The Challenge of Keeping Care Affordable

October 2005
In 1985, George Joseph was just four years sober and working for a treatment center he greatly admired, Parkside Lodge in Houston. If the name sounds familiar, it’s because Parkside Lodge was part of the famous chain of Parkside addiction treatment facilities that was built by Lutheran General Hospital of Chicago in the 1980s. Joseph believed strongly in the mission Lutheran General had undertaken. “Parkside wanted to have a national treatment footprint, with easily identifiable quality standards and prices that were affordable,” said Joseph. “Unfortunately, there was a high degree of debt leverage at the company, which made its survival impossible when industry revenues plummeted with managed care.” 

But many years later, Joseph has not forgotten his Parkside experience. In fact, in some ways, Parkside has provided the model for his own highly successful treatment venture, The Right Step treatment centers, based in Houston. Joseph is at the vanguard of a new wave of treatment industry entrepreneurial activity aimed at providing treatment services at prices that are more affordable, stepping into a gap that many businessmen and women perceive as needing to be filled. Of course, these new services still cost many thousands of dollars, so affordable in the treatment context usually is redefined to mean anything less than the $20,000 plus cost of monthly stays that have now become fairly typical in the private treatment arena.

The new entrepreneurial activity appears to be evident all over country, and certainly in all the regions that the private treatment business has a strong presence, including Minnesota, Southern California, South Florida and even in the birthplace of high-end treatment, Arizona. And while most of the affordable treatment movement seems to be dominated by small entrepreneurs opening centers with 20-40 beds, the nation’s largest treatment provider, Cupertino, CA-based CRC Health Group, was founded 10 years ago with the idea of delivering more affordable chemical dependency treatment as a central premise.

Boom and Bust
Over the past twenty years, the story of the addiction treatment business has been one of boom, then bust and now one of renewed growth again, with the current steady expansion being underpinned by the institution of a more realistic set of industry economic strictures in the wake of managed care. The response of addiction treatment providers to the tectonic economic shift of managed care was drastic, with much of the sector that relied on insurance payors electing to partially or completely opt out of the insurance payment system. What emerged was a frantic effort by much of the industry to move up the patient food chain, with many treatment centers increasingly refusing to take insurance, targeting only a high-end demographic that could afford to pay up front and out of pocket. “As an industry, we have become very reliant on private pay,” says Bill O’Donnell, founder of the legendary high-end treatment center Sierra Tucson, which was recently sold to CRC Health Group for the largest amount ever paid for a single treatment facility. “Before managed care, about 75 percent of Sierra Tucson clients paid at least in some part with insurance, before I sold earlier this year that figure had fallen to practically zero.”

It was during this period, beginning around the mid-1990s, that Malibu emerged as a major center of addiction treatment and that areas like South Florida and Arizona also began to recover. While the ways of Malibu – where centers seem to vie with each other over bragging rights to who can charge the most for a single month’s treatment – have not been replicated throughout the country, there is no doubt that the overall price of private treatment has drastically increased in the last 15 years.

There are a now a plethora of treatment options for the wealthy and well-insured, and the poor continue to get services. But the great majority in the middle – those whose managed care oriented policies now severely restrict access to residential care – are finding it ever more difficult to get effective treatment.

And there seems little doubt that this trend is set to accelerate, perhaps substantially. The recent bankruptcy of auto parts maker Delphi threatens to push hundreds of thousands of auto industry workers into the ranks of the working poor, wiping out one of the last bastions of the American blue collar middle class. Auto industry union benefits, which Delphi and others want to slash, are one of the few avenues left through which middle class Americans can access longer term residential addiction treatment short of emptying their personal piggy banks.

The Big Debate
A debate has begun within the industry as to whether growth can continue to be driven by the high-end of the market as it has to a large extent over the past ten years. Many dozens of treatment centers charging in excess of $20,000 a month, with some charging $40,000 and more, have sprung up. So far, most have been able to fill their beds, in the process churning out substantial profits for owners and investors. High-end pioneers like Bill O’Donnell, who has made many tens of million of dollars in the treatment business over the past 20 years, see no end in sight for the good times in the high-end side of the business. Although O’Donnell does not see a return to the boom of the late 1980s -his former treatment center Sierra Tucson now has about 70 beds, down from a peak of over 300 – he does not think that the high-end is in danger of hitting a growth wall, as some in the industry fear. “I’m out of the business, so I don’t need to act as a cheerleader anymore,” said O’Donnell during an interview at his offi ces in a tony northern suburb of Chicago. “But I believe that the amount of wealth out there is incredible, especially when it comes down to helping a loved one. Not in our lifetime are you going to hit a growth wall. If you open a good treatment center, you’re going to get customers.” Others, however, take exception to O’Donnell’s optimism about the boundless growth opportunities at the high end of the market. “There are a fi nite number of people who can pay cash for their treatment,” says Ron Hunsicker, president of the National Association of Treatment Providers, Naatp, whose 268 members are among the largest players in the private side of the treatment business. “If the trend toward self-pay oriented toward a high demographic has not played itself out, it is close to doing so. I would be irresponsible if I advised someone seeking to enter that area of the business not to be cautious.”

