Thurston Group-Backed ARC Health Doubles Down on M&A Strategy

ARC Health and Thurston Group put partnership and growth at the center of their strategy to expand a fast-growing outpatient mental health platform company.

The throughlines of partnership and growth have enabled the company to grow from one practice in Cleveland, Ohio, to 16 practices and 25 locations by the end of 2022.

In August 2021, the Chicago-based health care private equity firm Thurston Group formed ARC Health through an investment in Advanced Recovery Concepts. That deal helped establish and use the firm’s blueprint of ARC Health as it seeks to consolidate the outpatient mental health space and expand access to care.

In 2022, ARC Health announced six deals, expanding its nationwide footprint. Its latest, Ann Arbor, Michigan-based Lotus Counseling, expanded the firm into its twelfth state. It also operates in the District of Columbia.

“We didn’t see [in the market] the strategy that Thurston usually has in our deals, which is a partnership model, with having the doctors keep the clinical autonomy of the practice to continue to grow,” Dan Davis, managing director at Thurston Group, told Behavioral Health Business.

In starting the practice, Thurston Group responded to several other trends that signaled an opportunity to invest. They include a prevailing and worsening shortage of mental health providers, made worse by COVID-19; fragmentation in outpatient mental health; and the consolidation of physician practices that took away growth opportunities for the clinicians.

The partnership approach in its investing has accelerated ARC Health’s growth trajectory as the strategy becomes more well-known.

“If I’m looking at 2023 … our pipeline has already grown for the first, second and third quarter where we’re standing today,” Davis said. “That trend is going to continue even with a down market.”

ARC Health’s partnerships

ARC Health looks for the best clinicians it can find when looking for deals, and it’s largely agnostic on the practice’s location. However, if the market is saturated, ARC Health will only consider obvious clinical market leaders, Vincenzo Morra, ARC Health CEO, told BHB.

It also does not consider partnering with practices where the leading clinicians are seeking to cash out. Morra said many acquisitions fall apart because they lose the talented leader that grew the practice in the first place, adding that ARC Health looks for providers that intend to continue developing their practice in the long term.

The company also eschews working with investment banks and digs deep into the performance and reputation of the providers it considers.

“I know if the clinical quality is high, usually profitability is going to follow that,” Davis said.

ARC Health also allows practice owners to “roll over” the capital gained from selling to the firm into the firm itself. Practice owners who sell to ARC Health may invest between 20% and 40% of the enterprise value of their sale into Class A shares of ARC Health.

“We all have the same class of shares; it’s very easy to explain, and we’re all incented and aligned together with that,” Davis said.

The practice also helps its front-line clinicians, such as advanced practice nurses and therapists, to own equity in the company. ARC Health lends money to select providers to buy shares in the company. This strategy is a selling point with potential partner practices, Davis said, because many practices don’t have the means or wherewithal to enact such a practice.

The program is called the “Pathway to Ownership” and has two major aims — to attract talented providers and to retain existing staff, Morra said. It also helps to foster a sense of partnership across disparate practices.

Clinical care and growth

Thurston Group also saw an opportunity to build a comprehensive, multi-specialty practice, something Davis said was missing in the market.

The company has done so by acquiring partner practices with that lead in a given subspecialty and then implementing the best practices of that practice in others.

ARC Health has so far done so through its clinical advisory board. Once best practices, policies and training programs are established, the company then expands offices that need that specialty by adding the service and requisite employees.

“For example, we have a couples counseling program that we run in Minnesota, but that’s what they do. Looking forward, if a couple is not getting along, that may transcend to the kids. So how about we start a pediatric program as well within the practice?” Morra said. “Those are the things we are going to create and not reinvent the wheel because we have it already throughout the country.”

Clinical leaders oversee that work. In December, ARC Health representatives told BHB that it named Sandeep Vaishnavi as its new chief medical officer. Vaishnavi will start with ARC Health following the expiration of a non-compete agreement in May 2024.

Continued investment

ARC Health expects to roughly double in size by the end of 2023. At the time of the interview, ARC Health employed 350 health care providers and about 40 administrative staff.

In a year, Morra expects ARC Health to have between 600 and 650 providers and add 14 new practices that oversee 20 to 25 new locations to the ARC Health portfolio.

The company started 2023 with acquisitions. On Jan. 25, ARC Health announced it acquired Colorado Center for Clinical Excellence, a mental health practice based in Denver. Two weeks before that, it announced the acquisition of Kansas City-based Lilac Center.

Following acquisitions, ARC Health uses a light touch in managing its practices. The company introduces some technology to help track outcomes and manage business practices. It also consolidates some business functions, taking payroll and human resources duties off the plate of the local practices.

It is also investing in tech services that will enable its outcome-based care clinical practices and value-based care arrangements with payers. ARC Health has partnered with multiple firms, including Boston-based Mirah and Aurora, Illinois-based Mental Health Technologies.

However, these investments in tech and data won’t be fully realized or relevant until three to five years from now, Morra said.

“The platform will be built long-term to an alternative model … We’re still going to have to deal with a traditional fee-for-service model,” Morra said. “But the goal is to set up a system that gathers data to be able to negotiate alternative practice models or payment models for third-party payers.”

ARC Health will also negotiate directly with large firms. Morra mentioned the company engages with the global professional services firm Deloitte.