PE-Backed Providers Eye Inpatient Mental Health Bed Shortages, Build New Psychiatric Hospitals

Inpatient psychiatric hospital companies are seeing market-specific opportunities to develop new facilities in the face of a decades-long national decline in psych beds.

This new era is marked by growth-minded companies seeking to make the most of the massive demand for acute psychiatric services and other high-acuity services. For example, privately held Summit BHC (backed by Patient Square Capital) and PAM Health (wholly owned by Tony Mistiano) are expanding the market by building new facilities. 

The renewed interest in space comes as the coronavirus pandemic revealed the shortfalls and holes in the American behavioral health system, especially for children. A shortage of psychiatric beds has precipitated stories of patients boarding in emergency departments for days and weeks.

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While accentuated by the pandemic, the number of psychiatric beds available to Americans has been evaporating for decades. An American Psychiatric Association report released in May found that the U.S. had more than 558,000 state psychiatric beds in 1955, many at public facilities.

But “ federal policy changes, the development of antipsychotic drugs, and the rise of managed care” slashed the number of psych beds in the U.S. The number of state psychiatric beds has fallen to about 35,000. The patient population supported by inpatient services dropped from about 370,000 to 40,000 between 1970 and 2014, the report states.

While the historic outlook for psychiatric care is grim, macro-level trends and local market dynamics are creating compelling opportunities for behavioral health operators. Undergirding that, along with many aspects of behavioral health, is a steep shortage of supply and a huge demand for these services.

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“As a matter of fact, there’s a fairly profound bed need almost everywhere we’re looking,” Allan Brown, the founding partner of the health care real estate development company Prevarian Co.s, told Behavioral Health Business. “It’s simply because of a lack of supply over the last several decades. With a lot more investment interest more recently, these markets are emerging.”

Summit BHC looks local

On Aug. 15, Summit BHC announced that it opened a 116-bed full-service psychiatric hospital called Raleigh Oaks Behavioral Health in the Raleigh Metro, in Garner, North Carolina.

The Franklin, Tennessee-based behavioral health hospitals and addiction treatment provider picked that particular community to build a new facility based on “attractive market dynamics,” Summit BHC CEO Brent Turner said in an email.

“There is a supply/demand imbalance across all behavioral health sectors, including acute psychiatric hospitals,” Turner said. “Raleigh-Durham is experiencing strong growth and we believe Raleigh Oaks Behavioral Health will be an essential solution to mental health solutions in that community.”

And Summit BHC has grown its community footprint through private equity investment and ownership. Starting in 2015, Summit BHC secured investment from Flexpoint Ford LLC. At that time it had three facilities.

The private equity firms Lee Equity Partners and FFL Partners acquired a controlling interest in Summit BHC in 2017 that they sold to the Menlo Park, California-based private equity firm Patient Square Capital for over $1 billion.

A few months after the Patient Square Capital sale, Summit BHC acquired seven psychiatric hospitals in six states from Strategic Behavioral Health. That deal expanded Summit’s existing presence in Iowa, Tennessee, and Texas and gave the company a foothold in New Mexico, North Carolina, and Wisconsin for the first time.

Today, Summit BHC provides acute psychiatric, inpatient addiction treatment and outpatient services through 32 facilities in 19 states.

Decades of struggle open communities up to development

Dallas has seen the trends at play at the macro level in its city limits.

On Aug. 22, Voyages Behavioral Health, an affiliate of Enola, Pennsylvania-based PAM Health (formerly known as Post Acute Medical LLC), announced it would build a five-story 72-bed multidisciplinary behavioral health facility in a former medical office building in Downtown Dallas. 

The company saw an opportunity to build in a city that has seen psych services diminish while revitalizing an unused property, Paige Smith, vice president of growth and development for Voyages Behavioral Health, told BHB in an interview.

The number of psych beds in Downtown Dallas has diminished despite its population growth.

There are only three other hospitals that have psych units in a city of 1.3 million people.

“That’s unusual for a city that large, for a county seat: You typically see more access there,” Smith said.

In 2018, the 144-bed psychiatric hospital Timberlawn Behavioral Health System announced its closure. In September 2021, the 72-bed Garland Behavioral Hospital shut down.

