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AdCare buy would add Medicare and Medicaid to AAC payer mix

September 14, 2017
by Julie Miller, Editor in Chief
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AAC Holdings, Inc. announced that it plans to acquire AdCare, Inc. for $85 million. The transaction adds a hospital, a residential treatment center and seven outpatient centers to the AAC portfolio while at the same time adding Medicare and Medicaid to its payer mix.

For the 12 months ending June 30, AdCare's breakdown included approximately 59% of revenue from Medicare reimbursement, 22% from in-network contracts and 19% from Medicaid reimbursement.

“This will be the first time AAC Holdings has done any Medicare/Medicaid payer mix,” Kirk Manz, chief financial officer, tells Behavioral Healthcare Executive.

Manz says offering services to Medicare and Medicaid beneficiaries has been part of the company’s long-term plan. Many observers, however, are concerned about the future of Medicaid reimbursement because of recent policy proposals in Washington that would slim down the program’s spending.

“We have the benefit in the context of the addiction treatment industry and the opioid epidemic that’s going on in the United States that this happens to be one of the few bipartisan issues in Washington as it relates to healthcare,” Manz says. “We feel confident as to both the current reimbursement rates for Medicaid and Medicare and what we would expect those to look like in the future.”

Levels of care

AdCare’s Medicare inpatient hospital rates are comparable to AAC’s current commercial insurance rates. On the outpatient side, AdCare’s total outpatient volume is double AAC’s but with a lower price point of $76 per visit, compared to AAC’s $359. After the transaction, the combined revenue could average $173 per outpatient visit, according to the company’s analysis.

It’s anticipated that lab services for AdCare will be brought in-house using AAC’s existing labs, which would create cost savings.

AAC payer mix

With this deal, by the end of 2019, AAC’s reimbursement breakdown could shift from 77% out-of-network as it is currently to 40% out-of-network. Meanwhile, in-network could grow from 16% to 40%, while its government-paid services could account for 15% of its new structure.

Currently, AAC operates more than 1,300 beds nationwide with 427 in the pipeline, including AdCare’s 166 existing beds in Massachusetts and Rhode Island.

“Scale matters in this industry, looking at where we see the industry trending,” Manz says.

The ability to combine resources produces an advantageous deal, and AAC looks for acquisitions that complement the enterprise. In the AdCare deal, the advantages include AdCare’s established market presence, the existing leadership team and the experience with government payers, he says.

The deal also will include a national referral phone line (1-800-ALCOHOL) and other toll-free numbers that generate approximately 50,000 calls per year. It’s expected to close in the first half of 2018. AdCare generated revenue of $51 million with adjusted EBITDA of $8.5 million in the 12 months ending June 30.