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Strategies for Navigating the Behavioral Health Sector
In this episode, host and VMG Health Chief Commercial Officer Jen Johnson has a discussion with Valuation & Transaction Director William Teague and Strategic Advisory Director Scott Ackman to provide an in-depth overview of the behavioral health sector in the United States.
This month's dose of practical insight on the business side of healthcare explores the surge in behavioral health client activity, transaction trends, and how mental health has gained more recognition as a key issue. Teague and Ackman both have experience working with clients in the behavioral health space and offer strategic solutions for navigating this sector.
Topics covered in this conversation include:
- Overview of what is happening in the behavioral health sector
- Why there is so much transaction and strategic activity happening in behavioral health right now
- Some of the larger players focused on behavioral health and joint venture strategy with health systems
- How to navigate and advise health systems that are considering a joint venture partner
- Alternate options for behavioral health strategy options besides a joint venture
Want to learn more about this topic?
Read the VMG Health Behavioral Health Affinity Group's recent strategic case study about behavioral health services assessments linked here: Strategic Case Study: Behavioral Health Services Assessment
Watch Teague's on-demand webinar about inpatient behavioral health joint ventures linked here: Inpatient Behavioral Health: State of the Market
Learn more here about VMG Health's service offerings for Behavioral Health and click here to access the 2023 Healthcare M&A Report.
Intro: Welcome to the Healthcare Download with VMG Health. We are the leaders in strategy and transaction advisory dedicated to finding solutions for the healthcare industry. In each episode, we will leverage our expertise to provide trends and timely updates about what is happening on the business side of healthcare so you can move your strategy forward.
Jen Johnson 0:33 In this episode, “Strategies for Navigating the Behavioral Health Sector,” we’ll be interviewing two of VMG Health’s leaders focused on behavioral health. William Teague is a Director in VMG Health’s Valuation and Transaction Advisory Division, and part of his practice includes valuing and guiding clients through behavioral health transactions. Our other guest is Scott Ackman, who is a Director in VMG Health’s Strategic Advisory Division. Scott advises healthcare clients on strategy, and he has seen a growing need for his services in the behavioral health space. I’m Jen Johnson, VMG Health’s Chief Commercial Officer, and I’m ready to get us started with a dose of some practical insight on the business side of healthcare. So, William and Scott, welcome. William, you’re coming out of Nashville. How’s it going over there?
William Teague 1:19 It’s going great, you know, over here in the healthcare capital of the U.S.
Beautiful weather and excited to talk to you today.
Jen Johnson 1:27 Oh, good. I’m glad you’re here. Scott, how’s it going over there in Minnesota?
Scott Ackman 1:31 As you’d expect, we’re doing pretty well. It’s still cold and rainy and snowy. But other than that, we’re doing all right.
Jen Johnson 1:38 The usual, huh?
Scott Ackman 1:40 The usual, yes, 44 degrees.
Jen Johnson 1:42 Well, I’m really glad you guys are here. And as you know, we want to provide listeners insight on what’s happening in the behavioral health sector. I like to provide first an overview of the market, explore transaction trends and other strategies you’re helping your clients with in the space. Now, obviously, there’s been a huge focus on mental health over recent years, and our firm has seen a big uptick in client activity with both transaction and advisory work. Even from a broader perspective, I think mental health has finally gained the recognition as a real issue in America. And from my personal experience, as a healthcare consultant, this sector has seen more attention than any other over recent years. As just one example, I’ve been attending all the major healthcare conferences for over 15 years. And I remember just about five years ago, behavioral health was never on any agenda. Now it’s a dedicated session at virtually every healthcare conference we attend, whether legally or financially-focused. So obviously, there’s a lot to explore here, and my goal is that we provide listeners with some in-depth insight into this sector from a business perspective. So first, let’s provide a brief overview of this sector and its players. And I’d like to start with Scott, I know you do a lot of strategy work with health systems and provider groups. Why do you think there’s so much activity and attention in this area right now?
