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, Monday announced it had completed a recapitalization of its debt burdened balance sheet, without elaborating on the transaction. Last week, in response to emailed questions, Assured Healthcare revealed it was converting Promises debt into equity.
The news is the latest sign of trouble for investors looking to profit from addiction treatment as well as reimbursement in the sector.
Payers have tried "every trick in the book" to deny out-of-network as well as residential addiction treatment claims as the opiate crisis sent those claims soaring in recent years, said Michael Cartwright, founder and former CEO of American Addiction Centers, AAC, a major private addiction center operator.
The sector has undergone big structural changes as private healthcare payers began to scrutinize expensive out-of-network and residential treatment benefits, which was a bedrock of the business model upon which much of the private addiction treatment center business was built.
States, alarmed at record overdoses year after year, have demanded that payers adhere to parity laws. The Biden administration brought forth the first federal enforcement effort in this regard after reaching a settlement with UnitedHealthcare.
But that hasn't come soon enough for companies like Promises, which grew out of the ashes of Elements Behavioral Healthcare.
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 went public in 2014, was delisted by the NYSE in 2019, and shortly after declared bankruptcy. It last December arranged financing to continue operations.
N.Y.-based Assured Healthcare Partners—then BlueMountain Capital—along with partners, paid $40 million for the senior debt of Elements. They pared down assets, reorganized and rebranded as Promises Behavioral Health, moving the headquarters from California to Nashville.
But well-placed sources, speaking on condition of anonymity, reveal that those same Elements addiction treatment assets, however pared down, rearranged and rebranded, are not performing well.
The Promises board retained bankruptcy attorney Chris Ward of the Chicago firm Polsinelli, who shepherded Elements through its Chapter 11 travails, the sources said. Ward reportedly made a presentation to the board in August.
At the meeting, board Chairman Rob Waggener said Promises hadn't been able to arrange refinancing for approximately $75 million in debt and that large payments on the debt were due in December, sources said. The board already knew that Promises lost $20 million in the first half, they said.
In an email last week, Jim Pieri, managing partner of AHP, which controls the "majority" of debt and equity in Promises, said Promises' debt would be converted to equity and that AHP continues to fund Promises' growth.
In Monday's release, Waggener said these 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
About 80% of the $50 billion addiction treatment industry is not-for-profit. It's also highly fragmented with 12,000 plus players, 90% of it outpatient care, with residential centers having an average of 40 beds.
The remaining ownership has been inundated by private equity—players like Frazier Healthcare Partners, which backed Elements, Veronis Suhler Stevenson and Furman Capital Advisors—drawn by the promise of a flood of private insurance payment in response to the opioid crisis.
Overdoses have continued to surge, soaring to a record of more than 93,000 last year, according to the Centers for Disease Control and Prevention.
But patients, their families and their doctors say payers make them jump through hoops to attain coverage for needed inpatient and outpatient care for addiction, including medication-assisted treatment, which can often require prior authorization. Lofty deductibles and copayments are also common.
Payers invest in outcomes
While getting tough on claims, payers have also focused on addiction treatment outcomes. Aetna, for example, invested $50 million in MAP Health Management of Austin, which offers outcomes-based 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, said 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 has historically been the East Coast capital of private addiction treatment demand and supply.
There are fewer out-of-network addiction providers around, with those surviving now reporting much lower margins, 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," said Michael Cartwright, estimating the average length of residential stays have fallen from 30 days to 18 days.
"We will continue to devote substantial resources to opportunities in behavioral health given the meaningful value creation opportunities we can influence as a financial sponsor," said Jim Pieri, Managing Partner at AHP.
Ted Jackson is a freelance writer based in Chicago.
