The money – and the bulk of the patient population – is not in luxury substance use disorder (SUD) programs.
Instead, state funded and affordable programs are where the majority of patients are accessing services for SUD treatment, with private equity firms taking note. Operators looking to scale their businesses need to be cognisant of this trend, as it’s likely to continue shaping the behavioral health market for the foreseeable future.
“We’ve been waiting for this. We’ve been expecting it, because where’s all the money? All the money is not in a luxury program,” Dexter Braff, president of M&A advisory firm The Braff Group, said at the Behavioral Health Business VALUE conference. “All the money is state funded, and low and affordable private pay in the local markets where people are getting the service.”
In fact, in 2021, the vast majority of SUD transactions were in the affordable to mid-range service sector, according to Braff data. This is a change from 2012 to 2016, when the bulk of deals in the substance use disorder space were in high-end programs.
And again, this is a trend that could keep going in the future.
Between 2017 and 2021, there were 300 deals in the SUD space – the highest in any behavioral health subsector, according to Braff. Over time, the focus area of those deals has changed.
Looking ahead, Braff said the firm is expecting more activity in the outpatient sector of addiction care. He noted that the firm anticipated seeing more activity already, but transactions have yet to materialize in bulk.
“We’ve seen some, but we’re expecting that the community-based services are going to jump,” he explained. “Because there’s a real close kinship to mental health.”
Mental health providers will often provide counseling for substance abuse disorder. This change could impact the market in the future.
“But the general notion of moving into lower-cost outpatient community-based programs has definitely happened,” Braff said. “And it’s going to continue to happen. Not at the pace I thought it would, but it’s happening.”
Additionally, multidisciplinary consolidation is a popular trend in health care, Braff noted. But it’s somewhat lacking in the behavioral health sector.
To some extent, that’s because PE investors prefer to specialize in one area, often pursuing opportunities for vertical integration as opposed to horizontal.
“We don’t see it a lot in behavioral health care,” Braff said. “In fact, we don’t see it a lot in anything that’s private equity-based.”
He gave the example of a PE firm buying a treatment center in Washington, D.C., and wanting to layer on a Medication Assisted Treatment (MAT) program and a sober living home to make it a full continuum. This strategy then limits the firm to one geographical area.
“But [multidisciplinary consolidation] does comport well with people who are long-term holders, people that are not investing with the sole idea that they’re going to divest in five to seven years,” Braff said. “We see this as a fantastic opportunity for people that are not necessarily looking at a near-term exit plan to develop this multidisciplinary model.”
The current state of behavioral health
Overall, behavioral health M&A is on an upward trajectory. In 2021, Braff reported 250 deals in behavioral health, compared to fewer than 200 in 2019.
Within behavioral health, the mental health sub sector has seen a large jump in M&A activity. In 2021, Braff reported roughly 80 mental health transactions; there were under 60 the prior year.
One of the largest mental health deals last year, for example, was KKR’s acquisition of Therapy Brands. Others included Patient Square Capital’s purchase of Summit BCH and Onex Partners’ purchase of Newport’s majority shares.
Deals in mental health have been on the rise since 2016. However, 2020 to 2021 brought the most dramatic increase in terms of deal volume.
“That’s a new development of the last two years, mental health has taken off. It’s largely a function of the fact that it hadn’t been consolidated yet,” Braff said. “And the idea that therapy now is a crucial need as a result of COVID.”