Scott Ackman 3:00 Jen, I think it’s multifactorial, right? So let’s talk demand first. So, one in five Americans pre-pandemic had a mental health disorder, so 20% of the population, huge number, and that number only escalated going through the pandemic. At its peak, 40% of adults during the pandemic had issues with mental health, depression, anxiety, etc. So you have a huge demand push in the population. Couple that with just staggering supply shortages, 50% of the population lives in a mental health area that’s underserved. We’ve got a physician shortage 15,000 to 30,000 physicians, 60% of physicians are over 55. So, we’re faced with this crushing demand and a shortage of not only providers but beds. Per 100,000 people in the United States, we should be closer to 40 to 60 inpatient beds for psychiatric care, and we’re closer to 20. So a lot of clients are kind of faced with this crushing amount of demand with just a general lack of both providers and facility space to care for the population.
Jen Johnson 4:10 Woah, so thank you, Scott. There’s obviously a giant need in this space and we have more than just health systems trying to figure this all out. I know there’s several major players that are focused on this sector. So, William, I’d like to turn it over to you to comment on some of the larger players focused on behavioral health. And if you could spend a little extra time on joint venture strategy with health systems, that would be great.
William Teague 4:35 Yeah, sure. Well, I mean, behavioral health is probably one of the hottest sectors in healthcare for investment dollars. Tons of private equity interest in the space, lots of new investment dollars coming into the system. Generally, we see our private equity clients trying to employ roll-up strategies. So historically, you know, behavioral health, especially when you look at addiction treatment, you know, learning disabilities, some of the sub-verticals within the industry were “mom-and-pop” in nature. So, the private equity companies were coming in and trying to create scale, regional platforms. So, you know that’s accounting for a lot of the transaction activity. You know, as Scott mentioned, high demand, low supply, that’s a good set of facts and circumstances for an investment thesis. Coupled with you know, the government has really loosened a lot of the regulations, provided additional reimbursement or funding, now that behavioral health and mental issues are coming to the forefront. So, see a lot of private equity companies, you know, there’s a company called Summit, Bay Mark discovery that have maybe achieved some scale over the last few years. But then there’s tons of smaller players that will get bigger as they continue to do deals. You know, there’s three large companies, you know, two of them publicly traded, Acadia, UHS, and lifepoint. They have huge, Lifepoint being maybe a newer entrant into the market, they just started kind of rolling out their behavioral health strategy over the last couple of years. But UHS and Acadia have been doing it for a long time, UHS and Acadia being publicly traded. And you know, and we can talk about this a little bit later, they’ve really focused on doing joint ventures as well with not-for-profit health systems. And we can go into that. But yeah, that’s kind of the overview of the market and what I see out there kind of in terms of major players and kind of what’s attracting folks to behavioral health.
Jen Johnson 6:30 Okay, perfect. So, lots of activity and the big three that you mentioned, these last three- Acadia, UHS, and Lifepoint. You know, I assume they’re going to continue to do more joint venture transaction activity in the space, and I know that you guys go knee-deep in their earnings calls and keep tabs on them. So, what are they saying about the future of their joint venture activity?
William Teague 6:51 Yeah, absolutely. So I mean, I personally work with all three of them. I think I’ve got three or four joint venture projects going on as we speak. You know, if you look at Acadia’s earning call, and I think Acadia has probably been the most active in the market, in the joint ventures. You know, when you look at their earnings calls, they say they have 19 in different stages of development. Now, I only think a few of those have actually opened and started treating patients. As you know, it takes a long time to build these facilities, but they’ve got 19 in development. I think it’s a huge part of all three of their growth strategies going forward.
Jen Johnson 7:25 Perfect. So sounds like they’re going to continue with transaction activity. And so with that in mind with Scott, you know, I’d like to turn it over to you, you do a lot of work with health systems. How do you go about navigating and advising them when it comes to considering one of these JV partners?