Building a hospital in an existing property, a former medical office building, is also a strategic move; it allows a new facility to go up in a thoroughly developed and land-restricted area like Downtown Dallas.

“To provide something that is a beautiful location, that’s easy [to get to] just off the highway, that can house a large enough number of patients to have an impact in a city that’s lost in beds and is somewhat underserved is kind of exciting,” Smith said.

PAM Health launched Voyages Behavioral Health in 2019. It’s building three new facilities — Voyages Behavioral Health of Dallas, a facility in Sugar Land, Texas and a facility in Pensacola, Florida.

Smith said that Voyages Behavioral Health is also redeveloping a shuttered 44-bed psychiatric hospital in San Antonio, a city facing similar dynamics.

“It won’t be enough but it’s a good start,” Smith said of the San Antonio facility.

The structural challenge of psychiatric hospitals

Unlike the rest of the behavioral health sector, psych hospitals are heavily dependent and influenced by health care real estate development.

Despite a “pretty profound” psych bed need all over the U.S., Prevarian Co.s Founding Partner Allan Brown told BHB that it can be challenging to move the projects to the construction phase.

Prevarian Co.’s is Voyages Behavioral’s development partner on the new hospitals.

Local government bodies and other regulators often don’t have a clear idea of how psychiatric hospitals would or could fit within the context of zoning and use ordinances.

Often, these local regulations are antiquated and difficult to navigate with key decision-makers. On top of that, there are prejudices about behavioral health.

“Unfortunately, we have to deal with often that they have older, less informed ideas about what behavioral health is,” Brown said. “They’ve seen ‘One Flew Over the Cuckoo’s Nest’ and they imagine that there are people who are going to be escaping and running around. That’s not what these facilities are about. It takes some education.”

Even when not dealing with prejudices about psychiatric care, local development often attracts opposition based on any number of factors, especially local infrastructure questions such as traffic.

However, revitalizing an existing structure is a plus in this project, Brown said.

“The city of Dallas been very receptive to the idea,” Brown said of redeveloping a vacant building.

While construction costs were driven up over uncertain international trade policy during the Trump administration, the coronavirus’ disastrous impact on supply chains compounded the issue further.

For example, Smith said that delays in securing steel and related design delays for the Sugar Land facility delayed its anticipated opening date from 2021 to the fall of 2022.

But at this point, Brown the construction materials issue is still challenging but getting better.

Still, materials costs coupled with labor shortages make it difficult to hold competitive bids for subcontractor work, i.e., for roofers, painters, plumbers, framers and drywallers, Brown said.

“During the Winter, Spring and Summer — it was really challenging,” Brown said. “When you’re pricing preliminary drawings, they really were showing no interest or if they did show up their numbers were very high.”

This situation has improved over the last few months, Brown said.

Growth needed while challenges abound

Corona, California-based Signature Healthcare Services LLC said his company has opened three hospitals, encompassing about 350 beds, in the past eight months in California. 

The founder-owned company has faced workforce shortages and challenges with material costs in recent months. 

Still, the company’s focus is on optimizing its existing operations in light of the market forces all the while trying to grow given the huge demand and need for services in spite of the challenges.

“The size of cap ex is also increasing. … We still want to address the shortage of acute psychiatric services,” Eric Kim, senior vice president of strategy, told BHB. “It certainly is more difficult from a financial perspective.”

However, there are key market forces that are seeming to improve, including the regulatory landscape and the reimbursement environment. Signature Healthcare, as have other providers, has worked with payers to secure improved rates that respond to the pandemic challenges and resultant increases in workers’ wages.

While the market is overdue for reimbursement parity, Kim said that improved rates and the need for more psych beds becoming clearer for communities give the sector a hesitantly upbeat outlook.

“I do think the outlook for us is good because we are optimistic about conditions continuing to improve both on a pandemic level, reimbursement level and hopefully a labor level,” Kim said, “Still we’re sort of feeling quite cautious about our own growth and outlook.”

Editor’s note: Sept. 7, 2022 — This story was updated to note that Voyages, an affiliate of PAM Health, is not backed by private equity.

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