Copyright 2024, American Health Law Association, Washington, DC. Reprint permission granted.
Written by Clinton Flume, CVA and Mason Motal
Behavioral health mergers and acquisitions (M&A) recovered significantly through the first quarter of 2024 but have since leveled off. Based on data gathered by VMG Health, these deals are up approximately 6% compared to year-to-date (YTD) September 2023. The rise in deal volume can be attributed to the emergence of mental health and substance use disorder treatment platforms coming to market, labor cost inflation stabilizing, positive reimbursement changes, and continued increase in telehealth services, among other factors. According to PitchBook’s Q2 2024 Healthcare Services Report, the behavioral health market has begun to move away from developing continuum-of-care builds and is now emphasizing outpatient mental health services, driven by favorable reimbursement trends and practical challenges with the continuum-of-care approach.
Rising trends in the mental health sector seem to reflect broader patterns in the health care industry overall. Health systems are merging not only to expand geographically but also to achieve financial sustainability, manage increasing costs, and improve care delivery in a rapidly evolving health care environment.
Capital Markets
As seen in the following chart, follow-on (or add-on) deals account for approximately 80% of M&A activity in the behavioral health space compared to platform deals. Platforms serve as the foundation of the roll-up strategy, leading to a financially stable and recognized market leader to support the consolidation approach. An add-on acquisition in private equity (PE) involves the purchase of a smaller target by an existing portfolio company, with the acquired firm being integrated into the current portfolio (platform). Often referred to as the “buy-and-build” strategy, add-ons have become increasingly prevalent in the PE sector. In this approach, following the initial buyout of the core portfolio company, the financial sponsor aims to generate value by acquiring smaller targets and integrating them into the platform. As discussed previously, this strategy enhances platforms by offering additional technical capabilities, diversifying revenue streams and expanding market opportunities, among other synergies.
A detailed overview of the 2024 M&A market for behavioral health and other healthcare verticals can be found in VMG Health’s 2024 Healthcare M&A Report.
Key Players & Acquisitions
The largest behavioral health companies in the United States include publicly traded Acadia Healthcare and Universal Health Services, Inc. (UHS), along with privately held Legacy Lifepoint Behavioral Health. As of the end of Q3 2024, Acadia, the largest pure-play behavioral health provider in the United States and Puerto Rico, operates across 40 states with 258 treatment facilities and over 11,400 beds. UHS operates in 39 states in the United States and the United Kingdom (UK), with 186 inpatient behavioral health facilities in the United States and 144 in the UK, totaling more than 24,400 beds.
In February, Acadia closed on the acquisition of Turning Point Centers, a 76-bed specialty provider of substance use disorder and primary mental health care treatment services in the Salt Lake City metropolitan area.
“Turning Point Centers is a strategic addition to our facility portfolio, extending Acadia’s geographic footprint for our specialty service line into a new state and enhancing our continuum of care in Utah to include all service lines,” said Christopher Hunter, CEO and Director of Acadia.
In March, Acadia completed the acquisition of three comprehensive treatment centers (CTCs) in North Carolina, serving patients in Raleigh, Greenville, Hillsborough, and their respective surrounding communities.
In October, Acadia announced the acquisition of three additional CTCs in Clinton, Easley, and Ridgeland, South Carolina. Acadia’s CTC division now operates 165 brick-and-mortar locations treating over 72,000 patients across 33 states nationwide.
“South Carolina is an underserved market with clear, unmet treatment demand for those suffering from opioid use disorder,” said Chris Hunter. “We are proud to help address the needs of the patients, families and communities who will benefit from individualized, high-touch support. These three clinics have excellent reputations in creating positive outcomes for patients through the combination of medication-assisted treatment and clinical services.”
Meanwhile, UHS announced during their Q3 2024 financial results news release that a rise in interest rates has paused their interest in acquisitions for the time being.
“The increase in interest rates has substantially increased our borrowings costs and reduced our ability to access the capital markets on favorable terms. Additional increases in interest rates could have a significant unfavorable impact on our future results of operations and the resulting effect on the capital markets could adversely affect our ability to carry out our strategy,” said Steve Filton, CFO of UHS.
Joint Ventures
Joint venture (JV) partnerships have become very popular in the mental health sector, as behavioral health providers continue to expand their geographical footprint by helping traditional nonprofit health systems operate more efficiently and keep pace with the high demand for behavioral health services. In addition to alleviating capacity issues, JV partnerships assist hospitals by upgrading aging behavioral health facilities and recruiting hard-to-find providers.
In January, Acadia announced a JV partnership with Ascension, a leading integrated health care system in Austin, Texas, expanding access to behavioral health care services in Austin and surrounding communities. Acadia plans to construct a 106-bed expansion of the acute behavioral hospital, increasing the total licensed bed count to 196 upon completion. The new hospital, named Cross Creek Hospital together with Ascension Seton, is expected to open in the second half of 2024.
