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Addiction treatment is booming and under-regulated

April 6, 2016
by Harry Nelson, JD
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The “old guard” substance abuse treatment facilities must move over. Thanks to parity laws and the Affordable Care Act, the past few years have seen unprecedented growth in addiction treatment providers. Along the way, the volume of insurance reimbursement for addiction treatment centers and capital from investors keen to participate has fueled the launch of new facilities as well as the growth of many existing providers.

While business reports about the recent growth across the field of addiction treatment are positively sunny, there are clouds on the horizon. 

Among other things, many state regulators were not prepared for the growth of the industry and have found themselves overwhelmed and not able to regulate effectively. States are being forced to adapt quickly to provide more robust oversight and challenge practices perceived as unsafe. Similarly, insurance companies have been trying to stem the flow of claim reimbursement by cracking down on practices they regard as fraudulent and abusive. Some states and some insurers are further along than others in their enforcement efforts, but the bottom line is that all treatment providers need to be on notice that increased scrutiny is coming. 

While the overwhelming majority of addiction treatment providers are trying to do the right things, the evolving regulatory landscape presents challenges. Below are some considerations for providers about the compliance issues ahead.

Few rules, if any, being followed 

Unfortunately, state regulators didn’t get the memo on industry growth and were caught short-handed in policing all of the new market entrants—especially in addiction treatment hot spots, such as California and Florida. In fact, just as many new addiction treatment providers were coming online in California in 2012, the state was actually closing down its Department of Drug and Alcohol Programs, transferring key programs over to the Department of Health Care Services. 

While the majority of operators have been doing their best to help clients overcome addiction, the shortage of regulatory enforcement personnel allowed some unfortunate things to happen. In a handful of poorly run treatment centers and sober-living facilities, the unimaginable happened, from patient deaths to sexual assaults to free-flowing drugs. In a few cases, patients dropped out of treatment facilities, relapsed and died in motel rooms a few blocks away. While these problems were the exception, and most facilities operated without incident, these horror stories have given rise to a perception of an industry run amok. 

After all, if any of these incidents had come to light in a more regulated healthcare setting, such as a hospital or assisted living facility, regulators would have been onsite within days demanding actions. 

Regulators have been unacceptably slow to act. Provider Christopher Bathum managed to continue to operate despite multiple accusations that he had forced himself sexually on numerous people in recovery at his facilities and despite fraudulent practices in hiring people in recovery as “interns” to bill insurance companies for their treatment. These kind of cases have produced a wake-up call about safety protocols that has implications for all operators. 

Beyond negligent patient care and risk-laden practices, financial missteps are also a problem that have given drug treatment centers a bad name. 

Insurance companies allege that illegal marketing practices, kickbacks for referrals, overbilling and insurance fraud run rampant, and that regulatory enforcement in most states is only beginning to address the problem. Since addiction treatment is so expensive, those with substance use disorder are in high demand, since facilities can charge hundreds of thousands of dollars for inpatient treatment and sober-living services. Referral kickbacks are illegal in most states, yet according to some observers, patient brokering, the same practice by a different name, remains commonplace. 

The regulatory challenges in drug rehab relate not only to aggressive marketing practices, but also to confusing laws and regulations. Licensure requirements for addiction treatment centers, for example, are all over the map and far more varied from state to state than other types of healthcare or residential care facilities. 

Meanwhile, fair housing laws that permit sober homes to rent beds to those in recovery on the condition that they not use any drugs have drawn both good operators and slumlords. Although most of these unlicensed facilities operate legally, some do not, providing treatment programs, counseling onsite and urine screenings without a license or working in tandem with outpatient clinics, bypassing licensing requirements in the process.

State regulators, insurers starting to pay attention

Although the majority of operators are trying to do things the right way, the perception on the part of regulators is that the current level of safety problems, fraud and abuse can’t persist unchecked. Insurers are getting much more aggressive in investigating fraud through special investigative units (SIUs). 

Some insurers have reported that they are doing more to make up for the gap in states that are not yet doing enough investigating. Insurers are staffing their SIUs with former FBI and law enforcement officials and using data analysis to flag and track down fraud. These SIUs are demanding the recoupment of fees paid to programs based on lack of licensure, certification and accreditation. Insurers are also asking many more questions regarding the appropriateness of claims and the adequacy of documentation for clinical services.




Why do insurance companies view the waiving of copays, granting scholarships, or providing housing to clients in treatment as fraud? Very often, this is the only way clients can afford to get treatment.

Insurance companies view these waivers of patient financial responsibility as a form of fraud or abuse for several reasons. First, they argue that these discounts function as an inducement to the patient to choose a particular provider, in violation of anti-kickback laws, increasing utilization. Second, they argue that it results in a misrepresentation when the provider submits a bill to the insurer (for example, if a client's PPO plan calls for 20% of the billed amount to be patient responsibility and 80% to be the insurer's responsibility, and in fact the amount billed to the insurance company is actually 100% in the billed amount). Third, they object to the provider charging different prices to different people as a form of misrepresentation of their actual prices.

An excellent article. I would only add a note that you missed the regulation of opioid addiction treatment programs, aka methadone treatment. These providers are regulated by federal (DEA, HHS) and state entities and must follow federal rules, accreditation organizations standards and state licensure. Not that these layers would necessarily be capable of preventing all the types abuses written in the article but the presence of these regulatory structure add a degree of certainty that bad actors know there are regulatory authorities out there looking over their shoulder.

Robert Lubran