Private equity (PE) funding in behavioral health, which had been hitting record levels even before the pandemic, continues to hum along as COVID-19 has forced providers to adapt their business models.

And one area of behavioral health that has caught the eyes of private equity is the hybrid care model of in-person and virtual services.

“Capitalizing on the hybrid models of virtual and in person that will likely remain popular, private equity backers have been investing more heavily in underlying tech infrastructure to support telehealth options,” according to a recent report issued by Denver-based health care management consulting firm Vector Medical Group and national law firm Epstein Becker & Green.

Americans have been expressing a desire to continue using telehealth services, which have been estimated to have generated approximately 38 times more volume than they had before the onset of the pandemic. Additionally, the Centers for Medicare and Medicaid Services recently expanded its reach for telehealth when it announced that it would lift billing restrictions in 2022 to allow Medicare recipients access to services.

Given the numbers, the development of more hybrid behavioral health care providers might garner considerable notice from the PE world going forward.

“Increased PE activity in digital health capabilities related to core behavioral and rehab platforms is anticipated,” the report noted.

Transaction volume shows no signs of slowing down

As of October 13, 39 deals worth an estimated $909 million had occurred amongst behavioral health providers in 2021, according to statistics compiled by financial data company PitchBook, which were also cited in the report. This year’s activity is building off of momentum that closed out 2020, in which a record 22 deals occurred in the fourth quarter (Q4) alone.

At least 11 transactions had taken place in each of the past three quarters of 2021.

“That is substantial volume for an industry that had only five double-digit quarters before the pandemic,” the report noted.

Among the noteworthy items addressed in the report was that of the substance use disorder (SUD) treatment segment receiving an uptick of service demand during the pandemic.

“Demand for rehab services, which have traditionally been in-person and often inpatient, was stymied by social distancing mandates and strict rules about indoor gathering,” the report noted. “Telemedicine is an emerging option for rehabilitators, as well.”

As of mid-October, 40 deals worth $3.7 million for addiction treatment providers had taken place, according to PitchBook. The numbers represent a continuation of high transactional activity for SUD treatment operators that hit a fever pitch late last year, with a record 11 deals having occurred in Q4 2020.

Highly fragmented and opportunistic

The report further noted that a great deal of the PE transactions are coming from buyers who are looking at the behavioral health space and noticing an industry that, in many ways, still has not achieved critical mass with operations and services.

“Like other healthcare services, the mental and behavioral segment is highly fragmented and lacks scale,” the report stated. “And, also like other healthcare services, those factors set the stage for private equity-guided consolidation — particularly for outpatient services.”

A number of PE firms have been making add-on purchases as a way to help providers scale up services. The activity — the report stated — began in earnest late last year with deals such as the acquisition of provider Refresh Mental Health by Kelso Private Equity. 

Refresh has added eight outpatient clinics since the deal closed, according to the report.

“[This] highlights another trend under COVID-19: prominent secondary buyouts as sell-side owners took advantage of heightened private equity demand,” the report said.

The report also posited that going forward, PE firms might be inclined to send more investments towards the outpatient side of behavioral health, which can command higher margins than acute care due to factors like telehealth, which can potentially reach more patients.

“[T]hese models of behavioral and mental health are highly sought-after investor targets,” the report said. “The data demonstrates a higher transaction value for practices that implement tools such as telebehavioral and telemental health models that, comparatively, require lower capital and treat a higher volume of patients.”

Even in a post-pandemic world, virtual behavioral health services figure to remain in high demand.

“COVID-19’s key impact on the space changed the relationship between behavioral and mental health and the use of technology in telehealth,” the report said. “These trends will outlast the pandemic.”

As virtual health becomes a more permanent fixture within behavioral health, the report said that PE behavioral health activity will likewise continue to be busy, as buyers become attracted to the potential increase in reimbursements.

“Demand for behavioral and mental health services will continue to grow for both employers and individuals,” the report said. “That phenomenon will pressure payers to increase remuneration for behavioral and mental health treatments.”