PitchBook projects that private equity deal activity in behavioral health will rebound in 2023.
Investors will overcome concerns about the workforce and flat reimbursement rates, taking a long view of the sector, the financial data and software company states in a private equity investment report for the third quarter.
Dealmaking volumes have varied by sector. Autism and pediatric therapy dealmaking by private equity have remained elevated while mental health and substance use disorder (SUD) treatment has dipped, the report states.
“Despite the near-term economic headwinds that skilled care and behavioral health segments are experiencing, investors continue to flock to the space due to compelling long-term demand trends,” the report states. “As a result, we expect deal activity in skilled care and behavioral health to bounce back in 2023.”
Additional data provided by PitchBook shows that mental health and substance use disorder (SUD) treatment deals totaled 36 through the third quarter. The years 2020 and 2021 saw totals of 58 and 73, respectively.
For autism and pediatric therapy, the year so far has seen 16 deals. That number was 25 in 2020 and 21 in 2021.
The report merged big-picture insights about behavioral health with the skilled care industry. In total, these deals dipped by 29% for the year so far and by 63% quarter over quarter, according to additional PitchBook data.
The behavioral health space has seen huge consumer demand, increasing rates of behavioral health issues, increased interest from generalist health care companies and large retail companies. This provides opportunities aplenty for investment, M&A and exits, according to the report.
It holds up the high-profile exit of Kelso & Co. from Jacksonville Beach, Florida-based Refresh Mental Health as an embodiment of some of these trends. The New York City-based private equity firm sold Refresh to Optum in a deal announced in March 2022, just 15 months after Kelso announced its investment in Refresh.
Overall private equity deal making totals in health care services are down year over year by 10.3% in the third quarter.
The report didn’t provide specific data for the combined skilled care and behavioral health deal totals.
“ABA and pediatric therapy deal activity has held up, although platform creation in the category has slowed since 2018 to 2019,” the report states. “[Although] deal activity in mental health and SUD treatment has declined modestly from the levels seen in 2020 and 2021, the category still saw several noteworthy deals in 2022.”
The autism treatment space has seen several big-dollar deals over the years and continued activity and new entrants in 2022. However, 2022 so far has been better defined by office closures due to workforce and reimbursement rate challenges.
“ABA has experienced flat reimbursement amid rising staffing costs, but the space is not under the same margin pressure as home health and continues to be buoyed by high demand and a growing—if still insufficient—workforce,” the report states.
Most recently, Blackstone-backed Centers for Autism and Related Disorders confirmed Behavioral Health Business reporting that it will abandon 10 of its 24 listed state markets. In July. BHB tracked over 650 layoffs just at two major ABA companies.
There are indications that the workforce challenges may be seeing some improvement over time. The number of board-certified behavioral analysts (BCBAs) has increased by 65% between 2018 and 2021.
This enables de novo and organic same-store growth. There are some greenfield opportunities with the growth of BCBAs. In 2021, 37.4% of U.S. counties had no BCBAs while 8.2% of counties had no BCBAs and no BCBAs in bordering counties, according to one study.
The intellectual and developmental disabilities segment has also been hard hit by workforce shortages. The common denominator among several behavioral health segments and other medical specialties is a reliance on low- or moderately-skilled workers. Low-wage workers have seen the highest rate of compensation increases over the pandemic era.
The big picture with private equity
While investors are flocking to behavioral health deals, the workforce and payer challenges will inspire greater scrutiny of earnings quality and forward-looking financial projections.
This may take some of the heat out of behavioral health dealmaking.
“In previously red-hot categories such as behavioral health, multiples may begin to cool as growth slows due to staffing limitations,” the report states.
Despite lower multiples, dealmaking dynamics are pushing independent practices sellers into the market, furthering private equities’ influence as a consolidator in health care. A major part of the private equity investment approach is to consolidate health care businesses in an area of medicine where there are favorable demographic trends, the report states.
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