In many ways, the behavioral health world is divided into two camps: for-profit and nonprofit providers.
But as the industry matures and consolidates, the two are likely to interact more often – and they could even learn from each other. Moving forward, there is potential for more M&A opportunities between the two groups, with nonprofits bringing a wealth of institutional knowledge and private equity-backed for-profits bringing operational and tech-savvy to the table.
Still, to make these partnerships work, institutions on both sides of the line must break down bias and even cut through some red tape.
“Ultimately, what has to happen is a conversation where you bring those two worlds together,” Stacy DiStefano, CEO of Consulting for Human Services, told Behavioral Health Business. “Because sometimes a nonprofit would be best served in a for-profit provider because of geography or adjacent service lines or leadership depth.”
Consulting for Human Services (CFS) is a consulting firm that works with nonprofit provider organizations, payers, state systems, tech vendors and private equity firms. It is focused on behavioral health care.
Generally, nonprofits and for-profit organizations tend to “other” their counterparts on the alternative side, DiStefano noted. Nonprofits are skeptical of private equity-backed providers’ care, and for-profits are wary of the nonprofit’s business model.
“On the for-profit side, I think they are not looking at the value of nonprofits in a way other than through the P&L,” DiStefano said. “That’s a mistake because there are so many nonprofits that have a nuanced niche service, or they have deep, deep relationships in the community that could open doors to places that a for-profit could never open. And they’re discounted because they’re not seen as valuable.”
The deal market is hot in nonprofit and for-profit behavioral health. Over the last five years, Matrix Capital Markets Group reported 439 transactions in the behavioral health space.
Of that, 39 transactions included not-for-profit targets, 42 deals included not-for-profit acquirers and 27 not-for-profit mergers with other not-for-profits. Yet only 12 were not-for-profit acquired by for-profit organizations.
New York-based Matrix was founded in 1988 as an independent, advisory-focused, privately held investment bank.
Just one recent example of a for-profit entity buying a nonprofit: In 2021, private equity-backed substance use disorder provider Summit BHC acquired the nonprofit addiction treatment center Seabrook.
Why can’t we be friends
Deals between for-profits and nonprofits could make sense in certain situations, depending on the needs and service area.
“There are large numbers of facilities or companies out there that are not-for-profit, that have been around for a long time,” Vasanta Pundarika, co-head of health care investment banking at Matrix Capital Markets Group, told BHB. “They’ve been providing good care for a long time, but they don’t have the financial wherewithal or ability to keep up with some of the financial changes that are happening in the behavioral health world.”
Specifically, providers are more pressured to invest in electronic health records, new billing systems and payer contracting data.
Bringing new data-collecting capabilities is especially important as payers demand more evidence-based care when contracting, Pundarika noted. But putting these systems in place can be costly and require additional capital.
“I think a lot of the nonprofits are going to come to a point where they need to figure out how to get additional capital, which is now more expensive,” Pundarika said. “Some of the not-for-profits are probably going to look at their missions and how [they can] continue to grow to fulfill this mission. One of the ways they can do that is by going through an M&A transaction and joining a larger, growing company with the capital resources.”
This could be an opportunity for private equity-backed companies to take advantage of some of the assets nonprofits offer.
“You can’t argue that a provider who’s been around for 75 or 100 years has an incredible amount of value that you could learn from,” DiStefano said. “Private equity doesn’t come with that kind of historical knowledge of the field.”
Additionally, many nonprofit owners are nearing a point in their careers where they’re considering retirement or another exit. In the past, these individuals would perhaps pass on their organization to a family member in order to continue the nonprofit’s legacy.
That appears to be happening less frequently, however, sources anecdotally told BHB.
Potential hiccups
While there may be a lot of benefits for the two sides to partner through M&A, it can be a tricky process and require patience on both sides.
If a private equity firm or PE-backed provider acquires a majority stake in a nonprofit, that entity must be converted into a for-profit entity.
“It’s not easy. There’s a money cost to it, and there’s a time commitment cost. There’s red tape and bureaucracy costs, and it’s very different from state to state,” DiStefano said.
In some states, it’s not even allowed, Pundarika noted. But in those situations where it is allowed, there are a lot of nuanced questions, such as what will happen to the existing proceeds. But these questions can be worked out.
“One of the ways that this has happened in the hospital world is people have come in, if they’ve acquired a hospital, and they’ve created an outside foundation and put the proceeds into that outside foundation,” Pundarika said. “And the mission of that foundation will be similar to the mission of what the not-for-profit was.”
It also, on average, takes more time for these types of deals to go through. DiStefano noted that it’s genuinely a courting process, and unlike for-profit providers, the decision for a nonprofit to sell isn’t going to be exclusively based on finances. The organizations and their board of directors are more interested in ensuring the mission continues.
But these hurdles may scare for-profit organizations and private equity away from the space.
“I think sometimes the PE firm thinks the juice isn’t worth the squeeze,” DiStefano said.
Alternatives to M&A
Even if the two sides aren’t interacting in an M&A capacity, it’s difficult to ignore the other side entirely. DiStefano said that half of the behavioral health providers in many states are for-profit and half are nonprofit.
“You can’t ignore each other. In this, you’re all a system of collaborators who have colleagues providing service to a population in need of care,” DiStefano said. “So it’s not like a retail store where you’re trying to get market share. These are all people that need services.”
One way that for-profits and nonprofit organizations have worked together is through joint ventures.
“Health systems have been growing when they need to, by doing a lot of joint ventures … with [providers] like Acadia (Nasdaq: ACHC), [Universal Health Services] (NYSE: UHS) or Lifepoint,” Pundarika noted.
For example, the nonprofit health system Centra recently announced a new joint venture with behavioral health operator Lifepoint Behavioral Health.
But even beyond deals, the two sides of the business could learn a lot about each other by starting a conversation, and they may have more in common than they think.
“501C3 is not a business model; it’s a tax status,” DiStefano said during a webinar titled Coexisting with Private Equity in IDD Services. “And so we want everyone to operate as if they need to make money to survive, which they do. The way that money is invested in private equity is back to shareholders. The way it’s invested in a nonprofit is back into services and staff.”
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