Risks PE Firms Should Consider

Entering the substance use disorder treatment market

Substance use disorders represent a large, unmet need with only fractional treatment. The rapid rise in overdose deaths driven by Fentanyl increases the urgency for preventive treatment and recovery services. President Biden’s FY 2023 budget request for National Drug Control program agencies increased by $3.2 billion to $42.5 billion.[1] The market, though large and fragmented, poses challenges to potential investors due to complex regulations and a payer mix driven by Medicaid; selective opportunities remain.

Complex market increasingly for-profit

As a percentage of the total, substance use disorder facilities operated by private for-profit organizations increased from 30% (4,002) in 2010 to 41% (6,587) in 2020. Private for-profit organizations accounted for 45% of clients in 2020, whereas private not-for-profit and government facilities accounted for 46% and 9%, respectively.[2]?

Substance use disorder treatment is multi-factorial and incorporates specific efforts to stop using drugs, maintain a drug-free lifestyle and achieve productive functioning in the family, at work and in society. Patients may be treated on an outpatient basis, or in a residential (non-hospital) facility or in-hospital. Clients treated as outpatients account for 94% of the total; residential (non-hospital) treatment accounts for 5% and in-hospital is 1%.[3]

?Treatment paradigm and sites of care

Source: American Society of Addiction Medicine

?

Medication-assisted treatment

There were 1,816 Opioid Treatment Programs (OTPs) in the United States as of March 2021. OTPs must be accredited by the Substance Abuse and Mental Health Services Administration (SAMHSA) and meet Federal guidelines; surveys to assess medication usage, hours of operation, treatment plans and diversion control occur at least every three years.[4] OTPs are also regulated by the Drug Enforcement Administration and state agencies imposing zoning restrictions and certificate-of-need requirements.[5]

Most patients (62%) received treatment at private, for-profit facilities.[6] The market is fragmented with a few consolidators accounting for 10-15% of the market. Given the 1.6 million people with an opioid use disorder, the number of OTPs is inadequate to meet the demand for services, particularly in certain regions.

Substance use disorders: $42 Billion

SAMHSA projected the substance use disorder treatment market to reach $42 billion in 2020, reflecting a compound annual growth rate of 5.2% since 2014 ($31 billion).[7] Growth was driven by higher federal and state spending, and increased insurance coverage i.e., the Affordable Care Act’s mandated coverage of young adults (18-26 years old) under parental health plans, Medicaid expansion and growth of health exchange plans.

Public sources account for 71% of funding, while private sources account for the remainder. Public sources include Medicaid (28%), other state and local (28%), the federal government (10%) and Medicare (5%).[8] Private sources include commercial insurance (16%), out-of-pocket (9%) and other private sources (4%).[9] Out-of-pockets costs, particularly at high-end facilities, are high relative to other market segments.

Increased federal funding addressing SUD/OUD

In Medicaid, states and supporting public and private entities have flexibility to apply for waivers or expenditure authorities that explore new approaches to the delivery and payment of services and support, including SUD/Opioid Use Disorder (OUD). Leading into the pandemic, the Centers for Medicare & Medicaid Services (CMS), the Agency for Healthcare Research and Quality (AHRQ), SAMHSA and other federal agencies established various funding opportunities for both public and private entities to address SUD/OUD challenges.

?Currently, states participating in the 36-month demonstration receive enhanced federal reimbursement for Medicaid expenditures.[10] In addition, similar federal initiatives reviewed innovative state initiatives and strategies for housing-related services and supports for individuals with SUD in state Medicaid programs, which culminated in a report to Congress.[11]

In SAMHSA’s FY2019-FY2023 Strategic Plan, combating the opioid crisis was the number 1 priority.[12] Since that time, federal agencies have posted numerous grant opportunities targeting a wide array of services and supports related to SUD/OUD.[13],[14] ?The federal government routinely posts funding opportunities (cooperative agreements and grants) aligned with SUD/OUD initiatives that are available to public, private and other types of entities supporting SUD/OUD service delivery or related supports. The rising prevalence of mental health and substance use disorders may result in increased SUD/OUD treatment, services and supports funding opportunities for public and private entities.

