John Guarco

Associate

The Growing Relationship Between Private Equity and Behavioral Health

Market trends have exhibited a rise in private equity investments over the past
five years in behavioral health. In fact, in 2017 alone, total spending has reached over
$16.3 billion and is projected to go as high as over $20 billion in 2022. In particular,
legislation is contributing to Mergers & Acquisitions activity. The Patient Protection and
Affordable Care Act, the Medicare Improvement for Patients and Providers Act
(MIPPA), and a revised Mental Health Parity and Addiction Equity Act (MHPAEA) have
increased funding for mental health services and have put mental health treatment on a
reimbursement path on par with physical, medical, and surgical benefits.1
The accelerated interest in behavioral health also stems from understanding that
50% of Americans will develop a mental illness and that 27% will suffer from a
substance abuse problem in their lifetimes. The decline in the stigma involved in seeking
mental health treatment is causing more people to go to behavioral health centers. The
comorbidity rate of people with mental and substance abuse disorders is also high which
increases the chances of seeking treatment as well.
Behavioral health includes categories like:2
Specialty Centers: Centers treating eating disorders or brain injuries,
stand-alone facilities, or programs inside an inpatient facility or
rehabilitation hospital. Specialty centers require around-the-clock care; for
instance, patients treated for anorexia or bulimia. High numbers of
traumatic brain injury from American service members returning to the
U.S. from the Middle East also is fueling a rise in patients.
Addiction and Rehabilitation Centers: These include inpatient and
outpatient centers, residential treatment centers, or programs within an
inpatient facility. Limiting reimbursements to only the patient works
effectively for high-end residential treatments, but not in environments
where the cost becomes unaffordable to patients. Reimbursements from
an insurer may be negotiated to a lower rate, but the facility only needs to
rely on out-of-pocket payment by patients for co-payments and
deductibles or as a secondary source to an insurer.
Inpatient Centers: Institutional services in psychiatric hospitals and
designated units within acute-care hospitals fall under this category.
Closely monitored therapeutic treatment for patients who pose a risk to
their own wellbeing, or cannot be treated on an outpatient basis are

1 Mergermarket. Behavioral Health Continues To Attract Private Equity Investors. Forbes, Forbes Magazine, 6 July 2017,

www.forbes.com/sites/mergermarket/2017/07/06/behavioral-health-continues-to-attract-private-equity-
investors/#749c59606210. Accessed 5 Sept. 2017.
2
Walsh, Amber McGraw. PE Investors Should Consider Behavioral Health - Law360. Law360: The Newswire for Business
Lawyers, 17 May 2013, www.law360.com/articles/442783/pe-investors-should-consider-behavioral-health. Accessed 5 Sept. 2017.
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747 Third Ave. 2nd Floor New York, NY 10017 Tel: 917.363.4815 Email: mkelly@michaelkellyassociates.com
 usually sent to inpatient centers. This category includes nonprofits, public
entities, or for profit specialty hospitals.
State and Local Community Providers: Medicaid funded health
facilities.
Crisis Stabilization Units: Emergency services for psychiatric or
substance abuse needs. Here, patients receive short-term stabilization and
treatment for a period ranging from four to even fourteen days of care.
CSUs vary by state. Some are private or affiliated with a hospital.
Consolidation of behavioral health centers can lead to standardized, uniform
billing strategies and higher collection rates. At this time, no national behavioral health
entity owns more than 1% of the behavioral health market.
In states most affected by the opioid drug crisis, Medicaid funded between 35%
and 50% of gold standard, medication-assisted treatment according to the National
Council for Behavioral Health. As the demand for services outstrips the supply due to
the growing drug epidemic, an opening has led private equity firms to provide capital to
ensure a supply.3
In fact, private equity firms like Coker Capital, Kohlberg & Company (Alita Care),
Audax Group (Meridian Behavioral Health), Goldman Sachs (Advanced Recovery
Systems), Centre Partners (Bradford Health Services), and Clearview Capital (Pyramid
Health) have already invested in behavioral healthcare groups. In 2016, private equity
accounted for 73 transactions, 60%, of all deals in behavioral health care according to
The Braff Group. Companies with less than $1 million in EBITDA are still attractive to
private equity firms if they fill a gap in care or geography. Behavioral health is not
exclusive to drug and alcohol addiction.4 Autism, brain injury, at-risk-youth and eating
disorders also fall under the umbrella of behavioral health. High-acuity residential
treatment centers, ongoing, and long-term outpatient care are relevant.
Private equity firms are most attracted to lower cost outpatient treatment, high-
end residential treatment, and businesses that can track clinical outcomes with effective
management teams combined with a strong clinical reputation fostering a high-referral
rate.
Yet, there are caveats to their approach. Private equity investors aim to avoid two
red flags across behavioral health: 1) Out-of-network reimbursements; i.e., companies
with extremely high-margins, and 2) Lab services. Lab testing reimbursements are
usually exceptionally high and unlikely to continue. Additionally, the growth rate of the
M&A market may change depending on whether the Federal Reserve decides to raise
interest rates; however, for now, low interest rates and a fragmented market are
contributing to favorable market conditions.5
Nevertheless, capital inflows into behavioral health care are accelerating annually

3 Newkirk, Margaret. Private Equity Sees No End to the Drug and Mental-Health Gold Rush. Bloomberg.com, Bloomberg, 30 Mar.

2017, www.bloomberg.com/news/articles/2017-03-30/private-equity-rehab-romance-rages-amid-health-law-turmoil. Accessed 5

Sept. 2017.
4 Mergermarket. Behavioral Health Continues To Attract Private Equity Investors. Forbes, Forbes Magazine, 6 July 2017,

www.forbes.com/sites/mergermarket/2017/07/06/behavioral-health-continues-to-attract-private-equity-
investors/#749c59606210. Accessed 5 Sept. 2017.
5 Newkirk, Margaret. Private Equity Sees No End to the Drug and Mental-Health Gold Rush. Bloomberg.com, Bloomberg, 30 Mar.

2017, www.bloomberg.com/news/articles/2017-03-30/private-equity-rehab-romance-rages-amid-health-law-turmoil. Accessed 5

Sept. 2017.
e x p e r i e n c e e f f e c t i v e n e s s r e s u l t s
747 Third Ave. 2nd Floor New York, NY 10017 Tel: 917.363.4815 Email: mkelly@michaelkellyassociates.com

at a rapid rate. As the nation lurches deeper into an Opioid Epidemic, private equity
may provide an answer to this crisis. There is a steadily increasing number of addicts
and associated death rate in the country, a heightening political focus on helping these
individuals, a declining public stigma around treatment, and, above all, the fact that this
is a relatively untapped market.
If we can be of service to your organization, please contact Michael Kelly or John
Guarco at (917) 363-4815 or (917) 753-0756, or e-mail us at either
mkelly@michaelkellyassociates.com or john.guarco@michaelkellyassociates.com.

e x p e r i e n c e e f f e c t i v e n e s s r e s u l t s
747 Third Ave. 2nd Floor New York, NY 10017 Tel: 917.363.4815 Email: mkelly@michaelkellyassociates.com