Behavioral Health Facilities

A behavioral health facility (BHF) is an entity that focuses on the treatment of mental, social, and physical illness in children, adolescents, and adults. Behavioral health facilities can be freestanding for-profit/non-profit entities, state institutions or operated as a department of an acute care hospital. In 2016, the mental health and substance abuse industry in the United States had combined annual revenues of over $50 billion with 14,000 facilities nationwide.

Types of inpatient facilities include psychiatric hospitals/units, residential treatment centers and substance abuse programs. Outpatient businesses include partial hospitalization services, chemical dependency programs, intensive outpatient facilities and general clinics.

Behavioral health facilities are typically valued as a contribution to a joint venture, buyout by an operator/private equity firm or for other special circumstances. VMG Health has extensive valuation experience within the behavioral health space, including multiple freestanding psychiatric hospitals, acute care hospital departments and specific intangibles such as a certificate of need (CON) or tradename.

Important Value Drivers

For a psychiatric facility, special attention must be paid to the site of service during the valuation process. The reported revenue and cost structure for an acute care hospital based department (bills under an acute care hospital provider number) will most likely differ from a freestanding facility (separate tax ID number). The valuation depends on the ability of a hypothetical buyer or joint venture’s ability to achieve the historical reimbursement and expense profile post transaction. As a result, benchmarking the financial and operational metrics of the psychiatric facility becomes a critical factor in the valuation process.

Special consideration must also be paid to the behavioral health unit’s payor mix, patient mix, occupancy levels and whether the facility is regulated by CON laws. How the real estate is treated in a potential transaction (leased or contributed) must also be taken into account. For certain types of facilities (especially ones focusing on substance abuse) attention should be paid to whether the business is pursuing an in-network or out-of-network strategy with payors. Finally, the valuation analysis should also understand the physician utilizer base and other staffing levels. Many markets have difficulty in attracting/retaining physician providers and other support personnel that can effect past and future operating results.

Relevant Publications on Behavioral Health

Behavioral Health Industry: Impact of COVID-19
4 Reasons to Joint Venture Your Behavioral Health Unit
Joint Venturing Your Behavioral Health Service Line? Insights and Valuation Considerations