in March, selling the pioneering center for $90 million after buying it over ten years earlier during a deep trough in the addiction treatment business cycle.It is difficult to get exact numbers on the size of the high-end private addiction treatment market, but a very rough proxy are figures from SAMHSA detailing a rapid rise in private pay – client out-of-pocket payments – for substance abuse care in recent years, a phenomenon that has occurred largely at the high-end of the market.According to SAMHSA, the private pay marketplace for addiction treatment was worth $1.4 billion in 2001, up 40 percent from 1991. Private pay has accounted for virtually all the growth in overall private treatment payments, as reimbursements from insurance carriers declined 15 percent to $2.4 billion during the period. It is quite possible that the $1.4 billion private pay number quoted above has advanced significantly since 2001, as anecdotal evidence suggests that the last five years have been one of the most robust growth periods in the history of high-end addiction treatment.But many in the addiction treatment business have begun to question whether the high-end can continue on its current growth path, with some pointing out that there are a finite number of people who can afford such care. Others, however, believe that the market has yet to fully meet demand for high-end services and that more growth for the sector lies ahead.

Malibu Mudslide?

Over the last fifteen years or so, the chic coastal canyons of Malibu in Southern California have become home to about 20 treatment centers and several high-end sober houses, with perhaps 40 to 60 beds of additional capacity having been added in the area over the last two years, according to Dr. Morteza Khaleghi, founder of renowned Malibu dual diagnosis center Creative Care. Dr. Khaleghi believes that Malibu’s growth may be about to slow significantly, but not because of lack of demand. “The city of Malibu has its own agenda with respect to the treatment centers here,” said Khaleghi. “That agenda does not include more treatment centers and more beds.”Malibu and other cities have been putting pressure on regulators in Sacramento, who, by all accounts, are responding. According to treatment center owners, there are increasing indications from California regulators that they will soon be taking a more restrictive stance on the state’s six bed zoning law. Aleady resigned to the fact that it could be too much of a fight to continue expanding in Malibu, Dr. Khaleghi has instead bought another house 10 miles to the north in Calabasas.Bayside Marin’s Litchfield, who also is dealing with major concerns from local residents who are worried about his expansion plans, attributes the success of his venture to the high quality care he offers, but also to the fact that there were no other comparable high-end facilities in Northern California. “Growth in high-end addiction treatment going forward could be led by regions that are now underserved by high-end providers and not so much by Southern California and Arizona anymore,” said Litchfield.Underserved New England

Backed by a big gift from an alumni who was unhappy about how short treatment stays have become since she went through treatment years ago, venerable Harvard affiliate McLean Hospital sees opportunity in its New England market. Already renowned for its substance abuse treatment and research efforts, McLean in July opened a new high-end center in the wooded hills of Princeton, MA, about an hour west of McLean’s main facility in Belmont near Boston. McLean Center at Fernside, as the new facility is called, is housed in an 1835 Federal mansion that has all the luxury appointments expected from a high-end center.”We are seeking at Fernside to offer a longer term treatment xperience with a high degree of individualized care,” says Dr. Roger Weiss, clinical director for the hospital’s alcohol and drug abuse program. On the business side, Dr. Phil Levendusky,SVP new business development at McLean, says that he initially thought about using the gift to work with insurance companies to lengthen stays, but then quickly dismissed the idea as a “fool’s errand.”Levendusky began researching the high- end private pay market, seeing that there were no such facilities in the New England area. Levendusky found the mansion – then operating as an inn – which the psychiatric hospital later purchased. Open for a month, Fernside already has several clients. And McLean certainly offers all the right ingredients for attracting enough people to keep the center’s 10 beds full down the road.

The range and depth of clinical and psychiatric expertise at McLean is certainly hard for any competing center to beat. The hospital can arguably lay claim to being among the premier addiction research facilities in the nation, having been a leading player in studies like COMBINE, which tested 1400 alcoholics in a clinical trial that examined pharmacologic and behavioral treatments for alcoholism. The psychiatric staff at McLean, many of which are faculty at Harvard, have deep bench strength in dual diagnosis, the treatment of which Dr. Levendusky and Dr. Weiss plan to emphasize heavily at their new high-end facility. “We have gained considerable expertise in treating cooccuring disorders in recent years, with particular advancements having been made with the seriously mentally ill,” says Weiss, adding that McLean is also on the cutting edge when it comes to using new addiction medications.