PE-Backed Mental Health Providers’ Commercial Insurance Focus Leading to Head-Turning Earnings

The vast majority of private equity-backed mental health companies that take insurance prioritize commercial health plan patients. This strategy has led to head-turning adjusted earnings margins.

An analysis of companies tracked by the data firm PitchBook, in partnership with Definitive Healthcare, finds that commercial health plans represent 92% of total charges and 86% of claims. Medicaid, the next most common payer for both charges and claims, represented 4% and 9%, respectively. 

“This has allowed some providers to achieve [earnings before taxes, depreciation and amortization] margins in the 30% to 39% range or higher,” PitchBook said in its second-quarter report on private equity activity in health care services.


The analysis excluded pure-play addiction treatment platform companies and cash-pay revenue. Further, these data represent an aggregate of broad dynamics within different parts of the behavioral health industry.

“The typical reimbursement profile for mental health and SUD treatment varies by strategy,” the report states. “Although SUD treatment providers tend to be Medicaid heavy, PE-backed mental health platforms are overwhelmingly commercial pay.”

While Medicaid plans are known to have low reimbursement rates, providers are “sheltered” from other challenges of engaging with these plans, the report states. There is high demand for behavioral health services that accept Medicaid, especially in addiction treatment, and state-based programs meant to provide payment for uninsured patients.


Additionally, some private equity firms are encouraging their platforms to engage more with Medicaid programs because of rate increases meant to offset the financial disincentives of treating Medicaid patients and the reliability of Medicaid payers.

Despite the fragmented nature of the payer landscape, trends point to increasing coverage by managed care organizations, companies that administer most plans on behalf of state Medicaid programs, recognize the importance of integrating behavioral and physical health in terms of care and benefits, the report states.

Overall, deal volumes remain severely deflated in behavioral health compared to the past. Deal volumes in behavioral health are down by as much as a quarter in the first half of 2023 compared to full-year 2022 figures. This is an acceleration of 2022’s deflated deal volumes following a historic 2021. It also aligns with an “unexpected” dip in private equity deal-making activity in the second quarter of 2023.

Specifically, combined mental health and addiction treatment deal totals show that dealmaking in the first half of 2023 is about 26% of 2022 full-year totals. That figure is 32% for combined autism therapy and pediatric therapy deals.

PitchBook tracked 164 health care deals in the quarter, the lowest amount since the peak of the coronavirus crisis in the second quarter of 2020. That figure represents a 24% decline quarter-over-quarter. But it’s still 12% higher than the average quarterly deal volume of 2018 and 2019, the report states.

“Leverage has become the central story and the primary cause of declining deal activity,” the report states. “With the federal funds rate now set at 5.5%, heavily leveraged platforms are straining under growing debt service costs and impending maturity walls.”

Going wide or going deep

The report calls out two models that have come to the forefront in private equity-backed behavioral health platform companies: “volume-driven outpatient-only and vertically integrated continuum of care.”

The former focuses on creating models that provide care with improved unit economics through scale and market density. Scale and market density are meant to be used as leverage in payer rate negotiations. In addiction treatment, this model is associated with medications-assisted treatment (MAT) for opioid use disorder platforms, such as Ideal Option and Spero Health, and talk therapy and increasingly transcranial magnetic stimulation (TMS), such as Mindpath Health. 

The latter — which the report says “has more recently become du jour in PE mental health investing” — is meant to establish several levels of care in proximity to each other so that patients can get access to care by the same provider no matter the level of acuity. The report points to Discovery Behavioral Health, Eating Recovery Center and Summit Behavioral Health as examples of this model.

“Achieving this complete vertical integration within a given market is no easy feat, but the potential rewards include better patient outcomes, improved payer relationships, and the ability to retain patients who would otherwise have been referred to external providers for step-up or step-down care,” the report states.

Providers are increasingly offering more levels of behavioral health services, specifically intensive outpatient programs (IOPs), based on patient need and payer demand.

The key to making the vertical integration model work is reliant on technology to track care across the continuum (electronic health records) and assess the impact of such care (measurement-based care systems).

TMS and other niches in behavioral health

TMS is increasingly popular among private equity-backed mental health platforms because of its “efficacy and attractive revenue profile,” the report states. However, it has not reached the ubiquity of,, for example, MAT in addiction treatment, making its adoption a potential game changer for companies.

About 30% of the websites of private equity-backed mental health platforms’ websites mentioned offering TMS.

The PitchBook report states commercial health plan rates for initial TMS treatment are about $300 and $250 for the following visits. Since standard TMS treatment protocols demand dozens of treatments over the course of weeks, a single course of treatment can bring in a revenue range of “$5,000 $10,000” on “a roughly $50,000 to $100,000 piece of equipment,” allowing timely breakeven on the investment.

“We expect to see more PE-backed mental health providers lean into TMS in the coming years,” the report states. “However, prudent sponsors will seek revenue diversity to hedge against the possibility of reduced commercial reimbursement rates.”

Pitchbook dealmaking graph for market opportunity PitchBook
Market opportunities graphs that display the number of active PE platforms for a specific treatment compared to providers per capita within each state.

Further, implementing TMS procedures fundamentally changes the nature of outpatient mental health offices by requiring more sophisticated administrative and medical personnel to make it all work.

In addition to calling out TMS, the report highlights specific behavioral health niches that are underinvested within specific states that private equity-backed companies may consider.

“The market opportunity for residential eating disorder treatment is largely untapped, with numerous populous states nearly devoid of providers, PE-backed or otherwise,” the report states. “In MAT, a handful of midsize markets, such as Alabama, Missouri, Minnesota, and Louisiana, currently have little penetration, while PE has become highly active in large underserved markets such as Texas.”

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