Industry insiders have pushed back on the U.S. Senate Finance Committee’s highly charged report on the at-risk youth industry, claiming it failed to address the key drivers of abuse in the industry and chart a clear path forward after creating a public spectacle.

Despite the lack of a clear path forward, the report and comments by the committee suggest that Congress is considering major reforms down the pipeline.

On June 12, the committee released a report and held a hearing that contends this industry has “figured out exactly how to turn a profit off taxpayer-funded child abuse,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said during the hearing. Wyden vowed to take action against the industry, going so far as to limit federal funding for these facilities and increase scrutiny.

“I want to work in a bipartisan way to shut off the firehose of federal funding for these facilities to put an end to this cycle of abuse,” Wyden said. “In order to get a dime from Medicaid or any other program in my jurisdiction, all of these facilities are going to have to start providing actual care.

“Systemic failures at even a handful of these facilities are an indictment of the whole model. It’s pretty simple: a facility shouldn’t be getting a cent of taxpayer money if it can’t prove it’s providing high-quality care.”

Wyden plans to introduce legislation in the coming months that promises to increase safety, oversight and access to community-based services. What that legislation will look like is unclear. Wyden’s office told Behavioral Health Business it was “too early to share at this point” how it would address the matters at hand.

Experts told BHB that the lack of any legislation or other regulatory effort undercuts the assertion that this report and hearing were conducted in a good faith effort to improve the industry.

“This is not the kind of solid policy development process that leads to good legislation: This will not move things forward because it is so partisan and so biased,” Shawn Coughlin, president of the National Association for Behavioral Healthcare, told BHB. “I think that Chairman Wyden was trying to check a box … He was trying to show that he could be aggressive.”

The National Association for Behavioral Healthcare is a Washington, D.C.-based advocacy group whose members include some of the largest and most prominent behavioral health organizations in the U.S. Some of its members were named in the report.

Coughlin added that the extremity of painting the entire at-risk youth industry also shows heavy bias and a misunderstanding about what the behavioral health industry faces when treating these patients — individuals that are often identified as having severe behavioral health needs that make them a harm to themselves or others.

“The report also wholly fails to recognize the thousands of adolescents that have been successfully treated in our facilities over the years whose lives have been dramatically enhanced and quite possibly saved as a result of the care provided,” a statement from Universal Health Services (NYSE: UHS) reads.

Incidents at UHS facilities were highlighted in the report, including an incident that resulted in a $535 million verdict against the company.

Fundamental funding misunderstanding

One foundational misunderstanding the report presents is that this specific health care segment is notably profitable. In limited cases, it can be, but that happens when government payers aren’t in the picture. What’s more, that misunderstanding obscures governments’ role in contributing to a key driver of the problems the at-risk youth industry faces.

“They throw around at the committee hearing that these places are making money hand over fist, and that is not the case,” Ryan Kaczka, managing director for the M&A and company development firm Strategique Partners, told BHB. He has also worked in several top executive roles in behavioral health organizations. “It is such a hard business to be in, especially when taking state funding: you’re getting paid so little.

“That’s where there is an avenue. If we’re going to increase reimbursement, it should be in those areas — not to line the pockets of the companies, but to actually [help facilities] be able to afford the overhead and expenses that’s required to take care of such an at-risk population,” he said.

The low funding levels provided by state and local governments are often provided on a fee-for-services basis. This in turn leads organizations to overcome thin margins by increasing patient volumes while at the same time holding costs steady. The incentive of this system is to create some of the situations in the report, and the finance committees decry underpaid, unqualified staff caring for too many children. Many point to the high-volume, low-margin setup of the government funding model as one that limits organization’s ability to provide competitive wages for top-flight staff and staff training.

“If ever there should be a population that ethically and morally requires value-based care, it’s at-risk youth: that should never be a pay-for-volume situation,” Stacy DiStefano, CEO of Consulting for Human Services (CFHS), told BHB. “We should focus all of our dollars and attention on true value-based care and paying for good, quality clinical outcomes. And that underpins so many things … If we don’t do that, not only do we have all the incidents where we continue abuse and neglect, and all the things that we’ve seen, these folks are going to cost the system millions and millions of dollars because we didn’t address their care correctly as a kid.”

The report also appears to come with only middling support from Republicans. The only member of the GOP to comment on the report was Senate Finance Committee Ranking Member Mike Crapo (R-ID), who read a statement at the committee meeting that largely expressed his support for victims of abuse and agreed with the call for reform.