Not By Design
In a way, the treatment industry’s embrace of self-pay has been highly anticipatory of overall trends in health care, though more by accident of trying circumstance than by design of intelligent foresight.

As health care costs soar, more and more big companies that self insure – companies that choose players like Aetna and UnitedHealth simply as plan administrators – are refusing to pay the costs. Not only are existing employees being forced to pay more of the freight, but the percentage of employees who have commercial insurance benefi ts has been falling precipitously. Since 2000, over 3.5 million jobs have been created, but there has been zero growth in the number of people covered by commercial health insurance. How this links up with the treatment industry’s self-pay trend is that more and more Americans will be now be paying for more and more of their own general health care costs, just like they have been forced to do by managed care for specialty addiction services over the past fi fteen years. The Bush Administration has embraced the self-pay trend in the general health care market, saying that traditional plans give consumers no incentive to curtail their medical spending, and big health plan operators have seen the writing on the wall.

Giant insurer UnitedHeath Group is buying companies that specialize in designing high deductible plans which, when coupled with in-depth information services, are designed to help consumers navigate the health care system more intelligently, with data about cost, quality and even the need for certain tests and procedures. In a recent speech to a group of industry executives at the South Florida Naatp CEO Summit in September, CRC Health Group CEO Barry Karlin was no doubt thinking about the above trends when he warned that consumers are more and more going to become value conscious as they shop for treatment services. And as the trend accelerates, it is not likely to benefi t the high end of the market as much as it will treatment providers who can pass the rigorous cost/benefit scrutiny of informed addiction treatment consumers. So, not only are the managed care providers driving growth in affordable treatment options, but so too will consumers as they become more and more the managers of their own health care destiny. This constellation of forces is very much likely to benefit players like George Joseph, whose mantra at the Right Step is affordability for consumers and reliability for payors. So far, it has been mostly the payor side of its strategy that has been paying off for the Right Step, largely because the consumer trends discussed above are still in their infancy.

Part of what has been driving prices in the private treatment business over the past several years has been soaring marketing expenses. While it is difficult to get numbers on overall industry costs in this area -even most industry revenue numbers are guesstimates – one indication of how marketing costs are skyrocketing is what treatment centers are paying for “payper- click” on search engines like Google. “The treatment business pays among the highest prices for pay-per-click,” said one expert who wished to remain unidentified. “Centers have been bidding against each other for the virtual real-estate, paying exorbitant sums, in some cases many, many times the average that most industries pay per click.” There is no doubt that these big and rising marketing costs are being passed on to treatment consumers, but affordable players like The Right Step and others have avoided spending on marketing, one very key reason they are able to charge far less than most other providers.

The Right Step, which spends about 3 percent of revenues on marketing, concentrates instead on building relationships with payors, especially of the dreaded managed care variety. “We get 70 percent of our business from insurance payors, mostly from managed care companies who see tremendous value in doing business with us.” It’s not hard to see why. The Right Step charges just $6,000 for 30 days of residential care, among the lowest prices for such care in the industry. So impressed have payors been, that United Behavioral Health, the behavioral health arm of UnitedHealth, invited The Right Step into a coveted Self Management Arrangement in which The Right Step now makes all clinical decisions regarding patient care for clients sent by United Behavioral, including the all-important length of stay decision. The result of the focus on affordability at The Right Step has been a growth spurt the likes of which may not have been seen by any single high-end player since the glory days of Sierra Tuscon in the premanaged care era of the late 1980s.

When Joseph took over the struggling Right Step in 1994, it had $300,000 in revenues and one run down facility in central Houston. This year, the Right Step will have $10 million in revenues, with a facility in Louisiana, multiple facilities in Houston, and a brand new 124 bed center in Dallas. By the end of next year, Joseph expects to have a 30-40 bed residential program in the San Antonio/Austin corridor, along with multiple IOP facilities in the area. The Right Step will likely continue to grow outside the state of Texas, according to Joseph, but probably through acquisition rather than the building of new facilities. And Joseph has his eye firmly on the day when consumer choice will become a much more important factor driving growth at the Right Step, with innovative approaches like offering product guarantees. At the Right Step, any one who completes its 30-day inpatient program that relapses within one year can return to the Right Step for further treatment free of charge.

With the kind of roll that it’s has been on, its not surprising that the Right Step has caught the attention of acquisitive players like Barry Karlin, who says he admires Joseph’s way of doing business. That’s not surprising, since a central premise behind the creation of CRC, which has acquired over 90 addiction treatment facilities in the last 10 years, was to provide high quality treatment at a reasonable cost. “The key element of affordable care is quality,” says Karlin, who in October engineered the sale of CRC to private equity powerhouse Bain Capital for $720 million. “Anyone can deliver affordable care, but the trick is to maintain the quality. We cannot go back to the days when quality was often suspect.”

