Promises Behavioral Reeling, Private Equity Hit by Payer Addiction Treatment Intransigence, Regulators Finally Getting Tough on Parity

By Ted Jackson

From: Modern Healthcare Magazine

After investing in an addiction treatment play, NY-based healthcare private equity specialist? Assured Healthcare Partners, formerly BlueMountain Capital Management, is facing big losses on its investment in Promises Behavioral Healthcare.

Promises, one of the nation’s largest addiction care specialists, last week announced it had completed a recapitalization of its debt burdened balance sheet, without elaborating on the transaction. But previously, in response to emailed questions about Promises' financial condition, Assured Healthcare revealed it planned to convert the provider's debt into equity.

Promises grew out of the ashes of Elements Behavioral Healthcare, which after years of rapid fire addiction center acquisitions succumbed to big structural changes in the addiction treatment industry as private healthcare payers began to scrutinize expensive out-of-network and residential treatment benefits, which formed a bedrock of the business model upon which Elements and much of the rest of the private addiction treatment center business had been built.

Healthcare payers have tried "every trick in the book" to deny out-of-network as well as residential addiction treatment claims in recent years as the opiate crisis sent those claims soaring, says Michael Cartwright, a serial addiction treatment entrepreneur and founder and former CEO/chairman of American Addiction Centers, AAC, a major private addiction center operator.

And the states, alarmed at record overdoses year after year, have been fighting back, demanding that payers adhere to laws mandating the end of addiction and mental health claims payments discrimination, known as parity laws. The Biden administration, in the first federal enforcement effort ever of national parity legislation, this summer reached a settlement with giant UnitedHealthcare Insurance. ,????

Private addiction treatment providers, many backed by a flood of private equity money that flowed behind opiate crisis headlines, have been impacted by the healthcare payer moves.

Groaning under the weight of $500M in debt, private equity backed Elements Behavioral went under in 2018, the biggest bankruptcy in modern addiction treatment history. AAC, after going public in 2014, was delisted by the NYSE in 2019, shortly after declared bankruptcy and just last December arranged finance to continue operations.?

Following Elements’ downfall, in stepped Assured Healthcare Partners, AHP - then BlueMountain Capital - which, along with partners, paid $40 million for the senior debt of Elements and thus gained control of the company. They pared down assets, reorganized and rebranded as Promises Behavioral Health, moving the headquarters from California to Nashville.

Well Placed Sources

But well placed sources, speaking on condition of anonymity, reveal that just a few short years after Elements re-emerged as Promises, those same Elements addiction treatment assets, however pared down and rearranged, are not performing well.

Sources say the Promises board this summer retained bankruptcy attorney Chris Ward of the Chicago firm Polsinelli, who shepherded Elements through its Chapter 11 travails. Ward made a presentation to the Promises board in August, they say.

At the meeting, board Chairman and CEO Rob Waggener informed members that Promises hadn’t been able to arrange refinancing for approximately $75 million in debt and that large payments on the debt are due in December, sources say. The board already knew that Promises lost $20 million in the first half, they say.

In an email, AHP managing partner Jim Pieri maintained there is "no bankruptcy concern" and that AHP continues to fund Promises’ growth.?

Pieri later revealed, through his public relations agent, that AHP, which controls the "majority" of debt and equity in Promises, had reached a decision to convert its Promises debt to equity.?

In last week's press release headlined by the recapitalization, Waggener said Promises growth initiatives include "organic, acquisitions and M&A," including the acquisition of a facility in Texas as well as new outpatient programs in Tennessee, Massachusetts and other markets.

Highly Fragmented Business

The addiction treatment business - highly fragmented with 12,000+ players, 90 percent being outpatient operations, the average residential center having just 40 beds - is dominated by non-profits, about 80 percent of the $50 billion industry.?

The remaining percentage is private, for-profit, which has been inundated by private equity - players like Frazier Healthcare Partners, which backed Elements, Veronis Suhler Stevenson and Furman Capital Advisors -? some of whom mistakenly assumed that a flood of private healthcare payer money would flow amidst the overdose crisis, not digging behind the headlines.?

Just yesterday the federal government reported that overdoses fatalities are soaring in an unprecedented manner, reaching more than 100,000 in 2020 during the pandemic, a staggering 30 percent increase over the previous year.

For the first time ever, overdose deaths surpassed those of auto crash and gun fatalities combined.

But private healthcare payers have for decades been concerned about the subpar outcomes of an industry heavily reliant on what is known as the 12-Step Model of care, based on the teachings of Alcoholics Anonymous - a spiritual model where only relatively recently, and in many cases reluctantly, have attempts been made to integrate with more modern medical models, especially medication assisted therapies like the blockbuster drug Suboxone.

Fed up with payments intransigence, ten states have moved against more than 30 payers, including Aetna, Cigna and Optimum Choice, enforcing parity laws, according to ParityTrak. And the Biden administration, in the first federal parity action ever, reached a $17 million settlement this summer with UnitedHealthcare Insurance.

Payers Invest in Outcomes

While getting tough on claims, payers have also been promoting efforts to improve addiction treatment outcomes with, for example, Aetna investing $50 million in MAP Health Management of Austin, TX, which offers outcomes improvement solutions to addiction treatment providers.

Some investors failed to see the writing on the wall after Cigna flagged a possible payer sea change by temporarily pulling out of the Florida Obamacare health exchange in 2015, says Drew Rothermel, CEO of Austin, TX-based BRC Healthcare.?

Cigna cited the high cost of addictions claims, as well as scandals, in the huge South Florida addiction treatment market, which for years had filled the lion's share of the entire East Coast private addiction treatment demand.?

There are fewer out-of-network addiction providers around, with those surviving now taking much lower margin, but more reliable, in-network payments, the very shift payers desired to encourage. But that hasn't solved everyone's problems.

"The payers have cut back on more expensive, but sometimes clinically necessary, residential treatment," says Michael Cartwright, estimating the average length of residential stays have fallen from 30 days to 18 days.

Medicaid Surge

And smart private equity money is focusing on a sector of the addiction treatment industry historically only served by non-profits and totally ignored by private investors, Medicaid centers.?

The real flood of cash into addiction treatment has come from governments - many states and the federal government - who have pushed an expansion of Medicaid addictions coverage.

Chicago's Linden Capital Partners in 2016 invested in affordable care provider Pinnacle Treatment Centers and since has taken Pinnacle to 115 centers in eight states from 30 in five states.