Behavioral health mergers and acquisitions have generated much buzz in the last couple of years, as dealmaking has reached record levels. However, some other providers are choosing to scale up operations by going a different route — joint ventures (JVs).
Acadia Healthcare (Nasdaq: ACHC) and Universal Health Systems (NYSE: UHS) – two of the biggest names in the behavioral health space – have been leading the way over the last couple of years by forming partnerships with a number regional hospital providers.
Acadia has two JVs slated to open for business this year, along with four to five more scheduled to come online in 2023. And as recently as 2020, UHS had over 40 in its pipeline.
As behavioral health providers look to ramp up their services amidst heightened demand for assistance, JV activity is showing no signs of slowing down.
“The last two to three years, we’ve seen a much more heavy concentration of large behavioral health care providers partnering, often with hospitals and health systems,” Paul Gomez, a Los Angeles-based attorney and shareholder with the law firm Polsinelli PC, told Behavioral Health Business.
“We’ve seen a lot more focus on strategy, executing on them, and developing and operating the joint venture,” he added.
Gomez said various factors have contributed to the wave of joint ventures, such as the growing demand for mental health assistance as well as industrywide workforce shortages. The pandemic, he believes, only compounded such factors.
“You had a lot of these factors already in place that would have caused joint ventures among behavioral health care providers to make a lot of sense,” he said. “Just like the broader health care arena, the pandemic accelerated it and made everything much more urgent.”
More than a third of the country are estimated to live in areas with provider shortages, and smaller providers might be at a greater disadvantage to keep up with the demand, especially for acute behavioral needs.
As some smaller providers align themselves with larger providers who have recruitment divisions and more resources to attract employees, Gomez asserts these types of arrangements can help close the deficit.
“A lot of times, the larger behavioral health care providers are better positioned and have better established networks, and so they can help to address those shortages,” he said.
For this reason, larger providers are most active in driving the formation of joint ventures compared to partnerships between two smaller-sized operators.
“It’s not surprising that you’ll see – at least for now – some of the larger players being the most active, simply because they have the most resources, dry powder and infrastructure to bring to bear,” he said.
The rise of behavioral health JVs
Behavioral health care has long been criticized as lagging behind medical care when it comes to access and affordability. In certain markets where smaller nonprofit providers might be struggling to provide behavioral health care, those providers might be attracted to these arrangements as a way to scale services.
They can give larger players an entré into new markets with already established names, which Acadia Healthcare CEO Debbie Osteen has previously started regarding her company’s business philosophy.
“Acadia benefits because we gain market access to attractive geographies otherwise inaccessible through acquisition,” Osteen remarked in January during the 40th annual J.P. Morgan Health Care Conference.
Gomez also believes that the partnerships can result either in the improvement of existing facilities or the construction of new ones.
“It’s a combination of looking at the health system side where there is the most strain, and then looking at the larger behavioral health care providers that have greater expertise and resources to make a difference,” he said.
Industry figures like Steve Filton, who is the chief financial officer of UHS, echo such sentiments.
“More than 50% of the behavioral beds in the US are run by acute care hospitals,” Filton said in early March during the 42nd Annual Cowen Health Care Conference. “We have found that most of those acute care hospitals seem to acknowledge that they don’t do a very good job of running that service line.”
Gomez said that other factors can drive the formation of JVs as a way to provide more services, which include greater enforcement of mental health parity, the possible repeal of the IMD exclusion and continued relaxations on telehealth.
Gomez also believes that the industry move toward value-based care can be a catalyst for future behavioral JV activity, which would be another iron in the fire for providers to offer more services without having to refer patients to outside parties.
“People are increasingly realizing that we really have to invest in behavioral health care, because that is bound inextricably with the rest of the patient’s physical health care,” he said.
“The more proliferation you have of these models, the more that’s going to drive these kinds of joint ventures so that providers can bring a greater spectrum of services to their patients.”
The private equity world has been very busy in the last couple of years driving dealmmaking in behavioral health care, which last year reached another record high level. Gomez noted that PE has likewise been a major force behind JVs.
“Behavioral health care traditionally has been very fragmented, operated by very small providers, and it oftentimes has not had a very sophisticated management structure,” he said. “Investment by private equity can come in and help maximize the business side so that you help the clinical and treatment side to flourish.”
Making the JV work for both partners
To Gomez’s knowledge, there is not a standard earnings or revenue split that JV partners typically adhere to. Perhaps the biggest financial consideration in the formation of a JV has to do with tax laws, as it pertains to taxed for-profit providers and non-taxed non-profits much differently.
“The non-profit, tax-exempt partner may have to require that the operations are conducted consistent with its charitable tax exempt purposes,” he said. “The non-profit tax exempt partner may need to have certain reserve powers in order to help protect against any potential challenge to their tax-exempt status. Those kinds of considerations become important, and the non-profit partner and its for-profit partner will have to discuss that fairly early on.”
Perhaps the biggest challenge a JV has to overcome is in each partner being comfortable enough to cede some level of operational control.
From his experience of having worked on JV formations, Gomez believes that the challenge is not an insurmountable one. He insists that both parties early on have to establish the groundwork on matters such as how revenue will be distributed, which partner will be responsible for securing payer contracts, as well as which leaders within the JV will be responsible for making those determinations.
“If you don’t have a partner with a shared vision and a certain level of trust, the best written contract may not ultimately save that joint venture in the long run,” Gomez said. “That’s something that’s always very important for parties to bear in mind.”
For JVs to ultimately work, Gomez also believes it is necessary that the tone of cooperation set amongst leadership make its way to rank-and-file workers.
“If the joint venture partners are good at communicating with the personnel and the professionals who are going to be operating that facility, it can help mitigate that risk,” he said.
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