One way CRC has been able to offer affordable care and still maintain quality, according to Karlin, is through the achievement of economies of scale through its many acquisitions. These economies are also in part what has made it possible for CRC to deliver quality care affordably while still maintaining attractive profi t margins. And while CRC is a private company and does not reveal its margins, that these margins have been maintained seems very likely indeed given the recent high price investors paid for the company. Karlin believes that George Joseph and the Right Step have begun to reach a size where scale will work to keep costs down substantially, while still allowing for the provision of quality services. And as for profi ts, the Right Step has a 10 percent net margin, likely lower than the norm in the forprofi t side of the treatment business, but still very respectable and relatively attractive to bankers and fi nanciers. But while CRC, and to a lesser extent the Right Step, have been able to use scale to their advantage, the vast majority of centers offering more affordable care are quite small operations where scale does not come in to play.

Able to Change Recovery of San Juan Capistrano, CA, is delivering very affordable high-quality care, but has not found it easy to make profi ts. “For quite a while we were not profi table, says executive director and founder Saralyn Cohen. “We are now making some money, but it’s not much.” From its roots as a sober house, Able to Change began operating as a treatment center in 2000. The treatment center has fi ve facilities and 38 beds. It offers 90-day treatment, including primary care and several step-down levels of care, for $15,000. If patients wish only to come for 30 days of primary care, the charge is $10,000.

Cohen is just as highly focused on quality as Karlin or Joseph, with a staff that includes the former medical director of Betty Ford. In the fi rst month, Able to Change clients get 30 hours of individual therapy, according to Cohen. Able to Change’s prices make it among the most affordable treatment alternatives in Southern California, with charges falling between 40 percent to 50 percent less than licensed facilities nearby considered to be its principal competitors. “In Southern California, you have a lot of recovery entrepreneurs who are not doing treatment ethically, with some conducting detoxes inappropriately and running facilities that are not licensed by the state,” said Cohen.

Ironically, though, it is not the unlicensed facilities that are typically charging less, even though executives from higher priced facilities often dismiss the affordable care movement as being populated mostly by unlicensed players operating under the radar. “Our experience with many of the unlicensed providers here is that they are very greedy,” says Cohen. “They are not usually offering discount prices, and in some cases are often the ones charging the most.” And while the fact that a facility is unlicensed should always be a major red flag for consumers looking for addiction services, there are some highly ethical and very experienced professionals who have found it necessary to move outside traditional treatment modalities in order to realize their vision for affordable care. A former top executive at Hazelden – he helped initiate what has turned out to be the venerable treatment center’s less than successful expansion beyond Minnesota’s borders – John Curtiss has for a long time had affordable treatment on his mind. Back in 1991, Curtiss was among the driving forces behind the creation of The Community of Recovering People, CORP, which is dedicated to establishing affordable residential recovery services for alcoholics and drug addicts.

Out of Curtiss’ efforts, along with co-founder Dr. George Mann, has arisen an institution located near Minneapolis called The Retreat that delivers high quality services at a very affordable price indeed, $3,600 for a 30-day stay. But Curtiss is the first to admit that The Retreat is not a treatment center, neither in the licensed sense nor in the range of services that it provides. “For me it’s always been an ethical question,” he said “Shouldn’t we charge someone less if we can?” For The Retreat, that someone has to be medically and psychologically stable, and has usually been through traditional primary care several times. “There’s little need for education or assessment here, just a place where the tools of recovery can be made available in an environment where recovery can blossom. We are just a different level of care for a particular class of alcoholic or addict.”

Curtiss admits that he looked outside traditional models when writing the business plan for The Retreat. “To get it down to a very affordable price, I really had to challenge the paradigm. In the end I had to opt completely out of any kind of medical model of treatment. I also had to avoid licensing and accreditation, which drive up the cost of treatment by a huge amount. The level of administration expenses behind these two are just unbelievable.” Even more controversially, Curtiss is highly skeptical of the degree to which expensive psychiatrists and psychologists have become part of the treatment fabric. “Back when managed care hit, one of the things that payors did was to refuse to allow or extend residential care unless treatment centers could provide a medical reason for doing so. After this, it was amazing the level of psychiatric and psychological pathology that was suddenly found among the ranks of treatment clientele. Thus was born the boom in co-occurring disorders.” Having said this, though, Curtiss is nevertheless not surprised at these developments. “I mean, after all, if you told a medical officer at a payor that someone needs to stay in residential care because they haven’t finished their 3rd Step, you’d just get laughed at.”

Realizing that his views often make him less than popular in certain treatment circles, Curtiss also goes to great lengths to point out that facilities like The Retreat will never take the place of more comprehensive forms addiction treatment. “We often refer out to centers like Hazleden and the Caron Foundation,” he said. “If people need more, we do that.” Opting out of accreditation and licensing for Curtiss, though, was definitely by design. “To begin addressing the treatment gap, we need to start thinking outside the box.”