New documents reveal how Delphi Behavioral Health Group went from boom to bust.
After two rounds of private equity backing, shrinking payer rates for out-of-network substance use disorder care squeezed the Fort Lauderdale, Florida-based addiction treatment provider out of business.
The soon-to-be-defunct Delphi Behavioral Health Group first revealed its demise in late January. It told Florida officials it would shutter all its locations in the state as part of a larger wind-down.
Documents show how shifting trends can undo fast-growing companies in high-demand sectors. In this case, Delphi Behavioral Health Group was on the wrong end of the shift away from luxury addiction treatment. It also put itself on shaky operating ground by going after out-of-network reimbursement rates.
Delphi Behavioral Health Group initiated Chapter 11 bankruptcy following the shutdown announcements. The proceedings reveal how far gone the company has been for years and how things unraveled for the once-growing company.
Today, Delphi Behavioral Health Group has shuttered all but three of 15 facilities. Those facilities will be up for sale, according to documents from the U.S. Bankruptcy Court of the Southern District of Florida.
The company once operated in California, Florida, Maryland, Massachusetts and New Jersey.
As of Feb. 6, Delphi Behavioral Health Group employed 423 employees. But by then, Delphi had closed 10 facilities. The corporate entity of Delphi is expected to shutter in June, the bankruptcy court documents state.
The bankruptcy proceedings and other court documents reveal a company struggling to maximize two rounds of private equity investment.
Delphi Behavioral Health Group has engaged with several firms to aid in the bankruptcy proceedings. These include the New York City-based advisory firm Getzler Henrich & Associates LLC, which specializes in overseeing distressed assets.
Edward Phillips, managing director of Getzler Henrich & Associates, has taken over as interim CEO of Delphi Behavioral Health Group, according to a declaration filed with the courts. He replaced CEO Michael Borkowski, who resigned on Feb. 4. Borkowski held the role briefly, about five months after his promotion from CFO was announced.
Delphi Behavioral Health Group’s history
Delphi Behavioral Health Group was founded in 2016. The company’s founders previously opened facilities in partnership with New York City-based BlueOx Healthcare Partners. BlueOx engaged with Delphi and its founders starting in 2014.
The growth equity resulted in Delphi Behavioral Health Group going from 40 beds in 2014 to 300-plus beds in 2017, Oded Levy, founder and president of BlueOx, wrote in August 2018. It also took revenues from $20 million to $150 million.
BlueOx identified the need to address the opioid epidemic in 2014, Levy wrote. Delphi’s “boutique-like” approach included the acquisitions of other, “struggling facilities,” while building Delphi’s own facilities in different locations to expand nationally, he wrote.
In October 2017, Delphi Behavioral Health Group sold to the Halifax Group as part of a leveraged buyout. The New York City-based firms Deerpath Capital Management and Brightwood Capital Advisors provided debt financing as part of the deal.
The next year, Halifax Group financed the expansion of Delphi Behavioral Health Group into Massachusetts, New Jersey and Pennsylvania through the acquisition of Princeton Junction, New Jersey-based Summit Behavioral Health. The deal – announced in April 2018 – was financed by additional equity and debt financing.
In a lawsuit separate from the bankruptcy proceedings, ex-Delphi Behavioral Health Group CEO Borkowski said in a deposition the company started having trouble meeting payroll obligations as soon as 2018 because of reimbursement rate changes from its commercial payer partners.
The bankruptcy court documents state these struggles started soon after the leveraged buyout. Before the reductions, Delphi Behavioral Health Group was in a precarious financial position “as net income after payment of expenses and debt service was modest.”
Halifax Group eventually surrendered its equity in the provider due to Delphi Behavioral Health Group defaulting on debt terms in April 2020. At that point, the lenders were owed $110 million. After an out-of-court restructuring and a debt/equity swap, the restructuring reduced Delphi Behavioral Health Group’s debt load to $26.5 million.