Scott Ackman 7:42 Yeah, great question. I think our first question in dialogue with clients is always around just a make versus buy discussion. Do I think I can manage a program myself or do I think I need assistance? And really, that’s around provider supply. Do I think I can secure a stable supply of providers myself or do I need assistance doing that? Do I have the facilities? A lot of clients find that they don’t have the facilities to develop a program of the size and scale that they need, and they need access to capital which makes joint venturing a prime opportunity. Third thing we look at is competencies, a lot of clients, you know, what the JV can bring, frankly, is expertise in how to manage a behavioral health program, it’s difficult to do it if you’re trying to manage 16-18 inpatients a day versus if you’re trying to manage 40 or 50, or several 1000s like a lot of the for-profits do. So, that competency piece is really a critical discussion point for our clients, as well as just understanding the market. Maybe I’m in a market that really requires a level of expertise, or a level of scale that I don’t have. So, we’re evaluating those criteria and then based on kind of the outcome of that evaluation, trying to steer clients towards whether it’s a, “I’ll develop it myself” or it’s a partnership opportunity with one of the entities that’s out there.
William Teague 9:07 And I’ll just chime in, you know, I mean, we see health systems all over the country facing financial challenges with labor shortages, inflation, that everybody talks about. You know, generally, I see hospitals lose money on the behavioral health service lines, right? So, if they can do a joint venture and divest a money-losing operation, and achieve the size, scale, sophistication through a partnership with an operator. They can divest that loss, you know, a lot of times that operator will bring capital that they might not be able to have available because they get a lot of demands on their balance sheet, right? Behavioral health is a lot of times lower on the list of priorities in terms of capital projects. So, you know, you can divest a loss, you get access to capital you wouldn’t otherwise have, and then you know, you possibly can earn a return through the operations of the joint venture.
Jen Johnson 10:02 That’s excellent. So, it can really be a good deal for all. So, on finishing up with some thoughts on the JV model. I want, William, to ask you a couple of other questions from an evaluation lens? Like, are there any nuances you’d like to point out that are either really important to consider or are often overlooked when you’re putting these deals together?
William Teague 10:21 Yeah, absolutely. So I mean, typically, you know, when we’re putting these JVs together, generally, you know, when we think about what each party is contributing. A health system is contributing existing programs, whether that be inpatient beds, outpatient clinics, a license to use their brand, which can be very important, and the partner is contributing capital. Now, you know, I’ve seen it where the partner has existing facilities too, but our typical deal, that’s kind of what it looks like. So, many times were brought in to value the assets that the health system is contributing, right? You know, when I think about key things to think about when we’re going through that process: Is it a CON state, how hard is that CON to get? Because as I mentioned earlier, a lot of times I see the health system programs lose money, right, and you know, valuation 101 is based on cash flow. So, even in the absence of cashflow, if you have a CON, if you have a brand, or if your program is just facing some one time difficulties, whether that be COVID, or staffing that hopefully will be resolved in short order, we try to go through and adjust through that. You know, key key things I see that are challenges as well is a lot of Medicaid patients and behavioral health. And, you know, if the health system’s divesting this business it can impact their dish funding. So, I’ve seen that be a hiccup on deals. I’ve also seen, you know, the health systems’ reimbursement they get historically, you know, be it a percent of charges or based on DRG, is not achievable by the joint venture. So, you know, the joint venture might have to take a pay cut, if you will, because you got to negotiate new contracts with the payers. So those are all of the kinds of things we’ll think about when we’re doing an evaluation. And then, yeah, I think that was it.
Scott Ackman 12:16 And maybe, if I can make a point to that William, I think one of the things that we’re seeing, when we talk about why are health systems more interested in behavioral health. I think folks are recognizing kind of going beyond the economic the direct economic value of behavioral health and thinking strategically of, “How does this impact our programs now?” Maybe historically it was all direct margin, contribution margin, I show a loss I’m not going to make an investment. Well, now with kind of the evolution of value, you need to manage the behavioral health spend to achieve total population expenditure goals because there’s such a strong correlation between behavioral health comorbidities and total health expenditures. So, you have to manage that population in a much different way than you have in the past.
William Teague 12:58 Yeah. And I also think there’s just so many indirect costs, right? I mean, most of my clients are boarding patients in their ER, right? “Hey, we’ve got 20 to 30 behavioral health patients that we don’t have a bed for,” right? Either our unit and our hospital is full, or the area providers are full, and so we’ve got nowhere to send these patients, so they end up living in your ER, and the cost of that are just astronomical. So you know, when you think about lowering the cost of care, if you can find a way to treat these patients in an economical way, you know, with good outcomes, I think there’s a ton of opportunity there. Because I mean, it’s a very undertreated population, right? I mean, a lot of these folks are forgotten by the system and walk into ERs and are in crisis. And you know, obviously, that’s going to drive up cost.
