Side Effects: The Opiate Crisis & the Child Welfare Sector

Rachel Helman

September 13th, 2018

Source: East Liverpool Police Department

Two years ago, an publicly released image became the face of the opiate epidemic: a car with a child in a car seat, with his parents overdosed in the front. The opiate crisis has destroyed countless families in the United States. Deaths from drug overdose increased by nearly 50% in the US between 2012 and 2016 overall, with midwestern states like Ohio experiencing increases of over 100% (CDC). The rise in opiate addiction has led to changes in a multitude of industries, from detox centers to methadone providers to psychiatric institutions. In particular, the opiate crisis has led to a sharp uptick in the number of children entering Child Protective Services. The upset in demand for service providers may signal opportunity to investors, particularly as private providers become more common, but potential investors should be wary of the issues inherent in systems associated with child welfare and addiction services.

 

The child welfare and adoption industry has an annual revenue of $15.9 billion in the US. The industry directly employs upwards of 200,000 people, and demand continues to increase annually by about 3% on average. Before the crisis, foster care services were already strapped for resources. Today, children are increasingly being displaced out of their home counties or even states, often through privatized foster care services like The Mentor Network, a publicly traded foster care system. The number of entrants into the foster care system has risen by nearly 10% since 2012, according to the Children’s Bureau, and the total number of children in foster care has risen by over 10% in that period. In areas hit especially hard by the opiate crisis, like Indiana, entrance rates have risen as much as 67%. The increasing demand for placements and homes has led to a strange phenomenon, with institutions appearing, seemingly out of nowhere, to provide mental health and substance abuse treatment, trauma therapy and private foster homes.


The child welfare industry is well established, with cemented community partnerships and local respect. It is also considered to be a mature market, according to market analysts. However, it is also an industry in crisis. Demand is rising for services at a rate that local providers simply cannot meet. The opiate crisis is placing immense pressure on an already stressed system. In a more elastic market, supply could rise to meet demand. But child welfare is necessarily a highly inflexible market, with a great deal of red tape that makes it difficult to expand services in an efficient and timely manner. For example, social workers require intense training before being working with children and families. Foster homes also need to be vetted for stability and safety with regular check-ups and evaluations. Service providers must meet state and federal guidelines, which can be strict. The least costly option for the state is reunification, but often parents in recovery from opiates do not meet court ordered timelines, leading to increased need for foster homes. Unfortunately, state resources like foster homes have dried up. As a result, more and more states are experimenting with private providers, which are for-profit and may not have the same standards of care as state-run providers. More and more of these private firms have been setting up shop, turning the social program into a marketplace, each child carrying a price tag.

 

In such conditions, child welfare and its related industries may represent a wise investment. After all, the opiate crisis is likely to have long term repercussions and growth in revenue exhibited by privately owned providers is impressive. American Addiction Centers, a national system of treatment centers operating in seven states, had an increase in revenue of nearly 400%, from $28,275,000 to  $317,641,000 between 2012 and 2017. Its stock is currently trading for $9.76. Given the high propensity for relapse among addicts, these industries are likely to continue to grow, and addicts’ children are likely to continue to be taken into foster care. Additionally, the government has severely cut back on funding to the Administration for Children and Families, cutting the budget by $7.9 billion between 2017 and 2018. The result has been an increased reliance on private donations and endowments, making it likely that child welfare will be moving towards a privatized model in the future in order to increase revenue.

 

Lastly, the social services market is highly sensitive to societal and economic shifts, particularly increased poverty and substance abuse trends. While the US is currently in a period of economic growth, the growth is mainly impacting the upper class. If income for lower- and middle-class Americans falters, we will see a rising number of children in care, according to market reports.

 

Of course, there are very real problems surrounding investment in this industry. Falling federal funding may make child welfare services less strict about requirements, increasing the elasticity of the market. While this trend is unlikely to benefit children, it may serve to increase the number of providers in the industry. The result could be a stabilization of supply. More pertinent, however, is the likelihood of a backlash against privatized systems. Earlier in this article, I mentioned The Mentor Network, which has locations in 35 states. The Mentor Network came under public and congressional scrutiny last year, when it came to light that 86 children had died under its custody in the past decade. There is evidence that the company did not vet foster homes thoroughly, nor administer necessary oversight. Its value has been consistently falling since the investigation. Private firms simply do not have the same priorities as state run welfare agencies, and even as more states turn to the private sector in desperation, it seems that this system cannot be sustained in the long term.

 

The privatization of the child welfare industry is likely to continue, as long as current trends hold. We are likely to see an increase in for-profit trauma treatment, mental health counseling, and recovery centers as well. However, it seems unlikely that a completely privatized child welfare sector would be viable in the long term. Private agencies have no incentive to reunify children with their parents or relatives, which is usually at least attempted in state children’s services agencies. Profit is made by stalling recovery and reunification for as long as possible, and by cost cutting when possible. Already, we have observed the potential negatives of under-regulated private foster homes in the case of The Mentor Network. It is unclear how the future will look, if the government’s budget for child welfare continues to fall while the number of children in care rises. Investors should remain wary of unloading capital in a market relying so heavily on government policies.

Disclosure:

Investing involves risk, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Opinions reflect the market conditions when written.