Evolution in the Behavioral Health Market

ChallengeThe healthcare market is an ever-changing entity.  Some sectors can quickly become popular among investors, while others can possibly fade away in interest after numerous years of interest.  Currently, according to industry experts, there has been a trend in the last five to six years of private equity investors showing interest in the growing market of behavioral and mental health.

Amber Walsh, partner, Chair of the Healthcare Department with McGuire Woods says that the interest in investments in behavioral health stem from various factors.

“The first would be that behavioral health can encompass a lot of different service types and facility types.  That can be anything from in-patient psych hospitals, to a lot of the outpatient addiction treatment centers;so, substance abuse, eating disorders and those sorts of issues,” Walsh says.

“For all of those, I think one of the driving factors is that the social stigma around these conditions is lessening, but also, I think there is a public awareness of the importance of treating these conditions as well.”

Walsh says the second factor is being able to actually identify and diagnose conditions, and recognizing that there are acceptable treatments for those conditions.

“That is not for every condition certainly, that is a global concept, but that is also driving the practice of mental health and behavioral modification therapy,” Walsh says.

Although those factors are definitely key, Walsh says a big factor in investments is there are more available payments.
“A lot of payor programs, commercial pay, and government pay, are now accommodating these treatments and paying for a portion of them.  There are a number of different rules and laws on a state by state basis and federal basis, that would require plans to offer certain of these services.  Not only is it easier to identify and treat, but there is now payment for these treatments,” Walsh says.

“It’s still a fragmented market, so from an investor’s standpoint it’s very attractive for a private investor to see a fragmented market where there is money to be made but they can really add a lot of value as an investor by taking all of the fragments of providers, and consolidating them in a way that is logical and thoughtful and can save on expenses making these businesses a scaleable platform.”

Mark Covall, President and CEO of The National Association of Psychiatric Health Systems, says that in the current market, the demand for mental health and addiction treatment services is substantial.

“Most people that have an addiction or mental health problem do not get treatment.  So, as a treatment provider, there is a lot of opportunity to serve many people who have these problems.  Also, with the increase in coverage through the ACA, and with the parity legislation and rules that require health insurers to provide this coverage on par with medical services, we now know that there will be a lot more people who will actually have coverage and it will be affordable,” Covall says adding that as an investor, a potential candidate would be investing in a company, or treatment facility that really has a very high ceiling.

“I think the other interest is that the mental health system, different from the delivery system for other medical conditions, has been dominated by the public mental health system.  As insurance changes to where we have more private insurance, or insurance through Medicaid expansion, it provides an opportunity for the private sector to get more directly involved in the delivery of services that otherwise, have been provided by the public sector.  The private sector now has real opportunities to create efficiencies, to build a bigger platform, and be able to increase its market share,” Covall explains.

Jason Shafer, a partner at HCP & Company, a growth focused private equity firm based out of Chicago has been interested in behavioral health investments since 2008.  He says that although there were deals made between now and then, he believes the real acceleration in interest has been seen over the last couple of years for a few reasons.

“One, once other private equity firms see behavioral companies trade, and see them trade successfully, they start focusing a little bit more, doing research and digging in to better understand the opportunities in the market place.  I think the success of Acadia really brought a lot of attention to the industry,” Shafer says.

“The second thing is there were a lot of opportunities that came out of the ACA and many healthcare services investment professionals focused on investment opportunities created by the dislocation in the market caused from this regulation, such as retail or consumer focused healthcare services and healthcare IT investment opportunities.  Once those investments were executed and those markets became more mature, capital flows to other areas of healthcare and behavioral benefited from this shift.”

Walsh says that based on the fragmented market there are also risks involved in such investments.

“The fragmentation aspect also means that it is a little bit harder to vet out the good players.  It takes a lot of work to identify the particular targets in clinics that will be well-suited into rolling up together into a consolidated platform.  Some investors are really good at that.  The investors that are more platform build investors know how to do it and do it well, but it takes time and has its own set of risks and rewards.  It may be less expensive to build, but there is some risk that comes along with doing that,” she says.

Where Behavioral Health has Been and is Going

“I believe a lot of the markets have dried up in the sense that low hanging fruit has been plucked by existing acute psychiatry hospitals. Now, investors are shifting to other sectors.  Generally speaking, behavioral has always been a secondary focus where investment has predominately focused first on medical services.  Behavioral health has always been an afterthought.  I think that happens throughout the entire healthcare ecosystem, not just in private equity, and it is a natural evolution to now focus on a whole person’s medical and behavioral needs,” Shafer says of the current market.

Shafer says the opportunity to invest is still there broadly with the huge supply and demand imbalance across all behavioral subsectors.

“Demand is increasing across the board based on reduced stigma of behavioral disorders.  More people are utilizing services, but there is still not enough capacity throughout the system to meet the demand. That imbalance is a good place to invest, because now you have good growth opportunities with good margin profiles as well,” Shafer says.

He does add that he feels some of the more popular areas in behavioral health are now saturated, making potential investments a financial challenge.

“For example, acute psych;  I think that is probably one of the more mature sub-sectors within behavioral, and six years ago there were a lot more green field opportunities to get into new markets where there was truly an under-bedded need and no other provider in the marketplace,” Shafer says.

“Addiction treatments is another huge sub-sector within the behavioral space.  I think that is a little bit further down the S Curve for the industry, meaning that it is not yet mature, but there have been seismic shifts for companies operating there.  The requirement to have in network contracts is a huge trend.  As insurance companies are consolidating, they require their providers to be in network.  Six years ago, the vast majority did not require it, and you could make outsize returns utilizing an out of network strategy.  I think that is quickly diminishing.  Another area of meaningful change is the recent reduction to reimbursement for urinary analysis.”

Shafer says that people in the business of investments that are looking for these loop holes will find they are shutting.

“Going forward, as with everything in the business of healthcare, it is going to become more challenging in the sub-sectors that have already been identified and where investment has already occurred.  There will always be new behavioral opportunities in the future that will be created by advancements in clinical modalities and pharmaceuticals.  I think fundamentally what is going to change across all current and future behavioral sub-sectors is the requirement from payors of all types, including government, commercial and self-pay, to receive the value that they are paying for.  There needs to be solid outcomes,” Shafer says.

As far as the future of investment in behavioral health, Covall says that he believes investor interest in the sector will continue in the coming years.

Covall says the important aspect of advancement is going to be investing in programs that meet the kind of quality standards that are going to be necessary to continue to grow and prosper in an environment where payors are going to be looking for more accountability, are going to focus more on outcomes, and on quality improvement.

“I think that that is where the focus needs to be.  If you can develop programs and improve programs you will be in a position to continue to be an important part of the private network as a developer,” Covall says.

“The reason it’s going to continue, in my view, is the tremendous unmet need that exists.  Also, the reduction in stigma, both for alcohol, and drug abuse, and mental health, will allow a lot more people who would otherwise not seek treatment, to seek treatment.  The need is big but the amount of people actually receiving those services is very low.  That is a good case for a growth area.”

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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