Federal Spending on Drug Treatment, FY2016-FY2022 ($millions)

Source: Office of National Drug Control Policy

?Growing private equity interest

The substance use disorder treatment market is large and highly fragmented, with high barriers to entry due to the need for specialized care services and regulatory approvals. The number of people with opioid use disorders is a multiple of the number receiving medication-assisted treatment. The stigma associated with mental illnesses and SUDs is lessening, thereby increasing patient willingness to enter therapy. Mental health parity provides equal coverage for mental and physical health services for private and public sector employees.[15]

The market is attractive, though Medicaid and other state and local agencies are the predominant payers. Certain providers target the commercial, in-network segment, whereas others target the out-of-network, out-of-pocket segment. Longer-term trends favor commercial reimbursement. It’s possible, though challenging, to build a Medicaid-driven business as exemplified by a large, publicly traded and profitable behavioral health company with a significant substance abuse franchise having a Medicaid payer mix of 49.6%.[16]

Providers are concentrated within a state and/or region, i.e., all healthcare is local. The destination rehab model is declining.[17] The availability of services does not always follow epidemiological data, particularly in rural areas.[18]

Private equity-backed consolidators of SUD services, including MAT, have emerged.[19] From 2016 to 2021, there were approximately 10-25 SUD acquisitions per year.[20] The private equity market has evolved from out-of-network destination facilities with large out-of-pocket expenses to in-network, in-state, commercially oriented facilities.[21]

Primary risks include the recruitment necessary to maintain an average daily census above threshold, payer mix and its inherent variation in reimbursement, and collections, especially with out-of-pocket individuals.

Due diligence considerations

The substance abuse market is not without fraud; excessive legal and compliance risk may exist within certain centers.[22] Areas of concern include patient brokering, kickback relationships, excessive re-admission of “frequent flyers,” inducements into care, failure to collect deductibles, paying for insurance policies for those who did not have them pre-admission, an excess of diagnostic testing and inadequate HIPAA compliance. Payer reimbursement claw back is possible.[23] Avoidance of these pitfalls requires careful due diligence prior to acquisition.

Jonathan Myers brings 10+ years of experience in the areas of Federal and state compliance, program oversight and performance monitoring, data analytics, quality assessments, program integrity assessment, managed care, Medicaid policy and regulation, operational improvement assessments, procurement, operational readiness reviews, capabilities assessments, and mental health parity expertise.

Christina Sheffey is a healthcare regulatory and compliance manager with over 13 years’ experience in providing advisory support and analytical solutions to healthcare and life sciences industry clients and their counsel. She has extensive experience in the evaluation of existing and historical systems, processes, and controls; the analysis and quantification of potential financial exposure, and the development of integrated analytics and reporting to monitor compliance. She has supported multiple investigations, litigation matters, and buy/sell-side due diligence.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a certified public accounting firm or a law firm.

FTI Consulting is an independent global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centers throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. ?2022 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com

[1] “President Biden Calls for Increased Funding to Address Addiction and the Overdose Epidemic.” The White House Briefing Room; Press Release (March 28, 2022). https://www.whitehouse.gov/ondcp/briefing-room/2022/03/28/president-biden-calls-for-increased-funding-to-address-addiction-and-the-overdose-epidemic/.

[2] “National Survey of Substance Abuse Treatment Services (N-SSATS): 2020. Data on Substance Abuse Treatment Facilities.” U.S. Department of Health and Human Services, Substance Abuse and Mental Health Services Administration (June 2021). https://www.samhsa.gov/data/sites/default/files/reports/rpt35313/2020_NSSATS_FINAL.pdf.

[3] Ibid.

[4] “Facts About Opioid Treatment Program Accreditation.” The Joint Commission (last visited June 8, 2022). https://www.jointcommission.org/accreditation-and-certification/health-care-settings/behavioral-health-care/facts-about-opioid-treatment-program-otp-accreditation/#.

[5] “Opioid Treatment Programs: A Key Treatment System Component.” Pew Charitable Trusts (July 16, 2021). https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2021/07/opioid-treatment-programs-a-key-treatment-system-component

[6] “National Survey of Substance Abuse Treatment Services (N-SSATS): 2020. Data on Substance Abuse Treatment Facilities.” U.S. Department of Health and Human Services, Substance Abuse and Mental Health Services Administration (June 2021). https://www.samhsa.gov/data/sites/default/files/reports/rpt35313/2020_NSSATS_FINAL.pdf.