Also in April 2020, the Dallas-based investment firm Capital Southwest Corp. (Nasdaq: CSWC) acquired equity and loaned Delphi Behavioral Health Group money.
However, the struggles continued.
By August 2021, Delphi Behavioral Health Group needed to restructure its loan terms and get protective advances from lenders to limp along. It did so eight times with Brightwood in order to keep Delphi Behavioral Health Group going, according to the bankruptcy court documents. It also restructured its loan with Capital Southwest in April 2021, according to financial filings.
The advances and loan term restructuring increased the money owed to Brightwood to $49.5 million.
A year later, Delphi Behavioral Health Group started a sales process with the Washington, D.C.-based firm FTI Consulting Inc. (NYSE: FCN). By December 2022, it had approached 54 potential buyers, initiated confidentiality agreement-bound talks with 15 of them, and secured six non-binding letters of intent that contemplated various components of Delphi’s business, according to the documents.
The company executed none of the agreements and opted for a “stalking horse” offer of $15 million for the three operational facilities from Brightwood, pending other sale processes initiated by the bankruptcy court.
Powerful trends at play
The 2018 “rate compression” for out-of-network care had a devastating impact on the provider, according to court documents. However, that impact was magnified by the onset of the COVID-19 pandemic and the shrinking demand for a destination or luxury addiction treatment.
“That delicate balance was deeply disturbed when payors began reducing reimbursements rates … for inpatient and outpatient services rendered by out-of-network providers like the [Delphi Behavioral Health Group,] particularly at the Florida facilities,” the bankruptcy documents state.
While the company successfully transitioned to an in-network model, the difference between the lower payments was not enough to offset the costs of caring for a higher patient volume.
“While the Summit acquisition increased cash flow and improved liquidity, it was not enough to offset the negative impact that rate compression had on the revenue stream,” the documents read. “The company was overleveraged and unable to service [the lenders’] debt.”
Delphi Behavioral Health Group also shuttered its in-house laboratory service, QBR Diagnostics LLC, as payers lowered rates for testing services and pressured Delphi to use labs the payers preferred.
“In my opinion, the equity valuation of [Delphi Behavioral Health Group] decreased 100%” following the reduction in payer rates, Borkowski said in the deposition.
Then with the onset of the pandemic in March 2020, interstate travel slowed. The Delphi facilities in California and Florida particularly suffered. Across the country, COVID “complicated the consistency and degree of in-person treatment,” the bankruptcy court documents state.
In 2020, the company’s net income totaled $71.7 million, according to the bankruptcy court documents. That flipped to a net loss of $4.5 million in 2021 and $18.5 million as of November 2022.
Luxury addiction treatment’s position
Borkowski said in his deposition that “profitability of certain centers — or lack thereof — [and] geographic location of certain facilities compared to the rest of the organization” were the top motivators for closing its facilities.
The challenges of Delphi’s destination business reflect decreasing interest in that segment of addiction treatment at large by private equity investors and PE-backed acquirers, according to The Braff Group.
From 2018 to 2022, “high-end residential” facilities have seen one of the steepest decreases in both the volume and rate of decrease in the M&A space, according to its 2022 behavioral health report.
“And given its cost-effectiveness and demonstrated outcomes, medication-assisted treatment continues to be the most favored segment,” Braff’s report states. “But value- to mid-range residential treatment is closing the gap as buyers embrace the fact that affordable private insurance and Medicaid-funded services are where the people are, and hence where the cumulative demand and long-term prospects are the greatest.”
Despite the drop in deal volume in high-end addiction treatment, interest remains for some.
In February, an investment fund dubbed Behavioral Health Acquisitions — led by father-and-son team Dr. David Nesenoff and Adam Nesenoff — revealed it secured $85 million in capital and acquired Maui Recovery. The two already own luxury rehab Tikvah Lake, which is based in Sebring, Florida.
The shift away from luxury addiction treatment facilities is a more recent phenomenon.
From 2012 to 2016, when most deals in the substance use disorder space were in high-end programs, according to Braff data.