Despite a brief pandemic-related M&A slowdown last year, behavioral health deals picked up to close out 2020 on a record-breaking high note. And 2021 is poised to break that record again, with experts anticipating that behavioral health transactions will reach an all-time high this year.
The increased M&A volume means heightened regulatory attention for the space. As a result, behavioral health providers need to be more mindful, not just of the financial considerations that come with running larger, more diversified businesses, but also of the increased legal and regulatory scrutiny facing their everyday operations.
“Your best line of defense is: Don’t take on or inherit [a] problem,” said Rick Rifenbark, a shareholder and member of the behavioral health group for the law firm Polsinelli. “Find it on the front end through the due diligence process. … If you’re the acquiring entity, make sure you get all your questions answered [on] all the documents. Be diligent in terms of following up on open items.”
Rifenbark discussed those considerations during a recent webinar hosted by his law firm. Based in Kansas City, Missouri, Polsinelli counts health care law as one of its specialties and has a national footprint that spans 21 cities across the country.
On the webinar, panelists discussed the regulatory and legal issues currently associated with behavioral M&A.
One such issue they warned buyers to be mindful of is corporate practice of medicine legislation, which requires providers to be incorporated under a state’s professional service corporate laws. The laws prohibit unlicensed entities from employing physicians to practice health care on their behalf.
“Theoretically, the rationale behind … [the] prohibition is to … protect the independent professional judgment of physicians and other licensed professionals and ensure that corporate entities [and] unlicensed individuals are not commercializing the profession in a way that interferes with patient care,” Shuchi Parikh, a member of Polsinelli’s behavioral health law group, said during the discussion.
But the laws can throw a wrench in dealmaking, as corporate practice of medicine laws vary largely by state, according to Edye Bauer, the general counsel of Los Alamitos, California-based Discovery Behavioral Health.
“Some states … do not have a corporate practice prohibition and permit a general cooperation from employing physicians and rendering professional care, whereas other states … are very strict about requiring that only professional entities can render professional care and employ these types of licensed individuals,” Bauer said during the discussion.
She went on to stress the importance of buyers being aware of these laws for every state in which the sellers operate.
Additionally, telehealth was discussed as a major issue for M&A, as state and federal relaxations around telehealth have opened up more opportunities for providers to offer virtual services.
According to Tani Weiner, a shareholder and vice chair of Polsinelli’s behavioral health law group, providers need to keep an eye on the future of telehealth reimbursements amid industry consolidation.
“Telehealth has been an increasingly active [way] for providers to work to meet … behavioral health needs through COVID,” Weiner said during the panel. “But … this has continued to be hampered by restrictive rules and inconsistent payer requirements that payers are now working to navigate in real time.”
Panelists stressed that companies need to do their homework on these issues and more when entertaining prospective deals.
That includes consulting with senior management and compliance officers to review any potential past audits, checking for any previous HIPAA violations and taking out representations and warranties insurance to cover any financial losses that could come through a M&A deal unbeknownst to the buyer at the time of sale.
M&A breakdown
In the first half of 2021, the behavioral health industry saw 57 mergers and acquisitions, according to M&A advisory firm Mertz Taggart. If that level of M&A activity holds up for the rest of the year, 2021 will top last year’s record of 107 deals.
The pandemic is partially to thank, as it has made certain areas of health care less attractive from an investment perspective. At the same time, it has worsened the nation’s behavioral health and increased the demand for services.
“There’s a lot of capital … to invest, and there’s a desire … to implement investment in growth plans that were delayed due to COVID-19,” Paul Gomez — shareholder of Polsinelli’s behavioral health law group — said during the webinar. “Behavioral health care, in particular, is viewed as resilient, in high demand and well positioned for growth, improvement and development.”
Additionally, the pandemic has driven behavioral health M&A in that some companies have found it easier to buy existing facilities than open de novo ones, according to Bauer.
“Over the last year, the impact of COVID has been pretty significant with trying to open new programs,” she said. “With Discovery, we seem to have delays at every step.”
Discovery has over 100 centers across the country providing mental health, substance use disorder (SUD) and eating disorder treatment services. It’s currently planning to open a new location at the end of July, after its original debut date was delayed.
“From the fire inspection, to the building inspector, or to [getting] the licensing surveyor … onsite — [it] was very complicated to get anyone to come out during COVID,” Bauer said. “[With] a lot of the prerequisites to actually getting your license, those departments were very short staffed as everybody went into quarantine.”
Overall, panelists agreed that behavioral health M&A activity is not slowing down any time soon, and providers must be prepared.
“We’ve seen that there’s a great increase in investment and funding for behavioral health care, and that clearly has tremendous potential for great benefits,” Gomez said. “Behavioral health providers and stakeholders are certainly facing a lot of challenges in determining what’s the best strategy forward and managing legal risks.”
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