Rise of Outpatient Services, More Patient Demand Driving Big Investments in Behavioral Health

The volume of outpatient health care services has climbed for decades, as more Americans need assistance for a variety of concerns, including those pertaining to behavioral wellness. And as factors like value-based care payments have correlated with a rise in outpatient behavioral health assistance, C-suite leaders and investors are taking note.

Indeed, outpatient behavioral health care has attracted the interest of investors who are flush with cash and looking at which providers might be next to follow the path of LifeStance Health (Nasdaq: LFST), which received substantial private equity backing before going public earlier this year.

LifeStance’s trajectory has also captured the attention of industry leaders such as Rob Marsh, who is the senior vice president and chief operating officer of Kindred Behavioral Health Services.


“What that transaction highlighted for us as an industry is that you can think of that component in and of itself as something incredibly valuable,” Marsh remarked during a panel discussion at the inaugural INVEST Conference, which took place in Chicago.

Behavioral Health Business hosted the day-long October event, which brought together behavioral health care executives, entrepreneurs and financiers to discuss the state of business dealings throughout the industry — ranging from investments and operations to mergers and acquisitions (M&A).

LifeStance, which operates more than 450 centers nationwide, made news last year when it received a $1.2 billion investment from private equity platform company TPG Capital. At the time, the transaction constituted over 90% of the deal value within the behavioral health industry that occurred within the first six months of 2020. Less than a year later, LifeStance announced its intentions to go public, which it did this March when it debuted on the Nasdaq.


Behavioral health providers are ripe for investor attention of this sort, Marsh said. As an example, he pointed to the business of outpatient care, which makes up a critical component of behavioral services.

“We, as an industry, have thought too long that outpatient is just something that happens, instead of it as part of the overall trajectory of care,” he said. “Most people in this room probably know that outpatient services have a margin that far exceeds most of the inpatient metrics that we have.”

Investments into outpatient service providers

Hospitals nationwide are expected to lose $54 billion in net income over the course of 2021, according to a study released in September by health care consulting firm Kaufman Hall. But the volume of outpatient visits — which tend to have lower expenses and higher margins — has been growing, although it has been suppressed by the pandemic.

Stuart Archer is the CEO of Plano, Texas-based Oceans Healthcare, which operates over 40 inpatient and outpatient behavioral health locations across Texas, Louisiana and Mississippi. Speaking at INVEST, Archer talked about the importance of outpatient care to a provider like Oceans.

“Where does the patient really want to be,” he said. “Where do we have alignment with the payer? And where we traditionally have the most alignment is on the outpatient side.”

Archer said that outpatient care will be an important component of Oceans’ future service delivery.

“For us, historically, we’ve been and we will continue to be a big [intensive outpatient] and [partial hospitalization] provider,” he noted. “We’ve seen a lot of reforms happening in the inpatient space to better reflect some of the rising acuity. But for us, it’s going to be continuing that journey in traditional outpatient clinics.”

Pre-COVID, Deloitte Consulting reported that outpatient visits for conditions including mental health were 20%-22% higher for hospitals that largely derived payments from value-based care. Post-pandemic, the possibility of outpatient visits increasing would appear to bode well for behavioral providers’ bottom lines. Such a possibility comes as the industry, overall, moves from a fee-for-service payment model to value-based care.

The continuation of this trend toward outpatient care will drive further investor interest, and patients will ultimately benefit, in Marsh’s opinion.

“There’s going to be continued interest and investment in outpatient programs, which is good,” Marsh added. “It’s just going to expand access.”

Private equity investment in behavioral health

One of LifeStance’s early backers was the private equity firm Summit Partners. Summit also currently backs Vertava Health, a Nashville, Tennessee-based substance use disorder (SUD) treatment provider with locations in five states.

Vertava chief development officer Tom Viscelli believes that the presence of private equity firms in the behavioral health space is a positive one.

“It absolutely attracts people to the industry,” Viscelli told attendees at INVEST. “I think the investment is coming from all over the place. That’s raising the boats for everybody.”

M&A activity in the sector remains strong, with 25 deals having occurred among providers in the third quarter (Q3) of 2021, according to advisory firm Mertz Taggart. Although the number was down slightly from the prior quarter, M&A deals are still projected to finish this year with the most on record, surpassing last year’s tracked total of 116.

Notwithstanding a possible capital gains tax hike that might compel some providers to sell assets, behavioral health service demand has risen during the pandemic, which has sparked investor attention. Post-COVID, demand for behavioral health assistance is poised to continue, as telehealth further solidifies itself in the care landscape.

Because there is a need for a variety of assistance across the behavioral health spectrum, Viscelli said that it will fuel more private equity capital to the space.

“It’s private equity firms building platforms, and it’s people like us who are expanding into it to build into our core SUD program,” he said. “The eating disorder providers are doing more mental health care, because we’ve all recognized that this is a holistic type care, that it’s not just one and then the other. There’s value in bringing them together.”

Regarding the possibility of Kindred engaging in deals with other providers, Marsh said that Kindred is interested if the price is right.

“Kindred’s very disciplined about our approach, and how we look at assets, what we’re willing to acquire and what we’re willing to pay for,” he said. “We’ve got internal data that lets us know what is going to be a good opportunity, that maybe we’re paying a little bit more on the front end, but that we see as a longer term investment that is going to work for us.”

Likewise, Archer said that Oceans is open to M&A opportunities with other providers, but noted that they are taking a careful approach to such possibilities.

“We tend to be very disciplined about pricing,” he said. “We’ll certainly reach out if it’s the right asset, if they bring the right culture, and if there’s something unique about them.”

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