Big Opportunity for Behavioral Health Consolidation in 2022

The momentum of the merger and acquisition space in behavioral health will likely spill over into the first half of 2022 as dealmaking in the industry reaches new highs.

However, next year will likely see deal multiples “stabilize a little bit” as private equity continues to look for platform deals that more heavily emphasize clinical outcomes and financial returns, Scott Kremeier, director of the Los Angeles-based investment bank Houlihan Lokey Inc.’s health care group, said in a webinar hosted by Overland Park, Kansas-based health care tech services provider WellSky Corp.

After hitting a slump in July 2020, dealmaking roared back at the end of 2020 and pushed well into 2021, Kremeier said. He presented data from his firm that tracked 111 deals in the behavioral health space as of October and said it’s likely that number will go up as we approach the end of the year.

Houlihan Lokey Inc behavioral health consolidation deal volume graph
Graph presented by Scott Kremeier of Houlihan Lokey Inc.

The data also tracks a compound annual growth rate (CAGR) of 19.8% from the number of deals in full-year 2015 compared to 2021 through October.

“The outlook is still very, very positive,” Kremeier said, adding that the fundamentals of the space are still strong and that behavioral health consolidation presents many opportunities for deals. “The sector is firing on all cylinders.”

But beyond the first half of 2022, things get murky, Kremeier said, pointing to uncertainty around political concerns over inflation and Federal Reserve policies impacting lending rates.


In 2022 and beyond, private-equity-backed companies that were platforms for investors will seek to grow via M&A and will drive more dealmaking well into the future. And PE firms that haven’t made an entry into behavioral will have the opportunity to do so as behavioral health consolidation ramps up in the fragmented behavioral health industry, Kremeier said.

Graph presented by Scott Kremeier of Houlihan Lokey Inc.

He also pointed to record levels of “dry powder,” or uninvested capital, in the private equity space as a potential for optimism in increased investment in platform behavioral health deals. One estimate puts global dry capital totals at about $3.1 trillion.

“We’re still in the early innings of it, but it’s the beginning of consolidation within the industry as a lot of these private equity platforms look to grow, gain scale,” Kremeier said. “So we’re expecting to see that continue well into 2022.”

How technology and payers are moving behavioral health

Buddy Guy, a shareholder of and health care deal lawyer for Kansas City, Missouri-based law firm Polsinelli P.C., said on the webinar that telehealth, other health care tech tools like electronic health records, and the push toward more value-based compensation arrangements are pushing greater innovation in the legal and regulatory sectors.

“When you look at the winners in all this, where the law is going and will go, and where business is going, it is toward the companies that are being consumer-facing, being coordinated and integrated, being data-driven, tech-enabled value-based,” Guy said.

Taken as a whole, the hallmark changes in how health care providers operated over the last two years have pushed the \industry toward a greater likelihood of national regulations.

Guy also expressed concern for the future of dealmaking as advocates, politicians and their administrative appointees level skepticism toward private equity‘s role in behavioral health consolidation.

“One of the other challenges we’re seeing has been — let’s call it the government’s war on private equity,” Guy said. “The FTC is basically saying, ‘We don’t know if we want to approve private equity investments in these deals’ when they hit Hart Scott Rodino levels. With that, there’s so much deal volume the FTC really can’t stop a lot of it. But it’s an interesting issue that will drive and affect yields here for the next few years.”

Tech-enabled operations allow for the trend toward greater value-based reimbursement adoption among providers and payer partners, Joseph Deans, vice president of corporate development at Nashville, Tennessee-based Wellpath, said on the webinar. Wellpath provides medical and behavioral health to government-backed facilities such as state hospitals, correctional facilities and community care centers.

Behavioral health providers will need to be able to track their impact and be able to understand patients in greater detail to drive improved outcomes, Deans said.

“With addiction and mental health, you have the social determinants of care that are really impactful [on] the patient and what they’re experiencing — including their access to care, their housing, their employment, access to government resources,” Deans said. “When we think about quality and outcomes metrics, in the context of value-based care, what does that mean to which patient populations? They’re not all created equal.”

For example, Deans said an upper-middle-income patient with access to care, resources and support systems will require different resources and care than somebody who may face more environmental problems. He pointed to the complicating issues of homelessness, subjection to crime, exploitation, lack of resources and abuse.

He also said that outcomes standards and quality metrics need to be attuned to the specific circumstances of certain populations.

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