It’s no secret luxury rehab has been out of vogue for investors for some time now.
At Behavioral Health Business, we’ve written a lot about the decline of luxury rehabs.
And I stick by what we wrote.
As much as horseback riding by sunset seems like a wonderful addition to any treatment plan, I don’t see a mass resurgence of these types of facilities. The vast majority of patients want care that is in-network. Few clients have the means or are willing to shell out tens – or even hundreds – of thousands of dollars for treatment when they could seek a cheaper alternative.
“I haven’t seen a hint of investor interest,” Rebecca Springer, the former lead health care analyst at Pitchbook, told my colleague a few months ago about luxury rehabs.
And substance use disorder (SUD) disproportionately impacts Medicaid beneficiaries. This has led many investors to focus on facilities that care for patients on Medicaid.
Still, if there were to be a time for investors to start reevaluating their considerations of luxury facilities, it could be now when Medicaid is under fire. And there are a few operators and investors placing bets on the space growing.
In fact, some are trying to undo luxury rehab’s image issues, which include a fair share of scandals, and bring the treatment type in the future. While I’m not entirely convinced luxury rehab is where we’ll see the bulk – or even a fraction – of the investments in addiction care, I do think Medicaid’s shaky future could send more investors looking for alternatives.
In this BHB+ Update, I will explore:
– The luxury reimbursement deal landscape
– Why some providers are taking bets on high-end centers
– The risks of luxury providers
The shifting landscape
Addiction treatment could be one of the first industries to see the impacts of Medicaid cuts. While the industry is insulated from some of the potential changes, for example, those with a an SUD would likely be exempt from work requirements, any reductions or changes could still impact providers.
It’s also important to note that the Affordable Care Act allowed for new expansion efforts, enabling states to cover individuals with incomes at or below 138% of the federal poverty level.
Recent research published in JAMA noted that the expansion program covered half of Medicaid recipients treated for opioid use disorder (OUD). Thus, any changes to the program could be dire for these patients — and the providers caring for them.
These potential policy changes come at a time when the addiction treatment industry is already facing market headwinds. Overall, the addiction treatment industry is experiencing a slowdown in deals, driven in part by concerns about inflation. Addiction treatment deals were down by 11% in 2024, according to The Braff Group.
However, it is essential to note that while deals were down, the ones that were being completed were mostly in the lower-cost segment.
“This overall decline is due, in part, to increased interest in lower-cost non-residential community-based programs, which saw a 32% increase in deal flow for the three-year period ended 2024 vs. 2021,” Dexter Braff, founder and president of M&A advisory firm The Braff Group, told BHB.
Yet investors are closely watching the federal landscape — especially when it comes to reimbursement. The uncertainty around Medicaid coverage could drive investment away from lower-cost programs with a high Medicaid population.
The organizations taking bets on luxury
High-end residential programs haven’t exactly been a hot-ticket item for a while now. Deals in the sector plummeted from 18 deals in 2016 to zero in 2022, according to data from The Braff Group.
But some investors are beginning to change their tune. For example, in 2023, a fund dubbed Behavioral Health Acquisitions launched with $85 million in capital to focus on luxury rehab. It kicked off its M&A efforts with Maui Recovery in Hawaii.
While the fund doesn’t plan to focus exclusively on the luxury space in the long term, the founders say it makes sense to start there from a marketing perspective.
“A great example of that is the Marriott, which of course, owns high-end hotel brands. They own the Waldorf, and they also own the Fairfield Suites,” Adam Nesenoff, co-founder of Behavioral Health Acquisition, told me when the fund launched. “Now they’re all very good; it’s all under Marriott, … but they have the full spectrum. Because Marriott established itself as a high-end brand from the start, which allowed them to be very competitive in the border space. So that same type of concept, I want to bring to this.”
In 2024, Nesenoff told BHB that while Behavioral Health Acquisitions’ locations have not secured in-network payers, insurance covers some of his patient’s stays (which can cost up to $85,000 per month). Inking payer relationships could open up the patient population from the .001 percent to the 1 percent, according to Nesenof.
And he also reported that his centers are already profitable.
While the organization may be profitable, I do wonder how scalable the luxury model is. The majority of these luxury facilities have a low bed count. It’s called the 1 percent for a reason — it’s only 1 percent of the population. Although maybe this goes back to advice my mother gave me when I was dating: It only takes one. Now that I’m married, I can confirm it does only take one — and my marriage isn’t scalable either.
Still, some high-end providers are tapping into more than just the American clientele. For example, Borden Cottage, a luxury residential provider in Maine, reports that two-thirds of its clients come from outside the U.S.
“[Borden] is a destination rather than something just appealing to our immediate market for our immediate geographic area,” Tom Rodman, CEO of Borden Cottage, told Addiction Treatment Business.
In order for this model to work, it may take attracting individuals with funds in need of care from all over the world.
The flip side
There are certainly some advantages for luxury addiction treatment providers, such as immunity from reimbursement trends, lower bed count needs and the potential for higher margins. But the bulk of investors remain wary of investing in a provider that is not covered by insurance.
The cash-pay market is volatile and subject to macroeconomic environments.
Recently, I wrote a piece about cash-pay therapists facing potential headwinds in the face of a recession. And to put that in perspective – I was writing about therapists charging $150 per session – that’s a far cry from the thousands a month people are shelling out for luxury rehab.
Even so, as wealth disparity continues to rise in the U.S., some high-net individuals could swing it.
And for providers looking to try their hand at providing services set against a Malibu sunset, now could be the time as investors are looking to diversify in the face of potential reimbursement pitfalls.
Companies featured in this article:
