Top Three Strategic Issues in Behavioral Healthcare

October 12, 2022

By: Scott Ackman

The following article was published by Becker’s Hospital Review

Behavioral health is a highly fragmented market. With an increased demand for providers as well as the recent supply shortage, this sector requires innovative partnerships and strategic thinking.

Here are the top three strategic issues in behavioral healthcare to consider currently.

1. Provider Availability

Most health systems and provider groups struggle to recruit and retain enough psychiatrists to meet community needs. In many cases, a lack of provider resources limits the growth of existing services or prevents clients from offering a behavioral health program at all. Residency programs or other less formal relationships with medical schools have proven to be effective recruitment tools. 

2. Fee-For-Service Economics

From a contribution margin and net income perspective, behavioral health services are well below average for many health systems. This is largely due to some combination of the following:

  • Payer mix: For example, disproportionate share of Medicare, uninsured, etc.
  • Reimbursement rates.
  • State policy and community resources: Health systems are often required to use upwards of 25% of their capacity to board behavioral health patients due to a lack of community post-acute options. Patients no longer meet the criteria for inpatient reimbursement.

Organizations assuming higher levels of financial risk generally favor the economics of behavioral health due to the service line’s impact on the total cost of care. This phenomenon has resulted in increased interest and investment in behavioral health for many clients. VMG Health’s advisory clients have recently identified behavioral health as one of the most important service lines moving forward.

3. Care Model

The care model needed to provide behavioral health continues to be an area of interest for many organizations. Clients are increasing investment in pre-inpatient and post-admission services and community resources to improve program performance.

Categories: Uncategorized

Now Trending in Behavioral Health: Integration Strategy, Regulatory Compliance, & Transactions

August 10, 2021

At the American Health Law Association’s 2021 Annual Meeting, held in June, VMG Health Managing Director Clinton Flume, presented trends within the behavioral health industry, along with co-presenter Jenna Gunville of the law firm Polsinelli. The excerpt highlights Mr. Flume’s observations of the continued consolidation within the behavioral health industry.

Can you talk about the fluctuations in market transactions over the last few years?

Behavioral health has been a very active market over the last three to four years. 2018 was the high-water mark, with over 75 transactions. 2019 fell off a bit as owners and operators integrated these transactions within their platforms. Obviously, COVID-19 hit 2020, but the year started off well. As year-end numbers became available at the beginning of 2021, the industry anticipated total transaction numbers to be a bit soft but was pleasantly surprised that the deal count came in roughly the same as 2019. This boded very well for continued transaction acceleration in 2021, which is on pace to surpass 2019.

2014–2020 Total Behavioral Health Acquisitions [1]

What factors are key contributors to the increase in behavioral health transactions?

The Global Behavioral Health Market is expected to garner growth at a compounded annual growth rate of 5.0% from 2020 to 2027 and to reach a value of around $242 billion by 2027[2]. The two main factors that I believe will continue to help spur activity are public perception and acceptance and continued investment by private equity. Perception and acceptance involve the acknowledgement and social understanding that mental health services are just as important as the physical treatments we receive as a collective. High profile government official and celebrities certainly aid in bringing awareness to and lessening the social stigma around mental health struggles.

In addition, I believe that payor parity and investment in platform digital health services are key contributors to the increase in transactions. Payor parity focuses on the historical noncompliance of insurers in reimbursing providers for mental health services and creating equal footing for reimbursement and access to services. Increased legislative scrutiny and enforcement of health plans and reimbursement expansion though the Coronavirus Preparedness and Response Supplemental Appropriations Act are two ways payor parity has recently been addressed.

Can you comment on the sub-industry transactions mix and tell us how this mix may impact future consolidation of behavioral health?

Autism spectrum disorder transactions have exhibited the greatest share of transaction growth since 2018. This is largely driven by acknowledgement of an underserved industry, legislation that includes the Autism CARES Act of 2019, and improvements in reimbursement. Residential treatment centers (both substance abuse and mental health), along with office-based treatment facilities, continue to occupy the bulk of transactions. One area we have been seeing real growth in over the last two years is digital health transactions. These deals include digital technology administration of services such as direct-to-consumer care, revenue cycle performance improvement and automation, and artificial intelligence applications for managing and treating substance abuse and mental health disorders. In June, Rock Health[3] stated that U.S. behavioral health digital startup companies raised $588 million in the first half 0f 2021, which is equal to the annual amount this segment received in funding for any prior year. As we look at 2021 and beyond, we expect that digital health platforms and direct-to-consumer technology will accelerate the growth and acceptance of mental health services.

2020 Percentage of Acquisitions Involving One or Multiple Service Lines [4]


Sources:

[1] The merger and acquisition data contained in various charts and tables in this report has been included only with permission of the publisher of Deal Search Online, HealthCareMandA.com. All rights reserved.

[2] Globenewswire.com, IBIS World

[3] https://www.fiercehealthcare.com/tech/funding-for-digital-behavioral-health-startups-surged-amid-covid-19-pandemic

[4] The merger and acquisition data contained in various charts and tables in this report has been included only with permission of the publisher of Deal Search Online, HealthCareMandA.com. All rights reserved.

Categories: Uncategorized

Behavioral Health Joint Ventures: Recent Activity & Key Considerations

August 10, 2021

Behavioral health has been of one of the most active sectors in the healthcare transaction marketplace in recent years. Driven by plentiful investment capital, regulatory changes, the opioid crisis, public recognition of the need for mental healthcare and broader coverage from payors, the industry has seen numerous companies pursue consolidation strategies. A common trend that has emerged in the behavioral health industry involves the proliferation of joint ventures between non-profit health systems and for-profit companies to operate full service behavioral health hospitals. Some recent examples of joint ventures over the last two years include:

  • Acadia Healthcare and Bronson Healthcare partnered for a 96-bed facility located in Battle, Michigan.
  • Beaumont Health and UHS established joint venture for a new 144-bed facility located in Dearborn, Michigan
  • Mercy Health and UHS partnered to build a 96-bed inpatient psychiatric hospital in Bryon Center, Michigan.
  • Acadia Healthcare joint ventured with Geisinger to build two 96-bed facilities in Central/Northeastern Pennsylvania.
  • Acadia Healthcare and Ascension Saint Thomas partnered for with a 76-bed behavioral health facility in Nashville, Tennessee.
  • Kindred joint ventured with Baystate Health to build a 120–bed behavioral health hospital in Massachusetts.
  • HonorHealth and UHS partner on new 120-bed behavioral health facility In Phoenix, Arizona.

UHS and Acadia have traditionally been the most active for-profit operators pursuing this model.  However, new entrants have emerged, as highlighted by Kindred Healthcare’s entrance in the behavioral health space, which has historically focused on joint ventures with health systems to provide post-acute care. It appears this type of behavioral health joint venture will only continue to be a strategic focus for these companies going forward. Rob Marsh, recently highlighted Kindred’s perceived opportunity with the model to Behavioral Health Business:

Right now, we’re probably working with somewhere in the neighborhood of 15 health systems throughout the United States. Some of those are a little further along than others, but I feel very confident that the pipeline is just going to continue to expand.”

Acadia’s 2021 Q1 earnings call, Acadia’s CEO, Debra Osteen, stressed the importance of these strategic partnerships:

“We will continue to pursue this important pathway of growth for Acadia in the year ahead and beyond. With a solid pipeline of joint venture projects in different stages, we expect 2022 to be our strongest year for joint ventures with 4 to 5 facilities expected to open.”

UHS’ CFO, Steve Filton, expressed similar sentiments to its shareholders during the companies’ Q4 2019 earnings call:

“We also continue to grow our behavioral health joint venture portfolio with 3 new facilities already operational; 7 under construction or announced, which are expected to open in 2020 and 2021; and over 40 opportunities in the pipeline.”

Motivations Behind the Joint Venture Model

Why would a non-profit hospital want to joint venture their behavioral health service line with a for-profit operator? Based on our experience, motivations for these transactions from a health system perspective may include the following:

  • Often behavioral health patients are admitted through the ER and high demand has caused occupancy issues at the Hospital. Entering a joint venture often provides a new facility off-site, with expanded capacity to free up med-surg beds for other uses and relieve emergency room pressure.
  • Many non-profit health systems have aging behavioral health facilities that need replacement or upgrading if not current with anti-ligature requirements. With numerous competing demands on hospital’s capital budgets, a joint venture model enables the health system to finance much needed facility upgrades off balance sheet and with a partner that has liquidity.
  • The hospital’s behavioral health unit is poorly managed and/or unprofitable. For-profit operators have considerable expertise with behavioral health businesses and many times can increase profitability post transaction through the management of expenses, payor mix and throughput. Larger facilities also provide the benefit of scale.
  • There is a shortage of psychiatry providers and the hospital has difficulties in recruiting physicians for the service line. Large for-profit operators have physician recruiting departments and a large existing network of psychiatric providers. The national operators can leverage these relationships to help attract new providers to the joint venture post-transaction.

From a for-profit operator perspective, some of the major motivations behind the joint venture model are as follows:

  • Ability to access new markets without the potential of competition from major established providers like the local health system.
  • Opportunity to leverage the hospital reputation and trade name to improve facility visibility in the marketplace, attract potential volume and improve facility ramp-up.
  • Hospital emergency rooms act as large referral sources to behavioral health facilities.
  • Possible access to health system contracts and leverage with commercial payors that could result in higher revenue for services rendered.
  • Ability to improve the expense profile of facilities post transaction through superior supplier/pharmaceutical contracts, staffing models, etc.

Key Considerations

The transaction generally consists of a non-profit hospital contributing its existing service lines existing behavioral health service lines such as inpatient psychiatric units, outpatient programs, certificates of need (where applicable), and licenses for use of the health system trade name. The for-profit operator contributes capital to construct a new facility that expands capacity and service capabilities. In addition, the for-profit partner usually provides management services post-transaction.

As a large referral source to the new partnership, the health system contribution should be consistent with Fair Market Value (“FMV”) for regulatory purposes. In addition, any service agreements between the new joint venture and the parent entities also need to be carefully negotiated and consistent with FMV.  Key examples include the management agreement between for-profit operator and the joint venture, or if physicians employed by the hospital are provided to the joint venture through a professional services agreement. Finally, there may be other service agreements with either party providing IT, pharmacy or other ancillary services that payments will need to be at FMV

Another key consideration is the impact to revenue. Reimbursement for the service line when structured as a department of the hospital might not be achievable on a freestanding basis. Generally speaking, the joint venture has to negotiate new contracts and rates with the payors. Stakeholders should perform careful analyses around the impact of freestanding commercial rates when compared to what the health system was able to historically achieve. Furthermore, the hospital DSH or other government subsidy payments could possibly be impacted post transaction with the loss of Medicaid patient days. This impact to DSH can prove to be a strong disincentive for a health system to pursue affiliations.

In summary, behavioral health joint ventures have been common in recent years. With the large increase in demand for behavioral health services, limited bed capacity nationwide and the ability for both non-profit and strategic operators to achieve benefits, it is expected this type of transaction will continue to grow in popularity in the future.

Categories: Uncategorized