Private Equity vs Patient Care - a Bainful Example

A long investigative report in Salon summarized allegations about the quality of care in various treatment centers owned by Aspen Education, and its parent company, CRC Health Group, in turn wholly owned by a private equity firm, Bain Capital.  The article provides examples of what can go wrong when health care organizations are taken over by remote leadership focused overwhelmingly on short-term revenue.   

A Death from a Treatable Disease
The report opened with the investigation of a 14 year old resident at Youth Care, in Salt Lake City, and Aspen Education treatment center.  Brendan Blum "died of a twisted-bowel infaction," according to the local medical examiner, which allegedly went untreated because "two poorly paid monitors on duty," were slow to seek approval to call for emergency services, and "were too low on the totem pole to call 911 themselves."

The article cited "previously unreported allegations of abuse and neglect in at least 10 CRC residential drug and teen care facilities across the country."  It charged, "such incidents have largely escaped notice because the programs are, thanks to lax state regulations, largely unaccountable." 

Allegations of Toxic Corporate Culture

The article noted numerous other reports of unexplained and allegedly wrongful deaths, and other allegations of mistreatment of patients.

Furthermore, the article noted allegations "that such incidents reflect, in part, a broader corporate culture at Aspen's owner, CRC Health Group, a leading national chain of treatment centers.  Lawsuits and critics have claimed that CRC prizes profits, and the avoidance of outside scrutiny, over the health and safety of its clients." 

We have frequently discussed how the corporate culture of the finance industry, the industry that brought us the global financial collapse/ great recession, has influenced health care, and how this culture may be related to extensive problems with the leadership of health care, including lack of understanding of or even outright hostility to the health care mission, the prioritization of self-interest over the mission, conflicts of interest, and even outright criminal behavior, such as fraud, and kick-backs (bribery).  One way that finance may influence health care is the presence of finance leaders on the boards of trustees of non-profit health care institutions (see recent examples here and here). 

A more direct way the culture of finance can influence health care is for private equity firms (that is, re-branded leveraged buyout firms, look here) to purchase organizations that actually take care of patients.  The Salon article noted:

CRC’s corporate culture, in turn, reflects the attitudes and financial imperatives of Bain Capital, the private equity firm founded by Mitt Romney. (The Romney campaign also did not reply to written questions.) Bain is known for its relentless obsession with maximizing shareholder value and revenues. Indeed, this has become a talking point of late on the Romney campaign trail; he bragged to Fox in late May that '80 percent of them [Bain investments] grew their revenues.' CRC, a fast-growing company then in the lucrative field of drug treatment, was perhaps a natural fit when Bain acquired it for $720 million in 2006. In conversations with staff and patients who spent time at CRC facilities since the takeover, there are suggestions that the Bain approach has had its effects. 'If you look at their daily profit numbers compared to what they charge,' Dana Blum [the mother of the boy who died in the incident discussed above] said of CRC’s Aspen division in 2009, 'it’s obscene.' That point, ironically enough, was underscored by the glowing reports in the trade press about its profitability.

The article discussed how Bain Capital's acquisition of CRC Health Group further tilted the balance towards short-term revenue and away from quality care:

When Bain purchased CRC, it looked like an investment masterstroke. The company, founded in the mid-’90s with a single California treatment facility, the Camp Recovery Center, had quickly grown into the largest chain of for-profit drug and alcohol treatment services in the country, with $230 million in annual revenue. Under Bain’s guidance, its revenue has nearly doubled, to more than $450 million. CRC now serves 30,000 clients daily — mostly opiate addicts — at 140 facilities across 25 states. In the first five years after its acquisition, Bain had already extracted nearly $20 million in management-related fees from the chain, although Bain investors haven’t cashed in yet through dividends or an IPO. Bain’s purchase, a leveraged buyout, also saddled CRC with massive debt of well over $600 million.

According to company executives and independent analysts, hands-on oversight of subsidiary companies is a hallmark of both Bain and CRC. Romney’s campaign literature boasts about Bain taking exactly this sort of direct role in helping to turn around failing companies. 'Over the life of an investment, they have a strong management team willing to participate,' Sheryl Skolnick, an analyst with CRT Capital, a leading institutional brokerage firm, says of Bain.

