The luxury rehabilitation industry, once a thriving sector attracting substantial investments, has recently found itself in a complicated position. High-end treatment centers, renowned for their lavish amenities and exceptional care, are encountering a period of stagnation. With industry scandals, shifting approaches to addiction treatment, and a cooling of investor enthusiasm, luxury rehab centers are struggling to maintain the attention they once commanded. However, Adam Nesenoff, co-founder of Behavioral Health Acquisitions, remains a staunch advocate for the potential of luxury rehab centers as a sound investment. Despite the current landscape, he is convinced that these facilities represent an excellent opportunity for those who can navigate the challenges.
A Changing Industry Landscape: From Booming to Stagnation
In 2023, Adam Nesenoff and his father, David, founded Behavioral Health Acquisitions as a vehicle to invest in high-end rehabilitation centers. The business model aimed to capitalize on the lucrative market of luxury rehabs, which can charge up to $112,000 per month for services. This was a market that once seemed like a golden ticket for investors. For a period, the high revenues per bed made luxury treatment centers appear to be a highly profitable sector with relatively low risk.
However, convincing others that this industry still represents a solid investment has proven to be difficult. According to Rebecca Springer, lead healthcare analyst at Pitchbook, “I haven’t seen a hint of investor interest.” This is a stark contrast to earlier years when the sector was enjoying steady growth. Mergers and acquisitions in residential high-end substance use disorder (SUD) facilities reached their peak in 2016, with 18 deals. Palm tree-lined rehab centers in Florida, Southern California, and Hawaii became the focal point for many investors looking to enter the behavioral health space.
But the years that followed told a different story. In 2017, mergers and acquisitions dropped to just 10, and in 2018, they further declined to eight. By 2022, this number reached zero. The market for high-end rehabs was cooling, and investors were starting to turn their attention elsewhere. The luxury rehab industry trends that had once driven massive investment are now in a phase of reevaluation.
The Broader Economic Impact: Global Events and Changing Investor Sentiment
Several factors contributed to this shift. The global economic landscape has played a significant role in cooling investor enthusiasm. Global investment dropped in early 2022 amid political and economic challenges, such as Russia’s invasion of Ukraine and a rising inflation rate. These external pressures led to a tightening of capital flow, and luxury rehab centers, once viewed as a high-margin industry, suddenly seemed less attractive to investors who were now more cautious with their spending.
The investor community began to pivot towards different models within the behavioral health space. Specifically, outpatient providers that utilized Partial Hospitalization Programs (PHP) and Intensive Outpatient Services (IOP) became increasingly appealing. These treatment models, often more affordable and scalable, offered a broader patient base and the promise of capturing a more extensive market share. In 2014, only three deals involving outpatient providers were made, but by 2023, this number had skyrocketed to 17, according to data from The Braff Group.
Luxury rehab centers, on the other hand, continued to cater to a niche market. Brad Mostowy, vice president at Fifth Third Securities, notes that the initial appeal of high margins in luxury rehabs has faded. As outpatient models became more prevalent, investors began to see these as more sustainable, as they allowed providers to reach a larger and more diverse population. Outpatient providers were also more likely to secure in-network coverage from insurers, making them a more reliable investment opportunity. This shift in focus highlights the evolving luxury rehab industry trends that are reshaping investment priorities in behavioral health.
The Insurance Dilemma: A Major Obstacle for Luxury Rehabs
One of the key challenges that luxury rehab centers face is the issue of insurance reimbursement. Luxury treatment centers, especially those that charge upwards of $85,000 per month for services, often struggle to secure in-network payers. In-network coverage is critical for ensuring a steady stream of clients, as it provides more predictable revenue for providers. Without it, rehab centers must rely on out-of-network insurance, which can be a significant barrier for both investors and lenders.
Nesenoff’s own centers in Florida and Hawaii, which offer high-end treatments, face this exact challenge. Although insurance covers some of his patients’ stays, he has not been able to secure comprehensive in-network payers. This has led to skepticism from investors who are wary of the financial instability that out-of-network reimbursement can cause.
Nancy Weisling, senior advisor at The Braff Group, confirms that this issue of insurance reimbursement is one of the primary reasons for the decline in investor interest. “The simple answer is out-of-network insurance reimbursement. Buyers and investors don’t like this payer source,” Weisling explains. Lenders are also hesitant to support luxury rehab centers that do not have the security of in-network insurance deals. As Nesenoff points out, luxury rehab is “not even a discussion” for some banks, as they see in-network coverage as a key asset for long-term success.
These dynamics have caused some investors to pull back, as the luxury rehab industry trends no longer align with their priorities of stable, predictable returns.
The Case for Luxury Rehab Investment: A Contrarian View
Despite these setbacks, Adam Nesenoff remains committed to the potential of luxury rehab centers as a profitable investment. As a contrarian investor, Nesenoff sees value where others see risk. He believes that enhanced insurance coverage will ultimately expand the client base for luxury rehab centers, making them more financially sustainable. Despite the current challenges, Nesenoff asserts that Behavioral Health Acquisitions is already profitable, and he remains optimistic about future growth.
In fact, his company has half a dozen deals in the pipeline to acquire additional centers, and Nesenoff believes that 2025 could see him become one of the biggest buyers in the luxury rehab space. “I feel like this year I might be one of the biggest buyers in the space,” he says, confident that as the insurance landscape evolves, luxury rehab centers will once again become an attractive option for investors.
Nesenoff’s strategy is based on the belief that the luxury rehab industry trends will eventually rebound. As he continues to invest in high-end centers, he is betting on a future where insurers will be more willing to cover luxury services, thus opening the doors for even more profitable ventures. His belief in the long-term potential of the sector remains strong, and he is positioning his company to capitalize on future growth.
Conclusion: A Niche Market with Strong Potential
While the luxury rehab industry faces significant challenges, including insurance issues and a reduction in investor interest, it is not a market that should be written off entirely. For investors like Adam Nesenoff, luxury rehab centers represent a unique opportunity to cater to a niche market with the potential for high returns. While the peak of investment interest may have passed, Nesenoff’s persistence and forward-thinking approach highlight that there is still significant potential for those willing to navigate the complexities of this industry.
As the landscape continues to evolve, it is likely that luxury rehab centers will find new ways to adapt to the changing demands of insurers and patients. For investors who can see beyond the current challenges, the luxury rehab industry trends point toward potential for profitable and sustainable growth. Luxury rehab centers could remain a profitable and valuable part of the behavioral health investment ecosystem for years to come.
