On Jan. 8, Governor Peter Shumlin devoted his entire State of the State address to the crisis of drug addiction in Vermont and his administration's plans to address it. Not long after, on Feb. 28, CRC Health Group -- a chain of 154 residential and out-patient addiction treatment centers owned by private equity firm Bain Capital -- acquired Habit OPCO's 22 opiate treatment facilities. The acquisition includes Habit OPCO's Brattleboro methadone clinic. Barbara Cimaglio, who oversees Vermont's drug abuse programs as deputy commissioner at the department of Health, recently told vtdigger.org that she does "not expect any changes in services." But there may be a serious disconnect between the urgency Shumlin expressed and the reality of CRC's treatment of addicts. If past experience is any guide, Cimaglio will need to be vigilant.
As documented in a Bloomberg News report early last year, Bain's CRC clinics have had problems ranging from illegal street sales of poorly supervised take-home doses of methadone to counselors flooded with caseloads that greatly exceed state limits. CRC centers tend to provide clients with more take-home doses of Methadone than other drug treatment clinics and overloaded counselors are unable to adequately supervise their use. According to Bloomberg, "Regulatory reports from 15 states show that CRC clinics received more than 1,000 deficiency citation since the beginning of 2009."
The root of the problem lies in the private equity business model.
Unlike publicly traded corporations that cannot impose advisory, monitoring and transaction fees on their subsidiaries, private equity companies are able to do just that. They can charge the companies that they take over all kinds of fees for services that corporate executives provide in the ordinary course of business. And, they can charge these fees even if the company they are overseeing is going down the tubes.
An especially egregious example comes from Bain Capital's investment in Cambridge Industries in 1995. By 1997, the private equity firm owned a majority stake in the company. By 2000, Cambridge was in serious financial trouble. Bain Capital continued to collect $1 million a year in advisory fees even as the company headed towards bankruptcy. Over the five year period from 1995 to Cambridge's bankruptcy in 2000, Bain collected more than $10 million in fees.
According to the Bloomberg News report, between 2009 and early last year CRC paid Bain about $15.4 million in management fees and another $7.2 million in fees related to its acquisition by Bain. The Brattleboro clinic, along with the rest of the Habit OPCO treatment centers, will likely have to cut costs and increase cash flow in order to pay off its debts and contribute its share of these fees.
The private equity business model -- so different from the business model of other for-profit companies -- requires much greater oversight by state authorities to be sure the Brattleboro clinic can continue to fulfill its mission. Private equity loads acquired companies with high debt burdens that must be serviced to avoid bankruptcy. Some PE firms -- Bain among them -- exacerbate this situation by extracting fees from the companies their funds take over. Vermont officials will need to assure that the Brattleboro treatment center is able to retain the resources it needs to make necessary investments in IT and facilities, retain valued employees, and provide effective services to clients.
Elaine McCrate is Professor of Economics at the University of Vermont. Eileen Appelbaum is Senior Economist at the Center for Economic and Policy Research and co-author of "Private Equity at Work: When Wall Street Manages Main Street."