The CRC acquisition immediately made Bain owner of the largest collection of addiction treatment facilities in the nation. Unlike some Bain Capital acquisitions, which led to massive layoffs, the company’s approach with CRC was to boost revenues by gobbling up other treatment centers, raising fees, and expanding its client base through slick, aggressive marketing, while keeping staffing and other costs relatively low. But that rapid pace of acquisition couldn’t be sustained in the mostly small-scale drug treatment industry alone. So Bain Capital and CRC set their sights on an entirely new treatment arena: the multibillion-dollar 'troubled teen' industry, a burgeoning field of mostly locally owned residential schools and wilderness programs then serving, nationwide, about 100,000 kids facing addiction or emotional or behavioral problems.

One of CRC’s first acquisitions under Bain ownership was the Aspen Education Group. Founded in 1998 with about six schools, Aspen Education had expanded to 30 troubled-teen and weight-loss programs by 2006, including Youth Care of Utah. With Bain’s backing, CRC purchased Aspen for nearly $300 million in the fall of 2006.

Less than a year later, Brendan Blum was dead.

At the time of the CRC acquisition, Aspen already had a history of abuse allegations, including at least three lawsuits, and two known patient deaths, one by suicide. Featured on 'Dr. Phil,' it grew out of schools inspired by the 'tough-love' behavior-modification approach of the discredited Synanon program, which was eventually exposed as a cult. By 2006, Aspen was facing a wrongful death lawsuit, later settled, over an incident in 2004 in which a 14-year-old boy, Matthew Meyer, perished from heat stroke just eight days into his stay at its Lone Star Expeditions wilderness camp in Texas.

This just underscores concerns we raised here about how ownership by private equity could undermine the ability of health care organizations to fulfill their missions. At the time we worried that private equity's short time horizon would clash with health care's long-term focus, how standardized cost-cutting approaches, including emphasis on individual employees' "productivity," could undermine patient care, and how private equity's obsession with secrecy is the antithesis of the transparency required to make health care accountable.

The Increasing Influence of Private Equity

Ironically, the reason that the problems at CRC have gotten such public attention is that the former leader of the private equity firm that controls it is now running for the US presidency. His candidacy emphasizes just how influential the culture of private equity has come.

The purchase of CRC came seven years after [former Massachusets Governor and now Republican presidential hopeful Mitt] Romney publicly announced his retirement as CEO of Bain Capital, where he had been in charge since its founding in 1984. But at the time of his departure, Romney worked out an arrangement to continue to share in Bain’s profits as a limited partner in the firm. Today, he is still an investor in 48 Bain accounts. Though he has refused to disclose their underlying assets, some information about them can be gleaned. For example, he has reported at least $300,000 to $1.2 million, if not more, in fluctuating annual earnings from Bain Capital VIII, the convoluted $3.5 billion array of related funds that owns both name-brand companies such as Dunkin’ Donuts and the lesser-known CRC Health Group. Most of these funds were made more attractive to privileged investors by being registered in the Cayman Islands tax haven. And Romney’s connections to CRC run even deeper: Of the three Bain managing partners who sit on CRC’s board, two, John Connaughton and Steven Barnes (with his wife), gave a total of half a million dollars to Restore Our Future, the super PAC supporting Romney. They also each donated the $2,500 maximum directly to his campaign.

Furthermore, it provides a warning about much more influential it might become, particularly in regard to health care:

Romney has been outspoken about his belief that for-profit health care companies can flourish only without onerous regulations. 'I had the occasion of actually acquiring and trying to build health care businesses,' he said during a primary debate last year. 'I know something about it, and I believe markets work. And what’s wrong with our health care system in America is that government is playing too heavy a role.'

The allegations against one of those health care businesses suggest another viewpoint.

I have frequently repeated a contention that true health care reform would emphasize leadership of health care organizations that understand and uphold the values of health care, starting with prioritizing the needs of patients and the public's health over all other concerns. Instead, there is a danger that health care leaders will be ever more removed from patients and the public, and their health needs, while they become ever more concerned with making as much money as possible in the short-run, and after that, the Devil take the hindmost.