Traditionally, PE investment in healthcare services has focused on consolidating medical specialties such as dentistry, dermatology, and eye care, with returns driven primarily by multiple arbitrage, the development of ancillary service lines, and operational improvements.
Behavioral health on the other hand, is a newer darling to private equity investors, offering opportunities to finance de novo expansion and scale geographically through the acquisition of more practitioners, as well as virtually with the advent and proliferation of telehealth services, accelerated by the Covid-19 pandemic.
Within the space, the range of services offered is exceptionally wide, including brain injury, at risk youth, intellectual and development disabilities (IDD), outpatient mental health care, substance use disorders (SUD), autism services, individual counseling, etc. Given this diversity, the level of consolidation in the behavioral health sector varies depending on the subsector being examined, ranging from highly consolidated to in its infancy.
Rising Autism Rates: Rates of autism diagnosis among US children have increase steadily from about 1 in 150 in 2000 to about 1 in 26 in 2020.1
Mental health and SUD rates: The medical field has moved toward a more holistic approach to patient care including treatment of behavioral comorbidities alongside physical ailments. The COVID-19 pandemic exacerbated challenges people had coping with lockdowns, economic instability, social isolation, etc. resulting in elevated rates of depression, anxiety, and SUD, including among children and young adults.
Medicare Expansion: Beginning in 2024, CMS will greatly expand the range of providers who are eligible to enroll in and bill services to Medicare, as well as expand coverage to intensive outpatient (IOP) services. This will drive a material increase in behavioral healthcare access nationwide.
In the U.S., the behavioral health market remains highly fragmented and is just beginning to experience the early stages of consolidation through private equity partnerships.
However, the macroeconomic headwinds impacting overall M&A activity in 2023, have had a significant impact on behavioral health investment. In general, deal activity and transaction multiples have decreased from their record highs in 2021 and 2022. Additionally, investors have become wary of regulatory risk surrounding telehealth services following the expiration of the COVID-19 Public Health Emergency.
Although deal activity has seen a dip, investor interest in behavioral health remains strong, particularly in SUD and mental health – it is likely that deal activity will see a material reinvigoration in 2024.
There are many benefits to partnering with a private equity firm or a PE-backed platform, and it is crucial to work with an advisor that has experience representing diverse behavioral health practices in these partnerships to ensure clinical autonomy is maintained, a local governance structure is formed, and the economics make sense.