Scott Ackman 13:47 Yeah, the community need is through the roof. And I think the point that you make around taking a broader lens on how this impacts the system in total is much more common now than perhaps years ago when it’s like, “Oh, my EDS backed up, my obs beds are full. I’m putting people in beds, because I don’t have a community resource, or I don’t have a strong enough program to kind of manage this population and what does that mean for me big picture, system, operating performance, etc.” I think it’s much more understood now that cost accounting systems have evolved to some degree over the last handful of years.
Jen Johnson 14:47 Perfect, thank you both. Very, very insightful, helpful. Also, on the whole joint venture strategy, I just want to plug that William Teague did a webinar on these joint ventures and how they work. So, if you want to hit our website, there’s a lot more detailed information on that strategy. So, I’m gonna go ahead and try to just finish up with the topic of the transaction environment. And William, are you seeing any other major players or trends, anything you want to note before we move on to the next topic? Yeah, I mean, I think
William Teague 14:56 Yeah, I mean, I think we’ve talked about physician labor, but I think support staff labor has also been a huge issue. And so volumes are impacted, capacities are lower, financial performance is lower. So, I think there’s been some hesitancy for sellers to come to the market until maybe those headwinds improve, and they can improve their performance and you know, get a better price. You know, you’ve also got the macro trends with interest rates and access to the debt markets tightening. So, it wouldn’t surprise me if the transaction activity slows down a little bit due to those right, “Hey, as a seller, I’m going to wait until the debt markets improve a little bit and my financial performance improves, if I can figure out my staffing issues.” You know, the good news on that front is I think we’ve seen the worst of the staffing shortages. They’re still there, for sure, but I think they’re getting better. You know, the other thing I see is probably the out-of-network strategies are pretty prevalent in behavioral health, whether that be in substance abuse, or almost in any kind of strategy, we see a lot of companies, you know, bill payers out of network. There’s been pressure on that, especially with the No-Surprises Act. So, it wouldn’t surprise me to see some of those facilities struggle a little bit and look for a better partner, or a bigger partner, to kind of mitigate some of the impact of going out and network to in-network. So, I think those are maybe two themes I see out there. Scott, I don’t know if you’ve got any others?
Jen Johnson 16:27 Anything on the telehealth, you know what’s going on out there?
Scott Ackman 16:32 On the telehealth side, I think one of the things that we’ve seen is that telehealth is probably the – in behavioral health, especially in behavioral health. So, the pandemic obviously brought kind of an evolution of virtual healthcare and kind of advanced the practices of such. In a lot of specialties we’ve seen kind of a falling back to original levels pre pandemic, but in behavioral health, virtual health, virtual care has remained very popular and is up significantly pre-pandemic. So I think there are legs there, you’re seeing more organizations think differently about how they offer virtual care and behavioral health because it is an area that lends itself to that.
Jen Johnson 17:11 Yes, I hear that it has grown quite a bit. So, this is super helpful. And so at this point, we’ve set the stage with market trends, transaction overview. I want to let everybody know we did just release our Annual M&A Report, and that has got in-depth analysis of the behavioral health sector, we cover notable transactions, trends, an update on the reimbursement environment. So, if you want to go a little deeper into what’s happening in the transaction environment with behavioral health, we’ve got our M&A Report out there on our website. So, what I’d like to do now is turn it back over to Scott and discuss a little more about how health systems and other providers are grappling with this space. I’m wondering specifically if a JV is not in the cards, for whatever reason, what are some of the other options for them to find opportunities? For instance, what are some of the things you look at when you’re assessing the local market to start to guide your clients’ behavioral health strategy?