“Today, Acadia has 21 joint venture partnerships for 22 hospitals, with 11 hospitals already in operation and 11 additional hospitals expected to open over the next few years. Joint ventures will continue to play an important role in Acadia’s future growth, and we are excited about the opportunities to work with other leading providers in attractive geographies,” said Christopher Hunter, CEO and Director of Acadia, during Acadia’s Q2 2024 earnings call.
In September, Lifepoint Behavioral Health broke ground on the development of a new state-of-the-art behavioral health facility being developed through a JV partnership with Palomar Health, California’s largest public health care district. The two-story facility will consist of 120 beds and provide 84,700 square feet of indoor and outdoor recovery space.
“At Palomar Health, our commitment to reimagining healthcare is driven by our dedication to meet the evolving needs of our community,” said Diane Hansen, President and CEO of Palomar Health. “The Palomar Health Behavioral Health Institute represents a significant step in adapting and growing to provide exceptional, patient-centered care. Partnering with Lifepoint Behavioral Health will help us further our goal of addressing behavioral healthcare fears and creating a supportive environment that truly fulfills the needs of those we serve.”
In September, Lifepoint Behavioral Health also announced their plan to build new behavioral health hospitals in Indiana, through JV partnerships with Community Health Network.
“Community is committed to helping Hoosiers connect with the care they need, and this partnership with Lifepoint Behavioral Health demonstrates our determination to innovate and collaborate in order to make that happen,” said Jason Fahrlander, CEO of Community Health Network.
Artificial Intelligence in Behavioral Health
Because of a rise in mental health issues across the globe since the COVID-19 pandemic, artificial intelligence (AI) has developed into a helpful tool in reshaping the diagnoses and treatment of behavioral health. As discussed previously, there is a significant gap between the supply and demand for behavioral health services. AI therapy bots (chatbots) are intended to help bridge this gap by providing cost-effective support around the clock.
According to a February 2024 national survey conducted by Pew Research Center, 23% of U.S. adults responded saying they had used a chatbot such as ChatGPT before, up from only 18% in July 2023. Therapeutic chatbots utilize natural language processing and algorithms to engage users in conversation, enabling them to understand and respond to various human emotions. However, experts stress that therapeutic chatbots are not intended to completely replace human therapists, but instead serve as a complementary tool to help support high patient demand. Because of Al’s infancy in mental health, there are still several challenges to overcome before this technique is adopted worldwide. Experts’ primary concern is the lack of empathy and human element in AI chatbots, resulting in missed, nuanced emotional cues that can affect treatment outcomes.
“A crucial first step toward ethical mental health AI will be creating a transparent, independent set of guidelines for evaluating how well therapy apps support mental health. The more humanlike and unconstrained the chatbots become, the harder it will be to keep them from dispensing inappropriate or biased advice,” says Adela Timmons, University of Texas at Austin Psychologist.
Al opens new possibilities for mental health treatment, promising improved access, enhanced care, and stronger outcomes. As technology advances, integrating AI with traditional approaches could become the key to shaping the future of mental health care services, bringing better prospects for both patients and providers.
Telehealth & Reimbursement
Like the growth of AI in health care, telehealth has evolved into a common way to treat mental health patients since the COVID-19 pandemic. Telehealth offers a variety of convenient services, such as one-on-one therapy, group therapy, text therapy, addiction counseling, medication prescribing, medication-assisted treatment, medication monitoring, mental health screening, referrals, and anxiety and depression monitoring. In December 2022, Congress passed the Consolidated Appropriations Act, 2023, which extended several telehealth flexibility waivers through 2024. Significant updates to Medicare telehealth coverage and reimbursement included the removal of geographic restrictions for patients and providers, allowing all eligible health care providers to bill for Medicare telehealth services, and extending safe harbors to ensure telehealth services are covered by high-deductible health plans.
Although behavioral health telehealth services have offered numerous benefits and improved access for mental health patients, concerns remain about providers’ ability to effectively treat patients with prescribed medication via telehealth without close monitoring. Congress must act before the end of2024 to secure permanent telehealth reimbursement for Medicare recipients.
Conclusion
As the demand for mental health services grows, the behavioral health industry continues to expand. M&A transaction volume has rebounded through the first three quarters of 2024, driven by the emergence of mental health and substance use disorder treatment platforms, stabilizing labor cost inflation, and favorable reimbursement changes. The future of mental health treatment is already upon us with the integration of AI and telehealth services, providing patients with a more convenient way to access the critical behavioral health services they need from health providers. Behavioral health companies continue to pursue new opportunities to expand their geographical presence through acquisitions and joint ventures with nonprofit health systems. These innovations offer a more convenient way for patients to receive critical access to the behavioral health services they need from health providers.
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