Coughlin points to Republican silence on the topic as an indictment of a lack of partisanship on the issues. However, no Republican has publicly denounced the report.

The challenges of access and regulation

All sources BHB engaged with about the report agreed that strong oversight was justified to ensure the safety of children in the at-risk youth industry. But they note that the industry is already highly regulated, even when enforcement is lacking.

“Much of what they (the Senate Finance Committee) are calling for, we are already subject to,” Coughlin said. “We’re already subject to staffing regulations at the state level, and the national level, there are recognized entities that accredit them.”

But those regulations are only as effective as states and other oversight bodies enforce them and to the level that enforcement has teeth. Kaczka said that states sometimes don’t go far enough in enforcement actions with existing regulations, if enforcement happens at all.

“I’m not for overregulation by any means, but there are definitely instances where you have to throw down the hammer,” Kaczka said. “A lot of states are taking it easy, but also falling behind. Some of these [regulatory] bodies are so backlogged that a facility has a license renewal inspection in, let’s just say, January, but the state won’t get out there for six months to a year later.”

Yet, in the U.S., the severity and volume of youth mental illness are on an upward trend. At the same time, access to the most acute services (at inpatient facilities, for the most part) has declined. State hospitals, for example, are shuttering beds, leading to the number of state hospital beds dropping to 10.8 per 100,000 people, an 8% decrease from 2016 to 2023.

“Systemically, there appears to be no viable alternative to congregate, residential settings currently available,” Josh Marquez, co-founder and CEO of Compassion Recovery Centers, told BHB. “This is due to resource limitations and the need for high levels of care that in-home services cannot adequately provide.”

One study found that residential treatment access for at-risk youth is itself in decline: the number of youth served in these facilities has decreased by 78% due to a 61% reduction in these programs since 2010. Further, the same study finds that suicides in youth increased during that period and that these facilities and hospitals have comparable levels safety deficiencies.

Part of the problem with the national behavioral health industry-regulatory complex is that governments have not invested in services that are not in institutional settings, such as residential treatment centers.

Starting with the Kennedy presidential administration, the federal government has pushed government-backed and private health care providers to treat patients in the least restrictive settings possible. However, the lack of commensurate investments in community-based behavioral health services while the federal and state governments were pushing deinstitutionalization led to the shortage of acute care resources the U.S. faces today.

The report calls for greater investments in community-based services to decrease the reliance on residential treatment centers. While a buzzy topic in behavioral health industry reform, it belies the reality of increasingly severe mental health needs in most communities.

“That sounds like just running in a circle. The residential treatment centers have a higher level of care and acuity because that’s what the patients need,” Kaczka said. “If that’s not working, dropping them down to a community-based system with even less oversight and direct care and regulation is going to increase the number of issues because that is a low-level of care with lower levels of reimbursement and oversight.”

Still, the behavioral health industry recognizes that it is its responsibility to solve the problems that give rise to abuse.

“Our industry can and must do better, especially given the critical role that residential youth treatment centers have in addressing our nation’s behavioral health crisis,” a representative of Acadia Healthcare Co. Inc. (Nasdaq: ACHC) said in a statement.

Acadia Healthcare agreed to pay $400 million to settle three cases related to abuse at a now-defunct New Mexico facility.

While controversial, the report and committee report may spur further action within the industry to change. Further, the relative underinvestment in the at-risk youth space compared to the relative need creates a compelling opportunity for private investment.

Interest in meeting the increasing demand for — as well as going after increased funding for — youth-specific mental health services may drive increased activity in the small and somewhat sleepy industry from an investment perspective.

Data from the M&A firm The Braff Group shows that the number of deals in the at-risk youth space in the five years ending in 2023 was nearly the same as the previous five-year period. However, this segment accounts for a tiny percentage of all deals in the behavioral health segment in any given year. 

To some extent, the outcry from patient rights groups and other advocates has dissuaded casual investment in the space and prompted the industry to adapt due to so-called “headline risk.” One example is Embark Behavioral Health, an industry leader in the space, shutting down its wilderness programs to focus on more outpatient and intensive outpatient services.

“The findings (of the report) underscore a need for new platforms to emerge that can better address the ongoing adolescent mental health crisis, which will require investment,” Hayden Rosenthal, vice president at Intrepid Investment Bankers, told BHB. “If anything, this may create more opportunities for differentiated providers in the adolescent space to stand out and attract greater interest in the market.”