Scott Ackman 18:06 If a JV is not in the cards, our process is relatively straightforward. First thing we’re going to do is evaluate the provider market. Who are the providers in the area? Who are they aligned with? Do we have enough? Do we have a shortage? And in most cases, there’s a shortage and a general lack of inpatient, outpatient behavioral health professionals. So, kind of going in with the assumption that we have a shortage, it’s how do we create that stable environment for physicians? And generally, what we’ve found is partnerships with academic facilities or partnerships with larger organizations that have a more stable supply of physicians has worked well. The second thing we’re evaluating is really just the overall bed availability. And so I mentioned that statistic earlier around beds per 100,000 people. If we see a shortage there, that gives us some idea of kind of what are we dealing with relative to how much facility need do we have? And do we need to think about a capital investment to adding beds? The other thing that we’re evaluating quite a bit is just the community resources. Meaning, are there social programs? Are there residential facilities that give us an opportunity to discharge patients in an effective and efficient manner? Because what we find is a lot of clients have a program that can manage patients on the inpatient side, but they have a very difficult time discharging or finding a home for patients once they’re no longer eligible to be in an inpatient bed. And the last thing that we’re thinking about doing is, it’s a mistake to go into this and think, an inpatient program or behavioral, there’s so much emphasis on inpatient and how people are managed in the hospital, but you really need a continuum of services. That means, “I have to think about a partial hospitalization program. I have to think about intensive outpatient, I have to think about virtual care, I have to think about clinic visits and I do have embedded physicians with my primary care department.” So, it’s really more about that complete continuum that then is connected to a reasonable community resource that can help you manage a program. And then understanding what’s my Medicaid or environment in my particular state or what my commercial climate is. So, we’re kind of evaluating those factors and then building a customized solution based on what we find in those particular areas.
Jen Johnson 20:22 Perfect. Well, let’s talk a little bit more about this, Scott. I know that recently, you helped a large behavioral health organization grow into some new markets. And so that’s some, you know, they went it alone. And so could you tell listeners a little bit more about what y’all did strategically and the outcome?
Scott Ackman 20:42 Yeah, the client was a very strong behavioral health organization, but they were in a singular market. And they really felt like their particular care model, their particular approach to behavioral health was applicable to other markets, and they wanted to understand what options they might have nationally. So we built them an algorithm to help us understand what markets would be most conducive to a successful program launch, not saying they couldn’t launch in most markets, but was trying to optimize their opportunity for success. So, we looked at things like provider density, where are their providers today? We looked at facility capacity, facility availability, we looked at regulatory climate. William mentioned a great comment on CON. You know, what availability is there on the CON space? What work was required if we wanted to add inpatient beds, we also looked at the reimbursement climate. So through that, we built them a model that directed us, provided hotspots across the U.S. on where certain investments might make some sense. Once we isolated those markets, we then identified a physician group in one of those markets that had similar culture values as the organization you’re working with. Partnership was developed and they acquired that group as kind of their foot, kind of flag in the sand, so to speak, in that particular market, and then really started growing off of that group of physicians.
Jen Johnson 22:06 That’s awesome. That’s encouraging to know, there are so many strategies out there, and you guys know how to walk folks through it. So, I want to go ahead and let everyone know you’ve actually outlined this case study. And that is also available on our website. If people have questions for you, you’re available. So, I do think at this point, we’ve covered a lot, and it’s a good place to wrap this up. I’d like to thank Scott and William for their insight, you both have done a fantastic job outlining what’s happening in one of the most prominent sectors in healthcare today. So, I always like to do a little recap of what we’ve learned. So first, we have an industry that continues to be ripe for transactions. Second, joint venture strategy has shown many health systems financial success and is very encouraging. And third, JVs are not the only way to go. It’s important to understand your local market participants and circumstances before tackling your behavioral health strategy. So, to finish this up, I think it’s safe to say this is going to continue to be an active sector as each year there’s increased funding at federal, state, and local levels to combat the worsening behavioral health crisis. So, William and Scott again, we appreciate you both for the excellent insight and want to make sure listeners know they can reach out to either of you anytime, and that we have additional content around this topic on the VMG Health website. Lastly, I hope everyone tunes in next month for your dose of the Healthcare Download with VMG Health where we will be discussing important takeaways from the latest public healthcare company earnings calls and give you some insight and some cool tools VMG health has to help you navigate public company activity. Everybody take care.
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