[7] “Projections of National Expenditures for Treatment of Mental and Substance Use Disorders, 2010-2020.” U.S. Department of Health & Human Services, Substance Abuse and Mental Health Services Administration; HHS Publication No. SMA-14-4883. Rockville, MD (2014). https://store.samhsa.gov/sites/default/files/d7/priv/sma14-4883.pdf.

[8] Ibid.

[9] Ibid.

[10] “Substance Use Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities (SUPPORT) Act: Section 1003.” Centers for Medicare & Medicaid Services (last visited July 2, 2022). https://www.medicaid.gov/medicaid/benefits/behavioral-health-services/substance-use-disorder-prevention-promotes-opioid-recovery-and-treatment-for-patients-and-communities-support-act-section-1003/index.html#:~:text=Under%20section%201003%20of%20the,the%20treatment%20capacity%20of%20Medicaid.

[11] “SUPPORT Act Innovative State Initiatives and Strategies for Providing Housing-Related Services and Supports: Sections 1017 and 1018.” Centers for Medicare & Medicaid Services (last visited July 2, 2022). https://www.medicaid.gov/medicaid/benefits/behavioral-health-services/support-act-innovative-state-initiatives-and-strategies-for-providing-housing-related-services-and-supports-sections-1017-and-1018/index.html.

[12] “SAMHSA Strategic Plan FY2019-FY2023.” Substance Abuse and Mental Health Services Administration (SAMHSA) (last updated April 11, 2022). https://www.samhsa.gov/about-us/strategic-plan-fy2019-fy2023.

[13] Substance Abuse Prevention and Treatment Block Grant. Substance Abuse and Mental Health Services Administration (last visited July 19, 2022). https://www.samhsa.gov/grants/block-grants/

[14] HHS Announces Funding for Substance Use Treatment and Prevention Programs.?Health and Human Services (HHS), Substance Abuse and Mental Health Services Administration (SAMHSA). March 15, 2022. https://www.hhs.gov/about/news/2022/03/15/hhs-announces-funding-for-substance-use-treatment-prevention-programs.html

[15] The Mental Health Parity and Addiction Equity Act (MHPAEA). Center for Medicare and Medicaid Services. (last visited July 19, 2022). https://www.cms.gov/CCIIO/Programs-and-Initiatives/Other-Insurance-Protections/mhpaea_factsheet

[16] “Investor Presentation: March 2022.” Acadia Healthcare (March 2022). https://acadiahealthcare.gcs-web.com/static-files/15dd866e-e194-4920-b8c6-3ba2ce11bdba.

[17] Nick Jaworski. “The Pitfalls Private Equity Firms Need to Avoid When Evaluating an Addiction Treatment Center.” Circle Social Inc. (last visited June 20, 2022). https://www.circlesocialinc.com/the-pitfalls-private-equity-firms-need-to-avoid-when-evaluating-an-addiction-treatment-center/.

[18] “Barriers to Preventing and Treating Substance Use Disorders in Rural Communities.” Rural Health Information Hub (last visited June 9, 2022). https://www.ruralhealthinfo.org/toolkits/substance-abuse/1/barriers.

[19] “Investment & Consolidation in Addiction Treatment.” Provident Perspective (Q3 2019). https://www.providenthp.com/wp-content/uploads/2019/09/Private-Equity-Investment-in-Substance-Abuse_v5.0-005-002.pdf.

[20] “Established Private Equity Healthcare Provider Plays: Analyzing Deal Trends and Strategies in Behavioral Health, Dentistry, Dermatology and Vision.” PitchBook (December 21, 2021). https://pitchbook.com/news/reports/q4-2021-pitchbook-analyst-note-established-private-equity-healthcare-provider-plays

[21] Ibid.

[22] ”Special Topics and Resources: Addiction Treatment Scams Explained.”Recovery Research Institute. (July 19, 2022) https://www.recoveryanswers.org/resource/scams-corruption-addiction-industry-explained/

[23] Ibid.