Private Equity and Eating Disorders

In case you haven’t been paying attention, the economics of eating disorder treatment centers have been evolving. And it is doing so in ways that may be harmful. Today, a very small number of large entities own and run most of the country’s residential treatment and day treatment centers. Private equity firms now back most of them which have multiple sites—often 20 or more.

Many smaller centers can’t compete and have either been purchased or closed. Even an acquisition doesn’t mean a program will survive. One case study: Odyssey Behavioral Health acquired Long Beach’s Shoreline Center for Eating Disorder Treatment from its founder. In 2023, Odyssey closed the 28-year-old center. This center was one of the company’s smallest programs.

Or follow the history of what was once A New Journey Eating Disorder program in Santa Monica, California. It was purchased by Rosewood Eating Disorder Center, based in Arizona. Rosewood eventually closed the Santa Monica location and later was itself purchased by Monte Nido.

What is Private Equity?

Private equity firms are firms that invest in funds in or acquire private companies. They became prominent in the US in the 1980s. The goal of private equity is simply to create wealth for its investors. The investors in private equity comprise a broad range of companies seeking a return on their assets. Common investors in private equity funds are state and local pension funds.

To create profit for its investors, private equity firms must extract money from the businesses. There is a standard playbook for this: take on large amounts of debt; spend lavishly at first to grow the business, often taking out competitors; then cut costs dramatically to increase profitability; and finally sell the company to another party based on that boosted profit.

Defenders of private equity make the case that by increasing the scale of businesses and squeezing out inefficiencies they increase corporate productivity.

Detractors see the flip side: this cost-cutting decreases the quality of goods and services these companies produce. The managers of private equity firms earn money both by charging management fees to their investors—based on the amount of money that has been invested on their behalf—and earning “carried interest”—an additional share of any net profits that are generated from the investment. It can be argued that this creates incentives for riskier investment behavior that is more likely to benefit the private equity firm than the companies they acquire.

The financial engineering practiced by private equity also makes its targets much less stable: one study showed a 10-year bankruptcy rate of 20% for companies purchased this way, ten times that of a control group. They also reduce competition and concentrate power among a smaller number of companies.

A Brief History of Residential Treatment Centers and Private Equity

Private residential eating disorder treatment centers began to emerge in the US in the 1980s. Renfrew Center opened in 1985 in Pennsylvania. Carolyn Costin established Monte Nido in 1996 and a year later Center for Discovery was founded in 1997, both in California. Eating Recovery Center opened in Denver in 2010. Veritas Collaborative was established in 2010 in North Carolina. Most of these centers were founded by leaders in the field, providers with a strong desire to help people with eating disorders.

The new millennium saw the passage of two landmark health care laws: the Mental Health Parity Law in 2008 followed by the Affordable Care Act in 2012. These laws required private insurance companies to cover mental health treatment. Seeing the opportunity to capture this increased spending, private equity firms quickly became interested in investing in eating disorder treatment centers.

When Did Private Equity Enter the Eating Disorder Field?

Over time, private equity firms purchased each of the big residential treatment centers—except for the Renfrew Center—from their founders. Subsequently, these centers initiated periods of rapid expansion and consolidation:

Private equity firm Webster Equity Partners acquired Discovery Behavioral Health in 2011 and expanded aggressively in both eating disorders and non-eating disorder mental health facilities. It owned more than 150 treatment centers in 16 states in 2023.
Levine Leichtman Capital Partners invested in Monte Nido in 2015 and helped them open 22 facilities and acquire 10 facilities. Monte Nido had already acquired Oliver Pyatt (2013); with Levine Leichtman’s backing it acquired Rosewood Center for Eating Disorders (2020) and Walden Behavioral Care (2021).
Lee Equity Partners increased its stake in Eating Recovery Center in 2013. Eating Recovery Center bought The Moore Center for Eating Disorders in 2014 and expanded rapidly.
The Emily Program acquired the Cleveland Center for Eating Disorders in 2014 and sold part of its interest to TT Capital partners, LLC. In 2020 it acquired the Center for Balanced Living.
In 2015, Vestar Capital Partners invested in Veritas Collaborative. Veritas and The Emily Program merged into a new parent company, Accanto Health, in 2021.

These companies have increased in their valuation and changed hands at an astonishing rate:

In 2017 Lee Equity Partners sold Eating Recovery Center (ERC) for $580 million to CCMP, who in turn resold them in 2021 for $1.4 billion to Apax Partners and Oak HC/FT, two PE firms.
Levine Leichtman first invested in Monte Nido in September 2015 and then sold to Revelstoke for around $725 million in 2022.

The Current Eating Disorder Treatment Landscape

The current eating disorder treatment landscape is quite different than it was even five years ago. Most of the higher level of care market is now cornered by about 5 larger multi-site companies, which has drastically reduced competition. There are very few independent centers; those that remain will find it increasingly hard to compete against the private-equity backed conglomerates.

Focus on Profit

It is important to note that CEOs tasked with driving growth and profit for their owners lead these treatment conglomerates. According to Laura Katz Olson, author of the book, Ethically Challenged: Private Equity Storms Us Health Care,

“PE partners, whose only goal is to magnify short-term profit, keep their eye on the only ball that matters: return on investment. From their standpoint, health care is just another industry to exploit. But compared to other PE sectors, the stakes are higher; they are dealing directly with people’s lives, safety, and medical well-being. In this arena, financial players are preying, for example…on people dealing with eating disorders…” (p. 70).

These treatment centers are no longer run by providers who founded them based on the mission of care for patients. A PE firm follows the logic of the market, which states its sole duty is to maximize the return to its investors. PE will often provide executives with financial incentives to align them with this mission. These incentives do not extend to the treatment staff. Often these businesses are forced to reduce costs by eliminating higher paid staff and hiring less expensive staff.

Effects on Staff, Academic Centers, and Patients

This has been happening at eating disorder treatment centers throughout the US. Several well-known treatment centers have recently laid off previous leaders and eating disorder specialists in their employ.

As Carrie Arnold detailed in her Mother Jones article, these private-equity-backed programs seek the highest-paying patients. Few of them take public assistance. They aggressively take patients with private insurance from university and hospital ED programs. These in turn are left in financial distress.

The private equity companies also took staff from the university and hospital ED programs. Many of the private equity-backed companies lured away eating disorder researchers from academic settings with the promise of better salaries and benefits. However, after a time, private equity may be squeezed and let these same people go in favor of less expensive staff.

Why to Be Concerned

As an outpatient provider watching this, it’s scary. It feels like investors are preying on the needs of our most vulnerable eating disorder patients. The wave of investments leads to an unstable landscape. I know that previously trusted centers are no longer reliable. It leaves me with much less of a safety net and I am concerned. Patients considering higher levels of care need to do extra due diligence and not rely on the past reputation of facilities.

Get Help for An Eating Disorder at the Outpatient Level in California

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Sources

Arnold, C. It Was Hard Enough to Get Treatment for Eating Disorders. Then Private Equity Took Over. Mother Jones, May+June 2022.

Olson, Laura Katz, 2022. Ethically Challenged: Private Equity Storms Us Health Care

PE Hub (various articles)

McElhaney, Alicia. “LBOs Make (More) Companies Go Bankrupt, Research Shows.” Institutional Investor, July 26, 2019.