Covid-19 is destroying the rehab industry

A crisis within the crisis
A crisis within the crisis
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At the beginning of 2020, addiction treatment was a solid, growing industry, with 15,000 providers, $42 billion yearly revenue, and a projected 5.2% annual growth. Then Covid-19 hit.

By the summer, the industry had lost $4 billion in revenue, and about 1,000 providers—and that’s just the beginning. According to the latest survey of the industry, published Sept. 9 by the National Council for Behavioral Health (NCBH), which represents about 3,000 mental health and addiction treatment providers, 54% of organizations have closed programs and 65% have had to turn away patients. As a result, nearly half  have decreased work hours for staff, and over a quarter had to lay off employees.

It isn’t for lack of demand: With the pandemic exacerbating many of the risk factors of addiction—isolation, economic distress, lack of routine—the need for treatment services has gone up significantly, with 50% of substance abuse treatment providers reporting a growth in request of their services, according to the survey.

Yet many mental health treatment centers, and particularly those focused on treating addiction, have been struggling to stay open, because of the financial burdens caused by additional safety regulations and a limited capacity for patients and fewer referrals from physicians.

According to the National Association of Addiction Treatment Providers (NAATP), about 20% of its provider member—which range from the largest network in the country, with about 180 treatment centers, to individual clinics—have had to close their facilities either completely, or partially.

But though this spells crisis through the sector, the impact isn’t evenly distributed: For smaller providers in poorer areas, Covid-19 may force them out of business but for large ones, or investors looking for acquisitions, it might be an opportunity to expand.

Yet another coronavirus victim

Like other healthcare providers, addiction treatment services had to make changes when Coronavirus hit. Outpatient services were often reduced so fewer patients would be in a facility at the same time, and where possible, services were moved online. Residential treatments had to adjust, too. In many cases, they had to reduce capacity, procure large amount of personal protective equipment (PPE), and pay sick or quarantining staff while also paying their replacements.

Some also had to close temporarily, in the unfortunate case that an outbreak was recorded in the facility.

These costs could be substantial. Doug Tieman, the president and CEO of Caron Treatment Centers, a network of addiction treatment clinics based in Pennsylvania, says the cost of PPE has been about 2.4% of the monthly revenue since the beginning of the pandemic, while the cost of unexpected staff expenses has been about 1%.

“Most of us, especially in the non-profit world, operate on a couple of percent margin. If you begin to erode the top line by 15% or 20% it has a profound financial impact,” Tieman says. Though his organization has had the ability to implement rapid testing and avoid cutting down capacity, the impact of added expenses is still significant.

Even in better times, addiction treatment providers have little liquidity to cover emergencies, let alone prolonged ones.

Congress has made some relief available, allowing providers to receive up to 2% of their annual revenue in government’s support. But that barely makes up for the added costs brought on by the pandemic, and does nothing to help with the losses brought on by reduced capacity.

Dale Klatzker, the CEO of Gaudenzia, the largest addiction treatment provider in Maryland and Pennsylvania, says his company has about 1,200 treatment beds across their facilities, and while they usually have about 80% to 85% filled, occupancy has fallen to 55% to 60% during the pandemic.  The drop is due to a lack of referrals from hospitals which had to cut outpatient services on top of the occasional quarantine when staff and patients have been potentially exposed to Covid-19.

Considering the increased requests for addiction treatment, the risk is that the country will find itself on the other side of the pandemic facing an unprecedented demand of addiction treatment with fewer clinics to address it.

“We are going to have a trifecta of bad things happen: increased need, decreased resources, and decreased service providers,” says Klatzker.

Together with the American Society of Addiction Medicine (ASAM), the NCBH has petitioned congress to provide a standalone $38.5 billion to support behavioral health providers through the crisis, while asking to maintain some of the changes that have made remote treatment easier. Allowing a longer-term use of telehealth, for instance, could help providers cut costs for the visits that can be conducted remotely, therefore speeding their financial recovery.

An opportunity for expansion

Many smaller providers have struggled to keep their businesses going, and in some cases, have shut down entirely. This is especially true for facilities funded primarily through public insurance, which have a harder time getting sustainable reimbursement rates and were already in the most tenuous shape prior to the pandemic. These are providers that tend to serve the most financially vulnerable.

Still, institutions with a larger cashflow were better place to face these challenges: they were more likely than smaller clinics to have established PPE supply chains, or be able to rapidly test patients, and continue residential treatments without disruptions. They also could count on existing IT systems, and integrate telehealth without making large new investments.

“Our local public detox closed three weeks ago, so the people who had no money and needed the government to pay, though we are not a Medicare and Medicaid facility, are now coming here,” says Tieman. “They are from our community so we have been taking them.” This can be a burden, particularly at facilities such as Caron Treatment Centers, which offer financial aid to the patients who need residential treatment, but have to continue treatment without immediate compensation.

But what is a struggle for many, might become an opportunity for few.

While a majority of rehabs have been hit hard, there is a specific group that is already seeing the effects of increased demand: High-end services. These programs have luxurious settings and amenities, and fewer patients, which makes it easier to prevent possible exposure to Covid-19. “We provide premium services, and that’s been the saving grace in this,” says Tieman.

His organization’s three premium programs—two in Pennsylvania, and one in Florida—have stayed at capacity through the pandemic, he says, because patients with the financial wherewithal to check into premium residential treatment programs have continued to do so as they face a greater risk of substance abuse. Compared to the general programs, which costs $35,000 per month and is typically paid for with a combination of insurance and financial aid, the premium programs are $75,000 a month, with no discount offered, and though they have fewer patients, the programs have been helping the organization minimize the losses through the crisis.

Treatment centers that are able to survive might be positioned to absorb the ones that are struggling or have closed, leading to a consolidation of actors in the industry.

Given the increased demand, outside investors might find this to be a good opportunity to invest in focus in the rehab industry, which they had been losing interest in recently.

Between 2008 and 2015, the rehab industry was very attractive to private equity investments, drawing lots of new capital. This was at a time when the industry was expected to boom: the Affordable Care Act which had dramatically increased the insured population, and the passing of the Mental Health Parity Act forced insurance companies to cover addiction treatments; further, the opioid epidemic generated a large demand.

But more recently, large companies, including American Addiction Centers, the first publicly traded addiction treatment provider, ended up in bankruptcy, which has discouraged further investment.

Private equity firms might find this a convenient time to pour resources in the sector, Klatzer said. However, he fears they might not be reliable partners for the communities they serve in case of crisis, because they are less likely to serve the financially more vulnerable, or stay open unless they are profitable.

“Investment is going down but is still around, and I think it’s very possible that because of facilities failing now this will be an opportunity for some of those private equity groups to look at some bargains,” Tieman says.